The lawsuit of the century is already underway.
Although the oral hearing sessions are scheduled for mid-October, Twitter's lawsuit against Elon Musk already adds up to hundreds of pages in the Delaware commercial court that will decide if the tycoon is forced to buy the social network for 44,000 million dollars ( about 43,000 million euros), as it had agreed.
After completing the initial lawsuit, Musk has accused Twitter of misleading him and the company has responded with a mixture of irony and forcefulness.
The richest man in the world must not see it entirely clearly.
He has just sold $7 billion worth of shares in the electric car maker Tesla in case he is forced to buy the social network or pay compensation.
At the recent Tesla shareholders meeting he was asked if he would dedicate himself more to that company or to managing Twitter and he joked: "I think Tesla would still do very well even if I was abducted by aliens or if I returned to my home planet," he said, eliciting laughter and applause.
"To be frank, I don't have an easy answer," he added.
The analysis of the pleadings presented so far in court shows how Musk launched into the operation without doing the usual duties in these cases and signed a contract that left him few loopholes.
Twitter's lawyers have for now an argument with few cracks and a better pen in their writings.
They are winning.
Still, Musk's lawyers are looking for legal loopholes and have put all sorts of defenses on the table.
And the tycoon is always able to pull a rabbit out of his hat.
a quick trial
It's going to be a quick trial.
Kathaleen McCormick, 42, is in charge of solving the case.
There will be no jury.
The lawsuit is settled in a court of equity in Wilmington, in the State of Delaware, the business capital of the United States.
There are more companies – at least large ones – domiciled in Delaware than in the other 49 states combined, as Joe Biden, born in Scranton (Pennsylvania), but based there, usually recalls.
Delaware offers advantageous taxation and flexible regulation.
The Delaware Chancery Court is part of that ecosystem.
It was created in 1792, shortly after the independence of the United States, and in the last century it has become an arbiter of the great American corporate disputes.
Its judges are specialized in commercial matters and companies prefer them.
He has settled large-scale business battles, takeover bids, mergers and lawsuits of all kinds, with cases like the RJ Reynolds and Nabisco, the Time Warner merger, the HP and Compaq merger or the confrontation between LVMH and Tiffany, but probably none of They have united, as in this case, the media transcendence (the eccentric richest man in the world against the popular social network) and the economic one (44,000 million dollars at stake).
McCormick has scheduled trial sessions for the week of October 17-21.
That has been a first defeat for Musk, who wanted to delay the process and have the trial take place in February 2023. The judge or chancellor has set an accelerated schedule for the request and delivery of documents, summonses, statements, requests for experts, lists of witnesses and preview.
The two sides have begun to move.
Musk has requested that Twitter's advisory banks, JP Morgan Chase and Goldman Sachs, provide all the documentation related to the operation that they have.
Twitter has requested subpoenas for Musk's regular associates, friends and allies to testify, including Oracle founder and boss Larry Ellison, who is also an adviser to Tesla;
Paypal co-founder Jason Calacanis, investor in Uber and Robinhood and partner in the operation, and David Sacks, co-founder of Paypal, who has responded in a not very decorous way on social networks.
1. Schedule of the Twitter process against Elon Musk (8 pages)
2. Twitter lawsuit against Elon Musk (62 pages)
3. Response to Elon Musk's lawsuit against Twitter (165 pages)
4. Twitter reply to Elon Mus' reply (127 pages)
Strategies on the table
Meanwhile, the documents registered in the Delaware court make it clear where the strategies of the parties will go before the trial.
Twitter's lawsuit starts off strong: “In April 2022, Elon Musk signed a binding merger agreement with Twitter, promising to do everything possible to make the deal happen.
Now, less than three months later, Musk is refusing to honor his obligations to Twitter and its shareholders because the deal he signed no longer serves his personal interests.
Having put on a public show to put Twitter on the line, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he—unlike any other party subject to Delaware contract law—is free to change your mind, destroy the company, stop its operations,
Twitter recalls that Musk presented his offer as a "take it or leave it", but that he did not put conditions regarding a thorough review
of the company or financing.
And he maintains that now he wants to renege on the agreement because he has fallen on the stock market.
The social network points out that Musk's strategy is an example of "hypocrisy".
Saying that he wanted to buy it to cleanse it of
and fake accounts, he later argued that the latter were the problem preventing him from closing the deal.
He also accuses him of "bad faith" because the purchase agreement allowed him to ask for some information before the closing, but Musk has been asking for it not to close the operation, but to try to break it.
"Musk has been working furiously, albeit unsuccessfully, to try to prove that the company he promised to buy and not to smear has made material misrepresentations about its business to regulators and investors."
Three reasons to break up
Twitter's lawsuit reveals that Musk actually claimed three reasons for breaking the deal.
The first, that Twitter would have breached its obligations to cooperate and provide information to close the agreement.
