Like countless other contract disputes, Twitter’s ( TWTR ) clash with Elon Musk over the Tesla ( TSLA ) CEO’s attempt to back out of his $44 billion agreement to acquire the social media company includes language that could be open to multiple interpretations.
However, don’t expect Twitter or Musk to admit that the legal entities laying out the terms of their merger agreement leave the slightest ambiguity about their respective rights.
After publicly taunting Twitter with the threat of a hostile takeover and forcing the board’s hand with a premium too good to refuse, Musk agreed to the sale based on a merger agreement drafted by some of the world’s most expensive lawyers. that can be bought with money. Within weeks of signing the contract, Musk hinted that he was cold and then terminated the deal, citing suspicion that Twitter’s platform suffered from a higher prevalence of fake accounts than the reported less than 5%.
Twitter claims in a complaint against Musk that the agreement allows it to reject Musk’s demands and force him to buy the company. Musk’s lawyers, for their part, say he can walk away from the deal entirely because Twitter’s refusals qualify as a material breach — and possibly a “material adverse effect” that would void the deal. In a July 8 termination letter, Musk’s lawyers called the bot data “fundamental to Twitter’s business and financial performance” and necessary to complete the deal.
NEW YORK, NEW YORK – MAY 02: Elon Musk attends the 2022 Met Gala celebrating ‘In America: An Anthology of Fashion’ at The Metropolitan Museum of Art on May 2, 2022 in New York City. (Photo by Theo Wargo/WireImage)
Instead, Twitter says Musk is using the bot’s request as a pretext to back out of the deal, noting that the Tesla CEO has repeatedly snubbed Twitter on the platform itself. Twitter also notes that Musk’s premium purchase offer of $54.20 per share is much higher than the stock’s recent value — the company’s shares were trading at $37.74 at the close on Friday.
“Argument Room”
Despite competing claims, the actual merger document does not specifically mention bot data. It lays out general terms for Musk’s right to access information until the deal closes and Twitter’s right to withhold it.
The story continues
“There’s certainly going to be room for argument,” University of Delaware Widener Law Professor Lawrence A. Hamermesh told Yahoo Finance.
The proliferation of fake accounts would threaten the basis of Twitter’s revenue stream — advertisers pay to reach real, human account holders, not bots. A bot rate higher than Twitter claims could scare away investors, advertisers, and possibly even consumers, as bots can both reduce genuine ad impressions and spread misinformation.
SUN VALLEY, IDAHO – JULY 07: Parag Agrawal, CEO of Twitter, goes to a morning session during the Allen & Company Sun Valley Conference on July 07, 2022 in Sun Valley, Idaho. The world’s richest and most powerful business people from media, finance and technology will gather at Sun Valley Resort this week for the exclusive conference. (Photo by Kevin Dietsch/Getty Images)
As of the fourth quarter of 2021, the company’s regulatory filings indicated that fake or “spambot” accounts accounted for less than 5% of its user base.
For Musk, his lawyers argued that under a clause in the contract, Twitter was on the hook for handing over enough data to allow it to independently assess cases of fake accounts.
To support their claim, his lawyers cited the text of the contract, which says Twitter must give him “reasonable access” to Twitter’s “property, books and records” and promptly provide him with “all information concerning Twitter’s business, properties and personnel ” for any “reasonable business purpose related to the performance” (emphasis added) of the transaction.
“That section gives Musk some rights to get information,” Hammermesh said. “But it’s not a carte blanche, free-for-all access to information.” The language, he explains, poses hurdles for Musk to show he needs the data for a “reasonable purpose” that is “related” to making the deal.
“What is a reasonable business objective? What’s involved?” he asks, explaining that these issues, if the dispute goes to court, will be decided by a judge. Still, he says, “I’m sure there’s plenty of room to argue both sides of this.”
Twitter will likely argue that the type of information Musk is requesting is not covered by the contract language, and that Musk may have requested bot-related data before agreeing to the merger agreement, Hameresh said.
“It means what the trier of fact decided it meant”
To further muddy the waters, Twitter also cited inaccurate contract language to argue that it was free to reject Musk’s demands.
The company cited a provision that allows it to withhold information if it determines in its “reasonable judgment” that disclosure of the data would “cause significant competitive harm” to Twitter if the deal does not close. In other words, Twitter may decide that there is too much risk of competitive harm to Twitter if Musk fails to acquire the company and is left with tools to assess fake account data.
This language also leaves room for interpretation. What is “reasonable?” What is “significant?”
Columbia Business School senior lecturer Donna Hitscherich says resolving these issues through litigation is a risk for both Twitter and Musk, as a judge will have to interpret the meaning of ambiguous terms in the merger agreement.
“In reality, it means what the fact that it means decides,” Hitchscherich said.
In addition to the right to reject Musk’s requests, Twitter says the agreement further insulates it from handing over the data because Musk waived his right to due diligence — the right to obtain certain private information on Twitter. The very absence of a due diligence clause in the contract, they argue, means Musk has no right to demand data from a bot as a condition of acquiring the company.
Musk’s lawyers argue that he has not actually waived his right to review the data.
Unless Twitter and Musk settle their dispute, Delaware’s chief justice, Kathleen McCormick, will be left to interpret the contract. Before that, Musk will have a chance to respond to Twitter’s accusations that he tried to scuttle the deal in response to the company’s complaint.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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