- Sam Cadd
Elon Musk’s “Spam Bot” Problem
On April 25th 2022, Elon Musk entered a merger agreement with Twitter, Inc., in a highly publicized deal that has remained in the news cycle — and a prominent feature on Mr. Musk’s own Twitter account — ever since.
This media coverage, combined with the considerable cult of personality surrounding Mr. Musk’s own use of his social media platform, have shaped this deal (and the associated legal battle) to an extent unique even amongst other modern, high-profile transactions. This note examines how many of the disputes surrounding this merger have become untethered from the legal substance of the transaction, in no small part due to Mr. Musk’s use of the Twitter platform itself.
Since May 2022, Mr. Musk has publicly expressed an unwillingness to consummate the merger, citing Twitter’s “material breach[es]” of the merger agreement. This dispute around closing has only escalated, with Twitter ultimately bringing a claim against Mr. Musk in the Delaware Court of Chancery on July 12th in order to enforce the merger and Mr. Musk counterclaiming, alleging various breaches of the merger agreement and securities law by Twitter.
The main issue Mr. Musk has cited in this dispute is the presence of “spam bots” on Twitter — implying the presence of bots on the platform (and Twitter’s purported dishonesty in connection with these bots) is the key basis for his unwillingness to close. This has given rise to a particular strand of media coverage, characterizing Mr. Musk’s actions as “trolling” his counterparty.
“Trolling” aside, in order for Mr. Musk’s concerns about spam on the Twitter platform to be relevant (and thus release him from his obligation to consummate the deal), the concerns must relate to some operative provision in the merger agreement.
In Mr. Musk’s responses and counterclaim, we learn that his “spam bot” concern is based primarily on a representation given by Twitter in the merger agreement, providing that Twitter’s filings to the SEC are accurate; as well as an information covenant requiring Twitter to provide Musk with certain requested information prior to consummation.
It is true that the underlying merger agreement contains a representation that none of Twitter’s SEC filings are inaccurate:
[N]one of the [Twitter] SEC Documents […] contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, or are to be made, not misleading. [§4.6(a)]
It also contains an information sharing covenant, obliging Twitter to provide Musk with any corporate information related to the merger, subject to limited exception:
Upon reasonable notice, [Twitter] shall […] furnish promptly to [Elon Musk] all information concerning the business, properties and personnel of [Twitter] and its Subsidiaries as may reasonably be requested in writing, in each case, for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement [§6.4]
Musk’s contention is that, if the number of “real” Twitter users is materially less than represented in Twitter’s SEC filings, this may reduce Twitter’s value and constitute an MAE. This would appear to conflate two distinct points:
Whether Twitter’s filings are an accurate reflection of how they identify and estimate authentic users, or mDAUs (the “Process Question”); and
Whether Twitter’s filings are an accurate reflection of the number of mDAUs on the platform (the “Accuracy Question”).
The Process Question
Mr. Musk has criticized Twitter’s process for identifying mDAUs on their platform, characterizing the process as “shockingly thin”.
Whatever the merit of Twitter’s methodology for identifying mDAUs, however, it seems uncontested that Twitter’s filings do accurately reflect this methodology: Mr. Musk’s own counterclaim indicates that “[Musk] had assumed that Twitter employed a rigorous, modern methodology”, and that he was “concerned” by the process used.
Although Mr. Musk may disagree with this process, there is hardly any suggestion of a misrepresentation here. In fact, many of Mr. Musk’s earliest tweets and public statements about the Twitter acquisition relate to his disagreement with how Twitter management has analyzed and dealt with the “bot problem”:
This suggests he not only knew about this issue, but that this fact formed part of the impetus for the acquisition. Mr. Musk’s own counterclaim includes screenshots of a text conversation between Musk and Twitter CEO Parag Agrawal dating back to April of this year, which seems to confirm as much:
The Accuracy Question
The filing in issue, Twitter’s most recent 10-Q, provides as follows (emphasis added):
We have performed an internal review of a sample of accounts and estimate that the average of false or spam accounts during the second quarter of 2022 represented fewer than 5% of our mDAU during the quarter. […] In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.
This is a highly caveated assessment — certainly more reserved than Musk’s assertion that Twitter “represents that no more than 5% of […] accounts in a given quarter consist of false or spam accounts”. Such qualified language, expressly reserving the possibility of inaccuracy and upwards revision, is unlikely to form the basis for a finding that (a) Twitter provided an express representation as to the number of mDAUs on the platform; and (b) that Twitter is likely in breach of this express representation.
Not only is there limited evidence of breach, but — even accepting that a breach may be founded on this provision — it seems unlikely the Delaware Court of Chancery would find evidence of a Material Adverse Event here. The Delaware Supreme Court has historically imposed a “high [evidential] burden” on parties seeking to invoke MAE provisions, looking to whether there has been or is likely to be a change in business that is consequential to long-term earnings over a “commercially reasonable” period, likely years.
A review of past Twitter filings suggests they have historically applied a similar methodology to their identification of spam accounts on the platform; and have traditionally caveated this as only a general estimate (as in their most recent 10-Q, excerpted above). It is unlikely therefore the Court of Chancery will look favorably on Musk’s argument that Twitter’s longstanding methodology for identifying spam accounts belies such a grave, newly-identified threat to Twitter’s value that it merits extensive discovery and protracted litigation.
The Information Covenant
The sleight of hand in Mr. Musk’s characterization of the “bot issue” also informs his claim that Twitter has breached the information-sharing covenant (reproduced above).
Mr. Musk and his team requested information from Twitter principally to, in their words, “[exercise] his information rights to validate” Twitter’s mDAU representations.
Like the representation claims, this is implicitly premised on the idea that access to Twitter’s internal mDAU data (and Mr. Musk having an opportunity to run his own analysis of authentic users) is necessary to close. Indeed, this has been the public characterization of the dispute from Mr. Musk:
However, as Twitter’s filings point out, information requests under the merger agreement must be “related to the consummation of the transactions contemplated by the agreement”, and Mr. Musk’s ability to run a different form of mDAU analysis or post-hoc diligence Twitter’s mDAU figures does not obviously cut across either party’s ability to consummate the agreement.
It remains to be seen whether Mr. Musk's claims will hold water in the Court of Chancery. Chancellor McCormick has already granted Twitter’s motion to expedite in the face of Mr. Musk’s opposition — suggesting the court is not receptive to Mr. Musk’s characterization of the proceedings as a bot-focused, “extremely fact and expert intensive” dispute requiring a more extensive discovery exercise. Regardless, that the “bot issue” is in play at all means that Mr. Musk’s Twitter postings have taken on substantial significance in shaping this transaction.
Sam Cadd graduated as an LL.M. in corporation law and serves as a graduate editor of the NYU Journal of Law & Business. She was previously a corporate associate at Slaughter and May in London.