Elon Musk has buyer’s remorse. On April 25, the billionaire Tesla and SpaceX CEO agreed to buy Twitter for $44 billion, but since then the stock market has tanked. Twitter agreed to sell to Musk at $54.20 per share, a 38% premium at the time; today it’s trading around $40.
That’s probably the real reason Musk is spending so much time talking about bots. On May 13, he claimed the Twitter deal was “on hold” because of a discrepancy over how much of the platform’s user base is made up of bots—a catch-all term for automated accounts. On June 6, Musk’s lawyers sent a letter to Twitter and the US Securities and Exchange Commission, asserting his right to terminate the contract if the company doesn’t share information that would let Musk conduct his own analysis of the Bot Situation, analysis that Musk says is necessary to secure loans for the deal.
It’s a tricky claim: Musk would need to show that his loan agreements really are contingent on getting this information about bots. To make sense of the legal nuance, Quartz spoke to Ann Lipton, associate dean for faculty research at Tulane Law School, who is a corporate and securities law expert and has followed the Musk-Twitter saga closely.
This interview has been edited for clarity and length.
Quartz: So Musk bid to take over Twitter at $54.20 per share, and then the market fell precipitously. Now he’s talking about bots. Is this just a way to renegotiate the deal at a lower price?
Lipton: I think he’s been looking for a way out, but possibly to negotiate a lower price. And I assume it’s because of the churn in the market. But maybe not, because originally it seemed as though his interest in the company wasn’t financial. If Musk wants [Twitter] because he likes the company, but not because he plans to make it more profitable, he’s going to have trouble getting in other investors to pick up the slack. So yeah, it seems like a buyer’s remorse situation.
If the reason Twitter even accepted the deal was to maximize shareholder value, would renegotiating or letting Musk back out be unappealing?
It would be. Let’s imagine a world where he has a really good legal case, then it may be [beneficial] to the shareholders—or at the very least, if it couldn’t be resolved without years of expensive litigation, then one can imagine a world where Twitter just settles with him. But their interest is in getting the highest price for their shareholders. And as long as they think his claims are legally weak and could be resolved quickly in court, they have no reason to settle.
Can Musk just pay his $1 billion termination fee and walk?
No, because Twitter has the right to sue for specific performance, which means the contract says they have the right to force him to actually close as long as he has his debt financing in place. If the reason he doesn’t line up debt financing is that he himself undermines his ability, then that won’t count [as a way out]. So as long as the debt financing is there, then he’s going to have to close—well, Twitter has the right to sue to force him to close.
In terms of the number of bots, it seems like Musk is saying he wants the right to do due diligence… after he agreed to the deal and didn’t do due diligence.
Yes, in a way. Musk waived the right to examine their books and records and all of this before signing the agreement. However, the agreement itself says that Twitter will provide the information necessary to close. So he is trying to make this argument that the information that would allow him to validate the bots is necessary to close. And at least one of the reasons he says it’s necessary to close is because he can’t get his debt financing without it.
Now, that’s a much stronger legal argument than the original one, which was [to Twitter] “You misrepresented the amount of spam.” This is a stronger argument because the way the contract is drafted, Musk has the right to walk away if Twitter does not provide information necessary to close, and he can walk away if he can’t get the debt financing—they can’t sue for specific performance. So if it’s true that Twitter is not providing information necessary to get the debt financing, then that gives Musk grounds to terminate the agreement and Twitter can’t sue for specific performance. I have significant doubts that it is true. But if it were true, this is a stronger contractual argument as a basis for walking away.
When we talk about debt financing, what does that refer to?
Originally, the plan was Musk would put up some of his own money, raise some debt by using his Tesla shares as collateral, and then raise other debt that was to be paid back out of Twitter’s own cash flow. So, three sources of money. The part that is based on Tesla’s own shares as security for the loan has been dropped. But still, theoretically, the purchase price is partially debt-financed, meaning the banks are lending and they’re supposed to be paid back from Twitter itself.
Now he’s essentially saying, “Banks promised me they’re going to lend me this money so I can buy the company, which is to be paid back out of Twitter’s cash flows in the future. But they refuse to actually put out those funds unless I can substantiate something about the spam. You promised in the merger agreement, Twitter, that you’d provide the information necessary to get that loan, and by not giving me the information necessary to get that loan, I can’t get the loan, which means I can’t get my financing, which means I can’t close this deal.”
Is there any world in which Musk is able to get out of the deal using this argument?
Absolutely. It’s a correct reading of the contract, but that doesn’t make it factually plausible and I have my doubts about whether or not Twitter is, in fact, stonewalling necessary information. I have doubts that it’s stonewalling and I have doubts that this is necessary.
And again, whether Twitter wants to litigate over it is a separate question. It would depend, presumably the strength of their case. And I have no idea because I haven’t seen anything internal, but it seems implausible on its face that this is, in fact, what’s going on.
So would you still surmise that Elon ends up owning Twitter?
Oh no. I’d never surmise that he ends up with Twitter. I have no idea. I don’t know at what point Twitter decides the headache isn’t worth it.