Elon Musk has notified Twitter that he intends to terminate his agreement to buy the social media group for $44bn, accusing it of disclosing “false and misleading” information about the number of fake and spam accounts.
Musk’s attempt to pull out of the deal sets the stage for a high-stakes legal battle between the billionaire Tesla chief executive and the social media platform. Twitter’s chair, Bret Taylor, responded swiftly, saying the board was “committed to closing the transaction on the price and terms agreed upon with Mr Musk” and would pursue legal action to enforce the agreement.
“We are confident we will prevail in the Delaware Court of Chancery,” added Taylor, referring to the popular venue for business litigation.
In a filing on Friday, lawyers for the Tesla chief executive claimed Twitter was “in material breach of multiple provisions” of the sale agreement, and “appear[ed] to have made false and misleading representations”. The number of spam and fake accounts on the platform was “wildly higher” than the 5 per cent estimated by Twitter, according to preliminary analysis by Musk’s advisers, the filing stated.
Separately, according to the filing, Musk is considering whether Twitter’s “declining business prospects” and worsening financial outlook violate the agreement.
The filing also accused Twitter of failing to comply with its obligation to “conduct its business in the ordinary course” after chief executive Parag Agrawal imposed a recruitment freeze, fired two senior members of staff and this week announced that the company was laying off a third of its talent acquisition team.
Twitter’s shares fell nearly 5 per cent in after-hours trading.
The move is the latest twist in a dramatic saga that began when Musk first revealed he had taken a stake in Twitter in early April, with a view to reinstating a “free speech” ethos on the platform, tackling spam and reinvigorating growth.
Weeks later Musk sent shockwaves through Wall Street when he announced his bid to take over Twitter at a price of $54.20 per share, which the company eventually accepted. He subsequently said the deal was “temporarily on hold” because of doubts over whether Twitter had accurately represented the number of bots and spam accounts. Some analysts and Twitter insiders interpreted that as an expression of buyer’s remorse, and speculated Musk was trying to get a cheaper deal.
Musk said Twitter’s failure to provide information about fake accounts would make it problematic to secure financing from banks that agreed to lend him the cash to complete the transaction.
The agreement includes a $1bn “reverse termination fee” that Musk would owe if he withdrew from the deal. However, if all other closing conditions are met, including financing, Twitter can seek to make Musk close the deal. US courts have historically sided with sellers in legal battles when buyers try to terminate deals to discourage acquirers from walking away on spurious grounds.
Since Musk agreed to buy Twitter, the market capitalisations of tech companies have fallen sharply, making the valuation agreed expensive compared with rivals. The share price of Snap, one of Twitter’s closest competitors, has dropped more than 65 per cent this year.
When securing $46.5bn in financing for his Twitter bid, Musk originally took out a $12.5bn margin loan with a dozen lenders led by Morgan Stanley, which was secured against $62.5bn worth of his Tesla shares.
In addition, he raised $13bn in financing commitments from a consortium of 13 banks, leaving him on the hook for raising the remaining $21bn in cash. In May, Musk retired the margin loan, causing the equity portion of his bid to balloon to $33.5bn.
Part of the margin loan was repaid when Musk raised more than $7bn from investors including Larry Ellison, the billionaire founder of Oracle; venture capital firm Sequoia Capital; Saudi Prince Alwaleed bin Talal; and cryptocurrency exchange Binance, among dozens of equity investors. The rest of the margin loan facility fell away when he let the remaining $6.25bn expire.
Musk has vowed to bring free speech back to the platform, and in a recent interview with the Financial Times, said he would reverse the “morally wrong” ban on former president Donald Trump, which was imposed after the deadly January 6 2021 attack on the US Capitol.
The takeover process has left Twitter, which was already under scrutiny due to sluggish growth, in turmoil, with remaining staffers uncertain about their jobs and the future of the company.
