Twitter Stock Drops on Fears Musk Might Abandon Deal

April 27, 2022

Twitter shares are falling Wednesday as investors worry that Elon Musk could try to extricate himself from his $44 billion deal to buy the social media company by paying a $1 billion termination fee.

The merger document, released late Tuesday, states that Musk must pay a $1 billion termination fee if he fails to complete the transaction. This has spurred speculation that he may decide to walk from the deal if Tesla stock comes under renewed pressure.

However, merger arbitragers say that it’s not so simple for Musk to abandon the deal. The merger document contains language, including that under section 9.9, about “specific performance” that Twitter could use to seek to compel Musk to complete the deal.

Among the clauses of agreement (section 6.10) that seek to enforce the deal is that Musk appears to be personally on the hook for the margin agreement, which is secured by part of his Tesla stake.

One arbitrager tells Barron’s that the “conditions to his obligation are pretty tight and seller-friendly, including the MAC (material adverse change) clause, and his obligation to fund the equity commitment.”

Even with Twitter stock under pressure, investors appear to be putting odds of considerably more than 50% -- and perhaps close to 75% -- on the deal closing.

Twitter shares could fall sharply -- perhaps into the mid-$30s -- if the deal falls apart. That’s below the price of around $40 on April 1, the day before Musk revealed his stake of about 9%.

The implied odds of the Twitter deal closing can be calculated by comparing the upside from the current stock price to the deal price against the expected drop if the deal falls apart. If the upside is less than the projected downside, the deal odds are above 50%.

The transaction isn’t expected to face significant regulatory issues.

Elon Musk’s Belated Disclosure of Twitter Stake Triggers Regulators’ Probes

May 11, 2022

Federal regulators are investigating Elon Musk’s late disclosure last month of his sizable stake in Twitter Inc., according to people familiar with the matter, a lag that allowed him to buy more stock without alerting other shareholders to his ownership.

The Securities and Exchange Commission is probing Mr. Musk’s tardy submission of a public form that investors must file when they buy more than 5% of a company’s shares, the people said. The disclosure functions as an early sign to shareholders and companies that a significant investor could seek to control or influence a company.

The Tesla Inc. chief executive made his filing on April 4, at least 10 days after his stake surpassed the trigger point for disclosure. Mr. Musk hasn’t publicly explained why he didn’t file in a timely manner.

The SEC investigation hasn’t been previously reported. An SEC spokesman declined to comment. An attorney for Mr. Musk didn’t respond to a message Wednesday seeking comment.

Mr. Musk likely saved more than $143 million by not reporting that his trades had crossed the 5% threshold, said Daniel Taylor, a University of Pennsylvania accounting professor, since the share price could have been higher had the market known of the billionaire’s growing stake.

Investors who cross that line are required to file a form with the SEC revealing their stake within 10 days. Mr. Musk’s holdings topped 5% on March 14, securities filings show, meaning he should have disclosed his stake by March 24 under SEC rules.

After March 24, Mr. Musk purchased roughly $513 million of stock at prices between $38.20 and $40.31 a share, according to a regulatory filing. The total buying spree made him Twitter’s largest individual shareholder with 9.2% of its shares.

Based on Twitter’s closing price of $49.97 on April 4, the day Mr. Musk disclosed his stake, he likely saved more than $143 million on those trades, Dr. Taylor estimated.

“The case is easy. It’s straightforward. But whether they’re going to pick that battle with Elon is another question,” said Dr. Taylor, referring to the prospect of a regulatory lawsuit against the outspoken entrepreneur.

The SEC could drop its investigation without bringing civil claims, as not every probe results in formal action. An SEC lawsuit against Mr. Musk would be unlikely to derail the Twitter deal because the company’s board of directors has endorsed it and the SEC generally lacks the power to stop mergers or take-private transactions, said Jill E. Fisch, a securities and corporate law professor at the University of Pennsylvania Law School.

Regulators could seek a court order preventing Mr. Musk from voting shares he acquired without proper disclosure, but the SEC generally hasn’t pursued that remedy, Ms. Fisch said.

On his initial form disclosing his Twitter share purchases, Mr. Musk said he was a passive shareholder, meaning he didn’t plan to take over Twitter or influence its management or business. The following day, he submitted another form that showed deeper involvement with the company, including an April 4 offer to join its board of directors.

