Twitter 1 – Elon Musk 0. On Tuesday July 19, the social network emerged victorious from its first legal battle with the billionaire. The hearing in the Delaware court focused on the date of the trial that will determine the future of the $44 billion buyout. This victory over the date seems insignificant but it is nevertheless central to the power game between the two parties.
Twitter wanted a trial in mid-September, over 4 days. Camp Musk wanted it to be held in mid-April 2023, over 10 days. Chancellor of Justice Kathaleen McCormick has decided in the direction of the social network: the trial will be held in October, over 5 days, unless the situation turns around. Beyond the history of the dates, this first public debate between the lawyers of the two parties gave a glimpse of the defense of each.
Faced with Twitter’s economic and financial arguments, the Musk camp bet all its chips on the question of the number of fake users of the social network, to which the judge seemed unreceptive. A taste of the trial?
In her conclusion, the judge echoed Twitter’s argument on the need to resolve the dispute quickly, to avoid plunging the company into an even more delicate financial situation than it already is. “Generally speaking, the longer the acquisition drags on, the thicker the cloud of uncertainty around the business grows, and the greater the risk of irreparable harm to sellers.“, she said. The social network has lost more than 25% on the stock market since the announcement of the takeover attempt in early April, and several of its projects are frozen pending the outcome of the case.
As a reminder, Twitter doesn’t just want damages from the billionaire: the company wants the $44 billion takeover to come to an end. A possibility left open by the judge: “it is by no means obvious that damages are a sufficient remedy if Twitter ultimately proves what it claims“. But it remains difficult to anticipate the court’s decision, as the case is unique in the history of mergers and acquisitions, by its magnitude, the personality of Elon Musk and the successive reversals of the situation.
Elon Musk goes all-in on the argument of fake accounts
Faced with Twitter, the Musk camp’s argument focused on its suspicions about the numbers of fake users of the platform. The billionaire has been constantly defending this rhetoric since mid-May: according to him, Twitter would declare to the market four times fewer fake accounts (5%) than it actually has. And since this difference would have effects on the advertising turnover of the social network, Elon Musk would be harmed.
The boss of Tesla has made this argument the centerpiece of his case for withdrawing from the transaction, while his estimate is only based on a hunch, and which he has so far failed to show even a beginning of proof. The Musk camp still hopes to invoke this story of fake accounts to activate the MAC clause (material adverse effect), a usual clause in this type of contract, which would allow him to nullify his legal commitment. Problem: the effective uses of this clause are based on much more extreme cases than the one presented – such as the loss of 90% of turnover between the signing of the contract and the final agreement. In other words, even if the billionaire managed to prove what he says, he would run a strong risk of being refused the clause.
The other way out envisaged by the businessman amounts to proving that Twitter voluntarily withheld information on the false accounts, and thus breached these obligations of honesty included in the contract. Again, a difficult scenario to contemplate. The Chancellor of Justice has so far not said whether the lawsuit will require checking Twitter’s claims about spam accounts.
Does the issue of bots have a place in the trial?
In response to Musk’s attorneys’ briefing on the fake accounts, Twitter’s hacked: “this is not the subject of the acquisition agreement, then it will not be the subject of the lawsuit.” And for good reason: the uncertainty around the number of fake users, like the question of the volume of spam, does not appear anywhere in the contract and would therefore be outside the scope of the judgment. When signing the purchase agreement, the billionaire had declined his right to request more details on the company’s economic indicators.
That’s not all: Twitter has repeatedly stated that it does not categorically claim to have less than 5% spam accounts. His official statement to the SEC (the American market regulator) is finer. He explains that he has a system for estimating the number of fake accounts, that this method involves human judgment, and that it results in a figure of less than 5%. In other words, it is an estimate, with margins of error, in particular human, which can be significant.
Consequently, to attack the social network on the estimate, the Musk camp cannot really wage a war of numbers, which would not go directly against what Twitter asserts. His options? Demonstrate that Twitter lied and has no rating system; prove that this estimation method was not constructed in good faith; or even prove that the social network lied about the number released by its estimates. A debate quite different from a simple evaluation war.
The Musk camp takes advantage of a stalemate
In May, Twitter CEO Parag Agrawal publicly explained that he had presented the estimation process to Elon Musk. Then, in early June, after the billionaire said he was “freezing” the takeover, the social network opened up a database of all tweets in real time for him to do his own calculations. An act of good faith intended to calm the rhetoric of the businessman. But Musk’s lawyers stick to their guns: “we don’t have their system. We do not have the instructions given to the evaluators, nor how they applied them.“
If they can maintain this discourse, it is largely because Twitter cannot legally give them access to their evaluation tool. The latter involves the analysis of metadata [des données rattachées aux tweets, ndlr] some of which fall into the box of personal data, and require the free and informed consent of users to be processed.
Result: two months after the subject of Elon Musk raised the subject of fake accounts, no counter-estimate has appeared. Worse, his side wanted the trial to be held in 7 months to find that figure – a process”complex” and “very demanding in expertise” according to them. With yesterday’s decision, the businessman has only 3 months left to concretely support his remarks, or find other valid arguments to get out of the takeover.