It was late January and Elon Musk had just announced a change of gear at Tesla, the world’s largest electric car company. In the teeth of a global supply chain crisis, the firm would not be releasing any new models until at least 2023. But America’s $230bn (£194bn) tech tycoon had found another focus for his attention. Within days, he had begun investing large sums in Twitter shares, to build a stake that eventually reached more than 9%.
On 26 March, Musk held a conversation with his old friend Jack Dorsey. But this wasn’t an informal catch-up: Dorsey, who co-founded Twitter, had retained a seat on its board and the two men, along with another board member, discussed whether Musk should also become a director.
The other topic of conversation was the future of social media.
It is a future that now, at least for Twitter, hangs in the balance. The platform last week launched a multibillion-dollar lawsuit against Musk after the entrepreneur walked away from a $44bn agreement to buy the company. In a filing outlining its claim, Twitter’s legal team has given a blow-by-blow account of the events that led to the collapse of the deal.
Twitter is asking a court in Delaware to compel Musk to complete the takeover he agreed to in April at $54.20 per share. In the legal jargon, it is seeking “specific performance” – a requirement that he complete the deal as agreed – and a consensus is forming that Twitter has a strong case. It is pushing for a quick hearing in September, with the hope that a verdict will come before a deadline to complete the deal on 24 October. On Friday, Musk filed a motion opposing Twitter’s request to fast-track a trial and is instead seeking a date in February next year.
Twitter’s lawyers have not minced their words. Their scathing account of events offers an inside view of how an unlikely corporate dalliance between a tweet-from-the-hip multibillionaire and the platform he probably spends too much time on descended into vicious acrimony. The first paragraph of their lawsuit states: “Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.”
The document details how, at least from Twitter’s perspective, the relationship was tricky from the start. After the Dorsey conversation, Musk let Twitter know he was minded to either join the board, buy the company or take it private. Musk then discussed joining the board with Twitter’s chief executive, Parag Agrawal, its chairman, Bret Taylor, and a board member – Martha Lane Fox, the British co-founder of Lastminute.com.
Musk was offered a position and accepted in early April. But just days later, he told Twitter he would not be joining the board. Instead, he wanted to buy the company. Agrawal revealed the about-turn on 11 April.
On 13 April, Musk outlined his offer to the board and announced it publicly a day later. In a sign Twitter was not entirely happy about this, it adopted a “poison pill” defence, designed to stop an unwanted suitor from accumulating a significant stake.
It is at this point in the lawsuit’s account of events that Musk’s tweets start to appear. This string of messages to his 100 million-plus followers is unlikely to help his case. The document refers to repeated hints from Musk that a “tender offer” – or hostile bid – for the company is imminent, including a tweet that states “Love Me Tender”.
🎶 Love Me Tender 🎶
— Elon Musk (@elonmusk) April 16, 2022
After more back-and-forth, a deal agreement was drawn up and the board recommended the offer to shareholders despite, as the lawsuit states, misgivings: “Twitter had been buffeted by Musk’s reversals before.” There were more side-winds to come.
Musk began to get cold feet, the lawsuit claims, as the markets turned against tech stocks. Their offer of losses now but high returns in the future began looking less attractive as the global economy wobbled and interest rates rose. The resulting selloff drove down share prices, affecting the value of not just Twitter but Tesla, whose stock was a key source of deal financing for Musk.
At this time, Musk began asking questions about the number of spam accounts on Twitter, which the company has always insisted represent less than 5% of a daily active user base that stands at 229 million people.
In the lawsuit, Twitter claims that the tanking markets dovetail with the sudden emergence of a stumbling block on Musk’s side in early May. “As the market (and Tesla’s stock price) declined, Musk’s advisers began to demand detailed information about Twitter’s methods of calculating mDAU [monetisable daily active users] and estimating the prevalence of false or spam accounts.” Not long after, on 13 May, Musk tweeted that the deal was “temporarily on hold” over the spam issue, and his willingness to complete the transaction nosedived after that.
Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of usershttps://t.co/Y2t0QMuuyn
— Elon Musk (@elonmusk) May 13, 2022
Twitter says it was surprised by Musk’s declaration the deal was temporarily on hold but had an inkling in the days running up to it when his bankers at Morgan Stanley had circulated an agenda for a meeting with Twitter that included the question: “How do you estimate that fewer than 5% of mDAU are false or spam accounts?”
After the surprise tweet went up, there was a legal scramble: Twitter’s deal counsel called Musk’s deal counsel. Two hours later, Musk belatedly tweeted that he was still “committed” to the deal. But he couldn’t help himself. Days later he tweeted a poo emoji at Agrawal in response to a long Twitter thread by the chief executive explaining the spam issue. The tweet inevitably appears in the lawsuit as part of Twitter’s argument that Musk himself breached the agreement by repeatedly disparaging the company and its employees.
From there it seemed inevitable that on 8 July, Musk’s lawyers would write to Twitter declaring that he was terminating the deal. In the lawsuit, Twitter details “multiple” attempts to meet Musk and clear up the spam issue. A meeting never occurred.
