Twitter v. Musk: Explaining the Case that Broke the Internet
By Michaela Ryan-Lentini
Introduction
Pandemonium ensued on the internet this year when it was revealed that Elon Musk was buying the social media giant Twitter. It would seem, according to hysterical internet commentators, that the deal was already completed and Musk was firmly in control of the platform and its 229 million monthly users. However, we now know that was most definitely not the case. Less than a month later, Musk had put his 44 billion dollar deal ‘on hold’, claiming scepticism over the platform’s estimates of how many bots made up the site’s user base. By July, the deal had been ‘terminated’ by Musk, and Twitter responded by suing him in the Delaware Court of Chancery. But how did this happen? Can Elon really walk away from a 44 billion dollar deal with little opposition simply because he changed his mind, or does Twitter have a strong case to legally force Musk to go through with it? Unfortunately, the answer is not as simple as we might like.
How does Musk intend to get out of the deal?
Shortly after signing the deal, the stock market fell. This resulted in Twitter’s shares falling even further in price. As a result of this, Musk very quickly tried to find a reason to back out of the deal.
Musk’s team assembled a complex legal argument. This involved claiming Twitter failed to provide information that would enable “an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform”. The argument alleges that Twitter was in breach of the merger agreement, which requires Twitter to provide Musk any of the company’s data and information that he requests. Elon’s legal team argued that Twitter materially breached the contract by providing him with incorrect information that was misleading, thereby violating the covenant, instead of arguing that they strictly misrepresented the amount of bots on the platform. In a letter to Twitter, Musk’s representatives wrote that “based on the information provided by Twitter to date, it appears that Twitter is dramatically understating the proportion of spam and false accounts represented in its mDAU [monetizable daily active users] count”. Framing the issue as a breach of contract because the information is incomplete/incorrect and misleading as a result, enables the lawyers to avoid having to meet the higher standard for misrepresentation. The misrepresentation standard the Delaware Chancery Court requires is that the bot numbers have a materially adverse effect on Twitter’s functioning over the course of years. This standard is far too high to be satisfied in this case, so Musk’s lawyers must try to sidestep it with the breach of contract claim.
Crucially, Elon Musk waived his right to due diligence prior to signing the deal, which has a significant impact on his argument. The time for Musk to determine the accuracy of the information he was relying on was before the contract was completed. By waiving due diligence, Musk was essentially assenting to the accuracy of the information that Twitter had in their public filings, rather than seeking out information from Twitter himself. Though Elon refutes this, Twitter confirms in their proxy statement to shareholders that “Prior to entry into the merger agreement, Mr. Musk did not ask to enter into a confidentiality agreement or seek from Twitter any non-public info regarding Twitter”. Furthermore, although clause 6.4 entitles Musk to information and data, this clause is designed to facilitate a smooth change in ownership rather than enable due diligence after the contract has already been completed. Because of this key point, Elon cannot simply argue that the information was wrong, but must also prove that he was intentionally defrauded by Twitter into entering the agreement on the basis of the filings. This will be quite difficult, as Twitter states in their public filings that though they estimate that bot accounts make up less than 5% of MDUAs, the actual numbers may be higher than this. If it seems like Elon Musk’s legal team is grasping at inconsequential and insubstantial straws here to get out of a 44 billion dollar deal made for no real reason, your intuition may be right.
What are the options according to the contract?
The merger agreement itself gives some options for what can happen in the case of the contract breaking down. Clause 8.3 explains that there is a ‘termination fee’ which is set at $1,000,000,000 USD. However, this fee is of little practical importance here because the agreement also has clause 9.9, which entitles Twitter to seek specific performance. This enables Twitter to sue for Elon Musk to buy the company anyway at the original sale price. The only way that Musk can avoid upholding specific performance, is if his above argument succeeds and he is able to prove that Twitter was in fact in breach of the contract. This brings us to the lawsuit in question. Twitter is attempting to sue Elon for specific performance to legally obligate him to do what he very confidently said he would do, and in return he will try to argue that Twitter defrauded him into signing the contract.
Are the parties willing to go to Court?
Twitter is likely highly motivated to take this case to court on the facts we’ve seen so far. Twitter share prices are currently at $38.63USD (at the time of writing) and do not seem poised to rise significantly. Therefore, if Musk is obligated by the Delaware Court of Chancery to provide specific performance and buy the company for the agreed price of $54.20, Twitter’s shareholders will be in for a windfall. For the same reason, it is unlikely that Twitter’s shareholders would be satisfied with a settlement, as this would deprive them of gaining more money from one of the richest people in the world. It also seemed, until very recently, that Twitter was very well placed to win the case… but more on that later. Worth noting here is that regardless of their prospects, getting wrapped up in a legal battle is not exactly what Twitter wants or needs right now. In April, a Twitter team determined that the platform was failing to “detect child sexual exploitation and non-consensual nudity at scale”. Due to the nature of this issue, it is highly important that resources be directed into resolving it; however, the company was struggling to do so even prior to the acquisition. The diversion of resources and attention away from this issue, and towards Elon and the bots, is a casualty of this process that goes beyond the general inane events of the merger.
