Sunday, September 4, 2022

Elon Musk vs. Twitter: The Upcoming Trial FAQ

Elon Musk and Twitter Inc. will square off in Delaware Chancery Court on October 17, as the social-media firm attempts to compel Musk to finish his $44 billion purchase. In recent weeks, both parties have sought material to bolster their respective arguments, occasionally petitioning the judge to compel the other party to comply with their requests. Here's what you should know:

Why are Elon Musk and Twitter in court?

Mr. Musk announced his intention to leave the deal on July 8, claiming that Twitter had not supplied the required data and information to analyze the number of fraudulent or spam accounts on the platform. Days later, the social media business sued Mr. Musk to enforce the originally agreed-upon conditions of the deal.

The tale started in late January, when Mr. Musk, CEO of Tesla Inc., began discreetly purchasing Twitter shares. By the time his position became public in early April, he was the company's biggest individual investor. He subsequently moved to buy the whole firm with the intention of taking it private. That month, Twitter agreed to sell itself.

Mr. Musk consistently expressed worries about Twitter's administration and the existence of spam bots and phony accounts on the platform in the weeks that followed. Mr. Musk said in May that he was putting the deal "temporarily on hold" until he got more information, but that he was still committed to the transaction. He attempted to cut the cord less than two months later.

What are the two sides claiming?

Twitter claims in its complaint that it obliged with Mr. Musk's data demands and that he was using the spam bots as a pretext to back out of the deal as market circumstances deteriorated, reducing his personal fortune.

"Rather than shoulder the cost of the market slump, as required by the merger agreement, Musk want to transfer it to Twitter's investors," the business said.

Mr. Musk accuses Twitter of deception. He expressed reservations about the deal after Twitter restated certain user figures in April and after meeting with company officials in May to discuss how the platform handles spam and phony accounts. Mr. Musk's side said in a court statement that he was disturbed by the company's methodology for such accounts, particularly the absence of automated tools to assist with the computation. He also claims that Twitter made changes to the firm, including staff decisions, on which he should have been informed as the future owner.

Twitter claims that Mr. Musk violated conditions of the agreement, including nondisclosure agreements.

What exactly are spam bots?

Spam and fraudulent accounts are a widespread problem for social media firms. Bots, or automatic software programs capable of swiftly and extensively propagating postings, are sometimes used to control them. Such accounts degrade the experience of genuine users by displaying postings that they don't understand are made by bots or otherwise under false pretenses.

Bot operators have used bogus accounts to instigate violence, broadcast false information, deceive political activities, and accomplish other illegal aims. Fake accounts may also make it difficult for marketers on social media sites to determine how much value they are receiving for their money.

Twitter believes that such accounts account for fewer than 5% of its monetizable daily average users, although the true figure might be higher. Mr. Musk contends that the amount is substantially higher.

According to academics, Mr. Musk, who has over 100 million Twitter followers, has likely had significantly more exposure and experience with phony and spam accounts than the majority of users on the social-media platform.

Mr. Musk waived due diligence in the deal process, claiming Twitter refused to provide him with the data needed to verify the figure. Twitter said that it had supplied Mr. Musk with sufficient data, but that its accounting is difficult for outsiders to reproduce.

Before the merger deal was inked, the billionaire stated that he intended to "fight the spam bots or die trying!"

What exactly is the Chancery Court of Delaware?

The court is largely regarded as the most important institution in the country for corporate acquisition and merger issues.

Twitter, like many other businesses, is based in Delaware. According to its secretary of state, over two-thirds of Fortune 500 corporations are headquartered there. Mr. Musk and Twitter agreed to resolve any issues resulting from his possible acquisition of the microblogging service in Delaware Chancery Court or any state or federal court in Delaware.

The Chancery Court, a nonjury trial court, bills itself as the preeminent United States venue for legal matters concerning the internal operations of Delaware companies and other corporate organizations that perform "a significant percentage of the world's commercial dealings."

Who will make the final decision on the Musk-Twitter deal?

The case will be decided by Chancellor Kathaleen McCormick. She joined the Chancery Court in 2018, when it expanded from five to seven members. When she was appointed chancellor last year, she became the court's first female leader in its 230-year history.

Lawyers say Chancellor McCormick, who started her career as a legal-aid attorney, is known for her thorough preparation, ability to analyze complicated business contracts, and readiness to work over the hour when necessary. In 2019, she took a case opposing a takeover from start to finish in less than two months, drafting the 95-page ruling over the course of a weekend spent working at her home and office.

Separately, Chancellor McCormick is presiding over another multibillion-dollar dispute involving Mr. Musk. In that action, a Tesla shareholder claims that the board breached its fiduciary obligations by granting Mr. Musk a $56 billion pay package in 2018. Tesla disputes this. A trial is set to begin shortly following the Twitter case.

