Tesla (TSLA) CEO Elon Musk’s early Friday morning tweet proclaiming that his $44 billion bid to buy Twitter (TWTR) is on hold may violate laws meant to protect public markets from manipulation, experts say.
Twitter shares began sliding following the tweet, broadening a wider than usual margin over the past two weeks between the market price and Musk’s offer price of $54.20 per share. The slide could give regulators and shareholders more reasons to go after Musk, on top of ongoing disputes with the Securities and Exchange Commission and with Tesla and Twitter shareholders.
“Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” Musk tweeted along with a link to a Reuters report on Twitter’s calculation, which came in a recent SEC filing.
Roughly two hours later, though, he tweeted, “Still committed to acquisition.”
Musk has a long history of tweeting about corporate strategy, most notably alerting the public via Twitter in August 2018 that he had funding to take Tesla private at $420 share. The tweets prompted an SEC investigation and settlement, and experts say his latest tweet could invite more legal scrutiny. That’s partly because information relevant for shareholders must be filed to the SEC; moreover, Musk’s tweet arguably caused market moves in both Tesla and Twitter stock in a way that could benefit the Tesla CEO.
Speculation swirled Friday over whether Musk intended the tweets as a strategy to back out of the deal or alternatively to reopen negotiations to buy the company at a lower price after its shares dropped.
“Twitter is going to, and already is, dropping like a rock,” John Livingstone, a research fellow for Case Western Reserve University School of Law, told Yahoo Finance. “As for the SEC rules, this is definitely moving the market in a manipulative way, a way that Musk has been nailed for before by the SEC when he alleged he was taking Tesla private.”
Aside from Twitter’s stock price, Tesla’s stock moves pose another potential problem. If Musk abandons the Twitter deal, it all but ensures that Tesla shares won’t be deployed as collateral to acquire the social media company, according to Livingstone. In that case, he says, Tesla shares could get an unfair boost and enrich Musk, who’s a major shareholder.
If Tesla stock sees a spike, the SEC may be able to paint a picture that Musk used a deal with Twitter to drive down Tesla prices, only to then drive it back up by backing out of that deal.
Musk’s mode of communication could also be problematic, as the SEC requires communications to shareholders be filed with the agency to ensure investors aren’t misled. As of Friday afternoon, Musk’s tweets had not been filed with the agency.
“Musk’s tweet is certainly substantive information about the merger that has been communicated to the public, so it is subject to the filing requirements, and like any material statement about the merger, it cannot be misleading,” University of Kentucky law professor Alan Kluegel said.
Another risk for Musk is a $1 billion breakup fee he agreed to pay Twitter for backing out of the transaction, if all other closing terms are met. According to the merger agreement, Musk’s acquisition company, X Holdings I, can terminate the deal without paying $1 billion if Twitter breaches certain agreements or takes a competing higher offer, or if Twitter’s shareholders fail to vote for the merger.
In putting the deal on hold, Musk raised concerns over the veracity of a recent disclosure by Twitter in a quarterly 10-Q filing that it believes that fake or spam accounts represent fewer than 5% of Twitter’s monthly daily active users.
However, Twitter’s statement about its percentage of bots may not get Musk out of paying the breakup fee. On one hand, Musk could argue he relied on Twitter’s figures when he offered to buy the company. Still, a judge could rule the statement on bots isn’t material since Musk has publicly said he wants Twitter to have fewer regulations on users.
As for Twitter and Musk, they both agreed that Musk could freely tweet about the transactions.
“[Musk] shall be permitted to issue Tweets about the Merger or the transactions contemplated,” the merger agreement says, “…so long as such Tweets do not disparage [Twitter] or any of its reps.”
Nonetheless, the SEC and courts have powers that exceed those of the Twitter and Musk.
The SEC already settled with Musk and Tesla over the billionaire’s August 2018 tweets stating that he had secured financing to take Tesla private. The settlement, in addition to $40 million in total fines against Musk and Tesla, required Musk to step down as the company’s board chairman.
Several lawsuits filed by Tesla shareholders are still pending over the same tweets. And multiple reports earlier this week said the SEC is investigating whether Musk’s regulatory filings in connection with his Twitter bid followed reporting rules.
At market close on Friday, Tesla stock traded at $769.59 a share up 5.7% from the prior day’s market close. Twitter shares continued to trade lower at $40.72 and were down 8.5%.
Yahoo Finance did not receive a response to its requests for comment from Twitter and Elon Musk.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.