Many were wanting to know how the Musk-Twitter takeover fable ends, or rather, who will be the 1st to sue.
Late on Friday, Elon Musk chose to resolve the debate simply by effectively breaching his agreement signed three months ago, plus making a Delaware lawsuit unavoidable, by announcing within a 13D filing that he is terminating his Twitter merger contract, and claiming that “ Twitter is in material infringement of multiple provisions of that Agreement, seems to have made false and deceptive representations upon which Mr. Musk relied when entering into the particular Merger Agreement, and is more likely to suffer a Company Material Adverse Effect. ”
Of course , none of that will stick as Elon waived every rights to rework the deal when he signed the purchase agreement on 04 25, and today it will be up to either i) a judge to enforce the original deal, an final result which will likely take place after several years of lawsuits or even ii) to renegotiate the purchase price lower.
Here is the letter sent from Musk’s law firm, Skadden Arps, to Twitter’s common counsel, Vijaya Gadde.
1355 Market Street, Suite nine hundred
San Francisco, CALIFORNIA 94103
Attn: Vijaya Gadde, Chief Lawful Officer
Dear Ms. Gadde:
We refer to (i) the Agreement and Plan of Merger by and amongst X Holdings I, Inc., X Holdings II, Inc. and Twitter, Inc. went out with as of April 25, 2022 (the “ Merger Agreement” ) and (ii) our own letter to you dated as of June 6, 2022 (the “ June 6 Letter” ). As further explained below, Mr. Musk is terminating the Merger Agreement because Twitter is in materials breach of multiple provisions of that Agreement, appears to make false and misleading representations upon which Mr. Musk depended when entering into the Combination Agreement, and is likely to suffer a Company Material Adverse Impact (as that term is usually defined in the Merger Agreement).
While Area 6. 4 of the Merger Agreement requires Twitter to offer Mr. Musk and his experts all data and details that Mr. Musk demands “ for any reasonable company purpose related to the consummation of the transaction, ” Tweets has not complied with its contractual obligations. For nearly two months, Mister. Musk has sought the data and information necessary to “ make an independent assessment from the prevalence of fake or spam accounts on Twitter’s platform” (our letter to you dated May 25, 2022 (the “ May twenty five Letter” )). This information is definitely fundamental to Twitter’s business and financial performance and it is necessary to consummate the transactions contemplated by the Merger Agreement because it is needed to ensure Twitter’s satisfaction of the conditions to closing, to facilitate Mr. Musk’s financing and economic planning for the transaction, and to engage in transition planning for the company. Twitter has failed or refused to provide this information. Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has declined them for reasons that will appear to be unjustified, and sometimes it has claimed to conform while giving Mr. Musk incomplete or unusable information.
Mr. Musk and his financial advisors from Morgan Stanley have been asking for critical information from Tweets as far back as May 9, 2022— and repeatedly since then— on the relationship between Twitter’s disclosed mDAU figures and the prevalence of false or even spam accounts on the system. If there were ever any doubt as to the nature of these information requests, the Might 25 Letter made clear that will Mr. Musk’s goal has been to understand how many of Twitter’s claimed mDAUs were, actually fake or spam accounts. That letter noted that “ Items 1 . 03 to 1. 13 of the diligence request list contain high-priority requests for enterprise information and other information intended to enable Mr. Musk and his advisors to make an independent assessment from the prevalence of fake or spam accounts on Twitter’s platform… ” The letter then provided Twitter having a detailed list of requests to this effect.
Ever since then, Mr. Musk has provided numerous additional follow-up requests, almost all aimed at filling the gaps in the incomplete information that Twitter provided in response to his broad requests for information relating to Twitter’s reported mDAU counts and reported estimations of false and junk mail accounts. 1 For example , within our letter to you dated 06 29, 2022 (the “ June 29 Letter” ), we referenced Mr. Musk’s request in the May 25 Letter for “ details that would allow him ‘ to generate an independent assessment of the frequency of fake or junk e-mail accounts on Twitter’s platform. ‘” Because Twitter, by its own admission, provided only incomplete data that was not really sufficient to perform such an indie assessment, 2 the 06 29 Letter “ pursued to be even more specific, and also to reduce the burden of the [original] request, ” by identifying a specific subset of high priority information, responsive to Mr. Musk’s prior requests, for Twitter to instantly make available.
