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Legal Reasons Why Elon Musk Wants Out of Twitter Deal: Read To Find Out

By July 11, 2022September 29th, 2022No Comments

In a long July 8, 2022 Letter filed with the Securities and Exchange Commission (You can find the letter here: [Link]), attorneys for Elon Musk explain the reasons they believe Twitter—not Musk—breached the purchase agreement (the “Merger Agreement” in the Letter).

The core of the argument points to Section 6.4 of the Merger Agreement which provides that Twitter has to provide to Musk data and information that Musk requests “for any reasonable business purpose related to the consummation of the transaction.”

Musk lawyers argue that for nearly two months, they have sought information necessary to “make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform.” They argue that this information is fundamental to “Twitter’s business and financial performance and is necessary to consummate the transaction contemplated by the Merger Agreement.”

What information did Musk request that Twitter allegedly did not provide? The Letter lists five items:

1- Information related to Twitter’s process for auditing the inclusion of spam and fake accounts in mDAU (mDAU stands for “monetizable daily active users.” In other words real users from which Twitter can derive income).
2- Information related to Twitter’s process for identifying and suspending spam and fake accounts.
3- Daily measures of mDAU for the past eight (8) quarters.
4- Board materials related to Twitter’s mDAU calculations.
5- Materials related to Twitter’s financial condition.

In other words, the dispute is by and large related to what percentage of Twitter users are bots or spam as opposed to real identifiable humans.

In this context, Musk’s lawyer’s Letter accuses Twiter of making materially inaccurate disclosures to the SEC regarding the amount of spam accounts when it says that it is “fewer than 5%.” These inaccurate disclosures—the Letter argues—mislead Musk in its attempts to purchase Twitter.

Without specifics, Musk’s lawyers state that “Mr. Musk has reason to believe that the true number of false or spam accounts on Twitter’s platform is substantially higher than the amount of less than 5% represented by Twitter in its SEC filings.”

At the end of the day this is a contract dispute that hinges on the meaning of the word “material.” In contract law “material” means “important information, generally significant enough to determine an issue.” If the Court where the lawsuit will be filed, determines that the information regarding the spam accounts was “material,” perhaps Musk will get out of the deal. If not, he will probably be subject to penalties, damages like the decrease in Twitter’s stock value, or even a forced sale. At the end of the day it is hard to think that this “spam issue” could not have been anticipated by Musk who sought the sale of a company that was never for sale and of which it was already a large shareholder.

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