Elon Musk has formally added last week’s whistleblower allegations against Twitter as a reason for terminating his $44bn (£37.7bn) takeover of the social media platform, as he also sought to delay a trial related to the deal.
Representatives of the Tesla CEO said accusations of “far-reaching misconduct” at Twitter from Peiter Zatko, the company’s former head of security, constituted a further breach of the deal.
Zatko, who was fired by Twitter in January, has filed a whistleblower complaint against Twitter in which he warned that the company was “grossly negligent in several areas of information security”.
“These allegations, if true, demonstrate that Twitter has breached the following provisions of the merger agreement, thereby giving the Musk parties the right to terminate the merger agreement,” Musk’s lawyers said in a letter sent to Twitter on Monday and disclosed on Tuesday.
Musk has subpoenaed Zatko, meaning he will be required to supply evidence for a forthcoming trial about the deal termination, which is due to begin on 17 October but could now be delayed by a month. In a separate filing on Monday to the Delaware court of chancery, where the trial will be held, Musk asked to push back the hearing to an unspecified date after 10 November “subject to the court’s availability”. Zatko’s disclosures were attached to the filing seeking a delay, according to reports in the Verge and CNN.
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Zatko has alleged that about 30% of laptops in the company automatically blocked updates that included security fixes; user data, including that coming from Twitter’s most high-profile verified handles, are vulnerable to hacks; and the company’s board of directors was misled about these vulnerabilities.
The letter said Zatko’s allegations constituted a “company material adverse effect” that substantially altered the business’s value and therefore rendered the deal invalid. These include not complying with data privacy laws and regulations, alongside not complying with an agreement with the US Federal Data Commission in 2011 to better protect users’ data.
Other examples of a material adverse effect arising from Zatko’s complaint are an impending slew of official inquiries and civil lawsuits triggered by his revelations, Twitter said, and breaching intellectual property rights by failing to secure rights to the company’s machine learning models. It adds that Twitter said it would not experience a material adverse effect before the deal closing – but Zatko’s allegations represent just such a situation.
The complaint adds that Twitter’s CEO, Parag Agrawal, breached the agreement by failing to disclose to the board an internal report prepared by Zatko at the beginning of 2022. It also states that Twitter had committed fraud by not disclosing the privacy, data protection, safetyand cybersecurity risks raised by Zatko, which gives Musk the right to “rescission” – or ripping up the deal contract.
Carl Tobias, Williams chair in law at the University of Richmond, said there would be further legal skirmishes in the run-up to the trial, but both sides had reasons to seek a settlement.
“In the end, it does seem that both sides have reasons to settle, because each faces risks at trial and little to gain by consummating a deal that neither appears to want now.”
Musk’s lawyers added that the new filing was not “legally necessary” because they already believe the multibillionaire has strong enough grounds to quit the deal based on his original filing announcing the termination, which was delivered on 8 July. But the latest filing said the new termination notice could be used in case the July announcement was “determined to be invalid for any reason”.
Zatko’s claim that Twitter executives have no incentive to accurately detect spam bots on the platform was not in the updated notice of termination. However, the original statement of termination focused heavily on bots – vexatious accounts not operated by humans – and Zatko’s allegations are expected to be deployed in support of that argument.
A Twitter spokesperson said the letter was based on statements by Zatko that “are riddled with inconsistencies and inaccuracies and lack important context”.
They added: “Contrary to the assertions in Mr Musk’s 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. Twitter intends to enforce the agreement and close the transaction on the price and terms agreed upon with Mr Musk.”
