Elon Musk’s Response To Twitter’s Legal Filing May Impress His Fans On Twitter, But Is Not A Good Legal Argument
Last week, I wrote about Twitter's opening legal salvo in its case to try to force Elon Musk to pay the $44 billion he agreed to pay for Twitter (or, more likely, to try to force him to pay a very large settlement to walk away). As we noted, it was a very strongly argued filing, and Musk's lawyers had their work cut out for them. Nothing is certain in court, and getting the Delaware Chancery Court to order specific performance" (i.e., complete the agreement you signed) may still be a long shot, but Twitter's lawyers had a very strong opening. I expected that Musk would have a strong comeback, but many of the points Twitter raised would be difficult to refute.
Well, Musk has filed his opening in reply... and he (1) doesn't have a strong comeback, (2) basically just ignored the points he's going to need to refute, and (3) seems entirely focused on pushing the narrative about spam accounts (which is legally meaningless). Musk has good lawyers, and they've been dealt a tough hand by their client. But, still.
Amusingly, as a PR strategy, perhaps this is working. If you sample the discussions on Twitter, there are lots of very ignorant people who seem to think this filing is a strong one. They're wrong. Musk could still succeed in this case, but it will be in spite of this filing, not because of it.
The purpose of this filing is not a full reply to the accusations, but simply an attempt to slow things down a bit. Twitter asked the court to expedite things and hold a trial in September. On the scale of regular" court battles this seems mighty quick, but the Delaware Chancery Court is famous for how quickly it goes through its cases. It's a very no-nonsense type of court that doesn't want to wait around. I'm particularly interested in how the court deals with Musk adding quite a bit of nonsense to the process. Anyway, Musk doesn't want the case to happen in September, and would prefer it to happen in February. The excuse given is the need to conduct extensive discovery to prove Musk's point that there's a lot of spam on Twitter.
The core dispute over false and spam accounts is fundamental toTwitter's value. It is also extremely fact and expert intensive, requiring substantialtime for discovery. Twitter is a social media platform whose self-professed keyperformance metric is monetizable daily active users (mDAU"). Since theAgreement was first signed, new facts have come to light that call into doubt thetruthfulness of Twitter's curiously static representation in SEC filings that less than5% of its accounts are false or spam.
Except, as was clearly explained in the initial filing, that's not the core dispute at all, and in fact, the purchase agreement makes it clear that can't be the dispute. It's also stupid. Again, both right before and right after the agreement to buy Twitter, Musk made it clear that the primary reason he was buying Twitter was to rid it of what he believed was an overwhelming spam problem that was negatively impacting the site.
As was noted in the Twitter complaint, Musk had texted board chair Bret Taylor and argued one of the key reasons he wanted to take Twitter private was that purging all the spam would make Twitter's numbers look terrible, and thus was better done as a private company:
On April 9, 2022, the day Musk saidhe wanted to buy Twitter rather than join its board, he texted Taylor that purgingfake users" from the platform had to be done in the context of a private companybecause he believed it would make the numbers look terrible."
That shows that as he went into the process of buying Twitter, he already fundamentally believed that spam was a massive problem on the site, and that removing the spam accounts would make Twitter's numbers look awful. That pretty clearly implies that he never believed Twitter's publicly professed numbers regarding spam mDAU's.
For him to then come back weeks later and claim that the spam problem means he won't buy the site makes no sense. He claimed that fixing the massive spam problem was a key driving force in agreeing to purchase the site. On top of that, given that he said he wanted to get rid of the spam, the details of how Twitter analyzed its spam issue seems like the kind of thing that he would have asked about prior to signing the deal. Instead, Musk explicitly waived the right to examine that sort of information. So, again, it's pretty rich to argue that this is the reason he is calling the deal off.
Finally, Musk repeatedly stated that he wasn't buying Twitter to make money on it, but rather because he thought it was important for free speech and maybe to extend the light of consciousness" or something. So, to later say (as this filing implies) that he wants out of the deal because he doesn't agree with how Twitter counts spam, and that might lead to him making less money on the deal, doesn't just seem rich, it seems literally unbelievable.
And it is. Because that's also not the reason Musk's lawyers gave for terminating the deal. Again, because Musk wants the narrative to be about spam, but there was no escape clause in the contract about spam, Musk and his lawyers honed in on a clause regarding Twitter's requirement to give him information necessary to close the deal. Musk then started requesting increasingly ridiculous and impossible to obtain information, which he claimed was necessary to determine the amount of spam on the platform (it was not). The contract very clearly says that Twitter can refuse to provide such information if in Twitter's estimation it was not reasonable to provide. But that is what Musk is claiming allows him to terminate the deal.
Even given all that, Twitter's filing explains how it still provided Musk with all of the information he requested, plus much more - and even that it tried to set up multiple meetings to explain the spam count procedure, and Musk never took them up on it.
Musk's filing... responds to basically none of that. It just lays out some pretty silly arguments for why the spam count is the problem (which, again, is not true). And, in doing so, it calls into serious question Musk and his lawyers' ability to understand, well, anything.
I have to say that prior to all this going down, I actually thought Musk was a tremendously innovative entrepreneur who was strategically brilliant in taking seemingly insurmountable issues and actually figuring out ways to get around them. However, his behavior since trying to take over Twitter has basically erased every bit of that, and he comes out looking like a guy who has bumbled his way into success and has no idea what he's doing. And it shows.
