Elon Musk's lawyers have a new point of attack in the billionaire's efforts to get out of his $44 billion purchase of Twitter. While it's too early to say if Musk will be successful, allegations from former head of security Peiter Zatko could bolster Musk's case, according to legal experts.
Musk’s lawyers sent a second letter to Twitter (ticker: TWTR) seeing to terminate the deal, referring to a whistleblower complaint Zatko filed with Congress, the Securities and Exchange Commission, the Federal Trade Commission, and the Department of Justice. In a filing Tuesday, Musk’s lawyers also requested Chancellor Kathaleen St. Jude McCormick, the chief judge of the Delaware Chancery Court, to allow him to amend his counterclaims.
Zatko alleged the company had deceived its board and federal authorities about vulnerabilities to hackers and its efforts to fight spam, according to reports by The Washington Post and CNN. A company spokesperson told Barron’s last week that Zatko’s “allegations and opportunistic timing appear designed to capture attention and inflict harm on Twitter, its customers and its shareholders.”
“These violations would have material, if not existential, consequences to Twitter’s business, constituting a Company Material Adverse Effect as defined in the Merger Agreement,” Musk’s lawyers wrote in a letter to Twitter.
Twitter’s lawyers replied to Musk’s letter, arguing the purported termination was invalid, adding it “is based solely on statements made by a third party that, as Twitter has previously stated, are riddled with inconsistencies and inaccuracies and lack important context.”
“Contrary to the assertions in your letter, Twitter has breached none of its representations or obligations under the Agreement, and Twitter has not suffered and is not likely to suffer a Company Material Adverse Effect,” the reply continued. “Twitter intends to enforce the Agreement and close the transaction on the price and terms agreed upon with the Musk Parties.”
Boston College Law School professor Brian Quinn told Barron's Tuesday that once Zatko's allegations came to light, it became clear "Musk was going to suddenly become very concerned about security at Twitter."
"This opens another front on Musk's battle to escape the Twitter contract," Quinn said. "Not sure that it will be successful, but it's not immediately apparent that it's a total loser."
Tulane Law School professor Ann M. Lipton said in an email to Barron's that it's a bit too early to answer whether this makes it any more likely Musk, the chief executive of Tesla $(TSLA)$, gets out of the deal. She did note that Zatko's allegations about bots conflict with Musk's own claim that the social media company has undercounted spam accounts in its disclosures about monetizable daily active users, or mDAUs.
Zatko wrote that executives are incentivized to avoid counting spam bots as a monetizable users, since they don’t click ads or buy things. He alleges there are millions of active accounts not included in the mDAU figure because they are spam or because Twitter thinks they can’t monetize them.
"Zatko's allegations do undermine Musk's existing claims, so putting him forward as a credible witness, in some ways, sends a message that everything Musk has said up until now has been wrong and he'd like a do-over," Lipton added.
Lipton noted that it would not legally be a concession, but would have the general feel of one.
"That said, Zatko's allegations -- based on what's publicly available -- are simply a lot stronger than Musk's claims until this point, and if Musk is allowed to litigate them, it seems he'd be on stronger footing, with the reservation that I am not in a position to gauge the accuracy of Zatko's allegations," she added.
The trial, for now, is set for Oct. 18, though Musk’s lawyers have asked for that to be pushed back until November.
“My guess is, and it’s just a guess, that the court will likely grant a delay in the trial to accommodate this new line of attack by Musk,” Quinn said earlier Tuesday.
Twitter stock was down 1.9% to $39.26 in Tuesday afternoon trading. That represents a $14.88 discount to the $54.20 a share Musk agreed to pay for the company. Twitter shareholders have yet to vote on the deal, though influential proxy advisory firms Institutional Shareholder Services and Glass Lewis have recommend that they vote in favor of the takeover.
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