Howard Fischer, a partner at New York law firm Moses & Singer, says Twitter’s case has a strong chance of succeeding, in part because of Musk’s behaviour. “While courts are generally reluctant to order specific performance in these contexts, this might be one of the rare instances to justify that remedy.”
In the termination letter, Musk put forward three broad arguments: that Twitter had breached the agreement by failing to provide enough information on spam accounts; that it had misrepresented the number of spam accounts in its disclosures to the US financial watchdog; and that it had breached the agreement by failing to consult with him when firing senior employees recently.
The lawsuit rebuts these one by one, arguing that Twitter “bent over backwards” to respond to all information requests; that there is no proof it has misstated spam numbers; and that it contacted Musk’s lawyers about the firings, which were in the normal run of business anyway and received no objection.
Anat Alon-Beck, a law professor at Case Western Reserve University in Ohio, says Delaware case law indicates Twitter has a strong hand. She says one of Musk’s key arguments, that Twitter’s spam issue represents a “company material adverse effect” that substantially alters the company’s value, will be hard to substantiate. “I think that Twitter has the upper hand here, according to Delaware case law,” says Alon-Beck.
Twitter’s shares rose 9% last week to $37.74, reflecting investors’ belief that it has a good case. But it still leaves the prospect of a company forcing a suitor it does not like to buy a company he does not want.
(January 31, 2022) Stake-building
Elon Musk starts buying shares in Twitter
(March 26, 2022) Preliminary talks
Musk discusses joining the Twitter board with two directors, including co-founder Jack Dorsey
(April 4, 2022) The stake revealed
Musk discloses a stake of more than 9% in Twitter
(April 5, 2022) Engagement with the board
Twitter says Musk will join the company’s board
(April 11, 2022) First signs of a bid
Twitter says Musk will not be joining its board, as the Tesla boss prepares a takeover
(April 14, 2022) The bid
Musk offers $54.20 a share for Twitter, a 38% premium to Twitter’s 1 April closing price
(April 15, 2022) 'Poison pill'
Twitter adopts a “poison pill” defence, which prevents a suitor from building up a significant shareholding, to protect the company from an unsolicited takeover
(April 21, 2022) Funding
Musk announces he has lined up $46.5bn in financing for the deal
(April 25, 2022) Acceptance
The Twitter board accepts Musk’s offer
(April 29, 2022) Tesla assets
Musk sells Tesla shares worth more than $8bn to finance the takeover
(May 5, 2022) Backers join the bid
Musk discloses that he has secured $7.1bn in funding for the bid from a group of investors, including the tech tycoon Larry Ellison
(May 11, 2022) Dorsey mulls stepping down
Dorsey says he will not return as chief executive after the takeover
(May 13, 2022) Deal on hold
The slide towards termination begins. Musk says the Twitter deal is on hold pending review of spam and fake accounts. He later tweets that he remains committed to the deal.
(May 25, 2022) Boardroom tension
Twitter investors vote against re-electing a Musk ally to the board
(May 26, 2022) Twitter investors get angry
Musk is sued by Twitter investors for stock ‘manipulation’
(June 6, 2022) Musk alleges 'material breach'
Musk threatens to walk away from the deal if Twitter fails to provide data on spam and fake accounts, accusing the company of a ‘material breach’ of the deal agreement
(July 8, 2022) Deal is off
Musk says he is terminating the deal
(July 12, 2022) Twitter sues
Twitter sues Musk over his termination of the deal and asks a court to enforce the transaction
(July 15, 2022) Musk objects to trial date
Musk files a motion in Delaware opposing Twitter’s request to fast-track a trial over his termination move
According to one observer, Twitter’s board is being compelled by its duty to shareholders and the fact that it is unlikely to find a better offer elsewhere. Drew Pascarella, a senior lecturer on finance at Cornell University, says: “Twitter shareholders, as with any owner of any company, are entitled to receive the maximum value for their shares. The deal with Elon was for $54.20, which is, in July of 2022, an outrageous price.”
The US financial watchdog is also looking at the situation. Last week Musk’s lawyers revealed that the Securities and Exchange Commission (SEC), which has already asked questions about how Musk disclosed his Twitter shareholding, has come back with further questions about his disclosures related to the deal.
Robert Frenchman, a partner at New York law firm Mukasey Frenchman, says pressure from a more aggressive SEC is clearly building.
“The SEC has been looking at this since Musk started accumulating his position and didn’t do everything right. They have their toehold and I think they will continue to look at whether his regulatory disclosures are consistent with the public statements he has been making about Twitter,” he says.
He adds that a fine is the most likely punishment if Musk is found to have made errors in filing and amending his 13D – a form that an investor is required to file when they take a shareholding of more than 5% in a listed business – or is found to have violated other SEC regulations.
But, as Frenchman says: “I don’t think Elon Musk lies awake at night worrying about SEC fines.”