Here's the part in Musk's filing that his fans are so excited about:
On April 28, just three days after signing the Agreement, Twitterrestated three years of its mDAU numbers, despite never disclosing the issue toDefendants pre-signing. Post-signing, Defendants promptly sought to understandTwitter's process for identifying false or spam accounts. In a May 6 meeting withTwitter executives, Musk was flabbergasted to learn just how meager Twitter'sprocess was. Human reviewers randomly sampled 100 accounts per day (less than0.00005% of daily users) and applied unidentified standards to somehow concludeevery quarter for nearly three years that fewer than 5% of Twitter users were falseor spam. That's it. No automation, no AI, no machine learning.
Except, that makes Musk and his lawyers look extraordinarily foolish. The paragraph is either a direct misrepresentation of what Twitter actually does or (worse) Musk and his lawyers have absolutely no clue how everything works.
First of all, as Twitter's CEO Parag Agarwal detailed, the company has tons of processes (many of them automated) that remove over a half-a-million accounts every day that they suspect are spam. The paragraph above falsely implies that Twitter just looks at 100 accounts a day for identifying false or spam accounts." But that's not what Twitter is doing. It notes that after it has done all of that (mostly automated) blocking and filtering of spam, on a daily basis it consistently randomly samples 100 accounts for thorough human review.
This is actually very good statistical technique. Basically, it's saying that after using the automation/AI/machine learning tools to find and kill off most spam (contrary to Musk's claims that no automation is used), Twitter is then constantly doing spot checks using actual randomization and careful human review - something that takes time.
And while 100 accounts sounds" small, it only is if you don't understand statistics at all. Twitter claims to have about 215 million daily active users in the most recent quarter for which they've reported numbers. If they're sampling 100 accounts per day, that's 9000 accounts per 90 day quarter. Putting those numbers into a margin of error calculator we see that the margin of error is 1% at a 95% confidence interval. That's uh... pretty good.
If you bump it up to a 99% confidence interval, the margin of error is just 1.4%. So, if Twitter is using this sampling method to determine the percent of mDAUs that are spam, that's actually a pretty good statistical method and one that should provide pretty accurate results.
This does not mean that less than 5% of all tweets or less than 5% of all accounts are spam, by the way. Just the monetizable daily active users. To get to that number, it's possible that Twitter discounts spam or fake accounts that it simply does not include in its list.
Either way, the only way to look at this central claim of Musk's response is that Musk is bad with statistics. You could say that it's just his lawyers who are, but Musk had to have signed off on this filing, so it seems fair to say that he doesn't understand some fairly basic things about how statistics works.
And, again, none of this actually matters to the underlying issue in the dispute: did Twitter violate its agreement with Musk by failing to provide necessary information to Musk that in Twitter's estimation were reasonable" and necessary for Musk to complete the deal? That's the actual crux of the case, and Musk and his lawyers basically ignore it just to rehash the but there's so much spam" argument.
His lawyers also include a footnote that has Musk fans slapping each other on their virtual backs about how the company has no sense of humor:
With the sense of humor of a bot, Twitter claims that Musk is damaging thecompany with tweets like a Chuck Norris meme and a poop emoji. Twitter ignoresthat Musk is its second largest shareholder with a far greater economic stake thanthe entire Twitter board.
This footnote is clearly designed to delight Musk's fans online, but ignore the actual reasons those posts were included in the complaint - to highlight the pattern of behavior by Musk since signing the agreement to effectively diminish the overall value of Twitter, perhaps as an excuse to get out of the deal or (arguably) to try to pressure Twitter into selling it to him for even less.
The fact that Musk is the second largest shareholder doesn't much matter in this situation, given that he's trying to buy the rest of the company, and has a strong incentive to tank the value to make it cheaper to buy.
The other aspect that Musk really harps on in the filing is that Twitter restated its mDAU figures right after the deal closed.
Just three days after Defendants signed the Agreement, Twitter restatedits mDAU figures in its Q-1 2022 10-Q, disclosing it had been double counting userssince the first quarter of 2019. (Ex. 3 at 2) By restating its financials, Twittereffectively admitted that changes in mDAU are material and portrayed its estimates"as precise.
But, the restated mDAU numbers are such a miniscule change, the argument that they are somehow material is difficult to take seriously.
That's it. Basically it's less than a 1% change. It is difficult to argue that this restatement is material in any real way.
I don't know if the court will allow for the expedited trial to occur. There may be good enough reasons to hold off until February as Musk wants (as he notes, the financial commitments he has don't go away until April). But, Twitter does have a pretty strong argument that having its own ownership in limbo is incredibly damaging to the future of the company. How can it strategically plan for things when it has this potential buyer looming over everything it does?
Given that, it seems like there are many good reasons to expedite the trial, and the fact that Musk doesn't think he has enough time to figure out how many spam accounts are on Twitter doesn't even matter to the issues in the case. The issue is whether or not Twitter abided by the agreement in providing necessary information to Musk, and it has made a very strong case that it did (and that Musk ignored or refused to meet with them when they wanted to provide more).
Again, anything can happen in court, and the Delaware Chancery Court is no exception. But, if you can get past the narrative and some fairly ignorant Musk fans, this case still looks like Twitter has a massive advantage. Musk may enjoy spinning narratives for his fans online, but it seems like it will be harder to string along a Delaware chancellor the same way...