Elon Musk may find a way to prove his claim that spam accounts on Twitter Inc’s platform are significantly higher than the social media company estimated, but proving he and investors were misled will be difficult, legal experts say.
Musk tweeted on Tuesday that his $44 billion deal to take over Twitter could not go through until the company shows evidence to support its estimate that spam accounts make up less than 5% of its user base. He has said he believes the figure is four times bigger and that he will “beat the bots or die trying.”
Independent researchers have predicted that 9% to 15% of millions of Twitter profiles could be bots.
Twitter, for its part, has said in its regulatory filings that it has applied “considerable judgment” in making the estimate and has warned that its disclosure may not accurately reflect the actual number of spam accounts.
These disclaimers protect Twitter from potential lawsuits, whether from Musk over the deal or shareholders over the accuracy of the company’s legal statements, said four securities law experts interviewed by Reuters.
Even if Twitter’s estimate is wrong, a plaintiff must show that the San Francisco-based company was deliberately trying to mislead investors — a long task to prove in court. The experts said the Securities and Exchange Commission (SEC), the US regulator that oversees the disclosures of publicly traded companies, would struggle to do so for the same reasons.
“It would be difficult to lay the groundwork for an SEC enforcement case or shareholder action unless it can be shown that Twitter intentionally or recklessly ignored information that its spam estimates were misleading,” says law firm Moses & Singer. Howard
An SEC spokesperson declined to comment.
A Twitter spokesperson said the company’s board plans to close the deal with Musk at the agreed price and enforce the merger agreement. Representatives of Musk did not respond to requests for comment.
Another legal hurdle for Musk is his decision to waive due diligence when negotiating the Twitter deal. Legal experts have said this makes it harder for Musk to argue in court that Twitter misled him.
To be sure, Musk may walk away or renegotiate the deal at a lower price, even if the law is on Twitter’s side. This is because any lawsuit is likely to take a long time, and Twitter may decide it makes more sense to either agree to a lower price or receive the $1 billion severance payment that Musk will have to pay for not completing the deal, instead. of trying to force him to complete the transaction in court.
Investors bet the same. Twitter shares ended Tuesday at $38.32, a nearly 30% discount from the deal price of $54.20 per share, indicating that the market believes it is likely that the deal will close at a lower price or be abandoned.
BAD TRUST To meet the legal standard of showing that Twitter misled investors through its spam accounts, proof that the company acted in bad faith, experts say. These could be internal documents such as emails or testimonials from a whistleblower.
“This failure should rise to the level of willful ignorance, not just negligence,” said Urska Velikonja, a Georgetown University Law School professor.
The issue of fake and spam accounts is important to Twitter’s business. The company’s stock plummeted in 2018 after it carried out an automated and spam account purge, dropping 1 million monthly active users, while analysts had expected a gain of 1 million users.
Robert Frenchman, a partner specializing in white-collar crime at law firm Mukasey Frenchman, said it’s possible the SEC would review the issue of the Twitter spam account disclosures, given the public attention it has attracted. But he added that he did not expect Twitter to face a significant legal threat.
“I don’t see that as anything likely to fall into the category of materially misleading, and I bet the language has been carefully drafted and with a methodology that may not be foolproof, but that’s reasonable,” the Frenchman said.