Like countless other contract disputes, Twitter (TWTR) clash with Elon Musk about the CEO of Tesla (TSLA) tried to get out of its $44 billion deal to acquire the social media company is based on language that may be open to multiple interpretations.
However, don’t expect Twitter or Musk to admit that the legal jargon setting out the terms of their merger agreement leaves even the slightest bit of ambiguity about their respective rights.
After publicly taunting Twitter with the threat of a hostile takeover and forcing the board’s hand with a premium too good to refuse, Musk agreed to the sale based on a merger agreement drafted by some of the world’s most expensive lawyers. he can buy. Within weeks of signing the contract, Musk hinted that he had second thoughts and later backed out of the deal, citing suspicions that Twitter’s platform suffered from a higher prevalence of fake accounts than the less than 5% reported.
Twitter alleges in a complaint against Musk that the deal allows him to reject Musk’s demands and force him to buy the company. Musk’s lawyers, meanwhile, say he can ditch the deal entirely because Twitter’s denials qualify as a material breach, and possibly a “material adverse effect” that would void the deal. In a July 8 termination letter, Musk’s attorneys called the bot’s data “critical to Twitter’s business and financial performance” and necessary to complete the deal.
Instead, Twitter says Musk is using the bot request as a pretext to back out of the deal, noting that the Tesla CEO repeatedly disparaged Twitter on the platform itself. Twitter also notes that Musk’s premium purchase offer at $54.20 per share is much higher than the most recent share price: shares of the company were trading at $37.74 at market close on Friday.
‘Space for discussion’
Despite conflicting claims, the actual merger document does not explicitly mention the bot data. It explains general terms about Musk’s right to access the information until the deal closes, and Twitter’s right to retain it.
“There will certainly be room for discussion,” professor at Widener University Delaware School of Law. Lawrence A. Hamermesh he told Yahoo Finance.
A high prevalence of fake accounts would threaten the foundation of Twitter’s revenue stream: advertisers pay to reach real human account holders, not bots. A higher bot rate than Twitter claims could scare off investors, advertisers, and possibly even users, because bots can diminish genuine ad impressions and spread misinformation.
As of Q4 2021, the company’s regulatory filings indicate that fake or “spam bot” accounts make up less than 5% of its user base.
For Musk’s part, his lawyers argue that, under a provision of the contract, Twitter was required to hand over enough data to allow him to independently assess the incidence of fake accounts.
In support of their claim, his attorneys cite contract language that states that Twitter must give him “reasonable access” to Twitter’s “property, books, and records” and promptly provide him with “all information relating to Twitter’s business, property, and Twitter staff” for any “reasonable business purpose related to consummation” (emphasis added) of the transaction
“That section gives Musk some rights to get information,” Hamermesh said. “But it’s not carte blanche, free access to information for everyone.” The language, he explains, presents obstacles for Musk to show that he needs the data for a “reasonable purpose” that is “related” to closing the deal.
“What is a reasonable business purpose? What is it related to?” he asks, explaining that those issues, if the dispute is resolved in court, will be up to a judge to decide. Still, he says, “I’m sure there’s plenty of room to discuss both sides of that.”
Twitter is likely to argue that the kind of information Musk is demanding is not covered by the contract language, and that Musk could have asked for bot-related data before agreeing to the merger deal, Hameresh said.
‘It means what the judge of fact decides it means’
To muddy things up further, Twitter also cites vague contract language to argue that it is free to decline Musk’s requests.
The company points to a provision that allows it to withhold information if, in its “reasonable judgment,” it determines that disclosing the data will “cause significant competitive harm” to Twitter if the deal doesn’t close. In other words, Twitter may decide that there is too much risk of competitive damage to Twitter if Musk fails to acquire the company and is left with tools to estimate fake account data.
That language also leaves room for interpretation. What is “reasonable”? What is “significant”
Senior Lecturer at Columbia Business School Donna Hitscherich He says resolving those questions through litigation is a risk for both Twitter and Musk, because the judge will have to interpret the meaning of ambiguous terms in the merger agreement.
“Actually, it means what the judge decides it means,” Hitscherich said.
In addition to having the right to outright reject Musk’s requests, Twitter says the agreement further insulates it from handing over the data because Musk waived his right to due diligence, the right to obtain certain proprietary information from Twitter. The very absence of a due diligence condition in the contract, they claim, means that Musk has no right to demand data from the bot as a condition of acquiring the company.
Musk’s lawyers say he did not, in fact, waive his right to review the data.
Unless Twitter and Musk resolve their dispute, Delaware Court of Chancery chief judge Kathaleen McCormick will have to interpret the contract. Before then, Musk will have a chance to respond to Twitter’s accusations that she tried to scupper the deal in response to the company’s complaint.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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