Chancellor Kathleen St. Jude McCormick, the chief judge of the Delaware Chancery Court, ordered a five-day trial in October, over Mr. Musk’s objections. Chancellor McCormick said the case should be resolved quickly, agreeing with Twitter’s claim that it could be harmed by uncertainty about its future as a public company.
“Those concerns are on full display in the present case,” Chancellor McCormick said. “Typically, the longer the merger transaction remains in limbo, the larger the cloud of uncertainty cast over the company and the greater the risk of irreparable harm to the sellers.”
Twitter argued the case should be accelerated because shareholders and its business have been left in limbo by mr. Musk’s move this month to flee the dealciting the prevalence of spam or fake accounts on the platform. Twitter is seeking a remedy known as “specific performance,” meaning Mr. Musk would have to go through with the deal, rather than just monetary damages.
In the hearing, Twitter’s lawyers said the lawsuit does not turn on the amount of spam and fake accounts because the merger agreement did not make any promises about that metric. Twitter’s securities filings say the number of fake and spam accounts could be higher than the company’s estimates, attorney William Savitt noted.
Twitter has said Mr. Musk has buyer’s remorse over the fall in share prices since he struck the deal in April, pointing out that Mr. Musk’s personal wealth has declined by more than $100 billion from its November 2021 peak. Twitter shares have fallen more than 25% since the deal was announced on April 25.
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Mr. Musk said he needed more time to investigate the spam and fake accounts issue, which he says is fundamental to Twitter’s value and preparing for the trial will be “extremely factual and expert intensive, requiring substantial time for discovery.” The share of fake accounts matters for determining Twitter’s key performance metric—monetizable daily active users, according to Andrew Rossman, one of Mr. Musk’s lawyers.
Twitter’s estimate that fewer than 5% of its monetizable daily active users are spam or fake is questionable, and probably too low, Mr. Musk’s side says.
“If you read their earnings calls, if you look at the transcript of their analyst day, it is all about that metric,” Mr. Rossman said in the hearing.
Twitter is trying to railroad Mr. Musk to complete the deal while burying the truth about the number of fake and spam accounts, Mr. Rossman said. He said Mr. Musk has a bigger economic interest in the company, as the second-largest shareholder, than the company’s entire board, and therefore has no interest in stalling to harm the company.
Chancellor McCormick did not address whether the case would require verifying Twitter’s disclosures about spam accounts. She ruled for an earlier trial at least partly because Twitter wants to close the deal, and “it is not at all apparent that damages could constitute a sufficient remedy if Twitter ultimately proves its case,” she said.
Twitter, which filed its lawsuit last week, says its process for estimating fake accounts and malicious bots is rigorous.
“There is no reason to go into how many bots there are if a fair reading of the contract said Musk essentially waived that right,” said James Cox, a professor of corporate and securities law at Duke University.
Mr. Musk has cited at least two different reasons tied to spam and fake accounts to leave the deal. One is that Twitter allegedly misstated facts about that data in a way that could have a material adverse effect on its business. Delaware law allows companies to nullify mergers if a material adverse effect has occurredbut its courts have also tightly circumscribed the conditions for such an outcome.
Mr. Musk says his other basis to exit is that Twitter has allegedly withheld information about fake accounts, behavior that would violate its commitments to the merger agreement. “The limited information Twitter has provided calls its representations into serious doubt,” Mr. Musk’s lawyers wrote last week in a court filing.
A lawsuit over Mr. Musk’s compensation package at
is slated to go to trial in late October, before the same judge.
Write to Dave Michaels at [email protected]
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