In spite of these repeated requests in the last two months, Twitter has nevertheless failed to provide much of the information and information responsive to Mr. Musk’s repeated requests, including, but not limited to:
- Information related to Twitter’s process for auditing the inclusion of spam plus fake accounts in mDAU. Twitter has still not provided much of the information specifically required by Mr. Musk in Sections 1 . 01-1. goal of the May 19 persistance request list that is essential for him to make an evaluation of the prevalence of false or spam accounts on its website. As lately as the June 29 Notice, Mr. Musk reiterated this long-standing request for information related to Twitter’s sampling process to get detecting fake accounts. The particular June 29 Letter determined specific data necessary to enable Mr. Musk to individually verify Twitter’s representations about the number of mDAU on its platform— including, but not restricted to (1) daily global mDAU data since October 1, 2020; (2) information regarding the sampling population for mDAU, including whether the mDAU inhabitants used for auditing spam and false accounts is the same mDAU population used for quarterly reporting; (3) outputs of every step of the sampling procedure for each day during the days of January 30, 2022 and June 19, 2022; (4) documentation or other guidance provided to contractor agents used for auditing mDAU samples; (5) information about the user interface of Twitter’s ADAP tool and any internal tools used by the service provider agents; and (6) mDAU audit sampling information, including anonymized information identifying the particular contractor agents and High quality Analyst that reviewed each sampled account, the status given by each contractor agent and Quality Analyst, as well as the current status of any kind of accounts labelled “ jeopardized. ” A subsequent request along these lines must not have been necessary, as this details should have been provided according to Mr. Musk’s original persistance request. Yet, to date, Tweets has not provided any of this information.
- Information associated with Twitter’s process for determining and suspending spam plus fake accounts. In addition to information regarding Twitter’s mDAU audits, the June 29 Notice also reiterated requests just for data specifically identified in Sections 1 . 04-1. 05 of the May 19 persistance request list regarding Twitter’s methodology and performance information relating to identification and suspension of spam and fake accounts, including, but not limited to, information regarding account suspensions, including information sufficient to recognize daily numbers of account suspension systems since October 2020 and numbers of account suspensions for every of Twitter’s internal causes of suspension. In addition , during the June 30, 2022 call, Twitter’s representatives indicated for the first time that the workflow and processes pertaining to detecting spam and fake accounts in the mDAU inhabitants is different and separate through the workflow and processes intended for identifying and suspending accounts in violation of Twitter’s policies. On that call, Twitter indicated that it would not be willing to provide information regarding the methodologies employed to identify and suspend such balances.
- Daily actions of mDAU for the past 8 (8) quarters. On 06 17, 2022 (the “ June 17 Letter” ) Mr. Musk reiterated his request for “ access to the sample set used and calculations performed, as well as any related reports or analysis, to support Twitter’s representation that fewer than 5% of its mDAUs are false or junk e-mail account. ” To that end, Mr. Musk requested that Twitter provide “ every day measures of mDAU for the previous eight quarters, plus through the present. ” These details is derivative of the information Mr. Musk first sought in Sections 1 . 01-1. 03 of the May 19 diligence request list. Even though Twitter has provided certain summary data regarding the mDAU computations, Twitter has not provided the whole daily measures as required.
- Board components related to Twitter’s mDAU calculations. In the June 17 Letter, Mr. Musk requested a number of board materials and marketing communications related to Twitter’s mDAU metric, its calculation of the variety of spam and false accounts, its disclosure of the mDAU metric, and the company’s disclosure of the number of spam balances on the platform. Twitter has furnished an incomplete data occur response to this request, and has not provided information adequate to enable Mr. Musk to generate an independent assessment of Twitter’s board and management’s understanding of its mDAU metric.
