Elon Musk's Devastating Response to Twitter's Demand for a Lightning-Speed Trial Schedule
Twitter's complaint failed to mention that just 3 DAYS after they signed the deal with Musk they were forced restate user numbers in their 10Q after double-counting them for 3 years!
By Alexander Muse ·
UPDATE: After sharing this post on Reddit I received a number of criticisms including a) Elon knew Twitter had a bot problem, b) Elon waived due diligence, and c) the double-counting of users wasn’t material. I decided to update this post by clarifying my point here with a simulated dialog between Elon and Parag. If you don’t need the dialog you can skip down to the full post with links to the court documents at the bottom.
ELON MUSK: The bot problem on Twitter is out of control. If you could get a handle on the bot problem the user experience could be improved 1000%! It should be doable since bots only represent <5% of overall users. Will you sell me your company for $44 billion dollars?
PARAG AGRAWAL: We’re concerned you aren’t serious and that you won’t close. How can we be sure you’ll close after spending the next few months kicking the tires?
ELON MUSK: What if I waived completion of due diligence as a condition of close?
PARAG AGRAWAL: That would go a long way. How about you pay us $1 billion if you decide not to close. Oh, and you’d need to personally guarantee the $1 billion dollars if you use a worthless shell company to buy the company.
ELON MUSK: $1 billion? Hm. Okay, but I will need at least six months to conduct diligence. You’ll need to agree to give me everything I’ll need to conduct my diligence including financial information and user data. Why don’t we say a six-month diligence period?
PARAG AGRAWAL: Okay but what if you find something you don’t like during diligence?
ELON MUSK: If it is just something I don’t like I’d still be required to close. How about we outline reasons/events that would justify my termination of the deal? What about your SEC filings? Are they all accurate?
PARAG AGRAWAL: Yes. They are all accurate as of January 1, 20222.
ELON MUSK: Great. How about you represent and warrant that everything in your SEC filings is true and accurate as of January 1, 2022. Over the next six months we’ll conduct our due diligence to confirm the accuracy of the information you’ve provided to the SEC so that we can provide assurances to our fellow equity investors and lenders - $44 billion is a lot of money so everyone involved will need us to complete due diligence to feel comfortable closing - the banks will certainly require it as a condition of funding. Okay, so lets plan on closing in November.
PARAG AGRAWAL: Sounds great. Lets sign the deal.
ELON MUSK: Okay, so you’re sure everything in your SEC filings is accurate?
PARAG AGRAWAL: Yes. Please sign the Merger Agreement, Elon. Oh and you can’t Tweet mean things about me.
ELON MUSK: I can’t Tweet mean things? I’ll need a discount Parag! I’ll only Tweet my opinions and I won’t disparage you (i.e. by Tweeting things I know to be false). I just faxed you the merger agreement.
PARAG AGRAWAL: Ug. I’m not sure we have a fax machine.
[THREE DAYS LATER]
ELON MUSK: Parag, WTF, you just restated the number of users you’ve reported to the SEC for three years - you admit that you overstated the number of users you have in twelve-straight quarterly SEC filings. The restated 10-Q filed with the SEC today shows that you’ve been double-counting users. Just three days ago you signed an agreement with me to sell Twitter representing that the information you’ve provided to the SEC is accurate! You didn’t say anything about this Parag. What is going on?
PARAG AGRAWAL: Elon, it isn’t a big deal. It is just a legal thing we had to do. It isn’t material so it doesn’t count.
ELON MUSK: WTF! Isn’t material? We signed this deal three days ago and you didn’t mention that you’d be restating your user numbers with the SEC admitting you’ve been double counting the number of users for three years! That is a big deal Parag. You’ve literally already busted one of the very few REPRESENTATIONS I insisted on when we signed this deal THREE DAYS AGO. And we’re talking about millions of users per quarter. Damn it Parag.
PARAG AGRAWAL: Elon how can I fix this?
ELON MUSK: Okay we need to dig into your user numbers. How you count them. How you determine how many are bots. Etc.
PARAG AGRAWAL: No problem. We basically have a few people we hire on a contract basis to select 100 users at random and they determine what percentage are bots - they always tell us that the number of bots they find represent <5% of our total users. Does that help?
