Tesla and SpaceX boss Elon Musk has threatened to scrap his much touted deal to purchase Twitter.
In a letter sent to Twitter this morning, Musk’s legal team claims that Twitter has failed to provide him with information on the service’s spam bot problem and that he’s entitled to receive that information under the deal agreement.
In an amended securities filing on Monday, Musk said he believes Twitter is “actively resisting and thwarting his information rights” by refusing to disclose the information.
"As Twitter's prospective owner, Mr Musk is clearly entitled to the requested data to enable him to prepare for transitioning Twitter's business to his ownership and to facilitate his transaction financing. To do both, he must have a complete and accurate understanding of the very core of Twitter's business model - its active user base," lawyer Mike Ringler wrote in the letter.
"Based on Twitter's behaviour to date, and the company's latest correspondence in particular, Mr Musk believes the company is actively resisting and thwarting his information rights," the letter said.
"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."
Last month, Musk said he wouldn’t proceed with his $44 billion takeover of Twitter unless the social media giant can prove bots make up fewer than 5 percent of its users.
Cold Feet?
Much of Musk’s initial $46 billion plan to finance the deal used stock in Tesla, his electric vehicle company, as collateral for loans he would use to purchase Twitter shares in the deal. He’s since adjusted the plan so that more investors may be involved, including those with Twitter shares. But it’s not clear exactly who those investors might be.
Tesla’s stock price has also fallen dramatically since April 4, the day Musk disclosed that he was Twitter’s largest stakeholder. Its 35% decline has cut deeply into Musk’s wealth, even though he remains the world’s richest person.
Tesla’s falling share price also reduces the amount Musk can borrow against his Tesla holdings. Company rules limit Musk to borrowing no more than 25% of the value of his Tesla stake, which means Musk can now raise roughly $13.5 billion against his shares. The figure doesn’t include stock options Musk has exercised or loans he may have repaid.
Musk now owns about 163 million Tesla shares valued at $114.7 billion, according to FactSet.
Can Musk Back Out Now?
Experts say Musk can’t unilaterally place the deal on hold, although that hasn’t stopped him from acting as though he can. If he walks away, he could be on the hook for a $1 billion breakup fee. Twitter could also sue to force him to complete the acquisition on the agreed terms.
The Twitter sale agreement does allow Musk to get out of the deal if Twitter causes a “material adverse effect,” defined as a change that negatively affects Twitter’s business or financial conditions. That’s one reason Musk may be focusing on the spam bot problem — though he waived many of his rights to peek under Twitter’s hood when he signed the deal.
What Are Spam Bots?
Bots are basically programs that post automated tweets, either for information — like the U.S. government’s “quakebot,” which tweets the details of seismic events — or entertainment. Musk, however, has focused his ire on the “spam bots” used to blast out sales pitches or to inflate the influence of a person or cause.
That problem is highly visible to Musk, one of Twitter’s most active celebrity users, whose name and likeness are often mimicked by fake accounts promoting cryptocurrency scams. Musk says it’s also a problem for advertisers who take out ads on the platform based on how many real people they expect to reach.
So now such bots — and the way Twitter counts them — have become a sticking point in the deal. Twitter has long disclosed it has a “number of false or spam accounts” but estimates that they comprise fewer than 5% of its more than 200 million daily active users.
Musk insists the company has been undercounting them and has demanded that Twitter turn over its internal data for him to examine. It’s not clear whether he can legally demand such information after declining his right to conduct “due diligence” on Twitter’s internal accounting and operations. Some experts say a court will have to decide that.
How Has Twitter Reacted?
Twitter spokesperson Brian Poliakoff said the company has been cooperating with Musk and will continue to share information. “We intend to close the transaction and enforce the merger agreement at the agreed price and terms,” Poliakoff wrote in a statement emailed to The Verge.
Twitter estimates that less than 5 percent of its daily users are spam accounts. Last month, Twitter CEO Parag Agrawal said the company had provided Musk with an explanation of how Twitter generates its spam estimates.
“We shared an overview of the estimation process with Elon a week ago,” Agrawal wrote in mid-May, “and look forward to continuing the conversation with him, and all of you.”
(with inputs from agencies)
