The tweet reflected Musk’s efforts to lower the $44 billion price tag, said two people familiar with the matter who spoke on the condition of anonymity because they were not authorized to speak publicly. The amount was settled before the stock market slump in recent weeks, so the purchase price was relatively high.
The so-called “bot” accounts he raised concerns represent a financial risk to Twitter. Musk has said he intends to delete the accounts after completing the acquisition of the company. However, bots can generate income just like regular accounts due to viewing the same ads. If there are more fake accounts than Twitter allows, it would mean a drop in revenue if they were removed.
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Musk’s net worth has fallen by about $50 billion in recent weeks as markets roiled Tesla and other tech stocks, and he is free to exit the trade if he backs down. Much of Musk’s wealth comes from his 17% stake in Tesla. The electric car company is now worth nearly $800 billion.Musk has funded most of his Twitter acquisition, but still needs to put in $21 billion, he said Designed to offset external investment.
But legal experts say Musk could still be hit with a $1 billion fee for terminating the deal, even if he finds that Twitter has grossly underestimated the number of bots on its service. And if he pulls out of the deal, he’s likely to face a lawsuit from Twitter that could claim huge financial damages for Musk’s turmoil since agreeing to buy it.
Musk and Twitter did not respond to requests for comment.
Musk secretly started buying shares on Twitter earlier this year before publicly disclosing that he had acquired more than 9% of the company. Initially, he agreed to accept a position on the company’s board and limit his ownership of the company, but he quickly reversed his stance and made an offer to buy the entire company, a move that was accepted by the Twitter board late last month by Musk. proposal. to secure the financing of the transaction.
Like most merger agreements, Twitter’s contract with Musk contains a “material adverse effect” clause. Essentially, the clause means that the deal can be canceled if something material happens to Twitter before the deal closes and has a material impact on the company’s long-term business.
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Robots just can’t do it, says Urska Velikonja, a law professor at Georgetown University Law School. “If he tried to file a lawsuit, he lost,” she said.
Twitter has long said that about 5% of its users are bots, but that number has been under scrutiny and several reports over the years suggest it is much higher. And since Musk himself has pledged to address Twitter’s bot problem, it’s hard for him to argue that Twitter’s glut of bots represents anything he didn’t know when he made the offer.
Velikonja said there are very few, if any, cases where an acquirer can successfully argue in court that a material adverse change has occurred. A landmark example, she said, was a 2018 ruling in favor of Fresenius SE, which had agreed to buy generic drug maker Akorn, Inc.
After agreeing to buy the company for $4.75 billion, Akorn said it received information from an anonymous whistleblower that Akorn failed to comply with regulatory requirements and withheld that information from its acquirer. In a rare ruling, the judge in the case said Akorn offered “grave errors” as grounds for terminating the deal. Akorn did not respond to a request for comment.
In 2020, luxury holding company LVMH Moet Hennessy Louis Vuitton SE pulled out of a deal to buy Tiffany & Co. for $16 billion in the wake of the global pandemic. Even a pandemic isn’t enough of a reason. LVMH claims that the French government, where LVMH is headquartered, blocked the deal. Tiffany still sued. The two companies finally closed the deal for $16.8 billion earlier this year.
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Musk may have no legal basis, but it’s still worth a shot. Just tweeting that the deal was “on hold” sent Twitter shares plummeting. If Musk pulls out of the deal, Twitter’s stock price will shrink, the management team will be shaken, the future will be full of uncertainty, and the situation will be worse than before the deal. Any losses that Twitter was able to recover from Musk in its long, drawn-out lawsuit is no consolation.
Musk has a history of using Twitter to push markets, which has in some cases caught the attention of regulators. He tweeted in 2018 that he had secured funding to take Tesla private at $420 a share. The SEC fined him $20 million, saying the tweet was untrue.
Experts say that if Twitter negotiates and accepts a lower sales price, it will create other troubles. Shareholders are already suing Twitter, claiming the $44 billion price tag is too low to start. More lawsuits are likely to follow.
Musk spelled out his ability to disrupt Twitter with his own tweets in the merger agreement he signed with the company. Neither Musk nor Twitter are allowed to make announcements about the agreement without the other’s permission, but a split allowed Musk to tweet about the agreement.
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Still, Musk was on a good legal line when he potentially pushed the stock price to his advantage with his tweets.
“It’s something that regulators can consider, especially given that he has a history of tweeting things that have had an impact on the market, and in one case proved not to be true,” said David Rosenfeld, a law professor . Northern Illinois University School of Law. “But from what we know now, it’s not clear if there will be any breaches.”
While Twitter’s stock price gets a lot of attention, that number isn’t actually a relevant measure of value in court. Twitter’s underlying financial performance determines its value and the company’s sales price. Its shares may have fallen, but there hasn’t been any major change in the company’s ability to generate revenue from advertising.
What has changed is that if Musk fails to attract more investors, he will put a larger percentage of his net worth into the Twitter purchase.