ELON MUSK: Are you shitting me? You’ve got more than 100 engineers who are experts in artificial intelligence and machine learning and they haven’t built tools that give you a real-time accounting of users? Instead you rely on a part-time worker you contract to analyze 100 accounts as the basis for your SEC filings that represent <5% of your users are bots? First, I don’t believe you. Second, if it is true you literally have no idea how many real users you have. Okay, I will get my data experts to dig in. We will need your user data in real-time so we can build the AI/ML tools you should have already built to count the users.
PARAG AGRAWAL: Okay we can give you our firehose but it won’t have the data you need. We won’t give you the data you need to do the sort of analysis that you want to do. But you still need to give us $44 billion.
ELON MUSK: Screw you. You are in breach of the Merger Agreement.
[31 DAYS LATER]
ELON MUSK: The Merger Agreement gave you 30 days to cure your breach of the Merger Agreement. I count at least four different breaches of the Merger Agreement - none of which you have cured per the terms of the agreement. Given the fact that YOU breached the agreement you’ll need to pay me the $1 billion breakup fee - oh and yes, I’m not buying your company.
PARAG AGRAWAL: No. You have to close no matter what. None of our breaches of the Merger Agreement were ‘material’. Just minor breaches. You have to buy us. I want out of here.
Elon Musk’s response to Twitter’s demand for an expedited trial revealed devastating new facts that put not just the trial’s timeline in question but also the very future of the company. Legal experts assumed Twitter would ask Chancellor Kathaleen McCormick for an expedited trial date in November as I discussed in my July 10th post titled, ‘Will the Delaware Court of Chancery Agree to Hear Twitter’s Case Against Elon Musk in November?’ - we were wrong as Twitter demanded a warp speed trial in September arguing that it was required because the termination date for the agreement was October 24th.
In their motion, Musk’s lawyers point out that the Merger Agreement contemplated litigation and provided for an automatic stay until April 25th, 2023 if either party filed suit. As a result, Musk’s lawyers proposed a February trial date to give them time to conduct around 50 depositions AND prepare for trial while leaving plenty of time to complete the transaction if the court grants Twitter specific performance.
PREDICTION: THE TRIAL WILL COMMENCE IN 2023
After rendering Twitter’s unnecessarily unreasonable request for a lightning-speed schedule moot Musk’s lawyers go right for the jugular in an effort to telegraph to Chancellor McCormick the truth of the matter.
BOTS, BOTS, BOTS
In their complaint, Twitter’s lawyers fail to mention that just THREE DAYS after signing the Merger Agreement Twitter’s executives decided to restate THREE YEARS of their global monetizable daily active user (mDAU) numbers. They certainly didn’t mention this to Elon Musk before he signed the deal. While it is certain that Twitter knew it had been DOUBLE-COUNTING users on its platform since the first quarter of 2019 it isn’t clear whether it had planned to publicly restate its mDAU in its first quarter 2022 10-Q until it signed the deal with Musk. The inclusion of the restatement in Twitter’s 10-Q filed with the SEC is prima facie evidence that its mDAU overcounting ‘mistake’ was material. TWITTER NEVER DISCLOSED THEY WERE DOUBLE COUNTING USERS TO ELON MUSK PRIOR EXECUTION OF THE MERGER AGREEMENT.
The following week Twitter executives met with Elon Musk in an effort to explain why they had not disclosed the fact that for three years they had double-counted their users in their SEC filings to him prior to executing the Merger Agreement. During that meeting, Twitter claimed that it did not leverage any of the 100+ artificial intelligence and machine learning experts on its payroll to develop software tools to count users but instead relied on 'human reviewers’ to randomly sample 100 accounts to represent in its SEC filings that ‘fewer than 5% of Twitter users were false or spam.’ IT WAS AT THIS POINT THAT ELON MUSK DETERMINED MANAGEMENT DID NOT HAVE A CLUE JUST HOW MASSIVE THE BOT PROBLEM WAS.
The narrative that Micheletti lays out in his motion to deny Twitter its request for a lightning-speed schedule is beyond devastating. Remember this isn’t even Elon’s response to Twitter’s complaint. I will be interested in hearing how Twitter explains its decision not to tell Elon Musk they were going to restate user numbers for the past three years just three days after he signed the deal. If they don’t have a damn good answer I think it might be time for some heads to roll at Twitter.
Reminder, the first hearing is Tuesday 11-12:30 PM EST - sadly it won’t be televised but I’ll be sharing the transcripts as soon as I get them.
FWIW two months ago (May 17th) I wrote this lengthy post explaining why Elon Musk wasn’t going to close on the deal. IMHO it is interesting to read what I got right and what I got wrong.
