The Twitter deal leaves Elon Musk with no easy way out

The Twitter deal leaves Elon Musk with no easy way out

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Since the financial crisis, the company’s attorneys have wanted to craft the ultimate merger deal to keep cold-footed buyers from backing down.

The “bulletproof” modern trading deal now faces one of its biggest tests, as Elon Musk, Tesla boss and the world’s richest man, openly entertains the possibility of reneging on the deal. his $44 billion to Twitter.

Musk said in a tweet this week that “the deal can’t go forward“Until the social media platform provides detailed data on fake accounts, a requirement that Twitter is unlikely to meet. Meanwhile, Twitter’s board has stated its commitment to “complete the transaction at the agreed price and terms as soon as possible”.

Simply walking away from the deal is not an option. Musk and Twitter have both entered into a merger agreement, which states that “the parties … will use their reasonable best efforts to finalize and effectively execute the transactions contemplated in the agreement.” this.”

With tech stocks falling — dragging down Tesla stock, which forms the basis of Musk’s fortune and collateral for a margin loan to buy Twitter — all eyes are on the next move. of the nimble billionaire.

Can Musk walk away for $1 billion?

The deal includes a billion dollars in “reverse termination fees” that Musk will have to pay if he withdraws from the merger agreement. However, if all other closing conditions are met and the only thing left is for Musk to show up at the close with $27.25 billion of his equity, Twitter could find a way to get Musk to close. business. This legal concept, known as “specific performance,” has been a common feature in leveraged buyouts since the financial crisis.

In 2007 and 2008, leveraged buybacks typically included a reverse termination fee that typically allowed a company backing an acquisition to pay a modest 2 to 3% of the value of an acquisition. agree. At the time, sellers believed that private equity groups would monitor and close their deals to maintain their reputation. However, some have pulled over those deals, leading to a number of court battles involving well-known 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 private equity group Kohlberg & Co to close its acquisition of a cake decorating business called DecoPac.

Kohlberg argued that it was allowed out of the deal because the DecoPac business suffered a “severe adverse impact” when the pandemic hit between the signing and closing. The court rejected that argument and ruled that DecoPac could force Kohlberg to close — which it did.

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