Elon Musk Seeks to Abandon $44 Billion Twitter Deal

Twitter “is in materials breach of a number of provisions of that settlement” and seems to have made “false and deceptive representations” when getting into into the settlement, according to a letter from Mr. Musk’s lawyer filed with securities regulators.

The submitting caps almost two months of high-stakes suspense over Mr. Musk’s intentions, whereas setting up a possible legal battle over what comes subsequent for the social-media platform.

Bret Taylor,

chairman of Twitter’s board of administrators, tweeted Friday afternoon that the board plans to pursue legal action to implement the deal on the worth and phrases originally agreed upon.

“We’re assured we are going to prevail within the Delaware Courtroom of Chancery,” Mr. Taylor tweeted.

Parag Agrawal,

Twitter’s chief government, retweeted the message.

The corporate has stated repeatedly in latest weeks that it was sharing information with Mr. Musk to consummate the deal as specified by the merger settlement—and that it meant to shut the transaction and implement the settlement on the agreed worth and phrases.

There are not any ensures Mr. Musk will have the ability to stroll away from the deal totally, as Twitter is anticipated to problem his authorized arguments.

Mr. Musk’s lawyer cited considerations over Twitter’s estimates about what number of of its each day customers are faux or spam accounts as a problem Mr. Musk raised as a priority in regards to the deal virtually three weeks after he signed it.

Twitter shares fell about 6% in after-hours buying and selling Friday following the disclosure.

Mr. Musk’s determination to attempt to abandon a deal that he initiated—citing a problem he knew about earlier than agreeing to the transaction—reinforces the billionaire’s repute for unpredictability. It additionally leaves main questions on the future of Twitter, which Mr. Musk had pledged to rejuvenate, as the corporate and different social-media platforms deal with slowing development in digital promoting and broader financial uncertainty.

At a minimal, Mr. Musk could possibly be on the hook for a $1 billion breakup fee, based mostly on the phrases of his April 25 acquisition settlement with Twitter. However the deal offers him solely restricted leeway to stroll away and pay solely that quantity—and it isn’t clear that his complaints about Twitter’s account knowledge qualify. The settlement offers Twitter the best to attempt to pressure him to comply with by way of on the acquisition if he seeks to cancel it for different causes.

The deal’s destiny has been in query since Might 13, when Mr. Musk introduced on Twitter that he was temporarily putting it “on hold” pending extra details about the account points. Twitter has lengthy stated spam accounts symbolize lower than 5% of its monetizable each day energetic customers, the first person quantity it discloses. Mr. Musk has instructed the determine could possibly be nearer to twenty%, however hasn’t made clear how he arrived at that calculation.

The Might tweet kicked off weeks of forwards and backwards as Mr. Musk repeatedly questioned and poked enjoyable at Twitter—typically by itself platform—and demanded the corporate furnish him extra knowledge to verify its math. Twitter constantly stated it was complying along with his requests, and finally offered entry to its so-called hearth hose of tweets.

Simply Thursday, Twitter defended its accounting, saying it usually removes multiple million spam accounts each day whereas they’re being arrange or quickly after. It additionally stated it depends on intently held personal person info to establish spam accounts in a course of outsiders with out entry to that knowledge wouldn’t have the ability to replicate.

Whereas the fake-account sparring performed out, tech shares had been persevering with to fall. The tech-heavy Nasdaq Composite Index has slid 15% since Mr. Musk unveiled his all-cash offer to buy Twitter at $54.20 a share on April 14. Twitter shares had fallen almost 20% by way of Friday’s shut, after they had been at $36.81 every.

As he lined up financing for the deal, Mr. Musk offered among the shares in

Tesla Inc.,

TSLA 2.54%

the electric-vehicle maker he runs. Tesla shares have slumped about 30% since Mr. Musk’s curiosity in Twitter first turned public.

