Can Twitter Force Elon Musk To Buy It?
Elon Musk may be getting cold feet. Although he says he remains committed to buying Twitter, he has put the deal on hold until he gets “proof” about the number of bots on the site.
Twitter didn’t take the news lightly. It announced that it planned on moving forward with their merger agreement. And it sounds like it’ll fight Musk if he tries to back out.
So what does this mean? What, exactly, is a bot? And can Musk really walk away at this point?
What Is a Bot?
A “bot,” also known as an internet bot, a web bot, or simply a robot, is a software application that runs automatic tasks over the internet. A “Twitter bot” is software that controls a Twitter account using Twitter’s application programming interphase.
A Twitter bot can essentially operate an account on its own, including liking or retweeting tweets, following or unfollowing accounts, or even sending direct messages (DMs). They are often blamed for spam and the spread of “misinformation.” When people talk about “fake accounts,” they are referring to accounts run by bots.
Twitter’s value, as an ad-based business, depends in large part on the number of human users on the platform. Broadly speaking, the greater the number of bots in relation to human users, the less Twitter is worth.
So How Many Twitter Accounts Are Bots?
In its SEC filings, Twitter estimated that bots run fewer than 5% of Twitter accounts. Musk says he relied on those filings when he made his offer. He now claims (without publicly saying where his information came from) that the actual number could be as high as 20% and asked the company to provide the “real” numbers.
Would Musk Really Walk Away?
Musk may simply be trying to get a better price. Twitter’s stock price has dropped substantially since he made his offer of $54.20 per share. On May 19, Twitter’s shares closed at $37.24. Musk may now be having second thoughts about whether his plans for free speech are worth the $44 billion he promised.
Can Musk Really Walk Away?
Let’s say that Musk does want out. Under the merger agreement with Twitter, walking away won’t be easy. And even if he can, it won’t be cheap.
Fraud
Musk may argue that Twitter deliberately misrepresented the number of bots on the platform. Fraud is grounds for a party to cancel a contract. If Musk could show fraud, he could back out. But fraud is hard to prove. You generally need to show that someone knew something important and lied about it. Twitter estimated that the number of bots was less than 5%, but specifically said that the actual number could be higher. Musk would be hard-pressed to satisfy the high standard for fraud.
Material Adverse Effect
Musk may also rely on a “material adverse effect” clause in the merger agreement. In this context, a material adverse effect would be a change in circumstances that significantly reduces Twitter’s value. Musk may argue that had he known that the actual number was as high as 20%, he never would have offered to buy Twitter, much less at the price he did.
But Musk has three problems here. The first is based on the governing law. Delaware’s law governs the merger agreement. And Delaware almost never lets a buyer of a company back out of a sale because of a material adverse effect.
The second overlaps the fraud argument. Twitter specifically said in its filings that the number of bots could be higher than its estimated 5%. So there really hasn’t been any change in circumstances.
And the third is that Musk could have done his homework. When someone buys a company, they typically do what’s called “due diligence.” This can be a lengthy, involved, expensive process in which the target company provides substantial information about its assets, liabilities, and business operations. Here Musk did virtually no due diligence before offering to buy Twitter. A court could fault Musk for his haste.
What Can Twitter Do To Force Musk’s Hand?
Twitter doesn’t seem inclined to let Musk just walk away, either. It can ask a judge to force Musk to go through with the deal. Generally, if you breach a contract, a court can order you to pay monetary damages. If monetary damages would fail to put the seller of a company in the position it would have been in if the deal had gone forward, a court may in certain cases order the buyer to actually go through with the purchase. This doctrine is called specific performance.
Specific Performance
If Musk tries to abandon the deal, Twitter could sue him and ask for specific performance. This remedy is usually hard to get, but Musk agreed to a powerful specific performance clause in the merger agreement. In fact, he didn’t just agree that Twitter could get specific performance. He promised that he wouldn’t argue it couldn’t (forgive the double-negative).
Termination Penalty
Musk would also have to pay a termination penalty if he backs out. Each party agreed that if they were responsible for the deal falling apart, they would pay the other $1 billion. This may not be a jaw-dropping sum to an Elon Musk, but it may be enough to make him blink before abandoning the deal.
Stay Tuned!
So it’s hard to say what is going to happen. Where Elon Musk is concerned, trying to make predictions is a fool’s errand.
Having said that, Musk and Twitter will probably work it out on their own. But in their discussions, Twitter seems to have the upper hand for now.
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