What are the possible outcomes?

Twitter requested that Chancellor McCormick order Mr. Musk to complete the deal, which is the business equivalent of a shotgun wedding.

Alternatively, she might fire him if she discovers, as Mr. Musk claims, that Twitter breached the merger agreement by deceiving him about the incidence of spam or phony accounts on its platform.

In early August, Mr. Musk sold over $7 billion in Tesla shares, citing uncertainties about the Twitter deal: "In the (hopefully improbable) event that Twitter compels this deal to complete and some equity partners do not come through, it is critical to prevent an emergency sell of Tesla stock."

Mr. Musk and Twitter might possibly resolve their issue outside of court.

What is the legal strategy of Twitter?

Twitter sent subpoenas to many of Mr. Musk's Silicon Valley investors, acquaintances, and financial supporters in early August in search of conversations relevant to the deal. According to attorneys and academics who are not engaged in the dispute, the corporation's purpose is likely to ascertain if Mr. Musk had further worries about completing his deal to acquire the company beyond what he has publicly said.

Twitter also sent subpoenas on at least a dozen institutions seeking information on stock and debt financing, as well as correspondence related to the deal.

According to court filings, the subpoenas sought information and documents such as face-to-face discussions, physical mail, emails, text messages, instant chats, social media connections, facsimiles, and phone calls. According to Twitter's legal papers, the business is requesting, among other things, any records and correspondence linked to fraudulent or spam accounts.

According to attorneys and scholars, Twitter may be looking for conversations that would support its allegation that Mr. Musk is refusing because he lost more than $100 billion of his fortune during the market drop. Mr. Musk has offered up to $33 billion of his own money to the deal.

What are Mr. Musk's counter-arguments?

Mr. Musk launched a countersuit against Twitter in early August, accusing the company of misrepresenting the state of its business and critical data regarding its platform users.

Mr. Musk claims that many monetizable Twitter users do not contribute to the firm's financial success, as the company claims, since most monetizable daily average users are shown essentially no adverts.

Twitter reacted to Mr. Musk's countersuit, claiming that the billionaire's assertion that he was deceived is improbable and that he does not have the right to withdraw based on his worries about the quantity of spam or fraudulent accounts on its platform.

Twitter also said that Mr. Musk has not found any inaccurate or misleading statements in its regulatory filings, and that he is seeking to manipulate facts and use litigation to destroy Twitter's business.

What is the Twitter whistleblower claim's relevance to this?

Some of Mr. Musk's claims were bolstered by a whistleblower lawsuit filed with the Securities and Exchange Commission in July by Peiter Zatko, Twitter's former head of security who was sacked earlier this year. Mr. Zatko, sometimes known as "Mudge," is a well-known computer-security researcher. His letter, made public in late August, accuses Twitter of making false regulatory disclosures concerning spam and bogus accounts.

Twitter's former head of security, Peiter Zatko, filed a whistleblower lawsuit accusing the corporation of making false regulatory disclosures.

In a late August hearing in Wilmington, Del., Mr. Musk's lawyer, Alex Spiro, used Mr. Zatko's whistleblower complaint to support his claim that Twitter misled shareholders with information Mr. Musk relied on when agreeing to the merger conditions.

According to a court filing made public on August 29, Mr. Musk's team sent Mr. Zatko with a subpoena requesting data and discussions concerning how Twitter monitors and deals with bogus and spam accounts. It also wants to know about reports regarding the company's alleged security flaws that were given to CEO Parag Agrawal or other officials, as well as information about Mr. Zatko's departure from Twitter.

The subpoena requests a deposition on September 9. Mr. Zatko's attorney, Debra Katz, said that he would comply with the legal responsibilities of the subpoena and that his participation in the deposition would be forced.

What effect would a whistleblower complaint have?

The whistleblower case is distinct from the merger issue, and its grounds vary from those advanced by Mr. Musk. According to legal academics, litigators, and attorneys monitoring the case, it might be used to obtain further discovery, add new claims, and give new information about whether Mr. Musk had correct facts when he agreed to acquire the firm.

According to a securities filing on Aug. 30, Mr. Musk's attorneys updated their reasons for canceling the deal in response to Mr. Zatko's objection. The letter claims that if the accusations are accurate, Twitter would have violated several sections of the merger agreement, resulting in a "material adverse impact."

Twitter reacted with a letter in which it said that it had not violated any of its duties under its merger agreement with Mr. Musk. The business also reiterated in the letter, which was revealed the same day in a securities filing, that it plans to enforce the deal at the agreed-upon terms and price, and that the assertions in Mr. Zatko's lawsuit are "riddled with contradictions and falsehoods and lack significant context."