Elon Musk has cultivated shut ties with Beijing to construct Tesla’s enterprise in China. Now that he’s shopping for Twitter and specializing in free speech, WSJ appears to be like at how China has used the social-media platform to advertise its views, and why that’s elevating considerations. Picture Illustration: Sharon Shi

Outdoors specialists say faux and spam accounts are a problem for Twitter, in addition to different social-media platforms, and the corporate’s calculations about its customers are based mostly partly on a few of their personal info it received’t share, even with Mr. Musk.

Nonetheless, his decision to threaten the deal over the fake-and-spam accounts problem raised eyebrows from the beginning. One in all Twitter’s most energetic and well-known customers, with now more than 100 million followers, he had complained about such considerations for years, but had agreed throughout deal negotiations to waive due diligence of Twitter’s enterprise.

Twitter now faces the prospect of a difficult authorized combat to pressure Mr. Musk to finish the acquisition or present what it sees as honest compensation beneath a authorized safety known as “particular efficiency.” There are methods for Mr. Musk to combat such an end result. He might, as an example, show that one thing materially modified in Twitter’s enterprise since he agreed to purchase the corporate, or that he did not safe the mandatory debt financing.

Even when contract phrases are clearly spelled out, as a rule, deal clashes finish in negotiated settlements which might embody a worth lower or one-time funds.

In 2020, luxury-goods conglomerate

LVMH Moët Hennessy Louis Vuitton SE

tried to again out of a deal to purchase Tiffany & Co. for $16.2 billion after the pandemic harm demand for high-end jewellery. Tiffany sued to implement the settlement and LVMH countersued, arguing the enterprise had been so deeply broken that their unique settlement was not legitimate. The 2 sides later agreed to cut the price by a comparatively modest $430 million and settle associated litigation.

Twitter’s advisers have instructed that its contract had extra seller-friendly protections than Tiffany’s, and that the corporate has authorized avenues to make sure Mr. Musk follows by way of with the deal, folks accustomed to the matter stated. Its board is concentrated on getting one of the best end result for shareholders, which it has to date decided is the $44 billion sale slightly than a $1 billion breakup price, the folks stated.

If the deal does collapse, Twitter shall be left having to persuade shareholders about its personal plans to develop in an turbulent economic system after being jilted by a devotee of the platform who, by way of every thing else, had persistently talked up its potential. Mr. Musk laid out several changes he deliberate for Twitter, together with reducing again on content material moderation and making the platform much less reliant on promoting income that accounts for about 90% of its gross sales.

Mr. Agrawal, Twitter’s CEO, has continued managing the enterprise amid scrutiny and public criticism from Mr. Musk and towards a darkening macroeconomic backdrop. Now the corporate should regroup after a drawn-out course of that has stored staff and buyers in limbo.

In April, Twitter stated it was withdrawing formidable income and person objectives. In Might, the corporate stated it was pausing hiring and trying to lower prices because it grappled with disruptions within the digital promoting market and amid the struggle in Ukraine. The identical day, the corporate introduced the departure of two senior executives. On Thursday, the corporate laid off a third of its recruiting group.

Within the submitting Friday, Mr. Musk’s lawyer stated that Twitter had made materials adjustments to the enterprise with out his consent in shedding some workers, implementing a hiring freeze and taking actions.

Mr. Musk’s previous deal making has, at instances, landed him in authorized turmoil. In 2018 he instructed on Twitter he had “funding secured” to take Tesla personal. The SEC fined Mr. Musk for what it deemed a false assertion. Mr. Musk additionally relinquished his position as Tesla chairman as a part of the settlement. Mr. Musk is suing to have the settlement thrown out.

Additionally probably dropping out within the deal are monetary establishments looking to make it happen. Twitter’s bankers would stand to make tens of tens of millions in advisory charges on closing, in line with a earlier regulatory disclosure.

Goldman Sachs Group Inc.

would stand to make round $80 million, together with $15 million upfront, whereas

JPMorgan Chase

& Co. might make $53 million, together with $5 million upfront.

Write to Meghan Bobrowsky at Meghan.Bobrowsky@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

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