Musk may end Twitter deal over ‘material breach’

Elon Musk told Twitter Inc (TWTR.N) on Monday that if it fails to supply him with data on spam and bogus accounts, he may walk away from his $44 billion offer to buy the social media giant.

This isn’t the first time Musk has hinted that his takeover of Twitter could not go through. However, the warning, which came in the form of a letter from Musk’s attorneys to Twitter’s chief legal officer, Vijaya Gadde, signified a significant step forward. It accused Twitter of “materially breaching” its contract commitments.

Musk’s warnings to rip up the transaction have coincided with a drop in numerous technology equities, including Tesla Inc (TSLA.O), which he heads, amid fears of an economic slowdown and rising interest rates in the face of soaring inflation.

On Monday, Twitter shares fell 1.5 percent to $39.57, a significant discount to the agreed-upon $54.20 per share purchase price, as investors anticipate Musk would either persuade Twitter to accept a lesser deal price or walk away from the agreement.

Musk’s attorneys reaffirmed their request for facts on bot accounts in a letter to Twitter, saying he reserved all rights to cancel the transaction because the business had failed to meet its duties in a “clear material violation.”

Twitter replied by stating that it intended to ensure the deal’s completion on the agreed-upon conditions. “In order to complete the acquisition in accordance with the terms of the merger agreement, Twitter has and will continue to cooperatively exchange information with Musk,” the firm stated in a statement.

Musk, a self-proclaimed free-speech absolutist, has stated that removing “spam bots” from the platform will be one of his top goals.

In mid-May, he announced that the Twitter transaction was “temporarily on hold,” stating that he will not forward with the offer unless the firm can prove that spam bots make up less than 5% of its overall users. He has stated that spam bots account for at least 20% of the user base.

According to independent analysts, 9 percent to 15% of the millions of Twitter identities might be bots.

Musk wrote in his letter that he wants the information to perform his own research of Twitter users because he doesn’t trust the company’s “loose testing techniques.” Twitter has stated that it stands by its forecasts and that it is unable to reveal private information on how they are generated.

“He’s attempting to back out of the Twitter transaction, and this is the first shot across the bow,” according to Wedbush analyst Dan Ives.

The caveats Twitter employed in its forecasts on spam accounts, according to legal experts, provide it some protection against prospective lawsuits, whether from Musk over the transaction or shareholders over the integrity of the company’s regulatory representations.

Even if Twitter’s estimate is incorrect, Musk would have to establish that the San Francisco-based business was attempting to deceive with the intent to deceive – a high legal bar.

“It’s quite evident that Musk has buyer’s remorse, and he’s doing all he can to get a price drop, and I believe he’ll succeed,” Dennis Dick, a proprietary trader at Bright Trading LLC, said.

Even if the law is on Twitter’s side, Musk may be able to walk away or renegotiate the arrangement. This is because any legal action is likely to go on for a long time, and Twitter may decide that accepting a lesser price or receiving compensation from Musk is preferable to forcing him to complete the sale in court.

When the COVID-19 pandemic broke out in 2020, causing a global economic shock, some firms renegotiated or walked away from agreed-upon acquisitions. LVMH, a French retailer, threatened to pull out of a transaction with Tiffany & Co. in one case. The purchase price for the US jewelry retailer has been reduced by $425 million to $15.8 billion.

Musk is contractually forced to pay a $1 billion breakup fee if he cannot complete the sale because the loan financing falls apart or authorities stop it, according to Forbes, a fraction of his $219 billion wealth.

Last Monday, antitrust officials in the United States opted not to investigate Musk’s acquisition of Twitter any further, indicating that it is unlikely to face regulatory challenges. The accord is still being reviewed by the European Union.

Attorney General Ken Paxton of Texas stated on Monday that he has launched an inquiry against Twitter for “possibly fraudulent reporting regarding its bogus bot accounts,” which he described as a possible violation of state law.

As part of the investigation, Paxton requested that Twitter provide over documents.

“I have a responsibility to safeguard Texans if Twitter is misrepresenting how many accounts are fraudulent to increase their income,” Paxton said in a statement.

Twitter’s filings with the Securities and Exchange Commission, according to a spokeswoman, are accurate.

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