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Elon Musk cannot use Twitter bots to get out of the acquisition agreement

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The up-and-down saga of Elon Musk’s efforts to acquire Twitter took a turn this week that many had long suspected: the Tesla CEO tweeted something stating that the deal was in jeopardy.

Musk said in a tweet early Friday that the deal was temporarily suspended pending an investigation into the number of “spam / false, ā€¯Accounts found on Twitter. He later explained that he was quiet serious about acquisition.

Two people close to the deal, who spoke on condition of anonymity because they are not authorized to speak in public, said the tweet reflected an effort by Musk to bring the price down from $ 44 billion. That amount was settled before the stock market fell in recent weeks, making the purchase relatively more expensive for Musk.

These “bot” accounts, which he raised concerns about, represent a financial risk to Twitter. Musk has said he intends to remove these accounts once he has completed his acquisition of the company. But bots generate revenue, just like normal accounts do, thanks to seeing the same ads. If there are more fake accounts than Twitter allows, removing them would mean a drop in revenue.

Musk’s questions about bots are nothing new to Twitter

Musk, whose net worth fell by about $ 50 billion in recent weeks as markets hit Tesla and other technology stocks, is free to back out of the deal if he gets cold feet. Much of Musk’s wealth comes from his 17 percent stake in Tesla. The electric car company is now worth close to $ 800 billion. Musk has funded the majority of his Twitter acquisition, but still needs to set aside $ 21 billion, which he aims to achieve through external investment.

But even though Musk discovers that Twitter is grossly underestimating the number of bots on his service, and he decides to withdraw from the purchase, he will still be on the hook for a $ 1 billion fee to kill the deal, legal experts say. And should he withdraw from the deal, he would likely be sued by Twitter, which could claim major financial damages for the unrest Musk has caused since he agreed to buy the company.

Musk and Twitter did not respond to requests for comment.

Musk began secretly buying shares on Twitter this year before publicly revealing that he had acquired more than 9 percent of the company. Initially, he agreed to accept a position on the company’s board of directors and set a ceiling on his ownership stake, but he quickly reversed his position and made an offer to buy the entire company, an offer Twitter’s board of directors accepted at the end of last month, after Musk was able to secure financing for the deal.

Like most merger agreements, Twitter’s contract with Musk includes a “significant adverse effect” clause. Basically, the clause means that if something significant happens to Twitter before the deal closes and it significantly affects the company’s long-term business, the deal can be canceled.

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But the problem of bots is not sufficient cause, said Urska Velikonja, a professor at Georgetown University’s law school. “If he tries to sue, he loses,” she said.

Twitter has long said that about 5 percent of its user accounts are bots, but that number has been scrutinized, and several reports over the years have suggested that the number of bots is much higher. And because Musk stated that he would solve Twitter’s bot problem, he would have a hard time arguing that an abundance of bots on the platform represented something he did not already know when he made the takeover bid.

Velikonja said there have been very few cases of an acquirer having successfully argued in court that there had been a significant negative change. The landmark example, she said, was a decision in 2018 in favor of Fresenius SE, which had agreed to acquire the generic drug maker Akorn.

After agreeing to buy the company for $ 4.75 billion, Akorn said it received information from an anonymous whistleblower who claimed that Akorn had not complied with legal requirements and had withheld that information from its buyers. In a rare ruling, the judge in the case said Akorn’s “gross inaccuracies” were grounds for terminating the agreement. Akorn did not respond to a request for comment.

In 2020, luxury holding company LVMH Moet Hennessy Louis Vuitton SE withdrew from its deal to acquire Tiffany & Co. for $ 16 billion after the onset of the global pandemic. Even the pandemic was not sufficient justification. LVMH claimed that the French government, on which LVMH is based, had blocked the agreement. Tiffany sued anyway. The two companies eventually implemented the deal this year for $ 16.8 billion.

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Musk may have no legal basis to stand on, but an attempt to leave the deal may still be worth a try. Just tweeting that the trade was “on hold” caused Twitter’s stock price to fall. If Musk withdraws from the deal, Twitter will be worse off than before the deal with a shrinking stock price, a shaken management team and an uncertain future. Any injury that Twitter could get back from Musk in a long, protracted lawsuit would be little consolation.

Musk has a history of using Twitter to move markets, which in some cases has attracted the attention of regulators. He tweeted in 2018 that he had secured financing to take Tesla privately to $ 420 per share. The SEC fined him $ 20 million, alleging that the tweet was untrue.

If Twitter negotiates and accepts a lower price for the sale, it will create another headache, experts say. Shareholders are already suing Twitter, claiming the $ 44 billion price is too low to begin with. More lawsuits are likely to follow.

Musk’s ability to rattle Twitter with his own tweets is something that is clarified in the merger agreement he signed with the company. Neither Musk nor Twitter may publish the agreement without permission from the other side, but a cutout gives Musk permission to tweet about it.

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Still, Musk goes on a fine legal line when he moves stock prices potentially to his advantage with his tweets.

“This is something that could be looked at by regulators, especially considering he has a history of tweeting things out that have had an impact on the market and in one case turned out not to be true,” said David Rosenfeld, law professor at Northern Illinois University College of Law. “But it’s unclear if there would be anything offensive, just given what we know now.”

Although there has been a lot of attention paid to Twitter’s stock price, that number is not actually the value measure that is relevant in court. Twitter’s basic financial performance is what determines its value and the selling price of the business. Its share price may have fallen, but the company’s ability to generate revenue from ads has not changed significantly.

What has changed is that if Musk is unable to field more investors, he will put a much larger percentage of his net worth in the Twitter purchase.

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