Elon Musk Files to Pull Out of Twitter Deal

The highly publicized back-and-forth between Tesla Inc. (TSLA) CEO Elon Musk and Twitter Inc. (TWTR) continues. On July 8, Musk filed an amendment to a Schedule 13D with the U.S. Securities and Exchange Commission (SEC) with the intention of terminating his April deal to purchase the social media giant. Twitter's board has signaled plans to pursue legal action in an effort to close the transaction.

Musk Claims Twitter 'In Material Breach' of Agreement

In a letter attached to the SEC filing, lawyers for Musk stated that the billionaire was terminating the merger agreement because of his belief that Twitter "is in material breach of multiple provisions" of the agreement. The letter claims Twitter has not provided information that Musk requested earlier in the spring regarding spam and fake accounts.

It also states Musk's belief that Twitter has failed to comply with obligations related to conducting its business "in the ordinary course," citing the company's firing of two high-ranking employees and a July 7 Twitter announcement that it would lay off a substantial portion of its talent acquisition team.

Musk has previously made his concerns about the deal public, including filing a letter through attorneys in early June stating that part of the financing for the purchase depended on receiving information about fake accounts from Twitter. The company reportedly provided access to additional information days later.

Potential Next Steps

Twitter board Chair Bret Taylor tweeted later on July 8 that the company's board remained "committed to closing the transaction on the price and terms agreed upon," adding that it would "pursue legal action" in an effort to enforce the agreement.

The company has previously disclosed in SEC filings its belief that no more than 5% of accounts are automated or fake. It has also maintained that it has met the obligations of the agreement with Musk. Musk could be forced to pay fees, including a $1 billion break fee, to back out of the deal. Still, it appears that the confrontation is far from over. It may be that Twitter will be able to force Musk to complete the purchase through the legal system.

Impact for Twitter Shareholders

Twitter shareholders already have felt the impact of the purchase controversy, and could continue to as the situation develops further. Musk's $44 billion April offer represented a price of $54.20 per share; the stock is currently trading below $37, making Twitter's market capitalization about $28.1 billion. The sudden drop in price, which also coincides with a broader slump in tech stocks and the market overall, may have been fueled by investor concerns about the future of the deal and the company more broadly. Some analysts also believe it to be a major reason for Musk's reluctance to see the deal through.

If Musk successfully terminates the agreement, it could pose further problems for Twitter's share price. The company's brand, employee turnover rates, and advertising business could be further affected as well. Still, it's possible that the latest filing is a negotiating tactic Musk is using in an effort to lower his purchase price. Investors may want to watch to see if the billionaire sells off his considerable stake of Twitter shares as a signal that he is truly backing out of the deal for good.

The Bottom Line

Elon Musk has filed documents with the SEC indicating his intention to back out of his purchase agreement with social media giant Twitter. Musk said Twitter was in material breach of provisions of the agreement, adding that the company did not provide requested information about fake accounts, among other issues. Twitter's board has indicated plans to pursue legal action to see the completion of the deal.