The second, alleged "materially inaccurate representations" in the merger agreement that in theory is "reasonably likely" to have a "material adverse effect" and by this means that the volume of false user accounts is greater than declared.
And the third, the alleged breach of the agreement to manage the company in an ordinary way until the closing of the operation, for having fired certain employees, slowing down hiring and not retaining key personnel.
In his writing, Twitter dismantles those supposed reasons one by one.
The lawsuit is an insider's account of how the negotiations unfolded.
After buying more than 9% of the capital, Musk told Twitter CEO Parag Agrawal that he had three options in mind: join Twitter's board, buy the entire company or found a competitor.
Twitter offered him a board seat and Musk accepted it on April 5, but a few days later, on April 9, he changed his mind and said he wanted to buy the company.
He presented the offer to him.
He initially said that he was subject to conditions on financing and
but later withdrew those conditions.
His lawyers presented a draft agreement favorable to the seller to close a deal as soon as possible.
Twitter's lawyers still won a few more concessions, notably the right to hire or fire employees up to the close of the deal without having to get Musk's consent.
In the agreement, Musk claimed that he had “conducted, to his satisfaction, his own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets” of Twitter.
The social network promised to provide Musk with information about the company that would facilitate the closing of the operation.
The tycoon promised not to attack the company or its managers in his tweets.
Twitter recalls how the Stock Market fell, dragging down other companies in the sector and also harshly punishing Tesla.
The network argues that the billionaire decided to back down when he realized that he had offered a price, $54.20, that was too high.
“Musk wanted an escape.
But the merger deal left him little room.
Without any funding or due diligence conditions, the deal gave Musk no way out short of a material adverse effect on the company or a breach of the relevant covenant by Twitter.
Musk had to try to conjure up one of them," Twitter states.
The suit describes how Musk said he wanted to buy Twitter to purge its fake users and that it would have to be done without the company going public because it would "make the numbers look dire."
He also stresses that the deal doesn't even mention the fake accounts, that Musk made the offer from him without asking for information about them, and that he waived a prior review of the company.
However, in the first meetings to request information, Musk was interested in the way in which Twitter counted its users and, in particular, the monetizable daily active users (mDAU), a measure that the network gives importance to because they are the ones who can see advertising or, eventually, could be future subscribers.
Musk was not convinced by the explanations and on May 13, without prior notice to the company, he tweeted that the agreement was "temporarily on hold" until he knew how the social network calculated that it had less than 5% false accounts in that parameter. .
Two hours later, after speaking with Twitter officials, he tweeted that he remained "committed" to the deal.
Still committed to acquisition
— Elon Musk (@elonmusk) May 13, 2022
The engagement was short lived.
On May 17, she returned to the charge and to the didactic and detailed technical arguments of the head of Twitter, she answered with the smiley poop emoticon, a message for history.
— Elon Musk (@elonmusk) May 16, 2022
Twitter maintains that it did not stop giving information to Musk, that it opened the hose of its raw activity, 49 tebibytes of data, but it was not enough for the tycoon who settled, according to the lawsuit, "in an alternate reality", according to which the company did not give him any information.
The lawyers went so far as to ask for emails, text messages and other internal communications on those issues.
Twitter suspected that what Musk was looking for was a pretext to break the agreement and did not grant some of those requests.
In a meeting on June 30, Twitter says, Musk acknowledged that he had not even read the report he was given in May on the sampling process to estimate the percentage of false accounts and did not agree to meet to receive those detailed explanations.
As for layoffs, Twitter recalls that it reserved that right and also stresses that Musk insisted that it was necessary to be more aggressive in cutting costs and staff.
Regarding employee departures, the social network argues not only that employees have the right to leave without being prevented, but also that Musk refused to authorize retention plans.
The counterclaim brief argues that Musk waived prior checks on the principle of "check, but check."
And when he went to check, he concluded that Twitter had been misleading the market for years and filing false information with the United States Securities and Exchange Commission (the SEC).
"The numerous material misrepresentations or omissions that distort the value of Twitter," he contends, caused him to agree "to acquire the company at an inflated price."
He claims that "Twitter was miscounting the number of fake and
accounts on its platform, as part of its scheme to mislead investors about the company's prospects, targeting its alleged hundreds of millions of mDAU."
In addition, he then says that the number of monetizable active daily users is not as important as Twitter makes it out to be.
And that calling them monetizable is confusing because it includes many with very little assets.
Lawyers make a proclamation of principles of little legal relevance.
They say that "Musk is an avid Twitter user who believes in free speech and open debate and appreciates Twitter's role as the world's public square," but rejects "aggressive content moderation and account suspensions that spread disinformation." because the “cure is worse than the disease”.
“Musk believed that he could kill two birds with one stone”: eliminate the problem of fake accounts, making the network friendlier and “attract the more than 220 million mDAU that Twitter represented as real and monetizable users, to create a greater engagement and subscription revenue.
