Like countless other contract disputes, Twitter’s (TWTR) clash with Elon Musk over the Tesla CEO's (TSLA) attempted exit from his $44 billion agreement to acquire the social media company turns on language that can be open to multiple interpretations.
Don’t expect Twitter or Musk to admit that the legalese laying out the terms of their merger agreement leaves the slightest ambiguity about their respective rights, though.
After publicly taunting Twitter with the threat of a hostile takeover, and forcing the board's hand with a premium too good to refuse, Musk agreed to the sale based on a merger agreement drafted by some of the priciest lawyers that money can buy. In a matter of weeks from signing the contract, Musk hinted of cold feet and then terminated the deal, citing suspicion that Twitter's platform suffered from a higher prevalence of fake accounts than the less than 5% of its monetizable daily active users reported.
Twitter alleges in a complaint against Musk that the agreement allows it refuse Musk’s demands and force him to buy the company. Musk's lawyers, for their part, say he can ditch the agreement entirely because Twitter's refusals qualify as a material breach — and possibly as a "material adverse effect" that would void the deal. In a July 8 termination letter, Musk's lawyers called the bot data "fundamental to Twitter’s business and financial performance" and necessary to complete the deal.
NEW YORK, NEW YORK - MAY 02: Elon Musk attends The 2022 Met Gala Celebrating "In America: An Anthology of Fashion" at The Metropolitan Museum of Art on May 02, 2022 in New York City. (Photo by Theo Wargo/WireImage) ·Theo Wargo via Getty Images
Twitter instead says Musk is using the bot request as a pretext for backing out of the deal, noting that the Tesla CEO repeatedly disparaged Twitter on the platform itself. Twitter also notes that Musk's premium purchase offer at $54.20 per share is much higher than the stock's more recent value — the company's stock was trading at $37.74 at market close on Friday.
'Room for argument'
Despite the competing claims, the actual merger document doesn't explicitly mention bot data. It does spell out broad terms about Musk’s right to access information up until the deal closes, and Twitter’s right to withhold it.
"There certainly is going to be room for argument," Widener University's Delaware Law School professor Lawrence A. Hamermesh told Yahoo Finance.
A high prevalence of fake accounts would threaten the foundation of Twitter's revenue stream — advertisers pay to reach real, human account holders and not bots. A bot rate higher than Twitter claims could scare off investors, advertisers, and possibly even users, because bots can both decrease genuine advertising impressions and spread misinformation.
SUN VALLEY, IDAHO - JULY 07: Parag Agrawal, CEO of Twitter, walks to a morning session during the Allen & Company Sun Valley Conference on July 07, 2022 in Sun Valley, Idaho. The world's most wealthy and powerful businesspeople from the media, finance, and technology will converge at the Sun Valley Resort this week for the exclusive conference. (Photo by Kevin Dietsch/Getty Images) ·Kevin Dietsch via Getty Images
As of the fourth quarter of 2021, the company's regulatory filings state that fake or “spam bot” accounts represent less than 5% of its user base.
For Musk’s part, his lawyers argue that under one provision of the contract, Twitter was on the hook to hand over enough data to enable him to independently assess the incidence of fake accounts.
To back up his claim, his lawyers cite contract language stating that Twitter must provide him with “reasonable access" to Twitter's "properties, books and records," and promptly furnish him with "all information concerning Twitter's business, properties and personnel" for any "reasonable business purpose related to the consummation" (emphasis added) of the transaction.
"That section does give Musk some rights to get information," Hamermesh said. "But it's not carte blanche, free-for-all access to information." The language, he explains, presents hurdles for Musk to show he needs the data for a "reasonable purpose" that's "related" to closing the deal.
"What's a reasonable business purpose? What's related?" he asks, explaining that those questions, if the dispute is resolved in court, will be up to a judge to decide. Still, he says, "I'm sure there's plenty of room to argue both sides of that."
Twitter is likely to contend that the type of information Musk is demanding isn't covered by the contract language, and that Musk could have asked for data related to bots before he agreed to the merger agreement, Hameresh said.
'It means what the trier of fact decides it means'
To further muddy the water, Twitter also cites imprecise contract language to argue that it's at liberty to decline Musk's requests.
The company points to a provision that lets it withhold information if in its "reasonable judgment" it determines that disclosing the data would "cause significant competitive harm" to Twitter if the deal doesn't close. In other words, Twitter can decide there's too much risk of competitive harm to Twitter if Musk fails to acquire the company and is left holding tools for estimating fake account data.
That language too, leaves room for interpretation. What's "reasonable?" What's "significant?"
Columbia Business School senior lecturer Donna Hitscherich says sorting out those questions through litigation is a risk for both Twitter and Musk, because the judge will have to interpret the meaning of ambiguous terms in the merger agreement.
"In reality, it means what the trier of fact decides it means,” Hitscherich said.
In addition to holding a right to-flat out reject Musk's requests, Twitter says the agreement further insulates it from handing over the data because Musk waived his right to due diligence — the right to obtain certain proprietary Twitter information. The very absence of a due diligence condition in the contract, they claim, means Musk has no right to demand bot data as a condition of acquiring the company.
Musk's lawyers claim he didn't, in fact, waive his right to review the data.
Unless Twitter and Musk settle their dispute, the Delaware Chancery Court’s chief judge, Kathaleen McCormick, will be left to interpret the contract. Before that, Musk will have a chance to answer Twitter's accusations that he tried to tank the deal in an answer to the company's complaint.
This story was amended to clarify Twitter's reported fake accounts are fewer than 5% of monetizable daily active users.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
