It was late January, and Elon Musk had just announced a shift in gear at Tesla, the world’s largest electric car company. At the height of the global supply chain crisis, the firm would not launch any new models until at least 2023. But the $230bn (£194bn) US tech tycoon has found another focus for its attention. Within days, he began investing heavily in Twitter stock to build a stake that eventually reached over 9%.
On March 26, Musk had a conversation with his old friend Jack Dorsey. But it 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’s a future that now, at least for Twitter, hangs in the balance. Last week, the platform launched a multibillion-dollar lawsuit against Musk after the entrepreneur backed out of a $44 billion deal to buy the company. In a document outlining its claim, Twitter’s legal team gave a detailed account of the events that led to the deal’s collapse.
The Twitter logo on a screen at the New York Stock Exchange this month. Photo: Brendan McDermid/Reuters
Twitter is asking a Delaware court to force Musk to complete the takeover, which he agreed to in April at a price of $54.20 per share. The legal jargon is looking for “specific performance” — a requirement that it complete the deal as agreed — and a consensus is forming that Twitter has a strong case. He is pushing for a speedy hearing in September in the hope that a verdict will come before the deal’s Oct. 24 deadline. On Friday, Musk filed an appeal against Twitter’s request to speed up the process and is instead seeking a date in February of next year.
Twitter’s lawyers did not mince their words. Their scathing account of events offers an inside look at how an improbably corporate game between a hip-chirping multibillionaire and the platform he probably spends too much time on turned into vicious acrimony. The first paragraph of their lawsuit reads: “Having made a public spectacle of bringing Twitter into the game, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he—unlike any other party— subject to Delaware contract law—is free to change its mind, break up the company, disrupt its operations, destroy shareholder value, and walk away.
The document details how, at least from Twitter’s perspective, the relationship was rocky from the start. After the conversation with Dorsey, Musk let Twitter know that he intended to either join the board, buy the company, or take it private. Musk then discussed joining the board with Twitter CEO Parag Agrawal, its chairman Brett Taylor and board member Martha Lane Fox, the British co-founder of Lastminute.com.
Musk was offered the position and accepted in early April. But just days later, he said on Twitter that he would not be joining the board. Instead, he wanted to buy the company. Agrawal revealed the twist on April 11.
On April 13, Musk outlined his proposal to the board and announced it publicly a day later. In a sign that Twitter wasn’t entirely happy with this, it adopted a “poison pill” defense designed to prevent an unwanted suitor from amassing a significant stake.
It is at this point that Musk’s tweets begin to appear in the description of events in the case. This series of messages to his over 100 million followers is unlikely to help his case. The document cites repeated hints by Musk that a “trade offer” — or hostile bid — for the company was imminent, including a tweet that read “Love Me Tender.”
After many more differences, a deal was hammered out and the board recommended the offer to shareholders despite, the lawsuit states, concerns: “Twitter has been hit by Musk’s reversals before.” More crosswinds were to come.
Musk began to suffer, the lawsuit alleges, when markets turned against tech stocks. Their proposition of losses now but high returns in the future began to look less attractive as the global economy faltered and interest rates rose. The resulting selloff sent stock prices lower, affecting the value not only of Twitter but also of Tesla, whose stock was a key source of financing for the deal for Musk.
At the time, Musk began raising questions about the number of spam accounts on Twitter, which the company has always insisted represent less than 5 percent of its daily active user base of 229 million people.
In the lawsuit, Twitter argued that tanking markets coincided with Musk’s sudden stumble in early May. “As the market (and Tesla’s stock price) declined, Musk’s advisers began demanding detailed information about Twitter’s mDAU calculation methods [monetisable daily active users] and estimating the prevalence of fake or spam accounts. Not long after, on May 13, Musk tweeted that the deal was “temporarily on hold” due to the spam issue, and his desire to complete the transaction then waned.