Mr. Musk offered a week later to buy Twitter for $44 billion. The deal is scheduled to close later this year and must be approved by Twitter stockholders. SEC investigators, who have sought documents from Twitter, are probing whether Mr. Musk’s initial disclosure should have revealed more about his plans for the investment, the people said.

Separately, the Federal Trade Commission is investigating whether Mr. Musk violated a law that requires companies and people to report certain large transactions to antitrust-enforcement agencies, according to a person familiar with the matter. After making the filing, an investor generally waits at least 30 days -- giving the government time to review the purchase for whether it hurts competition -- before buying more shares.

Activist investors are subject to the antitrust filing requirements if their purchases of a company’s shares exceed a threshold -- generally $92 million -- and their existing assets are greater than $20 million. Passive investors who hold less than 10% of a company’s shares and don’t plan to be involved in governance or steer basic business decisions are exempt from the requirement.

If the FTC alleges violations of the law, it can seek fines of up to $43,792 a day. The FTC investigation was earlier reported by the website The Information.

Elon Musk says Twitter deal on hold pending details on fake accounts; shares plunge 18%

Fri, May 13 2022

Elon Musk announced Friday that his Twitter deal is on hold until he receives more information about how many fake accounts there are on the social media platform.

Twitter’s stock plummeted 18% following the announcement. A spokesperson for Twitter did not immediately respond to a CNBC request for comment.

Even before Friday’s announcement, the company’s market value had fallen to $9 billion beneath the offer price due to concerns about the deal.

Twitter estimated in a filing earlier this month that fewer than 5% of its monetizable daily active users during the first quarter were bots or spam accounts.

Musk, who is the world’s richest person on paper, now wants the company to confirm this before he continues with the deal, which is being partly funded by Oracle founder Larry Ellison and venture capital firm Andreessen Horowitz.

The San Francisco-headquartered social media firm said in the filing that it had 229 million users in the first quarter who were served advertising.

Texas Attorney General Ken Paxton launches Twitter bots probe after Musk’s public complaints

Mon, Jun 6 2022

Texas Attorney General Ken Paxton said on Monday that his office is opening an investigation into Twitter over the number of bot accounts on its platform.

“Attorney General Paxton issued a Civil Investigative Demand (CID) to investigate whether Twitter’s reporting on real versus fake users is ‘false, misleading, or deceptive’ under the Texas Deceptive Trade Practices Act,” his office said in a press statement.

Paxton is demanding details on 23 items, including extensive data on the social network’s daily, monthly and monetizable active users. He’s also asking for “documents sufficient to show the number of inauthentic Twitter Accounts for each month from 2017 to the present, broken down by category of inauthentic account (i.e., Fake Account, Spammer Account, and Bot Account) if available.”

Paxton, who was endorsed by former President Donald Trump, was himself indicted on securities fraud charges seven years ago, but has not yet stood trial.

His probe of Twitter was initiated on the same day that Tesla and SpaceX CEO Elon Musk, via his attorneys, threatened to back out of his agreement to buy Twitter for about $44 billion due to what he says are concerns around fake account, spam and bots.

In a letter they sent to Twitter on Monday, Musk’s attorneys said he is entitled to access data from Twitter that can help him determine how many bots are on the platform. The letter also said that Twitter was “resisting and thwarting” Musk’s right to this information, amounting to a “clear material breach” of the terms of their merger agreement.

Marc Fagel, a securities law expert who previously served as regional director of the SEC’s San Francisco office, said Paxton’s announcement is a bit unusual because such matters are not typically handled at the state level.

“States aren’t necessarily equipped to do this sort of sophisticated investigation,” Fagel said. “It’s one thing if you’re dealing with a local company, but if you’re talking about a national, publicly traded company in another state, that’s the province of the SEC.”

In addition to bringing high-profile business to Texas, Musk has emerged as a champion for many conservatives of late because of his criticisms of Twitter, which has booted a number of prominent conservatives from its platform, including Trump. Last month, Musk said he plans to vote for Republicans in upcoming elections.

Musk has frequently taken to Twitter, where he has 96.8 million followers, to criticize President Joe Biden and other Democrats.

