Elon Musk is withdrawing from his deal to buy Twitter Inc., and Twitter’s chairman has already promised litigation.
In a letter to Twitter’s TWTR,
Chief Legal Officer on Friday, the Tesla Inc. TSLA,
and SpaceX’s chief executive claimed he would terminate the agreement because Twitter would not share the requested information with him, and the information that was shared confirmed his belief that there were more bots on the service than Twitter had on itss Securities documents claimed .
“Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of several terms of that Agreement, appears to have made false and misleading statements on which Mr. Musk relied in entering into the Merger Agreement, and is likely to suffer material disruption to the Company ‘ said the letter, which was filed with the Securities and Exchange Commission.
First Take (May 2022): Elon Musk no longer wants to buy Twitter, but Twitter can still squeeze $1 billion — or more — out of him
A “material adverse effect of the company” would be a material change in the underlying business since the transaction was signed or a misstatement at the signing of the transaction that would allow the transaction to be terminated. In the letter, Musk and his attorneys allege that misstatements about the number of bots on the service are reaching the threshold, but also indicate that the company may face issues that would also serve the purpose.
“Mr. Musk is also reviewing the Company’s recent financial performance and revised outlook and will consider whether the Company’s declining business and financial prospects constitute a material adverse impact on the Company that provides Mr. Musk with a separate and distinct basis for terminating the merger agreement “, says the letter.
Twitter chairman Bret Taylor took to the social media platform to respond to Musk and promise to take him to court in Delaware. “Twitter’s board of directors is committed to completing the transaction at the price and terms agreed with Mr. Musk and plans to take legal action to enforce the merger agreement,” Taylor, Salesforce.com Inc.’s tweeted CRM Co-CEO. “We are confident that we will prevail in the Delaware Court of Chancery.”
Musk agreed to buy Twitter for $54.20 a share in April after beginning to build a position in the social media company in January. Twitter shares closed at $36.81 on Friday, then fell more than 6% in after-hours trading after the release of Musk’s letter.
In agreeing to purchase the company, Musk waived due diligence and signed a deal to purchase the company at a cost of around $44 billion. Since the broader stock market has fallen sharply since this deal, Musk has requested more information about bot accounts on the service.
The agreement includes a $1 billion separation fee for both parties, which provides pre-determined grounds for breaching the contract. Twitter could seek more than the $1 billion fee in court, up to and including the full $44 billion Musk promised to pay in April.
In the letter to Twitter, addressed to Chief Legal Officer Vijaya Gadde, Musk cited Twitter’s number of bots and other issues with the way it collects and provides data on its monetizable daily active users, or mDAUs.
“Although Twitter has not yet provided Mr. Musk with complete information that would enable him to conduct a full and comprehensive review of spam and fake accounts on the Twitter platform, he has been able to verify the accuracy of Twitter’s disclosures to be partially and tentatively analyzed with respect to its mDAU. While this analysis is ongoing, all indications are that several of Twitter’s public disclosures regarding its mDAUs are either false or materially misleading,” the letter reads.
Specifically, Musk claims that the actual number of bots on Twitter is “wildly higher” than the 5% Twitter claims in its filings with the SEC, and that Twitter executives admitted in a call June 30 that they had suspended accounts include in their mDAU count.
Additionally, Musk claims that Twitter’s board of directors declined to provide the requested information on its financial performance and expectations.
“Mr. Musk requested a variety of board materials on June 17, including a working bottom-up financial model for 2022, a budget for 2022, an updated plan or draft budget, and a To work Copy of Goldman Sachs’ valuation model on which its fairness opinion is based. Twitter only provided a PDF copy of Goldman Sachs’ final executive presentation,” the letter said.
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Musk also claims he has not been consulted on Twitter personnel changes in the time since the acquisition deal was signed, including the firing of two executives, the resignation of three other executives, and layoffs in the talent acquisition team, which were confirmed by MarketWatch Wednesday, and one general hiring freeze.
“The Company has not obtained parent company approval for changes in the conduct of its business, including the specific changes listed above,” the letter concludes. “The Company’s actions therefore constitute a material violation of Section 6.1 of the Merger Agreement.”
Wedbush Securities analyst Daniel Ives called the unfolding situation “a disaster scenario” for Twitter’s board on Friday afternoon.
“This is a catastrophic scenario for Twitter and its board as the company will now face Musk in a protracted court battle to recover the deal and/or at least a $1 billion breakup fee,” Ives wrote. “Twitter shares are probably trading at $25 right now [to] $30 range when the stock opens Monday with no deal likely.”
Tesla shares rose nearly 3% in after-hours trading following the news. Ives wrote, “For Tesla stock, this will be a recovery rally as this situation was an overhang in the stock, but the street is concerned about the upcoming court battle between Musk and the Twitter executive.” Shares in Digital World Acquisition Corp . DWAC,
a blank check company seeking a merger with the Truth Social property linked to Donald Trump also gained in late trade.
https://www.marketwatch.com/story/elon-musk-terminates-deal-to-buy-twitter-11657315801?rss=1&siteid=rss Elon Musk ends deal to buy Twitter and Twitter chairman promises litigation