Elon Musk did not become the world’s wealthiest person through a lack of confidence.
But the Tesla CEO revealed on Tuesday that he had sold $6.9bn (£5.7bn) worth of shares in the carmaker, in case he loses his attempt to walk away from a $44bn takeover of Twitter.
Twitter is suing Musk in Delaware over his abandonment of the deal and wants to make him buy the company.
In a countersuit released last week, Musk put his side of the argument. According to him: Twitter misled investors; it breached the agreement by failing to provide enough information on spam accounts; another breach occurred when Twitter failed to consult with him on business moves such as firing senior employees; and its misstatement of user numbers constitutes a material adverse effect, which substantially alters Twitter’s value and therefore invalidates the deal agreement.
Here is a breakdown of Musk’s suit.
The relationship between both sides remains poor
There is $44bn at stake and the language in Musk’s countersuit is just as punchy as Twitter’s in the original lawsuit, when the company described his behaviour as “a model of bad faith”. In the preliminary statement Twitter is accused of making financial disclosures to the US financial watchdog that were “far from true”.
“Instead, they contain numerous, material misrepresentations or omissions that distort Twitter’s value and caused the Musk parties to agree to acquire the company at an inflated price. Twitter’s complaint, filled with personal attacks against Musk and gaudy rhetoric more directed at a media audience than this court, is nothing more than an attempt to distract from these misrepresentations,” said the lawsuit.
Strong words, but Musk will need strong evidence as well to convince the judge.
Musk’s core argument is about user numbers
From the moment the deal started to go sour, the focus was on the veracity of Twitter’s numbers. It is at the centre of Musk’s countersuit as well. He argues that the number of monetisable daily average users (mDAUs) – authentic, active accounts that can see adverts (hence monetisable) – is falsely inflated by Twitter miscounting the number of false and spam accounts on the platform. As well as being a threat to the ad income on which Twitter depends, Musk said his plan to introduce a subscription service for Twitter would be affected because there would be fewer customers to target than first thought.
Twitter has consistently stated that it estimates the number of false or spam accounts on the platform to be less than 5% of its mDAUs base, which stands at just under 238 million currently.
The suit says that Musk became alarmed about how Twitter accounts for its mDAUs when, three days after signing the deal agreement, it admitted it had overstated its mDAU total for three years, by between 1.4 million and 1.9 million users per quarter. Twitter denies that the user change was a “restatement” (it describes the alteration as “updated values”) but admits it did not give the information to Musk prior to the deal being signed on 25 April.
Musk is not happy with Twitter’s verification processes
After agreeing to buy the business with minimal due diligence, the suit says Musk was “astonished” to learn about how “meagre” Twitter’s processes for identifying spam accounts were. It said 100 accounts a day were sampled by human reviewers in order to come up with the less-than-5% figure. Twitter’s CEO and chief financial officer were unable to explain how these accounts were selected to be a representative sample.
“Musk realised that, at best, Twitter’s reliance on and touting of its process was reckless; at worst, it was intentionally misleading,” says the suit.
Twitter argues that it uses a much more layered process for weeding out dodgy accounts, including using automated systems. It also pointed to the detailed explanations of how it polices spam accounts, which had been given to Musk, the press, the Securities and Exchange Commission and the public via a Twitter thread by CEO Parag Agrawal. In the most notorious episode of this takeover saga, Musk replied to the latter with a poo emoji.
💩
— Elon Musk (@elonmusk) May 16, 2022
But according to the countersuit at least Agrawal and Musk agreed on one thing. The document states that on 8 April Musk sent the CEO an example of a spam tweet saying: “I am so sick of stuff like this.” Agrawal replied, acknowledging “[w]e should be catching this.”
Musk’s counter-estimates
Citing “preliminary expert estimates”, the countersuit claims that in early July one-third of visible accounts may have been false or spam. This means that the true proportion of spam accounts among Twitter’s user base is at least 10%.
It says users that see zero or almost no ads account for almost all the growth in monetisable daily users. The majority of ads are served to less than 16 million users, the suit claims.
Twitter says that although not every user sees ads on a given day, in the first quarter “significantly more than” 229 million accounts contributed to Twitter’s average quarterly user number.
Regarding the 10% number, Twitter says it was based on a publicly available web tool, botometer, that has designated Musk’s own account as a likely bot.
Twitter made decisions without consulting Musk
One of the clauses in the merger agreement states Musk must be told when Twitter is deviating from its obligation to conduct its business in the “ordinary course”. In the countersuit, Musk claims that Twitter has made several “significant” changes – including firing two executives, starting a hiring freeze and initiating a legal clash with the Indian government – that occurred without his consent.
Twitter’s response is that axing employees or acting to protect users’ rights in foreign jurisdictions are part of the day-to-day business of running a company.
Information was not forthcoming
Musk is also claiming that Twitter failed to provide him with all the data and information that he requested “for any reasonable business purpose related to the consummation of the transaction”. The suit says Musk was sent reams of “stale data” that didn’t answer his questions.
It says, pointedly, that Twitter was happy to send data such as “a copy of its agreement with the Golden State Warriors for courtside basketball tickets and VIP parking”.
After more back-and-forth arguments over increasingly detailed information requests, the suit claims “the only conclusion the Musk parties could draw from Twitter’s obfuscation and delay was that Twitter knew that it had something to hide”.
