Elon Musk's decision to pull out of his $44 billion deal to buy Twitter has put the microblogging platform's stock under pressure, with the spectre of a protracted legal battle looming in the horizon.
Twitter's stock closed 5 per cent lower to $36.81 on Friday, its lowest close since May 24, and hit as low as $34.07 in after-hours trading. It has lost about 20 per cent since Mr Musk announced his takeover bid and 28 per cent since April 25 when Twitter's board agreed to his offer to buy the social media platform for $54.20 per share.
Mr Musk's decision to terminate the deal makes Twitter shares more vulnerable to further damage, said Daniel Ives, managing director at Wedbush Securities, given the "pure chaos" the company has dealt with throughout the almost three-month negotiating process.
"Monday, this is a $25 stock," Mr Ives said.
"The company has been in pure chaos — people have left in droves, and now competitors are going to seize on the advertisement dollars. With the employee turnover, it’s going to be viewed as damaged goods from another potential buyer."
Twitter shares lost 8 per cent on May 16, losing all its gains since Mr Musk disclosed his intention to buy the platform on April 14, and have continued to perform below its 2022 peak of $51.70 on April 25.
Mr Musk, the world's wealthiest person, pointed the blame at Twitter, saying the San Francisco-based company had not heeded his requests for more information regarding spam activity on the platform and its financial condition, a filing to the US Securities and Exchange Commission on Friday showed.
"Mr Musk and his financial advisers at Morgan Stanley have been requesting critical information from Twitter as far back as May 9, 2022 — and repeatedly since then — on the relationship between Twitter’s disclosed mDAU [monetisable daily active user] figures and the prevalence of false or spam accounts on the platform," it said, referring to monthly daily average users.
Specifically, Mr Musk wanted information on information related to Twitter’s process for auditing the inclusion of spam and fake accounts in mDAU, daily measures of mDAU for the past eight quarters and board materials related to Twitter’s mDAU calculations and information related to Twitter’s process for identifying and suspending spam and fake accounts, the filing showed.
Twitter had stood by its numbers, saying that bots make up about 5 per cent of the platform, while Mr Musk cited it as high as 20 per cent.
"In short, Twitter has not provided information that Mr Musk has requested for nearly two months notwithstanding his repeated, detailed clarifications intended to simplify Twitter’s identification, collection, and disclosure of the most relevant information sought in Mr Musk’s original requests," it added.
"As Twitter has been on notice of its breach since at least June 6, 2022, any cure period afforded to Twitter under the Merger Agreement has now lapsed. Accordingly, Mr Musk hereby exercises X Holdings I, Inc’s right to terminate the Merger Agreement and abandon the transaction contemplated thereby."
One important detail missing from the SEC filing, however, is the clause in the agreement that Mr Musk will have to pay a $1bn break-up fee should he decide not to push through with the acquisition.
Twitter remained defiant, issuing a one-line press release in response to the filing.
"We are committed to closing the transaction on the price and terms agreed upon with Mr Musk and plan to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery," it said.
Twitter's declaration of a legal war, however, would mean that it would either seek to renegotiate, demand higher compensation, or settle out of court.
A court battle in Delaware, however, could be an advantage for Twitter, legal experts say. While courts in the US state have a high bar for acquirers being allowed to abandon deals, target companies often opt a renegotiated deal at a lower price or financial compensation instead of a long drawn-out legal fight, legal experts told Reuters.
"The argument for settling at something lower is that litigation is expensive. And this thing is so messy that it might not be worth it," said Adam Badawi, a law professor at UC Berkeley.
Twitter has not commented further beyond the SEC filing. Mr Musk, a prolific Twitter user, has not posted anything regarding the issue as of press time.
Mr Musk's decision isn't particularly shocking, because the way he was pulling out was "kind of a very unsophisticated way", said Danny Cevallos, a legal analyst with NBC News.
"Mr Musk was essentially saying, 'hey, that's why I want out; the product isn't what I thought it was'," he said.
Meanwhile, "Twitter can say, 'hey, we can force you to go through with this deal', and Twitter will probably argue 'this whole bot thing is just you making this up to try to get out of the deal because you're having buyer's remorse'."
Analysts had already expressed scepticism on Mr Musk's ability to pull the bid. While Mr Musk has secured investment pledges from a number of big names — including Oracle founder Larry Ellison and Saudi billionaire Prince Alwaleed bin Talal — his strategy on how to run the company has remained in doubt, other than his declaration that he wants Twitter to be a platform for free speech.
Some Twitter influencers like Josh Wolfe, co-founder of Lux Capital, have said bots were never the issue for Mr Musk but a catalyst that allowed him to sell Tesla options that were about to expire.
"Entire thing was a clever ruse to SELL + LIQUIDATE $8.5 BILLION of TESLA STOCK (w/plausible excuse for doing it)," Josh Wolfe, co-founder of Lux Capital, said on Friday on Twitter after the announcement.
Mr Wolfe said he estimated there is an 80 per cent chance Mr Musk pays $1bn breakup fee, reaps $7.5bn from liquidated stock options and a 20 per cent chance that he spends $100 million on litigation proceedings with Twitter.
"Honestly think he can 'land rockets' but can't fix 'bots'?" Mr Wolfe asked rhetorically.