Twitter deal leaves Elon Musk with no easy way out

Since the financial crisis, corporate lawyers have been eyeing the drafting of a very strict final merger contract, which would keep reluctant buyers back.
Now the “dungeon” recent deal deal faces one of its biggest tests, as Elon Musk, Tesla’s CEO and the world’s richest person, publicly considers ditching the $44 billion takeover of Twitter.
He said in a tweet last week that “the deal cannot go ahead” until the social media platform provides detailed data on the fake accounts, a request that Twitter appears unlikely to meet. Meanwhile, Twitter’s board of directors announced its commitment to “complete the transaction at the agreed price and terms as quickly as practicable.”
Abandoning the deal thus simply is not an option. Both Musk and Twitter have signed the merger agreement, which states that “the parties (…) will use their best efforts to complete, achieve and make the transactions set forth in this agreement effective.”
With tech stocks plunging — sending the price of Tesla, the foundation of Musk’s fortune, down and collateral for a marginal loan to buy Twitter — all eyes are on the mercurial billionaire’s next move.
Could Musk withdraw in exchange for a $1 billion fine? The agreement includes a $1 billion “reverse termination fee”, which Musk will bear if he withdraws from the agreement, but if all other terms of the deal are met, and the only thing left is for Musk to come to complete the deal with $27.25 billion in stock, it can seek Twitter company to make the deal done. Since the financial crisis, this legal concept, known as “specific performance,” has become a common feature of loan-backed acquisitions.
In 2007 and 2008 loan-backed acquisitions typically included a reverse termination fee that often allowed the company backing the acquisition to pay a modest 2 to 3 per cent of the transaction 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 some of those agreements were discontinued, which led to numerous legal battles involving prominent companies such as Cerberus, Blackstone, and Apollo.
Since then, sellers have applied much higher termination fees, as well as specific performance clauses that require buyers to actually close the deal. Finally, in 2021, a Delaware court ordered the private equity group, Kohlberg & Co., to complete the acquisition of a cake decorating company called Decoupack.
Kohlberg had argued that it was allowed to walk out of the deal, because Decoback’s business suffered a “material negative impact” when the pandemic struck between the signing and completion of the deal. The court, however, rejected this argument and ruled that Decoback could compel Kohlberg to complete the deal – which it did.
If Musk chooses to go to court, he could allege that Twitter misrepresented the state of its business by estimating in regulatory filings that account bots made up 5 percent or less of its user base.
Bringing such a lawsuit would be easy enough, but proving that the automatic account problems justified the deal would be more difficult. Under the agreement, Musk would have to prove that any misrepresentation had a “negative material impact,” a burdensome standard that the court has rarely found met. He also publicly waived Twitter due diligence in his presentation to the board.
“It is hard to argue in court that a material adverse event occurred if you cannot show how it affected profits — and the impact must be significant,” said Gustavo Schweed, a professor at New York University and a former CEO of Providence Equity.
For its part, Twitter can sue Musk to close the deal if he tries to break it, and a person familiar with the company describes the contract as “immune”, and instead can choose to sue him for damages caused by the failure of the deal. But under the takeover agreement, the amount of damages that Musk can pay for damages will be a maximum of one billion dollars.
Another option, according to experts, is for Twitter to first threaten to force Musk to complete the deal, and then reach a settlement of more than $1 billion in damages to avoid a chaotic litigation.
“Well, we want the deal done, and we’re going to sue you to enforce the contract,” said Charles Whitehead, a professor of law at Cornell University and a former corporate attorney. “And you know, deep down, Mr. Musk, the court will lean on our side, so let’s forget the roof.” The billion dollars and we settle it with two billion dollars.”
But in order to find a compromise, Twitter’s board may decide to accept a lower price from Musk to avoid the risks of trying to enforce the existing agreement — and the risk of remaining an independent public company at a difficult time for tech companies.
In 2021, Tiffany & Co. sued LVMH in an attempt to force the French luxury goods company to strike a deal that had been agreed upon just before the pandemic, and the two sides eventually reached an agreement to lower the price slightly, which Tiffany shareholders later agreed to. .
The worry is that Musk’s public criticism on Twitter will damage the company, as well as the professional reputation he needs to run Tesla and the rest of his empire.
“Musk may be more concerned about the people he might do deals with in the future,” Whitehead said. “If he pulls out of this deal, it may be difficult for him in the future to do deals for Tesla, either on his own or on his behalf. There is a lot at stake.” .

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