- Materials related to Twitter’s financial condition. Mr. Musk is definitely entitled, under Section 6. 4 of the Merger Contract to “ all information concerning the business … of the Firm … for any reasonable company purpose related to the consummation of the transactions” and under Section 6. 11 from the Merger Agreement, to information “ reasonably requested” in connection with his efforts to secure your debt financing necessary to consummate the transaction. To that end, Mr. Musk requested on June 17 a variety of board components, including a working, bottoms-up financial model for 2022, price range for 2022, an up-to-date draft plan or spending budget, and a working copy associated with Goldman Sachs’ valuation model underlying its fairness opinion. Twitter has provided only a pdf file copy of Goldman Sachs’ final Board presentation.
In short, Tweets has not provided information that will Mr. Musk has asked for for nearly two months notwithstanding his repeated, detailed clarifications designed to simplify Twitter’s identification, selection, and disclosure of the most appropriate information sought in Mister. Musk’s original requests.
While Twitter has provided some information, that information has come with strings connected, use limitations or additional artificial formatting features, which has rendered some of the information minimally useful to Mr. Musk and his advisors. For example , when Tweets finally provided access to the eight developer “ APIs” first explicitly requested by Mr. Musk in the May 25 Letter, those APIs contained a rate limit lower than what Twitter provides in order to its largest enterprise clients. Twitter only offered to supply Mr. Musk with the same level of access as some from the customers after we explained that throttling the rate restrict prevented Mr. Musk great advisors from performing the analysis that he wished to carry out in any reasonable period of time.
Additionally , those APIs contained an artificial “ cap” on the number of concerns that Mr. Musk great team can run whatever the rate limit— an issue that initially prevented Mr. Musk and his advisors from completing an analysis of the information in any reasonable period of time. Mr. Musk raised this issue the moment he became aware of it, in the first paragraph of the June 29 Letter: “ we have just been up to date by our data specialists that Twitter has placed an artificial cap over the number of searches our experts can perform with this data, which is now preventing Mr. Musk and his team from performing their analysis. ” That cap was not removed till July 6, after Mister. Musk demanded its elimination for a second time.
Based on the foregoing refusal to provide information that Mister. Musk has been requesting given that May 9, 2022, Twitter is in breach of Sections 6. 4 and 6. 11 of the Merger Contract.
Despite general public speculation on this point, Mister. Musk did not waive their right to review Twitter’s information and information simply because he chose not to seek this particular data and information prior to entering into the Merger Contract. In fact , he negotiated entry and information rights within the Merger Agreement precisely so that he could review data and information that is important to Twitter’s business before financing and completing the transaction.
As Twitter has been on notice of its breach since at least June six, 2022, any cure time period afforded to Twitter underneath 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 considered thereby, and this letter constitutes formal notice of By Holding I, Inc. is actually termination of the Merger Contract pursuant to Section 7. 1(d)(i) thereof.
In addition to the foregoing, Twitter is within breach of the Merger Contract because the Merger Agreement appears to contain materially inaccurate representations. Specifically, in the Merger Contract, Twitter represented that no documents that Twitter filed with the U. S. Securities and Exchange Commission considering that January 1, 2022, included any “ untrue declaration of a material fact” (Section 4. 6(a)). Twitter offers repeatedly made statements such filings regarding the portion of its mDAUs that are false or even spam, including statements that: “ We have performed an indoor review of a sample of balances and estimate that the average of false or spam accounts during the first quarter of 2022 represented fewer than 5% of our mDAU during the quarter, ” and “ After we determine an account is spam, malicious automation, or fake, we cease counting it in our mDAU, or other related metrics. ” Mr. Musk relied on this representation in the Combination Agreement (and Twitter’s many public statements regarding fake and spam accounts in its publicly filed SEC documents) when agreeing to enter into the Merger Agreement. Mr. Musk has the right to seek rescission of the Merger Agreement in the event these material representations are determined to be fake.
