Elon Musk formally and forcefully revived his assertion that Twitter Inc. has a serious bot problem, and threatened to walk away from his deal to buy the company if the social network doesn’t do more to prove its users are real people.
Legal experts widely speculated that Musk is using the bot issue as an excuse to abandon or renegotiate the deal, which has looked better and better for Twitter as the broader stock market has taken a dive in recent weeks. Twitter shares were up slightly Tuesday morning in New York.
In a securities filing on Monday, Musk said he thinks Twitter is breaching their agreement by not meeting his demands for more information about spam and fake accounts. But behind the scenes, the deal is proceeding, according to people familiar with the matter. Both sides have been meeting regularly and sharing information, said two of the people, who weren’t authorized to speak publicly.
“He’s jockeying here — he’s trying to create a paper trail,” said Andrew Freedman, a partner at the law firm Olshan Frome Wolosky LLP, who is an expert in activist investment. “The unfortunate thing for Musk is that termination provisions under merger agreements don’t allow for buyer’s remorse.”
Last month, Musk said he was putting the deal “on hold” until the social media giant can prove bots make up fewer than 5% of its users, as the company has stated in public filings. Musk has estimated that fake accounts make up at least 20% of all users.
But Twitter said it has indeed shared information with Musk on how it calculates the number of spam accounts on the service, and executives have told employees that Musk can’t just put the deal on hold, as the two sides have signed a merger agreement. On Monday the company reiterated that it will hold Musk accountable to the terms of his proposed $44 billion takeover, a suggestion that even the company believes he may be trying to blow up the deal.
In a statement, Twitter said it “has and will continue to cooperatively share information” with Musk. The company said it believes the deal is in the best interest of all shareholders and intends to “close the transaction and enforce the merger agreement at the agreed price and terms.” It’s possible that Twitter could try to sue Musk to complete the deal if he tries to walk away from the acquisition.
“The board of Twitter is going to get tired of this and file a lawsuit in Delaware and say, ‘I want a declaratory judgment saying that I am not in violation of the agreement and that Musk has to complete the deal,’” said Brian Quinn, an M&A professor at Boston College Law School. “That’ll be Twitter’s next step.”
Twitter’s shares were up less than 1% on Tuesday to $39.60. The gap between the market’s expectations and the billionaire’s $54.20-a-share widened on Monday, fueling market speculation that the deal may fall apart. The shares have barely — and only briefly — surpassed $50 since Musk sprung his buyout plan on April 14. The deal came together at breakneck speed in part because Musk waived the chance to look at Twitter’s finances beyond what was publicly available.
Twitter Chief Executive Officer Parag Agrawal has sparred with Musk publicly on Twitter about bots. Agrawal has said the company has human reviewers look at “thousands of accounts” to determine the prevalence of bots, but added that he couldn’t share more specifics because of privacy concerns. “Unfortunately, we don’t believe that this specific estimation can be performed externally, given the critical need to use both public and private information,” Agrawal wrote in May.
In the filing Monday, Musk sharply disagreed with Twitter’s assessment on bots.
“Twitter’s latest offer to simply provide additional details regarding the company’s own testing methodologies, whether through written materials or verbal explanations, is tantamount to refusing Mr. Musk’s data requests,” Musk’s lawyer wrote in a letter to Twitter’s top lawyer, Vijaya Gadde. “Twitter’s effort to characterize it otherwise is merely an attempt to obfuscate and confuse the issue. Mr. Musk has made it clear that he does not believe the company’s lax testing methodologies are adequate so he must conduct his own analysis. The data he has requested is necessary to do so.”
Musk believes the company’s resistance to provide more information 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.”
Making such a filing wasn’t legally necessary, said Jill Fisch, an expert on business and law at the University of Pennsylvania Carey Law School. “This is him using the SEC filing to reach the capital markets with this statement.”
Complicating Musk’s claims, though, is the fact that he has been publicly complaining about Twitter’s bots since before he made an offer to buy the company.
“He obviously was aware of the bots issue — he was open about that as something he wanted to fix, as an area to create value,” said Freedman. “He would likely have to demonstrate that Twitter’s methodology is reckless or negligent” in order to force the company to renegotiate the deal.
The proposed takeover includes a $1 billion breakup fee for each party, but Musk can’t just walk away by paying the charge. The merger agreement includes a specific performance provision that allows Twitter to force Musk to consummate the deal, according to the original filing. That could mean that, should the deal end up in court, Twitter might secure an order obligating Musk to complete the merger rather than winning monetary compensation for any violations of it.
Musk’s lawyer, Mike Ringler of Skadden, Arps, Slate, Meagher & Flom, said Twitter must cooperate by providing the data requested so that Musk can secure the debt financing necessary to consummate the deal.
That claim is also complicated by the fact that numerous financial institutions have handed Musk commitment letters for debt financing, said Quinn.
Musk likely has a different experience with bots on the platform than most. Those designing automated accounts program them to follow popular users on a site, so that they fit in with the crowd and look more human. Musk, with a following of 96 million, probably attracts a higher percentage of bots than most users. His image has also been used by cryptocurrency accounts to run scams.
Though many outside estimates put portion of Twitter bots above the 5% threshold that the company has claimed, their assessments and methodologies vary. Andrea Stroppa, a former data consultant for the World Economic Forum and a veteran of scrutinizing online counterfeit goods, estimates that bot accounts have accounted for about 10% of Twitter’s global audience over the past nine years.
The rate rises to as much as 20% for some specific topics such as cryptocurrencies, the researcher said, and above 30% for accounts engaged in certain conspiracy theories.
“There’s a lot of money on the table, so he would have to have a lot of evidence to make it worth Twitter’s while to give up rather than fight for the original price,” said Ann M. Lipton, an associate professor in business law and entrepreneurship at Tulane University Law School in New Orleans. It could be “an ugly court battle.”