Twitter’s legal battle with Elon Musk to enforce his stalled $44bn takeover has gotten more complicated.
In a whistleblower complaint made public 23 August, the
social media platform’s former head of security accused Twitter of making
misleading regulatory disclosures about spam and fake accounts, an issue at the
centre of Musk’s stated reasons for abandoning the deal.
The complaint is separate from the merger dispute in Delaware
but could be wielded to request more discovery, add fresh claims and provide
new information about whether Musk had accurate details when he agreed to buy
the company, according to legal scholars, litigators and lawyers following the
case.
Still, notable differences exist between the complaint and
Musk’s lawsuit, and it isn’t clear how much impact the whistleblower’s
allegations will have on the trial or offer grounds to terminate the deal,
legal academics and attorneys say. Musk’s legal team likely would have to show
a deliberate attempt by Twitter executives to misrepresent or omit information
about the data, the observers say.
Twitter sued Musk on 12 July in Delaware Court of Chancery
to try to force him to go through with his takeover bid after he said in an 8
July securities filing that he planned to walk away. Musk said he wanted out
because the company hadn’t provided the necessary data and information he
needed to assess the prevalence of fake or spam accounts on its platform.
Musk later countersued, accusing Twitter of fraud for
misrepresenting the condition of its business and key metrics about the users
on its platform.
The whistleblower complaint was submitted last month to the
Securities and Exchange Commission by Peiter Zatko, who was fired by Twitter
earlier this year. A Twitter spokeswoman said 23 August that Zatko’s complaint
“is riddled with inconsistencies and inaccuracies and lacks important context.”
According to a securities filing 24 August, Twitter
responded in June to questions from the SEC staff about how it calculates bots
and whether an error in how it tallies monetisable daily active users, or
MDAUs, revealed problems in its financial reporting. Twitter said the error
wasn’t significant and didn’t affect its earnings or other financial results.
A representative for Twitter declined to comment 23 August
on how the whistleblower complaint would affect its lawsuit in Delaware. A
representative for Musk didn’t respond to a request for comment, but his
attorney previously said he sent a subpoena to Zatko, and found his exit
curious.
“It adds more fuel to the fire for Musk,” Brian Quinn, a
professor at Boston College of Law who focuses on corporate law and mergers and
acquisitions, said of the whistleblower complaint.
Musk and Zatko each say Twitter is misrepresenting various
ways of measuring its users, but offer different explanations for what they
think is wrong with Twitter’s math and why it matters.
It is those differences as outlined by Zatko that could end
up becoming supplementary claims for Musk, lawyers and legal scholars said,
even if the details from Zatko don’t directly align with the existing arguments
from Musk.
“Musk’s attorneys have sent out a lot of subpoenas for
information about what metrics Twitter paid attention to,” said Ann Lipton, a
professor at Tulane University and a former corporate lawyer. “They want to
show that the company omitted required information, and show a violation of”
SEC rules.
Hurdles still exist using Zatko’s complaint, she said.
Although he threw doubt on the methodology that Twitter uses to determine how
many fake accounts are on the platform, Lipton said from a legal perspective
that allegation alone won’t prove Musk’s claims, but rather it opens pathways
for his attorneys to argue that he was misled by information available at the
time of the merger.
A hearing in the lawsuit over the stalled takeover is
scheduled for 31 August in Wilmington, Delaware, for oral arguments over
requests by Musk for documents. Lawyers for Musk and Twitter have been
bickering over the terms of discovery in the Delaware lawsuit since the judge
granted Twitter’s request for an expedited schedule. A five-day nonjury trial
is scheduled for October in Delaware Chancery Court.
Musk alleges that Twitter undercounts the percentage of MDAUs
that are spam or fake accounts, thus misleading advertisers and regulators. In
his countersuit in Delaware, he alleges that the number of Twitter users who
see ads is far lower than what Twitter says.
In the whistleblower complaint, Zatko doesn’t take issue
with how the company measures MDAUs. He alleges that Twitter executives are
motivated to avoid counting spam and fake accounts and thus avoid removing
them, though they affect users’ experience on the platform.
Senior executives earned bonuses for increasing MDAUs, not
for cutting spam and fake accounts, Zatko said in the complaint. “Musk appears
to be asking a valid and intuitive question, what percent of accounts
encountered by the median user are actually bots?” Zatko said in the complaint.
Musk’s attorneys would have to prove that Zatko’s
allegations are significant enough to constitute a material adverse effect on
the platform’s business, which could be grounds to terminate the agreement.
If there were material misrepresentations or omissions from
reports to regulators before the merger agreement was signed, that would allow
Musk to terminate the agreement, said Paul Regan, associate professor at the
Delaware University Law School. His obligation to close the deal is expressly
conditioned on Twitter’s representations being accurate, including the filings
to the SEC.
Regan said Zatko represents a third voice in the Delaware
litigation without a stake in the outcome, and that could carry more weight in
“what otherwise is a battle of experts.”
Musk is likely to update his counterclaims to reflect the
latest accusations about Twitter’s handling of bot and spam accounts, said Adam
C. Pritchard, a securities and corporate law professor at the University of
Michigan. His attorneys are also likely to seek an extension of the period to
conduct discovery and a new trial date beyond October, Pritchard said.
Musk waived due diligence before agreeing to acquire Twitter
in April, but that may be irrelevant if he can argue that Twitter
misrepresented its fake and spam accounts in regulatory filings, Pritchard
said.
“If there is concealment, then you have an argument that
even if I did my due diligence, I would not have turned anything up,” Pritchard
said.
Musk would have to prove that the board intentionally failed
to disclose the security vulnerabilities of the platform, Boston College’s
Quinn said, and that he relied on those disclosures when penning the deal.
It is rare for a whistleblower case to affect the outcome of
a merger deal, Quinn said, but it has happened. In an acquisition dispute
between generics drug manufacturer Akorn and Fresenius, also in Delaware court,
a complaint revealed allegations that, if true, would have significant
consequences.
Akorn didn’t immediately respond to a request for comment. A
Fresenius spokesman declined to comment.
In that case, Quinn said, the disclosures were considered by
the court to be potentially material to the business. The deal crumbled.
“We aren’t there yet,” he said of the implications of the
whistleblower complaint on Twitter’s case.