Although Tweets has not yet provided complete information to Mr. Musk that would enable him to undertake a complete and comprehensive overview of spam and fake accounts on Twitter’s platform, he has been able to partially and preliminarily analyze the accuracy of Twitter’s disclosure regarding its mDAU. While this analysis remains ongoing, all signs suggest that several of Twitter’s public disclosures regarding its mDAUs are either false or materially misleading. First, even though Twitter has consistently symbolized in securities filings that “ fewer than 5%” from the mDAU are false or even spam accounts, based on the information provided by Twitter to date, it appears that Twitter is dramatically understating the proportion of spam and false accounts displayed in its mDAU count. First analysis by Mr. Musk’s advisors of the information provided by Twitter to date causes Mr. Musk to strongly believe that the proportion of false and spam accounts included in the reported mDAU count is definitely wildly higher than 5%. Second, Twitter’s disclosure that it stops to count fake or even spam users in its mDAU when it determines that those users are fake appears to be fake. Instead, we understand, based on Twitter’s representations during a 06 30, 2022 call with us, that Twitter includes accounts that have been suspended— and thus are known to be fake or spam— in its quarterly mDAU count even when it is aware the fact that suspended accounts were included in mDAU for that quarter. Final, Twitter has represented that it is “ continually seeking to improve our ability to estimate the entire number of spam accounts and eliminate them from the computation of our mDAU… ” However Twitter’s process for determining its mDAU, and the portion of mDAU comprised of non-monetizable spam accounts, appears to be arbitrary and ad hoc. Disclosing that Twitter has a reasoned procedure for calculating mDAU once the opposite is true would be false and misleading.
Twitter’s representation in the Merger Agreement regarding the accuracy of its SEC disclosures relating to fake and spam accounts might have also caused, or is fairly likely to result in, a Company Material Adverse Effect, which may type an additional basis for terminating the Merger Agreement. Whilst Mr. Musk and his experts continue to investigate the exact character and extent of this event, Mr. Musk has cause to believe that the true amount of false or spam accounts on Twitter’s platform is substantially higher than the amount of less than 5% represented by Tweets in its SEC filings. Twitter’s true mDAU count is a key component of the company’s company, given that approximately 90% of its revenue comes from advertisements. Because of this, to the extent that Tweets has underrepresented the number of false or spam accounts on its platform, that may make up a Company Material Adverse Impact under Section 7. 2(b)(i) of the Merger Agreement. Mister. Musk is also examining you can actually recent financial performance plus revised outlook, and is considering whether the company’s declining company prospects and financial perspective constitute a Company Material Adverse Effect giving Mr. Musk a separate and distinct foundation for terminating the Combination Agreement.
Lastly, Twitter also did not adhere to its obligations under Section 6. 1 of the Merger Agreement to seek and obtain consent prior to deviating from its obligation to conduct its business in the ordinary course and “ preserve substantially intact the material components of its current business organization. ” Twitter’s conduct in firing 2 key, high-ranking employees, the Revenue Product Lead and the General Manager of Customer, as well as announcing on Come july 1st 7 that it was laying away from a third of its talent order team, implicates the ordinary training course provision. Twitter has also implemented a general hiring freeze which usually extends even to reconsideration of outstanding job offers. Moreover, three executives possess resigned from Twitter since the Merger Agreement was authorized: the Head of Data Science, the Vice President of Twitter Service, and a Vice President of Product Administration for Health, Conversation, and Growth. The Company has not obtained Parent’s consent for modifications in our conduct of its business, including for the specific changes in the above list. The Company’s actions therefore constitute a material breach of Section 6. 1 of the Merger Agreement.
Accordingly, for all of these reasons, Mr. Musk hereby exercises By Holdings I, Inc. is right to terminate the Merger Agreement and abandon the particular transaction contemplated thereby, which letter constitutes formal discover of X Holding I, Inc. ‘s termination from the Merger Agreement pursuant to Section 8. 1(d)(i) thereof.
/s/ Mike Ringler
Skadden, Arps, Slate, Meagher & Flom LLP
Using due respect to Elon and his law firm , all the above is bunk, and everything that matters is his signature on the original combination agreement when he waived all rights. And now it really is up to the Twitter board to determine how to pursue next tips.
TWTR share dropped 7% after hours on an outcome that everyone should have priced in by now: the real fun begins now.