Corporate lawyers have been striving to create the perfect merger contract since the financial crisis. The modern “bulletproof” deal agreement is now facing one of its greatest tests. Elon Musk, Tesla‘s boss and the richest person in the globe, openly contemplate scrapping his $44 billion deal with Twitter.
Musk tweeted this week to say that the deal “cannot move forward” unless the social media platform provides detailed account data. It is a request that Twitter appears unlikely to fulfill. Twitter’s board, however, has made clear its commitment to “complete the transaction at the agreed price and terms as soon as possible.”
The deal cannot be abandoned. Musk and Twitter signed the merger agreement. This agreement states that both parties will use their reasonable best efforts to conclude and make effective the transactions.
The tech stock market is falling which has lowered the price of Tesla shares, which are the base of Musk’s fortune as well as collateral for a margin lending to buy Twitter.
All eyes now turn toMusk could be evicted for $1B
Musk would have to pay a $1 million “reverse termination fee” if the merger agreement is terminated. Twitter has the ability to push Musk to close the deal if all conditions are met. This legal concept, also known as “specific performances,” has been a feature of leveraged buyouts ever since the financial crisis.
Leveraged buyouts in 2007 and 2008 often included a reverse termination charge. This allowed the company that supported the acquisition to pay only 2 to 3 percentage points of the deal’s total value to exit. Sellers believed then that private equity funds would continue to close their deals in order not to damage their reputations. Some of those deals were terminated by some, leading to several lawsuits against prominent companies such as Cerberus and Blackstone.
Since then, sellers have implemented higher termination fees as well as performance clauses that require buyers to close. A Delaware court recently ordered Kohlberg & Co, a private equity firm, to buy out DecoPac’s cake decorations business.
Kohlberg had claimed that DecoPac had suffered a “materially adverse effect” between closing and signing the deal. The court rejected Kohlberg’s argument and ruled DecoPac could make Kohlberg close–which it did.
Musk would he be able to sue for his release from the deal?
Musk might decide to take his case to court. He could claim that Twitter misrepresented its business by estimating that bots account for 5 percent or less of its userbase in regulatory filings.
While filing a lawsuit is easy, proving that the bot issue warrants ending the deal would prove difficult. Musk would need evidence that any misrepresentation caused a “material adverse impact” according to the merger agreement. This burdensome standard is rarely met by courts. In his offer to the board, Musk explicitly waived due diligence on Twitter.
Gustavo Schwed (a New York University professor who was formerly an executive at Providence Equity) said, “It is hard to argue in court that there has been a material adverse events if you can’t show how it has affected earnings–and this has to be substantial.”
Musk could be forced by Twitter to close the deal if it was not ended?
Twitter could sue Musk in order to enforce the agreement. An insider at the company called the contract “bulletproof.” Or, it could sue him for damages resulting from the failed deal. Musk can only pay $1 billion for damages, according to the merger agreement.
Experts suggest that Twitter could also threaten Musk with closing and then settle for damages exceeding $1 billion to avoid any messy litigation.
“Twitter could state, “Well, we want the deal done. We’re suing for enforcement of the contract.” You know, Mr. Musk that the court is moving in our favor, so let’s forget about the billion-dollar cap, and settle for $2 Billion,” Charles Whitehead, a Cornell law professor who was formerly a corporate attorney.
Is there a way for both sides to come to a deal?
Twitter’s board might accept Musk at a lower price in order to avoid having to enforce the agreement. It also could risk remaining a public company, which is risky during a time of great difficulty for tech companies.
Tiffany & Co sued LVMH for a breach of contract in 2021. This was to force the French luxury conglomerate close a deal that had been made just before the pandemic. Both sides reached an agreement on a slight price reduction, which Tiffany shareholders approved.
Musk’s Twitter sniping is a concern because it could damage his professional reputation and cause havoc on Tesla.
“Mr. Whitehead suggested that Musk might be more concerned about who he might deal in the future. “If he walk away from this deal it might be harder for him to strike deals for Tesla and on his own behalf in the future.” There are many stakes here.
Second thoughts
Musk has long complained about fake Twitter accounts. He pledged to eliminate bots when he first announced his desire to purchase Twitter. Musk may have other reasons for having second thoughts, however, as purging bots from the site was a major impetus to his attempt to privatize the company.
Twitter shares fell amid a wider decline in tech stocks. Twitter’s share price has returned to the level it was when Musk first declared that he had purchased 9.2% of the social media platform. Tesla stock prices have also fallen 25% since Musk’s Twitter announcement. Investors are concerned about how the purchase could rebound on electric carmakers.
Musk’s share price drop makes him less wealthy. It also complicates Musk’s ability to finance the Twitter purchase. The CEO offered Tesla shares as collateral for loans. Investors also notice that Twitter deals load the social media platform with significantly higher debt.
The terms of the Musk/Twitter deal are that estimated research company CreditSights will increase Twitter’s debt interest payments from $51 million in 2021 to $900 million after the agreement is signed. Musk would have less margin to profit from transforming Twitter’s business model if he had to pay off these looming debts.
John McClain (portfolio manager at Brandywine Global Investment Management), stated that this is a poor capital structure for a business like Twitter. He said, Bloomberg.
Despite the noise, both the advisors on the deal (who stand to make $133 million if it closes) are continuing to work like it’s going forward. Twitter submitted a 139-page document to the SEC on Tuesday, which was reportedly also approved by Musk. It explained the background of the buyout offer and why Twitter agreed to it.
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