The counterclaim incurs some contradictions.
He assures that "Twitter closed the doors to the information in a desperate attempt to prevent Musk and his associates from discovering his fraud."
But at the same time, it is based on the information and data provided by the social network to conclude that at least 10% of these monetized daily users are false.
The writing also slips other criticisms of the company's management and its business model.
"When a long bull market was coming to an end and the tide was going out, Twitter knew that providing Musk and his partners with the information they were requesting would reveal that Twitter had been swimming naked," he says.
The tycoon justifies not having requested a prior review, a
, because "those processes can be costly and inefficient."
But that he has the right to break the deal if Twitter has been misleading the market.
Time and time again he returns to the mDAU number, arguing that it was the number that helped Morgan Stanley sustain its valuation of $54.20 per share, although the 420 ending has always had some special meaning for Musk.
But if he had known that the mDAU figure was not that relevant, his assessment would have been much lower.
Another thesis of Musk is that Twitter was too quick to close the deal because the market was about to discover its fraud and its executives would have had to answer uncomfortable questions when presenting the results of the second quarter, in which in the end there was no conference with analysts for the merger agreement.
The truth is that the one who marked the times clearly seems to have been Musk.
Musk and his partners said they believed that estimate of less than 5% false mDAU was calculated “based on automation, artificial intelligence and machine learning” and later learned (and disclosed, skipping the deal) that it was calculated with 9,000 quarterly human checks (100 daily).
That, however, is aside from the automated processes that allow millions of accounts to be deleted each week, which the Tesla founder does not point out.
The counterclaim maintains that the social network raised "a stone wall" against Musk so as not to reveal its methodology, that it entered "an endless game of cat and mouse, with Twitter hiding the truth at every step" and that it "repeated as a parrot the mantra that their process was robust” without clarifying it.
Somewhat desperately, Musk's lawyers also argue that challenging an Indian government decision regarding his content (as Twitter did around July 6) is an extraordinary departure from the normal course of business and that it will power to break the agreement.
It is a new argument, which they had not even mentioned in the letter in which the breakup was communicated.
Although Musk and his associates support free speech, they believe that Twitter should follow the laws of the countries in which it operates.
He also claims that not asking permission to let employees go breaks the agreement.
In short, Musk accuses Twitter of fraud, violation of securities legislation and breach of contract.
He asks not only for the merger agreement to be rescinded but also requests "compensation for damages for an amount that must be set at trial."
Among its defenses, it states that as such, Twitter has not suffered losses and is not entitled "to recover losses suffered by third parties, including, but not limited to, its shareholders."
And he reiterates that “the merger agreement was fraudulently induced”
That gives rise to the reply from Twitter, the third and last document in the series registered for now: “According to Musk, he – the billionaire founder of multiple companies, advised by Wall Street bankers and lawyers – was tricked by Twitter into signing a $44 billion merger deal.
That story is as implausible and contrary to the facts as it seems”, the lawyers point out ironically.
According to them, the counterclaim's assertions "are factually inaccurate, legally insufficient, and commercially irrelevant."
"The merger agreement does not contain a single reference to fake or
accounts, " Twitter stresses.
And he says Musk selectively uses sensitive data given to him by Twitter to claim a breach.
"Yet he simultaneously and inconsistently claims that Twitter breached the merger agreement by blocking his requests for information," he says.
The social network explains that when Musk talks about 10% of false accounts "he is not measuring the same thing as Twitter and he is not even using the same data."
And he embarrasses the tycoon by pointing out that the generic web tool used by him points to his own account as a likely bot.
Musk has more than 100 million followers, one of the most followed on Twitter, and has tweeted more than 18,000 times.
"Musk's preliminary expert estimates are nothing more than the result of computing the erroneous data with a generic web tool," says the social network.
He also argues that attacking his estimate based only "on the size of the sample relative to the size of the population is elementary statistical error."
“Musk and his partners have spent months trying to invent a spam
and have found nothing.
His complaints about the mDAU metric were not even listed among the reasons for the termination: they are a newly invented position, ”he also points out.
Twitter also underlines that its legal dispute with the Indian government is nothing new or exceptional and that it was not used to break the merger at the time.
He also refutes that, as Musk said, it is his third market.
There are still surprises, but as it is, Musk does not have it easy.
Judge McCormick is known for trying to enforce agreed operations.
The tycoon is left with the unlikely chance of mobilizing shareholders to vote against the merger at Twitter's board.
Or the option of trying to negotiate an out-of-court settlement with compensation to the company.
If not, she will risk it in court.
For Musk, the second half of October looks tough.
The week after the Twitter trial, before the same court in Wilmington, he faces a lawsuit from a Tesla shareholder who seeks to annul the record compensation package of 56,000 million dollars in shares that the founder of the company received.
The shareholder alleges waste and unjust enrichment.
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