Whistleblower claims may not free Elon Musk from his Twitter hook | Elon Musk

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As Twitter whistleblower Peiter Zatko spoke to US lawmakers about the company’s ‘glaring’ security flaws last Tuesday, the social media platform’s shareholders voted overwhelmingly to hand over those issues to someone. another: Elon Musk.

The Tesla CEO, who owns more than 9% of Twitter and agreed to buy the company in April, is unlikely to have been among the 99% of voting shareholders who backed the $44 billion deal. dollars (£38.5 billion), given that it is now determined. to give it up. A Delaware judge will decide in a trial beginning Oct. 17 whether Musk can walk away or be forced to acquire the company on terms he agreed to.

Hedge funds, financial firms that like to take big bets on certain market outcomes, also seem to be on the side of (the majority of) Twitter shareholders.

David Einhorn, founder of fund Greenlight Capital, bought a new stake in Twitter last month, reflecting his view that the Delaware Chancery court will “follow the law” and “enforce it here” by forcing Musk to close the deal at $54.20 (£47.46). ) sharing. Pentwater Capital Management, a hedge fund that became a major Twitter shareholder this year, also said it expected Twitter to win.

Zatko, however, gave Musk a chance in Delaware with a whistleblower complaint alleging a wide range of security flaws at the company. In his testimony, the former security chief of Twitter, who joined in November 2020 and was fired in January this year, said he discovered “extreme and egregious shortcomings of Twitter in all areas of its mandate”, including interference from foreign governments and poor controls over employee access to user data.

Previously, Musk’s case was largely based on a claim that Twitter deliberately underestimated the number of spam accounts — which are not operated by humans and disrupt the platform — among its monetizable daily active users (mDAU ), a key business metric for the company. .

Zatko’s appearance last week could be seen as a proxy for the testimony that really matters to Musk: a deposition to his lawyers on September 9 that will be used in the trial. The outline of what Musk should be making was reflected in Zatko’s opening statement.

“I’m here today because Twitter’s management is misleading the public, lawmakers, regulators, and even its own board of directors. What I’ve discovered upon joining Twitter is that this extremely influential was more than a decade behind industry safety standards,” he said.

Musk was allowed to expand his lawsuit to include Zatko’s disclosures, which he says constitute a “material adverse effect on society” that significantly alters the value of the company and therefore renders the agreement invalid. Zatko also argues in its complaint that Twitter breached the merger agreement between the company and Musk by making false statements — a statement of fact intended to reassure the counterparty in a deal — about its security provisions and other matters. .

Still, experts say Musk will still have a hard time canceling the deal, even with Zatko’s backing. Brian Quinn, a Boston College Law School professor, said that before the deal was struck, the company made broad disclosures in its earnings report about a risk of “real or perceived” security breaches and errors or vulnerabilities in its software.

“To the extent that there are already broad disclosures about risks to the business regarding cybersecurity and data privacy issues, the recent testimony doesn’t really add to the mix and certainly doesn’t derail the representation” , says Quinn.

Howard Fischer, a partner at US law firm Moses Singer, says Delaware courts are very reluctant to approve claims of a significant adverse reaction. Zatko’s complaint claims that Twitter executives have no incentive to hunt down bot accounts and that it isn’t doing a good enough job of cracking down on bot accounts lurking on the platform, though ‘he doesn’t count them in his mDAU total.

This is slightly different from Musk’s argument, a key reason for dropping the deal, that Twitter is deliberately understating the number of bots in its mDAU numbers.

“Twitter may be a badly governed, mismanaged mess, but a desire to give Twitter better management was one of the reasons Musk said he wanted to buy the platform,” Fischer says. “And the statements about the bots don’t really support Musk’s claims. Given the extremely skeptical eye the Delaware courts cast on those claiming significant adverse effect, I doubt these would qualify.

Anat Beck, a law professor at Case Western Reserve University in Ohio, adds: “The bar is very high for meeting a standard of fraud or material adverse effect, and I don’t think we’re quite there. unless we find something else.”

John Coffee, a law professor at Columbia University in New York, says any mistakes Zatko reports can be corrected by the new owner, adding that Delaware – the state where Twitter is incorporated – is inclined to back the agreed deals. such as Musk’s.

“Even if Twitter were wrong, Musk could correct these alleged errors without them negatively affecting the value of Twitter,” he says. “Thus, it was not irrevocably damaged. Zatko raised an issue that Musk didn’t seem to care about before and the financial impact of which may be minimal. Given Delaware’s strong commitment to “deal certainty,” I don’t think this is likely to hand Musk the win. This will, however, add confusion to an already complicated matter.

A settlement between the two sides has always been lurking in the background and Zatko’s testimony gives a slight increase in the odds of that happening, says Carl Tobias, Williams Professor of Law at the University of Richmond.

“I think the Zatko whistleblower complaint and Judiciary Committee testimony slightly bolsters some of Musk’s criticisms of Twitter. However, the complaint and the hearing do not show the kind of significant negative effect that Musk needs to win the case. Thus, there remains a possibility that the matter will settle, despite Musk having a long history of not resolving legal disputes.

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