Elon Musk Suffers a Huge Setback in a Fierce Battle

Elon Musk is experiencing a busy Easter week. 

The chief executive officer of Tesla  (TSLA) – Get Tesla Inc Report surprised the financial and tech circles by announcing this week that he wanted to acquire Twitter  (TWTR) – Get Twitter, Inc. Report after becoming the platform’s largest shareholder in early April with a 9.1% stake. 

The world’s richest man has bid $54.20 a share, which values ​​Twitter at $43 billion.

The billionaire is particularly angry with the use of the principles of free speech of the social network which is his main channel of communication. It is notably on Twitter that Musk builds the Musk brand. He has more than 82 million followers on Twitter, almost the equivalent of the entire population of Germany. 

The serial entrepreneur says he wants to make significant changes at Twitter, starting by making his algorithm open source. 

TweetGate Is Back

But Musk is meeting resistance from Twitter’s Board of Directors, which on April 15 put in place a “poison pill”, which is a kind of mechanism that makes it difficult for a shareholder to take control of the group.

In a Ted Talk interview, Musk said he wasn’t sure he’d be able to win this battle, but he said he had a plan B without giving details. Press rumors claim that he could invite one or two investment funds or private equity firms to join him in convincing shareholders to force the board of directors to accept his offer.

While waiting for the outcome of this fierce battle, another matter has just caught up with the Tech tycoon. This case concerns Tesla and the now infamous tweet sent on August 7, 2018. 

That day Musk had written that he wanted to withdraw Tesla from the stock market at a price of $420 per share. Above all, he added that he had secured the financing for such a transaction.

“Am considering taking Tesla private at $420. Funding secured,” Musk wrote.

The Securities and Exchange Commission (SEC) opened an investigation which resulted in a settlement in September 2018. Under the settlement, Musk would step down as chairman of Tesla’s board of directors, pay a $20 million fine, and Tesla would also pay a $20 million penalty. Tesla also committed to pre-approve Musk’s tweets that would have a potential impact on the stock.

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For shareholders the case is not closed. Some of them have thus decided to attack Musk in court by regrouping around a collective action. They believe that they were wronged by Musk’s tweet and above all they claim that Musk lied by saying he had the necessary funds to finance the operation.

They have therefore filed a class-action lawsuit.

Funding Secured Is Not Accurate

“Mr. Musk was considering taking Tesla private at $420 a share. Funding was secured. There was investor support. These conclusions are supported by extensive contemporaneous evidence, including discussions with Saudi Arabia’s sovereign wealth fund (the “PIF”) and Tesla’s Board, as well as the undisputed fact that there was sufficient funding for a go-private transaction, from the PIF or otherwise,” lawyers for the billionaire said in a motion filed with the U.S. District Court for the Northern District of California in San Francisco, in February.

“I should say, originally with Tesla back in the day, funding was actually secured. I want to be clear about that,” Musk said himself on April 14, during a Ted Talk interview.

“In fact, this may be a good opportunity to clarify that. If funding was indeed secured and, I should say, why do I not have respect for the SEC in that situation? And I don’t mean to blame everyone at the SEC, but certainly the San Francisco office. Because the SEC knew that the funding was secured, but they pursued an active public investigation nonetheless.”

But according to lawyers for the plaintiff investors, Californian judge Edward Chen said on the evening of April 15 that Musk’s statements were false. The judge concluded that Musk acted with scienter which means that he knowingly made false statements about having funding secured when he tweeted, the lawyers said.

“Nothing will ever change the truth which is that Elon Musk was considering taking Tesla private and could have,” Alex Spiro, Musk’s lawyer from Quinn Emanuel, responded in an email statement. “All that’s left some half decade later is random Plaintiffs lawyers trying to make a buck and others trying to block that truth from coming to light all to the detriment of free speech.”

Spiro didn’t dispute the statement from the plaintiffs about the judge’s decision.

Trial Expected in May

The information was revealed as part of a motion by plaintiffs’ attorneys asking the judge to bar Musk from continuing to make statements on the subject as of April 14 on the Ted Talk. Indeed, the decision is under seal at the request of the parties who are preparing for the trial scheduled from May 31, according to the lawsuit.

“Because it refers to evidence that defendants regarded as confidential, the Court preliminarily filed the order under seal while the parties agree what portions, if any, need to stay under seal. We anticipate the order will be published soon,” attorney Adam Apton of Levi & Korsinsky, which represents the plaintiffs, said in a statement by email to TheStreet.

This lawsuit could cost Musk dearly if he loses it.

Bloomberg was first to report about the Judge’s decision.