Bot Bickering
In my previous article, from late May, we dove into the details of Musk’s build-up and offer to buy the social media giant Twitter. Safe to say a lot has happened since then. Even then there was speculation the deal could flop, but now we are stuck in limbo not knowing whether Musk will be forced to buy Twitter for the initial $44 billion offer, buy Twitter at a discounted price, pay the $1 billion breakup fee, or scrap the deal entirely and leave Twitter spiraling further down as we head into a possible recession.
A quick recap: On January 31st, Elon Musk, the world’s richest man, started to build his stake in Twitter. Then, on April 14th Musk offered to buy the company, and less than two weeks later an offer of $44 billion was agreed upon. However, on May 13th Musk stated the Twitter deal was on “temporary” hold due to pending details of fake Twitter accounts, also known as “bots”. After almost two months of uncertainty Musk officially withdrew his bid to buy Twitter on July 8th, but Twitter fired back calling his termination “invalid and wrongful”, filing a lawsuit to force Musk to pay the full $44 billion initial offer, or at least the $1 billion break up fee (Garfinkle 2022). Musk claims he is terminating the deal due to Twitter’s inability or reluctance to disclose information regarding fake and spam accounts on Twitter spreading misinformation; However, Twitter called this a “pretext” and instantly sued the famous billionaire in Delaware (Garfinkle 2022). History shows it is evidently difficult to get out of a deal if you can not prove the company committed a “material adverse event” that shifted the circumstances of the deal massively which negatively affects the value of the company. There has never been a breakup of a deal anywhere close to this size (Garfinkle 2022). There are no clear precedents to base the ruling on the deal or even a sizable $1 billion breakup fee. The closest case to draw upon from history is the Tyson vs IBP Inc. case from 2001 (Garfinkle 2022). Over two decades ago, the food giant Tyson attempted to back out of a deal to buy the beef processor IBP Inc. for $3.2 billion, due to the claim of undisclosed accounting issues and declining company performance (“In Re IBP Inc. v. Tyson Foods Inc.” 2001). In the end, the same Delaware Chancery Court forced Tyson to go through with the deal, but applying this to the Musk-Twitter deal is a stretch for many reasons, such as the ruling being over two decades ago and a tiny deal compared to the $44 billion Musk was ready to hand over a few months ago. Head of media and entertainment M&A at Solomon Partners, Mark Boidman, stated: “There’s never been anything this high-profile that touches on specific performance…That said, if the court finds there’s a breach I can’t imagine that the court won’t make the buyer go through with the deal just because of the size” (Garfinkle 2022). Ultimately, the size of the deal should not matter when determining the outcome of this case.
The first step in this debacle was taken on July 16th, when the judge ruled in favor of Twitter granting them a fast-tracked litigation in the court case against Elon Musk (Keenan 2022). Some saw this as a slight clue as to who will win this case, building the argument for Musk having to pay the full $44 billion. Twitter requested a four-day expedited trial in September while Musk demanded for a date no sooner than February. Within minutes of arguments from both parties, Delaware Chancery Court Chancellor Kathaleen McCormick ruled mostly in line with Twitter’s request, a five-day trial in October (Keenan 2022). It was reported that the judge’s ruling came from Twitter’s time-sensitive concerns, however, this case is in its very early stages, so although this was a win for Twitter, there is still a majority of the battle to be fought. This will surely be a long and tough court case, whatever the final verdict is. So far the odds seem to be in Twitter's favor. History has shown it is very difficult to provide enough evidence to show that the circumstances have changed due to adverse events to devalue the company in question. History has also shown that the Delaware Chancery Court, as well as Chancellor Kathaleen McCormick both, have a record of forcing companies or individuals to commit to their previous deal terms that they no longer want, which is known as specific performance (Dugan 2022). In addition to this historical trend, according to many investment bankers, Chancery judges in the past did not look kindly on rich business types who attempt to change terms once the ink has dried (Gasparino 2022). Elon Musk, a whimsical “meme lord” tweeter and eccentric billionaire, not only fits this stereotype but has gone far beyond it. A few days after withdrawing his $44 billion offer to buy one of the largest social media platforms in the world, the world’s richest man posted a meme of himself poking fun at Twitter and their fake accounts.
