Twitter lawsuit 'credible threat' to Elon Musk's empire: Hindenburg Research

Hindenburg Research is throwing its support behind Twitter as it enters a legal battle with Elon Musk over the Tesla chief executive's decision to terminate his $44 billion acquisition of the social media giant. 

"We have accumulated a significant long position in shares of Twitter," the short-selling firm tweeted on July 13. "Twitter’s complaint poses a credible threat to Musk’s empire."

In a July 8 letter, Musk's lawyers said he would be abandoning the deal, claiming Twitter is "in material breach of multiple provisions" of the agreement and "appears to have made false and misleading representations" when it accepted Musk’s acquisition offer on April 25. Musk has disputed Twitter's internal estimates that spam and fake accounts make up less than 5% of its users. 

Twitter responded to the letter on July 10, calling Musk and his team's "purported termination" of the deal "invalid and wrongful" and a "repudiation of their obligations under the agreement." 

Two days later, the company filed a lawsuit against Musk in the Delaware Court of Chancery in an effort to force him to follow through on the deal. Twitter's complaint accuses Musk of refusing to "honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests." 

ELON MUSK SEEKS TO BLOCK TWITTER REQUEST FOR EXPEDITED TRIALELON MUSK SEEKS TO BLOCK TWITTER REQUEST FOR EXPEDITED TRIAL

"Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away," the lawsuit states.

In a research note in May, Hindenburg said Musk threatening to walk away from the Twitter deal could provide him with leverage to renegotiate its price. However, the firm's founder Nathan Anderson told FOX Business on Monday that Musk has "squandered much of his leverage, largely through ill-advised, compulsive tweets." 

"Twitter’s bot issue is perhaps the worst pretext Musk could have chosen for terminating the deal given that it was clearly and publicly a reason he entered the agreement in the first place," he said. 

The firm believes that Musk will either buy Twitter at his original $54.20 per share offer, pay damages in excess of the agreement's $1 billion breakup fee or ultimately settle. 

ELON MUSK TWITTER SAGA WILL LIKELY DRAG OUT: ‘NO PRECEDENT’ FOR THIS, EXPERT SAYS

"In all of the above scenarios we see Twitter trading significantly higher than current levels," Anderson predicts. "If Twitter loses outright, we see fair value in the mid-20s range." 

Twitter shares are down approximately 10% year to date. 

Despite the attention on the deal, Anderson argues that the market "seems to be ignoring or underpricing the risks to Musk."

"The market seems to mistakenly think the litigation will drag on for years, that Musk only has the $1 billion break fee on the line, and that Twitter’s chances of winning are low," he said. "We expect the process will move relatively quickly and that Twitter has a high likelihood of success beyond the $1 billion break fee." 

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A judge will hear arguments on Tuesday morning for Twitter's request to hold a trial in September. Twitter has requested that the proceedings be expedited because the merger agreement with Musk terminates on Oct. 25.

In a motion on Friday, Musk urged the court to reject Twitter's "unjustifiable" request and push the trial date to Feb. 13, 2023, or later. 

"Twitter’s sudden request for warp speed after two months of foot-dragging and obfuscation is its latest tactic to shroud the truth about spam accounts long enough to railroad Defendants into closing," Musk's lawyers wrote. "The core dispute over false and spam accounts is fundamental to Twitter’s value. It is also extremely fact and expert intensive, requiring substantial time for discovery."

The debt financing package committed by banks for Musk’s acquisition expires in April 2023. That means the deal could collapse if the trial began in February and did not finish by April.

Reuters contributed to this report