Billionaire Elon Musk wants to end his deal to buy Twitter, according to a letter sent by a lawyer on his behalf to the company's chief legal officer Friday.

Twitter shares were down about 5% after hours on Friday.

In the letter, disclosed in a Securities and Exchange Commission filing, Skadden Arps attorney Mike Ringler charged that "Twitter has not complied with its contractual obligations."

Ringler claimed that Twitter did not provide Musk with relevant business information he requested, as Ringler said the contract would require. Musk has previously said he wanted to assess Twitter's claims that about 5% of its monetizable daily active users (mDAUs) are spam accounts.

"Twitter has failed or refused to provide this information," Ringler claimed. "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."

Ringler also charged in the letter that Twitter breached the merger agreement because it allegedly contains "materially inaccurate representations." This accusation is based on Musk's own preliminary review of spam accounts on Twitter's platform. Twitter has said it's not possible to calculate spam accounts from solely public information and that a team of experts conducts a review to reach the 5% figure.

"While this analysis remains ongoing, all indications suggest that several of Twitter's public disclosures regarding its mDAUs are either false or materially misleading," Ringer alleged.

He also claimed Twitter breached its obligations under the agreement to get Musk's consent before changing its ordinary course of business, pointing to recent layoffs at the company.

Twitter did not immediately respond to a request for comment.

This is breaking news. Please check back for updates.

SEC letter to Musk questions tweet about Twitter acquisition

Thu, Jul 14 2022

The Securities and Exchange Commission asked billionaire Elon Musk for more information on a tweet related to his $44 billion acquisition of Twitter that he’s recently tried to call off, a new regulatory filing Thursday shows.

The disclosure sheds light on how Musk represented his commitment to the deal to the SEC, even as he probed Twitter for information on spam accounts on the platform. It also shows how the deal could again bring Musk into the crosshairs of the agency.

In a letter dated June 7, Musk’s lawyer and Skadden partner Mike Ringler responded to questions the SEC’s Office of Mergers and Acquisitions sent a few days earlier.

The letter reiterates the clarification the SEC sought from Musk, including whether an earlier filing should be amended based on his tweet that the Twitter deal “cannot move forward” until the company provides more information on its spam accounts.

“The term ‘cannot’ suggests that Mr. Musk and his affiliates are exercising a legal right under the terms of the merger agreement to suspend completion of the acquisition of Twitter or otherwise do not intend to complete the acquisition,” the SEC wrote, according to the filing. “Yet, we note that the Schedule 13D has not been amended to reflect the apparent material change that has occurred to the facts previously reported under Item 4 of Schedule 13D.”

Ringler responded at the time that Musk didn’t believe his tweet “triggered any required amendment to his previously filed Schedule 13D. Despite Mr. Musk’s desire to obtain information to evaluate the potential spam and fake accounts, there was no material change to Mr. Musk’s plans and proposals regarding the proposed transaction at such time.”

Musk has since sought to get out of the deal, claiming Twitter did not uphold its end of the contract by failing to disclose information it should have and conducting layoffs without Musk’s approval. But Twitter has said it has complied with the terms of the agreement and has claimed Musk is simply trying to back out now that market conditions have changed.

Twitter executives deceived federal regulators and the company’s own board of directors about “extreme, egregious deficiencies” in its defenses against hackers, as well as its meager efforts to fight spam, according to an explosive whistleblower complaint from its former security chief.

The complaint from former head of security Peiter Zatko, a widely admired hacker known as “Mudge,” depicts Twitter as a chaotic and rudderless company beset by infighting, unable to properly protect its 238 million daily users including government agencies, heads of state and other influential public figures.

Among the most serious accusations in the complaint, a copy of which was obtained by The Washington Post, is that Twitter violated the terms of an 11-year-old settlement with the Federal Trade Commission by falsely claiming that it had a solid security plan. Zatko’s complaint alleges he had warned colleagues that half the company’s servers were running out-of-date and vulnerable software and that executives withheld dire facts about the number of breaches and lack of protection for user data, instead presenting directors with rosy charts measuring unimportant changes.

