Dubai: Ahmed Al Bashir
CNBC said that Elon Musk cannot cancel his deal to acquire Twitter by paying the agreed-upon contract cancellation fee of one billion dollars, it is not that simple.
On Friday, Musk tweeted that he had decided to suspend his acquisition of Twitter because he was looking into whether the volume of fake accounts on the platform was in fact only 5% of all active accounts, as the company had long claimed. He followed that tweet with another in which he reiterated that he was still committed to the acquisition. But he risks a lawsuit from Twitter for breach of contract that could cost the world’s richest man several billion dollars.
Musk and Twitter agreed to a so-called reverse contract avoidance fee of $1 billion when the two sides agreed on the deal last month. However, contract cancellation fees are not an option that allows Musk to exit without consequences.
A termination fee paid by the buyer is applied when there is an external reason for which the transaction cannot be completed, such as regulatory interference or concerns about third-party financing.
A market downturn like the current sale, which caused Twitter to lose more than $9 billion in market value, would not be a valid reason for Musk to back out of the deal, according to a senior M&A lawyer.
The lawyer said that if Musk pulled out simply because he felt he paid too much to acquire the platform, Twitter could sue him for billions in damages in addition to collecting the $1 billion in fees. This has happened before when Tiffany sued French luxury goods group LVMH in 2020 for trying to renege on the agreed deal. The lawsuit was settled when Tiffany agreed to lower its selling price from $16.2 billion to about $15.8 billion.
Musk’s reason may be to put the deal on hold in order to get a better price; Twitter shares fell more than 8% on Friday and are down about 23% from the agreed purchase price of $54.20 per share. Part of the decline is related to the general decline in technology stocks this month.
Musk may feel some pressure or obligation to other potential Twitter investors to lower the price, even if the world’s richest man is more neutral about the price.
Musk is in talks with outside investors about both stocks and preferred financing to reduce his personal stake in Twitter. If he can get a lower price for his Twitter deal, the returns may be higher for outside investors.