It is clear Elon Musk has a history of provocative and comical use of Twitter, which millions of users love and adore, but the judge of his court case will not. All the polls and memes he posted recently will now all become evidence and could be used against him in the courthouse (Dugan 2022).
Musk's antics on Twitter aside, this court case boils down to the prevalence of Twitter’s fake and spam accounts in their user base. Musk states he is backing out of the deal due to Twitter not providing the information he is requesting, but Twitter believes the bot bickering is a pretext and Musk is deliberately trying to discourage the deal through requests of large amounts of irrelevant information and derogatory tweets (Keenan 2022). This uncertainty has weighed heavily on Twitter’s stock price, advertising ability, and business operations as a whole, which many analysts believe was a major reason the judge ruled in favor of Twitter’s expedited court date sooner than later. Brian Quinn, a Boston College Law professor, stated what he believes the expedited trial will mean for the outcome of the case: “If the judge just wants to ask questions about what’s in the contract, it’s not necessarily going to be that complex. If the judge is going to allow Musk to get down to what exactly the number of bots is, then that’s a more complex question” (Keenan 2022). This just means in such a quick trial complexity favors Musk. If the judge is just going to look at all this drama in black and white, then we should expect Twitter to make a better case that forces Musk to pay the full amount. If Musk’s lawyers are able to dig into their concerns over the number of bots in Twitter’s user base, then we could see some serious progress toward this deal being dropped altogether. An analyst at Raymond James, Aaron Kessler, stated: "We remain cautiously optimistic that Twitter can enforce the agreement though realize this could drag on for some time" (Garfinkle 2022). On July 13th, two days after Twitter filed suit, short-seller Hindenburg Research released a statement detailing they had taken a significant long position in Twitter in hopes Musk would have to pay the full $44 billion initial deal amount (Murphy & Aliaj 2022). With both entities in limbo concerning the deal, the next step, in this case, is on September 13th when Twitter shareholders formally approve the deal forcing Elon Musk to go to court. There is always the possibility that Musk (who owns a little less than a tenth of the company) and other shareholders veto and scrap this court case altogether (Dugan 2022).
On July 19th, just hours after Chancellor Kathaleen McCormick set the five-day trial on October 17th, Elon Musk submitted a 164-page lawsuit against Twitter. He accused Twitter of “dragging its feet” in response to his requests and called the information that he needed “irrelevant” (Reuters 2022). Twitter claimed the huge amounts of information were to prolong the main issue of the case, when Musk violated the deal contract when he withdrew, and also blames their constant legal fighting with Musk for the company’s slumping revenue and internal chaos (Reuters 2022). Some believe Musk has a plan through all of this madness to go through with buying Twitter but at a lower price. Musk was quoted in early May saying the Twitter deal at a lower price “is not out of the question (Bursztynsky 2022). Many bankers and analysts believe his mindset has not changed and he is taking a strategic approach using the war of attrition, meaning he wants to drag this process out as long as possible and wear down the operations and stock price of Twitter until they give in and agree to a lower deal price (Gasparino 2022). One analyst stated: “He couldn’t have been surprised by the fakes, in my humble opinion, because he knew there were issues. In fact, he said he had plans to get rid of them and turn the ubiquitous social-media site into something like a successful business” (Gasparino 2022). The world’s richest man isn’t foolish, his plan is to prolong the process whether he plans to buy Twitter at a lower price or not at all. Advertisers are already ditching the social media giant due to Musk’s comments and drama, and with a recession peeking around Twitter could be in some serious trouble if Musk doesn’t buy out the company at any reasonable price. An analyst at Jefferies, Brent Thill, has been following the deal closely and believes in the absence of a deal the floor for Twitter’s stock would be $22.50, which is over 45% lower than the current trading range (Sozzi 2022). With Twitter and its peers (such as Snapchat and Facebook) reporting poor earnings and guidance, a gloomy recession, and a long legal battle with the richest man in the world, it might be smart for Twitter to settle for a lower deal price.
