Elon Musk Seeks to Abandon $44 Billion Twitter Deal

The filing caps nearly two months of high-stakes suspense over Mr. Musk’s intentions, while setting up a possible legal battle over what comes next for the social-media platform.

Bret Taylor,

chairman of Twitter’s board of directors, tweeted Friday afternoon that the board plans to pursue legal action to enforce the deal at the price and terms originally agreed upon.

“We are confident we will prevail in the Delaware Court of Chancery,” Mr. Taylor tweeted.

Parag Agrawal,

Twitter’s chief executive, retweeted the message.

The company has said repeatedly in recent weeks that it was sharing information with Mr. Musk to consummate the deal as laid out in the merger agreement—and that it intended to close the transaction and enforce the agreement at the agreed price and terms.

There are no guarantees Mr. Musk will be able to walk away from the deal entirely, as Twitter is expected to challenge his legal arguments.

Mr. Musk’s lawyer cited concerns over Twitter’s estimates about how many of its daily users are fake or spam accounts as an issue Mr. Musk raised as a concern about the deal almost three weeks after he signed it.

Twitter shares fell about 6% in after-hours trading Friday following the disclosure.

Mr. Musk’s decision to try to abandon a deal that he initiated—citing an issue he knew about before agreeing to the transaction—reinforces the billionaire’s reputation for unpredictability. It also leaves major questions about the future of Twitter, which Mr. Musk had pledged to rejuvenate, as the company and other social-media platforms contend with slowing growth in digital advertising and broader economic uncertainty.

At a minimum, Mr. Musk could be on the hook for a $1 billion breakup fee, based on the terms of his April 25 acquisition agreement with Twitter. But the deal gives him only limited leeway to walk away and pay only that amount—and it isn’t clear that his complaints about Twitter’s account data qualify. The agreement gives Twitter the right to try to force him to follow through on the acquisition if he seeks to cancel it for other reasons.

The deal’s fate has been in question since May 13, when Mr. Musk announced on Twitter that he was temporarily putting it “on hold” pending more information about the account issues. Twitter has long said spam accounts represent less than 5% of its monetizable daily active users, the primary user number it discloses. Mr. Musk has suggested the figure could be closer to 20%, but hasn’t made clear how he arrived at that calculation.

The May tweet kicked off weeks of back and forth as Mr. Musk repeatedly questioned and poked fun at Twitter—often on its own platform—and demanded the company furnish him more data to check its math. Twitter continuously said it was complying with his requests, and eventually provided access to its so-called fire hose of tweets.

Just Thursday, Twitter defended its accounting, saying it typically removes more than one million spam accounts daily while they are being set up or soon after. It also said it relies on closely held private user information to identify spam accounts in a process outsiders without access to that data wouldn’t be able to replicate.

While the fake-account sparring played out, tech stocks were continuing to fall. The tech-heavy Nasdaq Composite Index has slid 15% since Mr. Musk unveiled his all-cash offer to buy Twitter at $54.20 a share on April 14. Twitter shares had fallen nearly 20% through Friday’s close, when they were at $36.81 each.

As he lined up financing for the deal, Mr. Musk sold some of the shares in

Tesla Inc.,

TSLA 2.54%

the electric-vehicle maker he runs. Tesla shares have slumped about 30% since Mr. Musk’s interest in Twitter first became public.

Outside specialists say fake and spam accounts are an issue for Twitter, as well as other social-media platforms, and the company’s calculations about its users are based in part on some of their private information it won’t share, even with Mr. Musk.

Still, his decision to threaten the deal over the fake-and-spam accounts issue raised eyebrows from the start. One of Twitter’s most active and famous users, with now more than 100 million followers, he had complained about such concerns for years, yet had agreed during deal negotiations to waive due diligence of Twitter’s business.

Twitter now faces the prospect of a tricky legal fight to force Mr. Musk to complete the purchase or provide what it sees as fair compensation under a legal protection called “specific performance.” There are ways for Mr. Musk to fight such an outcome. He could, for instance, prove that something materially changed in Twitter’s business since he agreed to buy the company, or that he failed to secure the necessary debt financing.

Even when contract terms are clearly spelled out, more often than not, deal clashes end in negotiated settlements which can include a price cut or one-time payments.

In 2020, luxury-goods conglomerate

LVMH Moët Hennessy Louis Vuitton SE

tried to back out of a deal to buy Tiffany & Co. for $16.2 billion after the pandemic hurt demand for high-end jewelry. Tiffany sued to enforce the agreement and LVMH countersued, arguing the business had been so deeply damaged that their original agreement was no longer valid. The two sides later agreed to cut the price by a relatively modest $430 million and settle related litigation.

Twitter’s advisers have suggested that its contract had more seller-friendly protections than Tiffany’s, and that the company has legal avenues to ensure Mr. Musk follows through with the deal, people familiar with the matter said. Its board is focused on getting the best outcome for shareholders, which it has so far determined is the $44 billion sale rather than a $1 billion breakup fee, the people said.

If the deal does collapse, Twitter will be left having to convince shareholders about its own plans to grow in an turbulent economy after being jilted by a devotee of the platform who, through everything else, had consistently talked up its potential. Mr. Musk laid out several changes he planned for Twitter, including cutting back on content moderation and making the platform less reliant on advertising revenue that accounts for about 90% of its sales.

Mr. Agrawal, Twitter’s CEO, has continued managing the business amid scrutiny and public criticism from Mr. Musk and against a darkening macroeconomic backdrop. Now the company must regroup after a drawn-out process that has kept employees and investors in limbo.

In April, Twitter said it was withdrawing ambitious revenue and user goals. In May, the company said it was pausing hiring and looking to cut costs as it grappled with disruptions in the digital advertising market and amid the war in Ukraine. The same day, the company announced the departure of two senior executives. On Thursday, the company laid off a third of its recruiting team.

In the filing Friday, Mr. Musk’s lawyer said that Twitter had made material changes to the business without his consent in laying off some staff, implementing a hiring freeze and taking actions.

Mr. Musk’s past deal making has, at times, landed him in legal turmoil. In 2018 he suggested on Twitter he had “funding secured” to take Tesla private. The SEC fined Mr. Musk for what it deemed a false statement. Mr. Musk also relinquished his role as Tesla chairman as part of the settlement. Mr. Musk is suing to have the settlement thrown out.

Also potentially losing out in the deal are financial institutions looking to make it happen. Twitter’s bankers would stand to make tens of millions in advisory fees on closing, according to a previous regulatory disclosure.

Goldman Sachs Group Inc.

would stand to make around $80 million, including $15 million upfront, while

JPMorgan Chase

& Co. could make $53 million, including $5 million upfront.

Write to Meghan Bobrowsky at Meghan.Bobrowsky@wsj.com and Cara Lombardo at cara.lombardo@wsj.com