Two people close to the deal, who spoke on condition of anonymity because they were not authorized to speak publicly, said the tweet reflected Musk’s attempt to lower the price from $44 billion. That amount settled before the stock market plunged in recent weeks, making the acquisition relatively more expensive for Musk.
The ‘bot’ accounts he raised concerns about are a financial risk on Twitter. Musk said he plans to remove those accounts when he completes his acquisition of the company. But the bots are just as profitable as regular accounts do, thanks to displaying the same ads. If there are more fake accounts than Twitter allows, removing them will mean a decrease in revenue.
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Musk, whose net worth has fallen by nearly $50 billion in recent weeks as Tesla and other tech stocks hit markets, is free to back out of the deal if he gets cold. Much of Musk’s fortune comes from his 17 percent stake in Tesla. The electric car company is now worth nearly $800 billion. Musk funded the majority of his Twitter acquisition but still needed to pay $21 billion, which he did It aims to obtain it through foreign investments.
But even if Musk discovers that Twitter is significantly reducing the number of bots on his service and decides to back off the purchase, he will still be in trouble for $1 billion to close the deal, legal experts say. And if he withdraws from the deal, Twitter will likely sue him, which could claim massive financial damages for the turmoil Musk has caused since agreeing to take over the company.
Musk and Twitter did not respond to requests for comment.
Musk began secretly buying shares on Twitter this year before publicly revealing that he had acquired more than 9% of the company. Initially, he agreed to accept a position on the company’s board of directors and limit his ownership stake, but he quickly reversed his position and made an offer to take over the entire company, an offer that Twitter’s board accepted late last month after Musk was able to secure financing for the deal.
Like most merger agreements, Twitter’s contract with Musk contains a “material adverse effect” clause. Essentially, the clause means that if something significant happened to Twitter before the deal closed, and it affected the company’s long-term business in a major way, the deal could be cancelled.
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Urska Velikunga, a professor at Georgetown University School of Law, said the problem with robots is not a good enough reason. “If he tries to sue, he loses,” she said.
Twitter has long said that about 5 percent of its user accounts are bots, but that number has come under scrutiny, and several reports over the years have suggested the number of bots is much higher. Because Musk has announced that he will fix the bot problem on Twitter, he will find it difficult to argue that the abundance of bots on the platform is anything he didn’t already know when he made the bid.
Filikunga said there have been very few cases in which an acquirer has successfully argued in court that a material adverse change has occurred. The landmark example, she said, was a 2018 ruling in favor of Fresenius SE, which agreed to acquire generic drug maker Akorn.
After agreeing to take over the company for $4.75 billion, Acorn said it received information from an anonymous whistleblower who alleges Acorn failed to comply with regulatory requirements and withheld that information from its buyer. In a rare ruling, the judge in the case said Acorn’s “fatal mistakes” were grounds for ending the deal. Acorn did not respond to a request for comment.
In 2020, luxury holding company LVMH Moet Hennessy Louis Vuitton SE reneged on its agreement to acquire Tiffany & Co. For $ 16 billion after the emergence of the global epidemic. Even the pandemic was not a sufficient justification. LVMH alleged that the French government, where LVMH is based, blocked the deal. Tiffany sued anyway. The two companies eventually sealed the deal this year for $16.8 billion.
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Musk may not have any legal basis to stand on it, but trying to get out of the deal may still be worth a try. Just tweeting that the deal was “on hold” sent Twitter’s stock price down. If Musk withdraws from the deal, Twitter will be left in a worse position than it was before the deal, with a lower stock price, a shaky management team and an uncertain future. Any damages that Twitter could recover from Musk in a long and drawn-out lawsuit would not be much consolation.
Musk has a history of using Twitter to move markets, which has drawn attention in some cases from regulators. He tweeted in 2018 that he secured funding to take Tesla private at $420 a share. The SEC fined him $20 million, claiming the tweet was untrue.
Experts say that if Twitter negotiates and agrees to a lower sale price, it will lead to other problems. Shareholders have already filed a lawsuit against Twitter, claiming that the $44 billion price tag is too low to start with. More lawsuits are likely to follow.
Musk’s ability to irritate Twitter with his own tweets is something made clear in the merger agreement he signed with the company. Neither Musk nor Twitter is allowed to make announcements about the agreement without permission from the other side, but the waiver gives Musk permission to tweet about it.
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With that said, Musk walks a good legal streak when he moves stock prices in his favour with his tweets.
said David Rosenfeld, professor of law at Northern Illinois University School of Law. “But it’s unclear if there will be anything to the contrary, just given what we know now.”
While a lot of attention has been paid to Twitter’s stock price, this number is not actually a relevant measure of value in court. Twitter’s underlying financial performance is what determines its value and selling price for the company. Its share price may have fallen, but the company’s ability to generate revenue from advertising has not changed in any way.
What has changed is that if Musk is unable to line up more investors, he will put a much larger percentage of his net worth into buying Twitter.