The complaint — filed last month with the Securities and Exchange Commission and the Department of Justice, as well as the FTC — says thousands of employees still had wide-ranging and poorly tracked internal access to core company software, a situation that for years had led to embarrassing hacks, including the commandeering of accounts held by such high-profile users as Elon Musk and former presidents Barack Obama and Donald Trump.

In addition, the whistleblower document alleges the company prioritized user growth over reducing spam, though unwanted content made the user experience worse. Executives stood to win individual bonuses of as much as $10 million tied to increases in daily users, the complaint asserts, and nothing explicitly for cutting spam.

[Twitter to pay $150 million fine over deceptively collected data]

Chief Executive Parag Agrawal was “lying” when he tweeted in May that the company was “strongly incentivized to detect and remove as much spam as we possibly can,” the complaint alleges.

...

SAN FRANCISCO — Elon Musk alleges Twitter is vastly undercounting the number of spam and bot accounts on its platform. A new whistleblower complaint from a recently fired top Twitter executive could add ammunition to that argument, though it provides little hard evidence to back up a key assertion.

Former head of security Peiter Zatko accuses Twitter of “Lying about Bots to Elon Musk” in a whistleblower complaint filed in July with regulators, including the Securities and Exchange Commission, a copy of which was obtained by The Washington Post.

Zatko, a well-known figure in the security community, alleges Twitter is not incentivized to tally the true number of bots and spammy accounts on the service, which counts 238 million daily users. And he lays out another argument that could give Musk a potential boost in his fight to prove Twitter broke its contract when he agreed to acquire the company for $44 billion: that Twitter deceived regulators regarding its defenses against hackers.

Importantly, however, Zatko provides limited hard documentary evidence in his complaint regarding spam and bots, so the potential impact of those allegations is difficult to initially gauge. Musk’s lawyers scheduled a deposition with Zatko before the publication of the whistleblower complaint, according to a person familiar with the matter, who spoke on the condition of anonymity to discuss an ongoing legal matter.

Twitter has repeatedly pushed back against the argument that it does not tally or work intensely to combat bots and spam. In May, CEO Parag Agrawal said the company removes half a million spam and bot accounts each day, a number the company updated in July to 1 million a day.

“Twitter fully stands by … our statements about the percentage of spam accounts on our platform, and the work we do to fight spam on the platform, generally,” said Twitter spokeswoman Rebecca Hahn, in response to Zatko’s allegations.

But any new allegations that Twitter misled shareholders and regulators could bolster Musk’s case in Delaware Chancery Court in October, according to half a dozen legal experts who spoke with The Post before the complaint became public, who were not briefed on the complaint. The arguments would depend on the severity of the revelations, as well as data supporting any new claims — and the extent to which Musk relied on such claims in consummating the deal.

“We have already issued a subpoena for Mr. Zatko, and we found his exit and that of other key employees curious in light of what we have been finding,” said Alex Spiro, a partner at Quinn Emanuel who is representing Musk in his ongoing litigation with Twitter.

Musk did not immediately respond to a request for comment.

Musk’s countersuit contains aggressive new claims. Twitter is rebutting them.

Musk, the Tesla and SpaceX CEO, has been angling to exit his deal to purchase the social media site, alleging Twitter’s longtime estimate that bot and spam accounts make up fewer than 5 percent of its “monetizable daily” users is untrue. He terminated his agreement to buy Twitter alleging its miscount of bots would present a “material adverse effect,” a fundamental change to the business that, for example, cuts steeply into its value. And he’s since countersued the company for allegedly misleading his team, accusing Twitter of fraud and breach of contract.

Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of usershttps://t.co/Y2t0QMuuyn

— Elon Musk (@elonmusk) May 13, 2022

Zatko is a security pioneer who is known in the industry for his history of exposing software flaws — under the handle “Mudge.” His tenure at Twitter, however, was controversial, resulting in repeated clashes with fellow executives and, ultimately, his firing.

The complaint alleges that Twitter misled regulators from the Federal Trade Commission and Securities and Exchange Commission on security issues. Twitter’s Hahn said Zatko’s allegations were “riddled with inaccuracies.”

The true number of bots and spam accounts on Twitter is likely to be “meaningfully higher” than the figure Twitter claims, the complaint alleges.

“Twitter executives have little or no personal incentive to accurately ‘detect’ or measure the prevalence of spam bots,” the complaint alleges, adding “deliberate ignorance was the norm” among its executive team.

