Elon Musk Cites New Reasons to Scrap Twitter Deal, as Subpoenas Fly

Elon Musk’s lawyers told Twitter in a letter on Monday that the recent whistle-blower report by Pieter Zatko, Twitter’s former security chief, could provide additional reasons for Mr. Musk to walk away from his $44 billion acquisition agreement.

The letter, revealed in a regulatory filing on Tuesday, could be a precursor to the billionaire seeking to incorporate Mr. Zatko’s allegations in his arguments for a coming trial over whether Mr. Musk must complete the purchase.

Mr. Zatko has accused Twitter of years of “material misrepresentation and omissions” about security and privacy protections built into its platform. Twitter executives have strongly rejected Mr. Zatko’s claims.

Mr. Zatko’s claims “are riddled with inconsistencies and inaccuracies and lack important context,” lawyers for Twitter wrote in a letter responding to Mr. Musk, also disclosed in a regulatory filing on Tuesday.

Twitter is suing Mr. Musk to force him to close the transaction, with a trial at the Delaware Chancery Court scheduled for October. Twitter said both Mr. Musk’s prior and new attempt to exit the deal were “invalid and wrongful” and that it would continue to push Mr. Musk to purchase the company at the agreed-upon price.

What Happened to Elon Musk’s Twitter Deal

Card 1 of 7

What Happened to Elon Musk’s Twitter Deal

A blockbuster deal. In April, Elon Musk made an unsolicited bid worth more than $40 billion for the social network, saying he wanted to make Twitter a private company and allow people to speak more freely on the service.

What Happened to Elon Musk’s Twitter Deal

The response. Twitter’s board countered Mr. Musk’s offer with a defense mechanism known as a “poison pill.” This well-worn corporate tactic makes a company less palatable to a potential acquirer by making it more expensive to buy shares above a certain threshold.

What Happened to Elon Musk’s Twitter Deal

Securing financing. Though his original offer had scant details and was received skeptically by Wall Street, Mr. Musk, the world’s wealthiest man, moved swiftly to secure commitments to finance his bid, putting pressure on Twitter’s board to take his advances seriously.

What Happened to Elon Musk’s Twitter Deal

Striking a deal. With the financing in place, Twitter’s board met with Mr. Musk in April to discuss his offer. The two sides soon reached a deal, with the company agreeing to sell itself for $54.20 a share.

What Happened to Elon Musk’s Twitter Deal

Tensions arise. Not long after Mr. Musk and Twitter reached their agreement, problems began. Mr. Musk  threatened to pull out of the deal if Twitter did not provide more information on how it calculates the number of fake accounts. On June 8, the company announced that it planned to give him access to a large swath of its data.

What Happened to Elon Musk’s Twitter Deal

Musk backs out. In July, Mr. Musk announced that he was terminating the deal, citing the continuing disagreement over the number of spam accounts. Twitter then sued the billionaire to force him to go through with the deal. But Mr. Musk fired back in a legal filing, arguing that the company concealed the true number of fake accounts on its platform, accusing Twitter of fraud.

What Happened to Elon Musk’s Twitter Deal

Previewing the trial. Lawyers for Twitter and Mr. Musk have issued more than 100 subpoenas ahead of the trial in October, mostly targeting tech VIPs. But Mr. Musk’s lawyers have also subpoenaed Twitter’s former security chief, Peiter Zatko, signaling that Mr. Musk may try to use Mr. Zatko’s accusations of false statements and security shortcomings at Twitter in the dispute.

While both Mr. Musk and Mr. Zatko have accused Twitter of fraud, their allegations are not the same, making it difficult for Mr. Musk to include Mr. Zatko’s claims without legal maneuvering.

Mr. Musk’s lawyers appear to have been setting the groundwork for such an action. They highlighted Mr. Zatko’s allegations at a briefing in Delaware last week and disclosed in a court filing Monday that they had subpoenaed Mr. Zatko. The subpoena is one of more than 100 that lawyers for Mr. Musk and Twitter have issued ahead of the trial.

Mr. Musk has said that Twitter’s public disclosures about the number of fake accounts on the platform — which he relied upon when he agreed to purchase the company — were misleading, and were the basis of his initial rationale for walking away from the deal, expressed in a letter to Twitter in July.

But the most recent letter from Mr. Musk’s lawyers suggests that the billionaire may seek permission from the Delaware court to amend his countersuit against Twitter. He could also push for more time for discovery, demanding more documents and information from Twitter.

It would be up the judge overseeing the trial, Kathaleen St. J. McCormick, to allow him to do so. It is not clear that she would do so, given the trial is less than two months away.

In their latest letter, Mr. Musk’s lawyers write that Mr. Zatko’s allegations, if true, constitute a “material adverse effect” on the company, allowing Mr. Musk to break the agreement. The deal requires Twitter to comply with federal laws, and Mr. Zatko has accused it of being in breach of a 2011 consent decree with the Federal Trade Commission over its security practices. This would have “existential” consequences for Twitter’s business, according to the letter.

The letter also said that Twitter should have disclosed security weaknesses raised by Mr. Zatko in its documents filed with the Securities and Exchange Commission. The fact it did not do so constitutes fraud, the letter said.

Several lawmakers have called on the F.T.C. to investigate Mr. Zatko’s claims. He is scheduled to testify before the U.S. Senate Judiciary Committee in September.

If Judge McCormick does not allow Mr. Musk to amend his countersuit, another, more unconventional option remains. He could lodge a federal lawsuit arguing that he has the right to walk away from the deal under laws governing the sale of securities. And he could ask that judge to put the deal on hold until the case is settled. But the bar for federal securities fraud claims is high, and taking such action would risk angering the Delaware court overseeing Mr. Musk’s fight with Twitter.

Kate Conger contributed reporting.

Back to top button