Elon Musk Threatens to End Twitter Deal Over Lack of Information on Spam Accounts

Twitter says it will continue to share information with Musk; Texas launches investigation of Twitter’s tally of fake bot accounts

By guest authors Will Feuer and Sarah E. Needleman from the Wall Street Journal.

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Elon Musk threatened to terminate his deal to buy Twitter Inc. TWTR -1.49%▼ in a letter accusing the company of not complying with his request for data on the number of spam and fake accounts on the social-media platform.

Mr. Musk said Twitter has refused to provide the data necessary for him to facilitate his own evaluation of the number of spam and fake accounts. In April, Twitter accepted Mr. Musk’s USD 44 billion bid to take over the company and go private.

In a letter to Twitter Chief Legal Officer Vijaya Gadde that was disclosed in a regulatory filing Monday, Mr. Musk’s lawyer Mike Ringler said Mr. Musk is entitled to the requested data, in part so that he can facilitate the financing of the deal.

“This is a clear material breach of Twitter’s obligations under the merger agreement and Mr. Musk reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement,” Mr. Ringler wrote.

A Twitter spokesman said the company “will continue to cooperatively share information with Mr. Musk to consummate the transaction in accordance with the terms of the merger agreement.” He added: “We intend to close the transaction and enforce the merger agreement at the agreed price and terms.

Shares of Twitter fell around 1.5 % to USD 39.57 Monday, June 6, 2022; the all-cash deal is priced at USD 54.20 a share.

Also on Monday, June 6, 2022, Texas Attorney General Ken Paxton launched an investigation into Twitter, saying the company may have falsely reported its fake bot accounts in violation of the Texas Deceptive Trade Practices Act. Mr. Paxton’s office ordered Twitter to produce documents on how it calculates and manages its user data and how that information relates to its advertising businesses. Mr. Paxton’s office said Twitter has until June 27 to respond to its demands.

“Texans rely on Twitter’s public statements that nearly all its users are real people,” said Mr. Paxton, a Republican. “It matters not only for regular Twitter users, but also Texas businesses and advertisers who use Twitter for their livelihoods.”

Mr. Musk last year moved the headquarters for his automotive company, Tesla Inc., to Texas from California. The rocket company he runs, Space Exploration Technologies Corp., has large operations in Texas as well.

Mr. Paxton and Twitter have clashed in the past. Last month a federal appeals court ruled that Texas for now can enforce a law prohibiting the internet’s biggest social-media platforms, including Twitter, from suppressing users’ content based on the viewpoint of their speech. Mr. Paxton responded to the ruling with a tweet saying he supported the law and that the Fifth Circuit “made the right call here.”

Mr. Musk’s latest letter is his clearest statement that he may try to abandon the deal, potentially spurring what could be a protracted legal battle between the two sides. As part of the deal, both sides agreed to pay each other a $1 billion breakup fee if they cause the deal not to happen for certain reasons. Twitter could also sue to force Mr. Musk to go through with the transaction.

There are only specific scenarios under which Mr. Musk would be able to simply pay the termination fee to walk away from the transaction, including if regulators try to block the deal or the debt financing falls through.

For years, Twitter had publicly disclosed its own estimate of how many of its daily active users represent false or spam accounts, putting the percentage at fewer than 5% of its monetizable daily active users. Mr. Musk has pegged the figure at least four times as high at 20 % of Twitter’s accounts.

Video and Caption courtesy by the Wall Street Journal

Twitter CEO Parag Agrawal on May 16 tweeted that the company had shared information with Mr. Musk about how it estimates spam figures. Mr. Musk responded with a poop emoji.

In his letter Monday, Mr. Ringler confirmed Mr. Musk received a response from Twitter on June 1, but said it didn’t satisfy Mr. Musk’s requests. “If Twitter is confident in its publicized spam estimates, Mr. Musk does not understand the company’s reluctance to allow Mr. Musk to independently evaluate those estimates,” the letter said.

As part of the deal, Mr. Musk had waived detailed due diligence that buyers typically perform on targets. In a response to a tweet Monday, Mr. Musk suggested him waiving due diligence didn’t apply to any potential misstatements by Twitter.

Legal experts offered different theories on what may be driving Mr. Musk and his legal team.

“This sounds like they’re trying to shoehorn a due diligence termination right into an agreement that does not have one,” said David Hoppe, a mergers and acquisitions, tech and media attorney with Gamma Law in San Francisco.

Mr. Musk would need to argue that something happened since the time he signed the deal that raised new doubts about the estimates that Twitter provided on the amount of spam and fake accounts on its platform, he said.

“I’m sure Musk’s legal team wishes there was some change of circumstance that would raise doubts about the legitimacy of those numbers, but nothing’s really changed,” Mr. Hoppe said. “There’s no bombshell.”

By linking the fake-account issue to Mr. Musk’s ability to secure financing for the deal, his legal team could be indicating the exit ramp they may try to pursue to extract their client from the transaction, said Ben Means, a professor at the University of South Carolina School of Law. “Financing obviously is necessary to close the transaction,” he said.

Eric Talley, a professor at Columbia Law School, said that while Mr. Musk has the right to request information, Twitter may be unable to share it if doing so would breach another person’s legal rights or undermine the company’s competitive position.

Mr. Musk offered to buy Twitter for USD 44 billion in April, and the company agreed to the deal the same month. In May, the Tesla chief executive said the deal was “temporarily on hold” because of his concerns over the company’s accounting of the number of fake accounts on its platform.