Twitter deal leaves Elon Musk with no easy way out

Zoom / This illustration taken on May 13, 2022, shows the Elon Musks Twitter account with the Twitter logo in the background in Los Angeles. Elon Musk sent conflicting messages on Friday about his proposed takeover of Twitter, squeezing the microblogging platform’s shares amid doubts over whether the deal will ever go through. In an early morning tweet, Musk said the $44 billion acquisition is “temporarily on hold,” pending questions about the social media company’s estimates of the number of fake accounts, or “bots.” That sent Twitter’s stock down 25 percent. (Photo by Chris Delmas/AFP) (Photo by Chris Delmas/AFP via Getty Images)

Since the financial crisis, corporate lawyers have been looking to build a strict, eventual merger contract that will keep buyers from holding back.

The recent “bulletproof” deal deal now faces one of its biggest tests, as Elon Musk, Tesla’s boss and the world’s richest person, publicly floats the possibility of dropping his $44 billion deal on Twitter.

Musk said in a tweet this week that “The deal can not go forwardUntil the social media platform provides detailed data on the fake accounts, a request that seems unlikely to be met by Twitter. Meanwhile, Twitter’s board of directors has declared its commitment to “complete the transaction at the agreed price and terms as quickly as practicable.”

Just giving up the deal is not an option. Musk and Twitter have signed the merger agreement, which states that “the parties … will use their reasonable efforts to complete and make the transactions set forth in this agreement effective.”

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With tech stocks plunging — lowering the price of Tesla shares that form the basis of Musk’s fortune and collateral for a marginal loan to buy Twitter — all eyes are on the mercurial billionaire’s next move.

Can Musk get away with a billion dollars?

The agreement includes a $1 billion “reverse termination fee” that Musk will owe if he withdraws from the merger agreement. However, if all other closing conditions are met, and the only thing left is for Musk to appear at closing with a balance of $27.25 billion, Twitter could seek to get Musk to close the deal. This legal concept, known as “specific performance,” has become a common feature of leveraged buyouts since the financial crisis.

In 2007 and 2008 leveraged buyouts typically included a reverse termination fee that often allowed the company backing the acquisition to pay a modest 2 to 3 percent of the deal value to exit. Sellers at the time believed that private equity groups would follow and close their transactions in order to preserve their reputation. But those agreements were halted by some, which led to numerous court battles involving notable companies such as Cerberus, Blackstone and Apollo.

Since that era, sellers have implemented much higher termination fees as well as specific performance terms that actually require buyers to close. More recently, in 2021 a Delaware court ordered private equity group Kohlberg & Co to close a deal to buy a cake decorating company called DecoPac.

Kohlberg argued that he was allowed to walk out of the deal because the DecoPac business suffered a “material negative impact” when the pandemic fell between signing and closing. The court rejected this argument and ruled that DecoPac could force Kohlberg to close – which it did.

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