Twitter deal temporarily on hold pending details supporting estimate that spam/fake accounts really represent less than 5% of users https://t.co/Y2t0QMuuyn
— Elon Musk (@elonmusk) May 13, 2022
Twitter says it was surprised by Musk’s declaration that the deal was on hold, but had an inkling in the days before when its bankers at Morgan Stanley circulated an agenda for a meeting with Twitter that included the question: “How do you estimate that less than 5% of mDAUs are fake or spam accounts?”
After the surprise tweet went viral, there was a legal wrangle: Twitter’s transaction advisor called Musk’s transaction advisor. 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 poop emoji at Agrawal in response to a lengthy Twitter thread from the CEO explaining the spam problem. The tweet inevitably appears in the lawsuit as part of Twitter’s argument that Musk himself violated the agreement by repeatedly maligning the company and its employees.
From there, it seemed inevitable that Musk’s lawyers would take to Twitter on July 8 to say he was ending the deal. In the lawsuit, Twitter describes “multiple” attempts to meet with Musk and clarify the spam issue. The meeting never took place.
Twitter founder Jack Dorsey said he would leave the company after the Musk takeover. Photo: Alamy
Howard Fisher, a partner at the New York law firm Moses & Singer, says Twitter’s case has a strong chance of succeeding, in part because of Musk’s behavior. “While courts are generally reluctant to order specific performance in these contexts, this may be one of the rare cases that warrants this remedy.”
In the termination letter, Musk makes three broad arguments: that Twitter breached the agreement by not providing enough information about spam accounts; that he misrepresented the number of spam accounts in his disclosures to the US financial regulator; and that it breached the agreement by not consulting him when firing senior staff recently.
The lawsuit refutes them one by one, claiming that Twitter “went overboard” to respond to all requests for information; that there is no evidence that there are erroneous spam numbers; and that Musk’s lawyers were contacted about the layoffs, which were anyway in the normal course of business and received no objections.
Anat Alon-Beck, a law professor at Case Western Reserve University in Ohio, says the case law in Delaware shows that Twitter has a strong hand. She says one of Musk’s key arguments, that Twitter’s spam problem represents a “material adverse effect on the company” that significantly alters the company’s value, will be difficult to substantiate. “I think Twitter has the upper hand here, according to Delaware case law,” Alon-Beck says.
Twitter shares rose 9% last week to $37.74, reflecting investors’ belief that there is a good case. But that still leaves the prospect of a company forcing a suitor it doesn’t like to buy a company it doesn’t want.
Chronology
Elon Musk’s bid for Twitter
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Key dates in the Tesla billionaire’s campaign to gain control of the social media giant
January 31, 2022
Construction of stakes
Elon Musk starts buying shares in Twitter
March 26, 2022
Preliminary talks
Musk discussed joining Twitter’s board with two directors, including co-founder Jack Dorsey
April 4, 2022
The bet revealed
Musk reveals stake of over 9% in Twitter
April 5, 2022
Engaging with the board
Twitter says Musk will join the company’s board
April 11, 2022
First signs of bidding
Twitter says Musk won’t join its board as Tesla boss prepares takeover
April 14, 2022
The offer
Musk offers $54.20 per share for Twitter, a 38% premium to Twitter’s April 1 closing price
April 15, 2022
“poison pill”
Twitter Adopts ‘Poison Pill’ Defense That Prevents Suitor From Accumulating Significant Shareholding To Protect Company From Unwanted Takeover
April 21, 2022
Financing
Musk announces that he has lined up $46.5 billion in financing for the deal
April 25, 2022
Acceptance
Twitter’s board accepts Musk’s proposal
April 29, 2022
Tesla assets
Musk is selling more than $8 billion worth of Tesla stock to finance the acquisition
May 5, 2022
Backers join the bidding
Musk revealed he had secured $7.1 billion in funding for the bid from a group of investors including tech mogul Larry Ellison
May 11, 2022
Dorsey is considering retiring
Dorsey says he will not return as CEO after the takeover
May 13, 2022
The deal is on hold
The slide to the end begins. Musk says the Twitter deal is on hold pending a review of spam and fake accounts. He later tweeted that he remained committed to the deal.
May 25, 2022
Tension in the meeting room
Twitter investors vote against re-electing Musk ally to board
May 26, 2022
Twitter…
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