A redacted version of the 84-page filing went to congressional committees. The Post obtained a copy of the disclosure from a senior Democratic aide on Capitol Hill.

Twitter is probing Elon Musk’s social circle in broad legal requests

Multiple divisions at Twitter are in charge of fighting spam and bots. As the head of security, Zatko was not directly responsible for eradicating bots, but his role touched upon some aspects of bot removal. Zatko was fired long before Musk’s initial Twitter investment became public in April, in the run-up to his acquisition announcement later that month.

Four people familiar with the company’s processes for spam detection, who like others spoke on the condition of anonymity to describe sensitive internal matters, told The Post that the company keeps several internal tallies of spam and bots — known as “prevalence” — across the service beyond the number supplied to Wall Street. The Post also obtained an internal document, which was redacted to hide the numbers, showing that “spam prevalence” was a number shared with the board. The document was supplied to the board at a meeting Zatko attended, according to two of the people.

The four people said the social media company estimates the broader amount of spam and bots on the service using software to sample thousands of tweets each day, as well as 100 accounts that are sampled manually. Three of the people said that the company’s internal bot prevalence numbers were almost always less than 5 percent.

Twitter’s Hahn said the company is transparent about the number of accounts it removes for violating its rules. In addition, there are many rule-following bots that are allowed to stay. The company doesn’t report a total number of bots because it would just be a minimum number of the ones they’ve caught, she said. The internal measurements of prevalence focus on how many people are seeing the rule-breaking bots, which the company believes is the more accurate measure of potential harm than an overall count, since many bots are inactive, Hahn added.

Elon Musk says Twitter deal is on hold, putting bid on shaky ground

Twitter and Musk became embroiled in a legal battle this summer, after Musk backed out of his deal to buy the social media company. Twitter filed suit, alleging he had breached his contract while disrupting the site’s operations and dragging down its stock.

In response, Musk filed a countersuit late last month alleging a spate of new issues, including that a majority of ads are shown to fewer than 16 million users. That’s a tiny fraction of the 238 million daily users that Twitter claims could earn the company revenue by viewing ads.

Alexander Manglinong, an attorney who focuses on business litigation at the firm Stubbs Alderton & Markiles, pointed to Musk’s waiving of due diligence in consummating the agreement, depriving him of a deeper look at Twitter’s internal workings.

“From my perspective — even without knowing what specific information could be out there, it still seems against Musk, an uphill battle,” he added.

Musk’s legal team has already shown its willingness to question high-ranking former executives, issuing a subpoena to former Twitter chief executive Jack Dorsey. (Zatko was already one of the executives whose records Musk’s legal team attempted to obtain, but a judge denied the request.)

Twitter sues Elon Musk, setting stage for epic legal battle

Musk’s team has asked for information from more than 20 company leaders, but the judge so far has only allowed them to obtain internal communications from a single Twitter executive, former head of consumer product Kayvon Beykpour.

Zatko alleges in his complaint that an unnamed senior executive attempted to shut down a key tool for stopping bot and spammy accounts. The tool, internally called ROPO, for “read-only phone only,” blocks an account from tweeting until a user can prove it is linked to a real person.

That executive was Beykpour, who was fired by Agrawal this year, said two of the people familiar with the company’s processes with spam, as well as a third person familiar with the discussions. The complaint says Beykpour became critical of the tool after personally “receiving a small number of unsolicited DMS (text messages).” But the people said that Beykpour thought ROPO was riddled with much broader errors, and was not trying to shut down the tool but was proposing an overhaul.

Beykpour declined an interview request.

Zatko’s attorney from the nonprofit law firm Whistleblower Aid said before publication that there had been no interaction with Musk’s team but that he would respond to subpoenas.

As Musk moves to abandon deal, Twitter faces ‘worst case scenario’

Zatko also alleges in the complaint that Twitter’s security systems had massive deficiencies, leaving the company vulnerable to repeated hacks and even the real possibility of a sitewide shutdown. He says that during his year-long tenure at the company, many workplace servers and laptops were running out-of-date and vulnerable software and far too many employees had access to internal systems that contained sensitive user data and software.

Twitter’s Hahn says security practices are up to industry standards.​​​​​​​