Investors Sue Elon Musk and Twitter Over Pending Takeover

By Bryan Jung
Bryan Jung
Bryan Jung
Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.
May 29, 2022Updated: May 29, 2022

The CEO of Tesla and SpaceX, Elon Musk, was sued by Twitter investors for “unlawful conduct” claiming he manipulated the company’s stock price downward by sowing doubt about his bid to buy the social media company.

Twitter, which is based in California’s Bay Area, was also named as a defendant in the suit, which argued that the company had an obligation to investigate the Tesla CEO’s pre-bid conduct.

The class-action lawsuit (pdf), filed on May 26 in the U.S. District Court for the Northern District of California, accused Musk of allegedly attempting to drive down Twitter’s stock value in order to buy it for a cheaper price, or as a possible attempt to step away from the acquisition deal.

Musk admitted at a technology conference in May, that striking a deal at a lower price was “not out of the question.”

Musk offered to buy the company in April for $44 billion, but has since put the deal on hold until Twitter provides more information on how many platform accounts are bots.

The social media company had said that it had fully disclosed its total bot estimates to the SEC, but it still admitted that its estimates may be too low.

In 2021, Twitter was forced to pay $809.5 million to settle claims that it had inflated its rate of growth and the number of actual users per month.

The shareholders also claim that the recent drop in Tesla’s stock since the final deal was announced on April 25, has put Musk’s ability to finance his acquisition of Twitter in “major peril,” as he has publicly pledged to use his shares as collateral in order to secure the loans needed to buy the platform.

Tesla’s shares were trading at around $713 at the end of the week on May 27, down from above $1,000 or about 25 percent since early April.

Twitter shares on May 26 closed at $39.54, about 27 percent lower than Musk’s current $54.20 offer price.

The litigants by investor William Heresniak of Virginia, who said he was acting “on behalf of himself and all others similarly situated,” accused the tech billionaire of “wrongful conduct” after his “false statements and market manipulation created ‘chaos’ at Twitter’s headquarters in San Francisco.”

They requested that the California court grant certification for the suit’s class-action status and to be awarded an unspecified amount of punitive and compensatory damages.

Meanwhile, the timing of Musk’s disclosure of his stake in Twitter has already triggered an investigation by the Securities and Exchange Commission.

The SEC requires any investor who buys a stake exceeding 5 percent in a company to disclose their holdings within 10 days of crossing the threshold.

The litigants said that Musk saved $156 million by his failure to timely disclose within the required timeframe, and that he had exceeded the ownership threshold of 5 percent on March 14.

The investors further allege that Twitter’s stock price would have been higher had they been made aware that Musk had increased his holdings in the company.

“By delaying his disclosure of his stake in Twitter, Musk engaged in market manipulation and bought Twitter stock at an artificially low price,” said Heresniak.

Musk only publicly admitted in April that he had already owned 9.2 percent of Twitter for his initial bid.

The suit also accuses of Musk making a false and misleading disclosure of his Twitter holdings to the SEC, by submitting a form meant only for passive investors, not for those attempting to buy the company or who had been offered a board position.

The litigants were further upset at Musk’s public tweet on May 13, which they claim, “constituted an effort to manipulate the market for Twitter shares as he knew about the fake accounts.”

Musk posted on Twitter: “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users.”

The tweet by Musk and the reaction to it further drove down Twitter shares.

The shareholders accuse Musk of denigrating the social media platform in response to the plunging value of Tesla’s shares, violating both the non-disparagement and non-disclosure clauses of his purchase agreement with the company.

They said that “in doing so, Musk hoped to drive down Twitter’s stock price and then use that as a pretext to attempt to re-negotiate the buyout.”

The lawsuit also noted that the Tesla CEO waived due diligence in his immediate bid to buy the social media platform, which meant that he had waived his legal right to review its non-public finances.

Musk is facing another lawsuit this month from the Orlando Police Department’s pension fund in the Chancery Court of Delaware, where Twitter is incorporated, in an attempt to halt the takeover on the basis that other major shareholders were quietly supporting Musk’s buyout, which would forbid the deal from closing for three more years according to state law.

However, the litigants in the California suit are not attempting to stop the purchase.

Musk pledged an additional $6.25 billion in equity financing to fund his bid for Twitter on May 25, which is a sign that he is still interested in closing the deal.

Reuters has contributed to this report.