Elon Musk is threatening to pull out of his $44 billion acquisition of Twitter if the company does not provide more information on how it calculates the number of fake accounts.
In a letter delivered to Twitter on Monday and filed with the Securities and Exchange Commission, Mr. Musk’s lawyers at the law firm Skadden, Arps, Slate, Meagher & Flom argued that Twitter was “actively resisting and thwarting” Mr. Musk’s rights under the terms of his deal to acquire the social media company. His lawyers accused Twitter of a “clear material breach” of its obligations and said that Mr. Musk had the right to break off the agreement as a result.
The letter said Mr. Musk had “repeatedly” requested more information about how Twitter measured spam and fake accounts on its platform and that he had “made it clear that he does not believe the company’s lax testing methodologies are adequate so he must conduct his own analysis.”
The letter featured the most direct words yet about Mr. Musk potentially scrapping the deal, something he has, so far, obliquely suggested he might do through tweets and other off-the-cuff statements. The letter also presents a new legal argument for pulling out of the deal, opening a new front in the increasingly bitter back and forth.
Twitter’s cooperation was necessary to secure the debt financing that banks have committed to fund the deal, the letter said. Morgan Stanley and other lenders have committed a total of $13 billion in debt to help pay for Mr. Musk’s takeover. A spokesperson for Morgan Stanley did not immediately respond to a request for comment.
Twitter’s response to previous queries from Mr. Musk’s team, which gave more detail about the company’s methodology for measuring fake accounts, was “tantamount to refusing Mr. Musk’s data requests,” the letter said.
“Twitter has and will continue to cooperatively share information with Mr. Musk to consummate the transaction in accordance with the terms of the merger agreement,” a Twitter spokesman said in a statement. “We believe this agreement is in the best interest of all shareholders. We intend to close the transaction and enforce the merger agreement at the agreed price and terms.”
Twitter’s stock opened lower on Monday, before regaining some ground to trade at about $39.50 per share, still far below the $54.20 price set in the deal agreed with Mr. Musk.
Mr. Musk’s discontent with Twitter’s tracking of its fake accounts has coincided with a market nosedive that has driven down the shares of technology companies, as well as those of Tesla, the electric vehicle company that is the billionaire’s main source of wealth. The turmoil has also hit credit markets, potentially making it harder for banks to sell the debt raised to finance the takeover. Analysts have speculated that these factors have given Mr. Musk buyer’s remorse about spending $44 billion on the social media company.
Mr. Musk, who signed a deal to acquire Twitter in April, has, in recent weeks, threatened to put the deal “on hold” over its number of fake accounts. Last month, he tweeted that “the deal cannot move forward” until Twitter shows “proof” that these accounts make up less than 5 percent of its users, as Twitter has repeatedly said. He made similar remarks at a conference in Miami, indicating that he may be trying to lay the groundwork to rework the deal.
In doing so, Mr. Musk appeared to be building a case to argue that Twitter had experienced a “material adverse change,” or a change that would significantly affect its business, which could allow him to break off the deal. Legal experts have questioned the merits of that argument, particularly since Twitter has long disclosed that fake accounts represent about 5 percent of its users. Mr. Musk’s letter on Monday, though, represented a new strategy.
“What he is actually doing is a much more clever attempt to get out of the merger agreement,” said Ann Lipton, a professor of corporate governance at Tulane Law School. “If Twitter were really stonewalling information requests, and those information requests were necessary or reasonable for Musk to be able to get his financing — which is what he’s claiming in this letter — then that would conceivably be a breach that allows Musk to walk away.”
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Twitter could, in turn, argue it does not have the information that Mr. Musk is demanding, or that it is not necessary for the deal to close, she said.
“The merger agreement provides for information, with exceptions, but that doesn’t mean he can get any information he wants,” said Edward Rock, a professor of corporate governance at the New York University School of Law. “What I don’t know is what information he is asking for.”
A deal is expected to close by Oct. 24. If it does not close by then, either side can walk away. If the transaction is delayed by regulatory approvals at that time, Mr. Musk and Twitter would have another six months to close it.
Last week, Twitter announced it had received regulatory clearance from the Federal Trade Commission to proceed with the deal. Last month, Mr. Musk disclosed in a filing that he had raised his personal cash commitment to the deal, canceling a planned loan against shares of Tesla. Mr. Musk said he was in talks with other Twitter shareholders, including the company’s co-founder and former chief executive, Jack Dorsey, about rolling their existing shares into the company after it is taken private, rather than selling their stakes as part of the deal.
For Twitter, completing the deal is existential. The company’s stock price is largely buoyed by the agreement that Mr. Musk will buy the company at a price of $54.20 per share, and it would be at great risk of plummeting if the deal falls apart.
Executives at the company insist that while Twitter has struggled in recent years, its future remains bright. Parag Agrawal, Twitter’s chief executive, is in the midst of a tricky turnaround of the company, cutting discretionary spending and freezing new hiring. Since taking over in November, Mr. Agrawal has pushed out the previous heads of product and revenue to install his own leaders, and he has plans for more changes as he tries to execute his vision in the months ahead, in the shadow of an even bigger change looming over the company.