Twitter filed its expected lawsuit against Elon Musk on Tuesday, demanding that he complete the $44 billion purchase of the social network.
“Musk refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests,” the lawsuit said. “Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he—unlike every other party subject to Delaware contract law—is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.”
The suit described “a long list of material contractual breaches by Musk that have cast a pall over Twitter and its business” and asked the court to “compel consummation of the merger upon satisfaction of the few outstanding conditions.” The lawsuit points out that in the purchase agreement, “Twitter negotiated for itself a robust right to demand specific performance of the agreement’s terms that encompassed the right to compel defendants to close the deal, and ensured that Musk personally was bound by that provision (among others).”
The lawsuit was filed Tuesday in the Delaware Court of Chancery.
Musk’s unsolicited, “seller-friendly” offer
The lawsuit describes how Musk made an unsolicited bid to buy Twitter for $54.20 per share, a “take-it-or-leave-it” offer that “represented a 38 percent premium over Twitter’s unaffected share price.”
“The other terms Musk offered and agreed to were, as he touted, ‘seller friendly.’ There is no financing contingency and no diligence condition. The deal is backed by airtight debt and equity commitments. Musk has personally committed $33.5 billion,” Twitter’s complaint said.
But the market fell after the agreement was signed, and “the value of Musk’s stake in Tesla, the anchor of his personal wealth, has declined by more than $100 billion from its November 2021 peak,” the lawsuit said. “So Musk wants out. Rather than bear the cost of the market downturn, as the merger agreement requires, Musk wants to shift it to Twitter’s stockholders. This is in keeping with the tactics Musk has deployed against Twitter and its stockholders since earlier this year, when he started amassing an undisclosed stake in the company and continued to grow his position without required notification.”
Since agreeing to buy the company, Musk has also “repeatedly disparaged Twitter and the deal, creating business risk for Twitter and downward pressure on its share price,” the complaint said.
“Model of hypocrisy”
“Musk’s exit strategy is a model of hypocrisy,” the lawsuit continued, pointing out that one of Musk’s chief stated reasons for buying Twitter “was to rid it of the ‘[c]rypto spam’ he viewed as a ‘major blight on the user experience.’ Musk said he needed to take the company private because, according to him, purging spam would otherwise be commercially impractical.” In the press release announcing the deal, Musk said his goals included “defeating the spam bots, and authenticating all humans.”
Musk made his offer to buy Twitter “without seeking any representation from Twitter regarding its estimates of spam or false accounts,” and “even sweetened his offer to the Twitter board by expressly withdrawing his prior diligence condition,” the lawsuit said. But after the market dropped, Musk started questioning Twitter’s spam estimates and eventually claimed that Twitter broke the merger deal by not providing all the spam data he requested.
“Musk shifted his narrative, suddenly demanding ‘verification’ that spam was not a serious problem on Twitter’s platform, and claiming a burning need to conduct ‘diligence’ he had expressly forsworn,” the complaint said.
Musk centered the dispute on Twitter’s estimate that fewer than 5 percent of monetizable daily active users (mDAUs) are spam or fake. “Musk wanted an escape. But the merger agreement left him little room,” the complaint said. “With no financing contingency or diligence condition, the agreement gave Musk no out absent a Company Material Adverse Effect or a material covenant breach by Twitter. Musk had to try to conjure one of those.”
Musk’s “deal temporarily on hold” tweet
On or about May 9, two weeks after the merger agreement was signed, Musk’s team asked for more detailed data on users and spam.
“Neither Musk nor his advisors said what had prompted these requests or identified new information regarding spam or false accounts that had come to light warranting the inquiries,” the lawsuit said. “Nothing had changed about Twitter’s estimates concerning the prevalence of spam on the platform in the days since signing. Nonetheless, in the spirit of cooperation, Twitter responded on May 12 with data sets and written descriptions of its audience metrics and its process for sampling the prevalence of false or spam accounts.”
Musk tweeted on May 13 that his deal to buy Twitter was “temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5 percent of users.” Musk posted this tweet “without any advance notice to the company,” Twitter’s lawsuit said. It continued:
Musk had no basis for asserting that the deal was “on hold” based on this longstanding disclosure. Twitter’s deal counsel called Musk’s deal counsel. Two hours after the “on hold” Tweet was published, Musk belatedly Tweeted that he was still “committed” to the deal.
Twitter said it continued to provide information on its spam estimate to Musk, and that “Musk tweeted publicly a misrepresentation that Twitter’s sample size for spam estimates was just 100,” and “boasted publicly that he had violated his nondisclosure obligations.”
“Musk’s Tweets on May 13 and 14 violated his obligations under the merger agreement, including the provisions prohibiting public comments not consented to by Twitter, disparagement, misuse of information provided under Section 6.4, requiring best efforts to consummate the merger,” the lawsuit said.
The lawsuit points out that Musk responded to Twitter CEO Parag Agrawal’s explanation of the spam estimate by posting a poop emoji.