There are signs Elon Musk may be keeping cold feet a few weeks after he agreed to buy Twitter Inc. for $44 billion.
The CEO of billionaire Tesla Inc recently tweeted that the deal is “on hold” until he finds out more about the share of users of the social-media platform that spam accounts. Twitter has said in filings over the years that it estimates they represent less than 5% of its daily active users, though cautioned that the number could be higher.
All of this is happening when tech stocks—including Tesla, which Mr. Musk is relying on to fund the deal—are under pressure. Meanwhile, Twitter’s board says it intends to enforce the agreement, which calls for it to pay $54.20 per share.
Here’s how things could turn out.
Can either side walk away at any time?
not easily. The two parties signed a merger agreement, a detailed document that outlines what each will do to close the agreed-upon deal, and what legal rights each has if the other doesn’t put an end to the deal. It is similar to moving a house under contract.
In this case, Mr. Musk was quick to negotiate a deal, and in doing so, agreed to a contract with several vendor-friendly constituents. For example, they waived the detailed due diligence that buyers typically perform at Target (preferring to skip the home inspection), and gave Twitter the right to sue to follow up with the deal, A legal clause called a “distinctive performance”. ,
The two sides also agreed to pay each other a $1 billion breakup fee if they do not strike a deal for certain reasons, but specific scenarios must emerge for it to become relevant. Also called termination fees, the penalties are to prevent the parties from breaking the agreement and to address the inconvenience and cost of a failed deal.
Can Mr. Musk pay Twitter a $1 billion breakup fee just to get out of the deal?
Not necessarily. There are three obvious scenarios in which this could happen, and possibly more. If regulators try to block the deal or debt financing declines, he’ll likely be out. The third is if he can show that Twitter has changed significantly for the worse since the deal was agreed, under a concept known as “material adverse effect.”
If Mr. Musk believes that Twitter’s accounting of spam accounts was wrong when he signed the deal, his lawyers could try to prosecute that issue in a variety of ways, including the use of content. As an adverse effect, or possibly by alleging that Twitter misrepresented information in its filing. It is not clear whether they will succeed, although the deal could open the door to talks.
What will Twitter do?
Twitter’s board feels strongly that there was an agreement between the two parties that remains in effect and is the best option for shareholders. “We intend to close the transaction and implement the merger agreement,” it said.
For that reason, Twitter appears to be ready to sue for specific performance if it comes to that, meaning it will ask Mr. Musk to comply with the deal or provide whatever it sees as fair compensation. Might try to force. In practice, this can be difficult but often compromise opens the door to discussions.
The agreement between the two sides also requires Mr. Musk to refrain from humiliating Twitter and its representatives on the platform and his recent tweets could have crossed that threshold. While Twitter may be challenging the behavior, it seems more focused at this time on closing the deal rather than launching relatively minor litigation that could run the risk of complicating things further.
Photos: How Elon Musk Made the Fortune He’ll Need to Buy Twitter
what is going to happen?
It is too early to say that. The deal could still happen, and could close soon this summer if both sides keep moving forward. Another possible outcome is that the two sides negotiate a settlement, especially if it becomes clear that Mr. Musk intends to pull out of the deal or is trying to bring down the price.
Even when the terms of the contract are clearly spelled out, often conflicts end in negotiating which can include price reductions or lump sum payments.
In 2020, luxury-goods conglomerate LVMH Moët Hennessy Louis Vuitton SE pulled out of a deal to buy Tiffany & Co for $16.2 billion after the pandemic hurt demand for high-end jewelry. Tiffany sued to enforce the agreement, and LVMH argued that the business had been damaged so deeply that their original agreement was no longer valid.
The two sides later agreed to cut the price by a relatively modest $430 million and settle related litigation.