The possibility of a protracted court battle between Twitter and billionaire Elon Musk, who claims he’s bailing out of a takeover deal, caused Twitter’s shares to crash on Monday afternoon. This cast doubt on Twitter’s future.
Musk announced on Friday that he was canceling the agreement, claiming that Twitter had withheld too much information about the number of bogus accounts it had and that his advisors had found that the actual prevalence of bots on the network is “wildly higher” than what Twitter had indicated. In response, the social media platform vowed to sue Musk to enforce the agreement. According to Bloomberg, the social media platform has retained the services of prestigious law firm Wachtell, Lipton, Rosen & Katz in order to do so. The lawsuit is expected to be filed this week in the Delaware Court of Chancery.
Acquisition contracts are typically quite tough to leave. It’s uncommon for someone to want to withdraw after you’re in the world where you already have the agreement, according to Mathieu Shapiro, managing partner at Obermayer and an expert in business disputes. The Delaware court will wish to enforce that merger agreement as a first principle, and that will be their starting point.
Battle over bots
The number of bots and fake accounts on the platform is the key factor in Musk’s efforts to leave.
Twitter announced last month that it was giving Musk access to a “firehose” of unprocessed data on hundreds of millions of tweets each day. It has stated in regulatory filings for years that it thinks about 5% of the platform accounts are fake.
Musk, however, has continued to cast doubt on the matter and on Monday, he mocked the company on Twitter for what he called their “stonewalling.”
According to Shapiro, Musk will have to show either that Twitter executives knew they had a bot problem but chose to ignore it or that Twitter executives knowingly lied about the number of bots they had. However, Musk might be able to convince a judge to let him back out of the agreement if he is successful in making that argument — a big if.
“Twitter generates revenue by selling information about what users are doing and viewing or by running advertisements. Each of those things depends on how many actual people there are “using the platform, according to Shapiro. “That gets right to the core of what Twitter’s core business is.”
A $1 billion break-up fee was agreed to by Musk as part of the buyout agreement. According to the terms of the agreement, a court could also order Musk to complete the transaction and purchase Twitter.
According to Wedbush analyst Dan Ives, who follows the company, “Twitter this fiasco is a nightmare scenario and will result in an Everest-like uphill climb for Parag & Co. to navigate the myriad challenges ahead around employee turnover/morale, advertising headwinds, investor credibility around the fake account/bot issues, and host of other issues abound.”
As of 3 p.m. Eastern time on Friday, Twitter shares had dropped 10% to $33.13 per share, far below the $54.20 that Musk had agreed to pay for the business. That strongly implies that Wall Street has severe questions about the deal’s viability. Ives forecasts that the stock price will drop to $30 per share.