SEC looms over Musk-Twitter deal
Elon Musk’s $44 billion deal to acquire Twitter has been the subject of countless headlines as the mercurial CEO has made his hang ups with the acquisition very public.
That tendency to share his thoughts on the public forum might be putting the billionaire on a collision course with the Securities and Exchange Commission (SEC).
Musk has berated and antagonized the regulatory agency for years after being penalized for tweeting recklessly about taking Tesla private.
His latest conduct on Twitter as he attempts to take over the company could draw even more legal headaches, but it remains an uncertain whether the agency will find enough misconduct to rein Musk in.
The SEC must vet and approve Musk’s offer to buy Twitter, a publicly traded company, before it can be finalized. While the agency can’t reject Musk’s offer based on his vision for the company, the SEC can raise objections and delay the transaction if they believe he was not forthcoming on required disclosure forms.
“The documents will need to detail what’s transpired in his journey to getting financing, and that’s where you may find some fertile legal ground,” said Steven Siesser, partner at law firm Lowenstein Sandler and co-chair of the firm’s transactions and advisory group.
“What [the SEC’s] rules are designed to do is enable you, the public, to have all the information necessary so that you don’t wake up three weeks later and say, ‘If I had known that, I wouldn’t have tendered my shares.’”
The SEC already has several potential reasons to probe Musk and his bid to buy Twitter, including the late disclosure of his stake in the company, filing the wrong type of disclosure, and his frequent criticism of Twitter leaders on the platform itself.
Before Musk made his intentions to fully purchase the platform public, he revealed through an April 4 filing that he had bought 9.2 percent of outstanding shares, making him the largest independent shareholder.
That disclosure sent shares of the company skyrocketing from roughly $39 per share to over $50.
However, legally, Musk should have notified the SEC about his investments in Twitter far earlier, when he cleared a 5 percent stake.
By filing that disclosure after the 10-day deadline, Musk may have netted $156 million according to University of Maryland business school professor David Kass.
“Either he’s underpaid by $156 million by withholding this information, or he had $156 million profit as a result of holding this information,” he explained. “And of course shareholders who sold their shares during this time period… were in effect shortchanged.”
Multiple outlets reported last week that the SEC has launched an investigation into the late disclosure.
The agency could also take issue with the form Musk filed to reveal his initial stake in Twitter.
The Tesla and SpaceX CEO filed a 13G disclosure with the SEC, which is meant for passive investors. While at the time he may not have had intentions of being an active investor, within a matter of weeks, he did receive an offer to join the company’s board, rejected it, and offered to buy all outstanding shares.
The agency last month sent Musk a letter asking him to explain several potential missteps in his April 4 announcement of his purchase of a major portion of Twitter shares, according to documents obtained by several news outlets.
Musk did eventually file a 13D disclosure meant for active investors and is known for changing his mind drastically, giving him some cover.
“It’s quite possible at some point he really just was interested in Twitter and wanted to be a passive investor,” said Michael Dambra, an associate professor of account and law at the University of Buffalo. “Once we get more information about what his conversations were with Twitter beforehand it’ll show whether or not there was an incorrect filing.”
The SEC is under some pressure to act on the two potential initial disclosure filings because such a high-profile case of allegedly skirting the rules could encourage others to follow Musk’s lead.
“Certainly if the SEC just backs down and there doesn’t seem to be strong enforcement on revealing your positions, you’d think that other activist investors would be incentivized to do so,” Dambra explained.
“They don’t want to disclose their position early on, they’d rather creep up and grab more ownership of another company over time, because one, it gives them more control, and two, it allows them to buy shares at a discount.”
Some of Musk’s conduct since agreeing to a deal to purchase the company could also invite SEC scrutiny.
Musk has griped on Twitter about whether the company accurately determined how many Twitter accounts belong to automated bots instead of verifiable human users, hinting it could jeopardize the deal. He then said Twitter’s legal team accused him of violating a non-disclosure agreement, and also sparred online with Twitter CEO Parag Agarwal, at one point responding with a poop emoji.
“The standard governing what goes into an SEC disclosure certainly isn’t the same standard as what some random person says on Twitter. But, by the same token, when you have somebody like Donald Trump, Elon Musk, or any celebrity that can move markets or move people to action with words, the government has always considered that factor,” said Joe Valenti, partner at law firm Saul Ewing Arnstein & Lehr.
Valenti added that Musk’s previous issues with the SEC could influence scrutiny of the Twitter deal.
In 2018, the SEC forced Musk to pay a $20 million fine, step down from the Tesla board and obtain pre-clearance from lawyers to post things that could be material to the company in a settlement over allegations that he had fraudulently tweeted about securing funds to take the electric car maker private.
Musk has remained frustrated about that settlement, calling SEC regulators “bastards” at a conference last month. An attempt to have the portions of the 2018 settlement requiring supervision of Musk’s Tesla-related tweets terminated was recently thrown out by a judge.
“The previous enforcement history is always the starting point in any type of case analysis. The government tries to understand what it is dealing with,” Valenti said.
Both Valenti and Siesser said it’s unlikely Musk will face criminal charges based on questionable disclosures and testy tweets unless they are part of a plan meant to harm Twitter or make money off the potential deal under false pretenses. Even so, scrutiny from the SEC could slow the deal to a halt if banks backing Musk get cold feet.
“Given its sheer size and the celebrity around it, [Musk’s bid] will get a meaningful review and his prior history will make that even more of a certainty,” Siesser said.
An attorney representing Musk did not respond to a request for comment.