As well as the facts and finances generally looking in Twitter’s favour, the Court itself indicates that Twitter may be likely to come out successful. The Delaware Court of Chancery is a court that is highly practised in dealing with large scale Merger and Acquisition disputes. They are one of the most business/corporation-friendly courts in America and have not shied away from ruling on specific performance in favour of powerful vendors in the past. The court is known for perceiving buyers and sellers as equally entitled to specific performance as a remedy, rather than reserving this remedy largely for buyers. It is almost certain that the court will have little sympathy for Musk, and instead prioritise upholding the consistency and predictability of contract law. This, unsurprisingly, involves upholding contracts that have been freely entered into rather than allowing Musk an out. Curiously, the Delaware Chancery Court also moves very fast. After the commencement of the trial, it is likely to be concluded in a matter of a few weeks. Given the nature of the case as highly public and very much in the media spotlight, this factor could potentially have a huge impact on the court of public opinion. A lot of this dispute has already occurred in the public arena, as we saw by the CEO of Twitter defending his company’s information in a public twitter thread. This is also the first widely discussed trial since the Johnny Deep v Amber Heard defamation case earlier this year. That case demonstrated to the online community how a trial can very truly be played out in the public sphere as well as in court. It also showed us how deeply unhelpful that can be. The fast turn around of the Chancery Court may allow us the benefit of having this dispute resolved in the courtroom rather than on Twitter itself.
Will Elon want to go to trial? The answer to this has likely very recently changed. Up until the last few weeks, it looked like it would not benefit Musk at all to go to court and that he would be hoping for a settlement at a lower price. It even appears that he anticipated a settlement at the very least, as he sold around $7 billion worth of Tesla stock in early August to increase his capacity to finance either a settlement or the specific performance decision. If Elon did go to court and lose, he would be obligated to sell even more Tesla stock, causing it to crash. Not only that, but such a decision by the court would likely also crash Twitter stock, meaning that his $54.20 shares would be worth even less.
However, this was not meant to be. The richest person in the world got the luckiest break in the world by way of a miraculous whistleblower. Peiter Zatko, a high profile former Twitter employee, blew the whistle on Twitter in mid-August alleging that Twitter was violating their federal obligation to uphold safe security practices. Under a heading labelled “Legal Violations and Deceit”, Zatko claims that Twitter made “false and misleading statements” concerning their “security, privacy, and integrity” and made “fraudulent and material misrepresentations” to directors and investors. Zatko also alleged negligence and complicity with “efforts by foreign governments to infiltrate, control, exploit, surveil and/or censor the ‘company’s platform, staff, and operations”. This short description barely scratches the surface of the allegations but, if true, they clearly carry immense implications for not only the trial but also wider security concerns. Crucially for Musk’s case though, the whistleblower disclosure states the following:
… senior management had no appetite to properly measure the prevalence of bot accounts — because [...] they were concerned that if accurate measurements ever became public, it would harm the image and valuation of the company.
Keep in mind that Elon did not know any of this when he pulled out of the agreement. When claiming that Twitter misled him about the bot amounts, Musk was shooting in the dark for a reason to abandon the contract. It is sheer luck that he hit something. Musk’s legal team swifty subpoenaed Zatko and, at the time of writing, are appealing to the Delaware judge to amend their claim against Twitter to reflect this new information. Twitter, of course, contends that Zatko’s claims are entirely false and may argue that it would be unfair to allow the amendment.
Now what?
The upcoming legal battle in the Chancery Court is poised to be a lot closer than spectators may have initially anticipated. Twitter is still undoubtedly motivated to try to gain the specific performance ruling and Musk’s initial argument remains very weak. Twitter retains the benefit of the Delaware Chancery Court being incentivised to protect the consistency of contract law, and the fact that their previous rulings cater to Twitter as vendors. The Delaware judge may also be unsympathetic to Musk on the basis of his damning lack of due diligence. However, if Musk is able to amend his countersuit to reflect the Zatko information, and this can be validated, the balance may be shifting away from Twitter’s favour. It is also possible that by involving Zatko in the lawsuit, Musk will unleash an onslaught of highly damaging information about Twitter during discovery. Whatever happens, whoever ends up owning Twitter at the end of this process will be obtaining a platform riddled with problems.
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