Like countless other contract disputes, Twitter’s (TWTR) struggle with Tesla (TSLA) CEO Elon Musk has attempted to break out of his $44 billion deal to acquire the social media company that has turned into language that can be open to multiple interpretations.
Don’t expect Twitter or Musk to admit that the legal rules defining the terms of their merger agreement leave the slightest ambiguity about their respective rights.
After publicly mocking Twitter by threatening a hostile takeover and forcing the board of directors to pay a premium too good to refuse, Musk agreed to the sale based on a merger agreement drafted by some of the most expensive lawyers the money could buy. Within weeks of signing the contract, Musk hinted at not hesitating and then terminated the deal, citing a suspicion that Twitter suffered a higher prevalence of fake accounts compared to less than 5%.
Twitter alleges in a complaint against Musk that the agreement allows it to deny Musk’s demands and force him to buy the company. For their part, Musk’s lawyers say he can abandon the agreement entirely because Twitter’s refusal is a material breach — and possibly a “material negative effect” that would invalidate the deal. In their July 8 termination letter, Musk’s lawyers described the bot data as “essential to Twitter’s business and financial performance” and necessary to seal the deal.
Instead, Twitter says Musk is using the bot request as an excuse to back out of the deal, noting that the Tesla CEO has repeatedly belittled Twitter on the same platform. Twitter also notes that Musk’s token bid at $54.20 per share is significantly higher than the most recent value of the share — the company’s stock was trading at $37.74 at market close Friday.
“room for argument”
Despite competing claims, the actual integration document does not explicitly mention bot data. It spells out general terms about Musk’s right to access information until the deal closes, and Twitter’s right to withhold it.
“There will certainly be room for controversy,” University of Delaware Lawrence Hammermesh professor of law told Yahoo Finance.
The proliferation of fake accounts would threaten the foundation of Twitter’s revenue stream – pushing advertisers to reach real and human account holders, not bots. A higher bot rate than Twitter claims can intimidate investors, advertisers, and possibly even users, because bots can reduce the visibility of real ads and spread misinformation.
As of the fourth quarter of 2021, the company’s regulatory filings state that fake or “spam” accounts represent less than 5% of its user base.
On Musk’s side, his lawyers say that under one of the terms of the contract, Twitter was in trouble to provide enough data to enable it to independently assess the occurrence of fake accounts.
To support his claim, his attorneys cite contract language which states that Twitter must provide him with “reasonable access” to Twitter’s “property, books, and records,” and promptly provide him with “all information relating to Twitter’s business, property, and employees for any”Reasonable business purpose related to fulfillment” (emphasis added) of transactions.
“This section gives Musk some rights to access information,” Hammermusch said. “But it’s not carte blanche, free-for-all access to information.” He explains that language presents obstacles for Musk to show that he needs the data for a “reasonable purpose” that is “related” to completing the transaction.
“What is a reasonable commercial purpose? What is relevant?” He asks, explaining that these questions, if the dispute is resolved in court, it will be up to the judge to decide them. Still, he says, “I’m sure there’s plenty of room to discuss both sides.”
Hammerich said Twitter was likely to confirm that the type of information Musk requested was not covered by contract language, and that Musk could have requested data about the robots before he agreed to the merger agreement.
“It means what the truth-experimenter decides.”
To further muddle the waters, Twitter is also citing imprecise contract language to say it’s free to deny Musk’s requests.
The company is citing a clause allowing it to withhold information if it determines in its “reasonable judgment” that disclosure of the data would “do significant competitive harm” to Twitter if the deal is not closed. In other words, Twitter could determine that there is too much risk of competitive damage to Twitter if Musk fails to take over the company and leave tools for estimating fake account data.
This language also leaves room for interpretation. What is “reasonable”? What is “important”?
Resolving these questions through litigation is a risk for both Twitter and Musk, says Donna Hitscherich, senior lecturer at Columbia Business School, because the judge will have to interpret the meaning of the vague terms in the merger agreement.
“Actually, it means what the truth factor decides,” Hitschrich said.
In addition to retaining the right to deny Musk’s requests, Twitter says the agreement further protects it from handling data because Musk has waived his right to due diligence — the right to some private Twitter information. They claim that the lack of a due diligence clause in the contract means that Musk has no right to demand bot data as a condition of acquiring the company.
Musk’s lawyers claim that he has not, in fact, waived his right to review the data.
Unless Twitter and Musk resolve their dispute, Delaware Chancery District Judge Kathleen McCormick will be left to interpret the contract. Before that, Musk will have a chance to respond to Twitter’s accusations that he tried to spoil the deal in response to the company’s complaint.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter Tweet embed.
Follow Yahoo Finance on TwitterAnd the FacebookAnd the InstagramAnd the FlipboardAnd the Smart NewsAnd the LinkedInAnd the YoutubeAnd the reddit.
Find live stock market quotes and the latest financial and business news
For lessons and information on investing and stock trading, check out Kashay