Catch-22 often refers to a dilemma where the only way out is barred by an intrinsic problem or an extrinsic rule. Interestingly, this is exactly where Elon Musk currently finds himself. Entrapped by his desire to stealthily build up an initial stake in Twitter, the CEO of Tesla might now have to hoist himself by his own petard, so to say, as per the musings of one law professor. Before delving further, let’s go over where things currently stand in the Elon Musk vs. Twitter saga, which is headed for a legal showdown in the Delaware Court of Chancery in October. At the heart of this dispute lies Musk’s decision to simply walk away from a legally binding agreement to acquire Twitter at $54.20 per share while citing the uncertainty around the quantum of bots or fake accounts that constitute a part of Twitter’s monetizable Daily Active Users (mDAUs) metric as the casus belli. Twitter, on the other hand, believes that its inability to definitively measure its mDAUs does not constitute a valid reason for Musk’s abandonment of the deal. Recently, a whistleblower complaint by Twitter’s head of security came to the fore, further muddying the proverbial waters around this saga. Peiter “Mudge” Zatko, who was the social media giant’s security tzar and was fired back in January for allegedly raising the issue of chronic mismanagement at Twitter – including security lapses, technical shortcomings, and non-compliance with an already-signed privacy agreement with the Federal Trade Commission (FTC) – had filed this complaint with the US Congress back in July. Critically, Mudge alleged that Twitter’s executives have neither the resources nor the willingness to investigate the true quantum of bots that populate the social media platform. Bear in mind that Twitter has already signed a non-disclosure agreement (NDA) with Mudge. However, Congressional whistleblower complaints are not covered by NDAs, hence this latest addition to the ongoing saga between Elon Musk and Twitter. So, why is this whistleblower complaint important? Well, the Delaware Court of Chancery has now allowed Elon Musk to incorporate Mudge’s whistleblower complaint in his counterclaim against the social media giant. Recently, in his testimony at a Senate sub-committee hearing, Mudge identified two critical shortcomings at Twitter: With the background over, let’s discuss why one law professor believes that Elon Musk is holding back his arguments against Twitter.
Elon Musk’s Haste in Acquiring an Initial Stake in Twitter Is Now Coming To Haunt Him
Professor Ann Lipton is the associate dean for faculty research and a Michael M. Fleishman associate professor in business law and entrepreneurship at Tulane University Law School. Recently, she penned a long thread on the Elon Musk vs. Twitter saga.
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022 In relation to Mudge’s whistleblower complaint, Elon Musk needs to show that the allegations add up to a Material Adverse Effect – a materiality threshold to measure the negative effect of an event on the target business or a contract. Moreover, Musk’s fraud claims against Twitter require that he furnish a fraudulent statement made by the social media giant.
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022 Interestingly, Professor Lipton believes that Twitter dotted all the i’s from a legal viewpoint, as it never claimed to be in compliance with the FTC order and disclosed risks to its intellectual property, security, user privacy, etc. As a workaround, Elon Musk’s lawyers can claim that the risk disclosures themselves were “misleading because they suggested these were only potential problems, rather than ones that were actually occurring.”
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022 Professor Lipton claims that a good plaintiff’s lawyer would also contend that by choosing not to disclose the specific risks flagged by Mudge, Twitter committed a fraudulent act. However, Elon Musk’s lawyers have not raised this point so far.
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022 Professor Lipton then goes on to argue that a plausible explanation for this shortcoming might be the lawsuit that Elon Musk is facing for failing to disclose his initial stake in Twitter in a timely manner.
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022 After all, if the CEO of Tesla were to now take the position that omission equates to fraud, he might himself end up on the docket for choosing to withhold – to be read as an omission – the disclosure related to his initial stake in Twitter. Do you think that this is a plausible explanation for why Elon Musk’s legal team is not throwing aggressive legal punches at this stage? Let us know your thoughts in the comments section below.
