Elon Musk has withdrawn his $44bn bid to buy Twitter after a dramatic few weeks of speculation that his deal to take over the company was falling apart.
“Mr Musk is terminating the merger agreement because Twitter is in material breach of multiple provisions of that agreement, appears to have made false and misleading representations upon which Mr Musk relied when entering into the merger agreement, and is likely to suffer a Company Material Adverse Effect,” wrote lawyers for Musk to Twitter.
But walking away from the deal will not be straightforward. According to the 95-page acquisition agreement filed with the US Securities and Exchange Commission, Musk will have to prove that Twitter breached the original agreement or risk being sued for a $1bn breakup fee.
Twitter said on Friday that it planned to sue Musk to complete the $44bn merger and that it was “confident” it would prevail.
“The Twitter board is committed to closing the transaction on the price and terms agreed upon with Mr Musk and plans to pursue legal action to enforce the merger agreement,” said Bret Taylor, the chair of the board at Twitter, in a tweet.
The likely unraveling of the acquisition was just the latest twist in a saga between the billionaire businessman and one of the most influential social media platforms, and it may portend a titanic legal battle ahead.
The Tesla CEO and richest man on earth had reached a deal to buy Twitter on 25 April, with Musk offering to purchase all of the company’s shares for $54.20 each.
But things took a sour turn when Musk and his lawyers accused Twitter of withholding information about the number of “spam” accounts on the platform. This week, the company revealed that it was suspending more than 1m spam accounts a day.
In the Friday filing, lawyers for Musk wrote that Twitter had not provided information on its “process for auditing the inclusion of spam and fake accounts” in spite of repeated requests.
“Twitter has failed or refused to provide this information. Sometimes Twitter has ignored Mr Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr Musk incomplete or unusable information,” the letter said.
Musk also said the information is fundamental to Twitter’s business and financial performance, and is needed to finish the merger.
The company said it was “confident we will prevail in the Delaware court of chancery”, the court where any legal showdown would take place.
With the deal, Musk stood to take control of a social media network with more than 200 million users. An avid, but critical user of the platform, he had vowed to push through various reforms, including relaxing its content restrictions, ridding the platform of fake and automated accounts and shifting away from its advertising-based revenue model.
Musk announced on 13 May that the deal was “on hold” while he awaited details supporting Twitter’s assertion that fewer than 5% of its users were spam or fake accounts. He asserted the figure was 20% and said Twitter would need to show proof of the lower number for the purchase to go through.
Twitter chief executive, Parag Agrawal, attempted to address Musk’s concerns in a lengthy tweet thread but his efforts to explain the problem “with the benefit of data, facts, and context” were met with a poo emoji from the world’s richest person.
Musk later suggested he could seek to pay a lower price for Twitter because of the fake accounts issue. Speaking virtually at a conference in Miami, he said reducing his agreed $54.20 a share offer would not be “out of the question”. However, the terms of Musk’s takeover agreement with Twitter gave him only limited room for manoeuvre, legal experts said.
The Musk takeover had been controversial among Twitter employees, with consternation among staff growing after Musk engaged with tweets criticizing Twitter staff following the announcement of the agreement.
Analysts said the break-up, with or without a court battle, would probably be damaging to Twitter’s valuation and its ability to seek a new buyer.
“This is a disaster scenario for Twitter and its board as now the company will battle Musk in an elongated court battle to recoup the deal and/or the breakup fee of $1bn at a minimum,” said Dan Ives, a Wedbush analyst.
Twitter’s stock, which was trading at about $38 per share on Friday and far below the $54 per share Musk had offered, “will now likely trade in the $25-$30 range when the stock opens on Monday with no deal likely”, Ives said.
“From the beginning, this was always a head scratcher, to go after Twitter at a $44bn price tag for Musk, and never made much sense to the Street. Now it ends (for now) in a Twilight Zone ending with Twitter’s board back against the wall and many on the street scratching their head around what is next,” Ives added.
The dispute between Musk and Twitter could be fast tracked to court, but before it gets there Musk and Agrawal will likely meet up, however awkwardly, on Saturday at Allen & Co’s Sun Valley Conference in Idaho that both are attending and where Musk is scheduled to speak.
Charles Elson, a professor of corporate governance at the University of Delaware, said the Musk break up filing “is part of classic negotiating strategy”.
“Litigation is not the end of the story but a bargaining chip in an ongoing process,” Elson says. “Even if there aren’t the number of users there he thought there were, Twitter is still a franchise and still has value.”
Musk, Elson points, has claimed his desire to buy the company had to do with freedom of speech and that has not changed.
“This is an economical dispute, not a philosophical dispute. An economical dispute is resolved economically – either you pay less or you pay to leave. In the end, he may owe them something and at that point they’ll renegotiate the price. It’s a litigation step in a very long dance.”
In after-hours trading on Friday, shares of Twitter fell 7% to $34, well below the $54.20 that Musk had offered to pay. Shares of Tesla, meanwhile, climbed 2.5% to $752.29.
Others remained skeptical the deal could be revived at all, even if Twitter takes Musk to court.
“It seems very difficult to imagine exactly how this deal could be salvaged, especially in light of the deteriorating relationship of the parties involved and what apparently lies ahead in litigation,” said Carl Tobias, the Williams chair in law at the University of Richmond.
“I think that Musk has had buyer’s remorse since shortly after he entered the deal, which has spiraled downward until today,” Tobias added.
The Associated Press contributed reporting