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The Twitter agreement gives Elon Musk no easy way out

The Twitter agreement gives Elon Musk no easy way out
Enlarge / This illustration taken on May 1[ads1]3, 2022 shows Elon Musk’s Twitter account with a Twitter logo in the background in Los Angeles. Elon Musk sent mixed messages on Friday about his proposed Twitter acquisition, and pushed shares on the microblogging platform in the midst of skepticism about whether the agreement will be terminated. In an early morning tweet, Musk said the $ 44 billion takeover was “temporarily pending”, pending questions about the social media company’s estimates of the number of fake accounts or “bots”. As a result, Twitter’s stock plunged 25 percent. (Photo by Chris DELMAS / AFP) (Photo by CHRIS DELMAS / AFP via Getty Images)

Since the financial crisis, corporate lawyers have wanted to build the ultimate iron-clad merger contract that prevents buyers with cold feet from retiring.

The “bulletproof” modern deal is now facing one of its biggest tests, as Elon Musk, the Tesla boss and the richest man in the world, openly entertains the possibility of dropping his $ 44 billion deal for Twitter.

Musk said in a tweet this week that “the agreement can not go ahead” before the social media platform provides detailed data about fake accounts, a request that Twitter seems unlikely to meet. Twitter’s board has meanwhile stated its commitment “to complete the transaction at the agreed price and terms as soon as practicable.”

Just leaving the deal is not an option. Musk and Twitter have both signed the merger agreement, stating that “the parties … will use their respective reasonable efforts to complete and streamline the transactions contemplated in this agreement.”

With tech stocks falling – pulling down the price of Tesla shares that form the basis of Musk’s fortune and the security of a margin loan to buy Twitter – all eyes are on the mercury billionaire’s next move.

Could Musk walk away for $ 1 billion?

The deal includes a $ 1 billion “reverse termination fee” that Musk would owe if he withdrew from the merger deal. But if all other closing conditions are met and the only thing left is for Musk to show up at the close with his $ 27.25 billion in equity, Twitter could try to get Musk to close the deal. This legal concept, known as “specific performance”, has become a common feature of geared buyouts since the financial crisis.

In 2007 and 2008, gired buyouts typically included a reverse termination fee that often allowed a company that supported the acquisition to pay a modest 2 to 3 percent of a contract’s value to get out. Sellers at the time believed that private equity groups would follow up and close their transactions to maintain their reputation. However, some withdrew from these agreements, leading to several lawsuits involving prominent companies such as Cerberus, Blackstone and Apollo.

Since that era, sellers have implemented much higher termination fees as well as specific performance clauses that effectively require buyers to close. Most recently, a Delaware court in 2021 ordered the private equity group Kohlberg & Co to close the acquisition of a cake decorating business called DecoPac.

Kohlberg had claimed that it was allowed to withdraw from the agreement because the DecoPac business had suffered a “significant negative effect” when the pandemic hit between signing and closing. The court rejected that argument and ruled that DecoPac could force Kohlberg to close – which it did.

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