In addition to those daunting headwinds, Twitter has recently been fighting another battle against a whistleblower who exposed many problems within the business. A whistleblower complaint by Peiter Zatko was made public last month which claimed Twitter misled regulators and investors concerning their security systems and spam account numbers (Mehta 2022). In his 84-page complaint, Zatko stated Twitter falsely claimed it had a solid security plan and reported spam estimates in their quarterly filings that were inaccurate. Zatko ridiculed Twitter’s inadequate defenses against spam accounts and hackers, which raises concerns outside of the Musk case since Twitter is a massive technology platform that collects immense data on its millions of users but yet is apparently very susceptible to spam and hacking. The documents also claimed Twitter prioritized user growth over spam account control, which was evident in the executive incidents that amassed up to $10 million for increasing user count but none for reducing spam accounts (Mehta 2022).
Peiter Zatko was the social media company’s former Head of Security but was fired a few months ago. Before his termination, Zatko raised multiple concerns to Twitter’s board about the security systems but never received a response from Twitter (Mehta 2022). Along with being terrible timing for Twitter, this complaint hit the social media giant hard because Zatko is a well-respected hacker who became famous for his password-hacking tools in the 1990s. He was even offered the position of Chief Information Security Officer for the United States of America in January after the riots but turned it down (Mehta 2022). Due to his reputation, he received ample support for his claims; However, Twitter labeled the whistleblower complaint as a “false narrative that is riddled with inconsistencies and inaccuracies” by CEO Parag Agrawal (Mehta 2022).
Musk’s legal team has subpoenaed Zatko in hopes his whistleblower complaint and his insider knowledge can help win his case against appealing the $44 billion buyout deal. It is believed Musk primarily wants to find out from Zatko how Twitter measures their spam accounts and any inefficiencies in their methodology, to discover any attempts of Twitter to hide security weaknesses that are not complaint the 2011 Federal claim agreement, and aunty action by Twitter that could be seen as unlawful (Hals 2022). For a few weeks, it was unclear if the judge was going to allow Musk to use this information in the court case due to the tight schedule of the court date, which would have placed a large significance on the earlier decision of an expedited trial in favor of Twitter; However, judge Chancery McCormick ruled in favor of Musk in his ability to use Zatko and his claims in the court case, but denied Musk’s request to delay the trial due to Twitter being so vulnerable (Hals 2022).
There is no shortage of excitement with various moving parts in this deal. Just as with anything Elon Musk does, this deal has been anything but boring. The only thing more bizarre than the drama concerning this deal might be the rumors that Elon had an affair with the wife of Sergey Brin, longtime friend and co-founder of Google (Grind & Glazer 20222).
Work Cited
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Dugan, Kevin T. “Elon Musk Is Already Losing His Court Battle with Twitter.” Intelligencer, Intelligencer, 29 July 2022, https://nymag.com/intelligencer/2022/07/elon-musk-is-already-losing-his-court-battle-against-twitter.html.
Garfinkle, Alexandra. “Twitter v. Musk: Can the Billionaire Be Forced to Buy Twitter?” Yahoo! Finance, Yahoo!, 12 July 2022, https://finance.yahoo.com/news/twitter-v-musk-two-instances-where-companies-were-forced-to-go-through-with-a-deal-205013899.html.
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“In Re IBP Inc. v. Tyson Foods Inc.” Legal Research Tools from Casetext, CaseText, 15 June 2001, https://casetext.com/case/in-re-ibp-inc-v-tyson-foods-inc.
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