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When Elon Musk agreed to buy Twitter in April for $ 44 billion, he had an argument for improving the company by adding new features, defending himself from spam bots and being more transparent about his algorithms. He won the support of a consortium of banks that agreed to cede more than half of the total price of the deal to take over the company.
But now Musk wants to leave, blaming Twitter for not giving him more information and what he sees as the company’s business prospects darkening. Twitter is asking him to close the deal, saying his reasons for moving away are excuses to get out of a financial commitment he no longer wants to honor. Meanwhile, its financial sponsors are trapped.
Twitter argues that his deal with Musk clearly requires him to do everything he can to finish what he started. Similarly, banks that agreed to give Musk billions in loans to help him buy Twitter signed legal agreements that ban them from simply leaving if they change their minds, according to legal experts.
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“They’ve signed letters of commitment, so they’re essentially committed,” said Adam Badawi, a law professor at the University of California at Berkeley. Banks also have a reputation to maintain. “Other companies wouldn’t want to work with them if they renounced,” he said.
Even if they find a reason to leave the deal, for example, arguing that Musk’s change of face has made the deal significantly riskier for them, Musk could be forced by a judge to find another source of funding.
What role does debt play in Musk’s original deal to buy Twitter?
Musk is the richest man in the world, valued at $ 218 billion, according to the Bloomberg Billionaire Index, but even he doesn’t have $ 44 billion in cash sitting under his mattress. He signed two agreements with banks such as Morgan Stanley, Bank of America and Barclays for loans totaling $ 25.5 billion. He put a significant amount of his own wealth in the form of Tesla shares as collateral, in case he could not repay the loans. The rest of the deal had to be funded in cash, split between Musk himself and a consortium of hedge funds and sovereign wealth funds who later agreed to help him buy the company and would co-own it if the deal was successful. .
Bank of America and Barclays spokesmen declined to comment. A Morgan Stanley spokesman did not respond to a request for comment. Musk did not immediately respond to a request for comment, nor did a Twitter spokesman.
Before saying he wanted to give up the deal, Musk had increased the share he would pay in cash, contributing $ 33.5 billion to the total.
Now that Musk says he will terminate the deal, the calculation may be changing for the banks that agreed to lend him.
“Musk doesn’t want to own Twitter, the banks don’t want to fund it. We’re in this weird situation of ‘Alice in Wonderland’ trying to force this guy to buy a company he doesn’t want to buy,” M said. Todd Henderson, a professor in the University of Chicago School of Law. “Would you like to fund a man to own a company he doesn’t want to own?”
Why have the banks not already tried the bail?
Banks are only pending financing the deal if it closes, and many people don’t believe Twitter will succeed in getting a court to force Musk’s hand. A more likely outcome is that the judge in the Delaware chancellery court, where the trial will take place, will force a compromise, causing Musk to pay a high fee on Twitter for having gone through so many problems, but letting him go to the end, he said. Carl Tobias, Professor of Law at the University of Richmond.
In this case, the banks will still receive a small fee from Musk to do the job and will no longer have to lend him anything.
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There’s another reason they could stay with Musk for now: they want to stay in his good books and arguing that he’s acting in bad faith could put him in danger. Musk remains the richest man in the world and will be in dire need of debt financing in the future, regardless of how the Twitter situation ends, Tobias said. “You want to keep your business if you’re a bank, because I think it’s very lucrative,” he said.
If the banks find a way to retire, will that give Musk a way out?
No, Musk’s deal with Twitter has a clause that forces him to continue with the deal even if the financing of his debt is not available.
“Canceling the deal could be a kind of breach, but Twitter will say it’s your fault, not ours,” said Anthony Casey, a law expert at the University of Chicago.
In that case, Musk would have to pay the cash portion of the deal to Twitter investors, and then Twitter itself (now owned by him) would take on the same debt to finish paying the former shareholders, according to Henderson.
Musk could also go to court to force the banks to comply with his agreement and lend him the money. If he did not want to do so, the court could even appoint a special representative to act on his behalf and sue the banks, Henderson said.
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Has this happened before?
If Musk’s debt agreements become a factor in a possible settlement or lawsuit, it would not be the first time financing has become a factor in a court case for a merger settlement. Last year, Delaware Chancellor Court Judge Kathaleen McCormick, who experts hope will preside over the Twitter case, oversaw a court case with a privately held company that tried to withdraw from a settlement by buy cake supply company DecoPac blaming the economic downturn. caused by the pandemic. McCormick said the private equity firm that acquired DecoPac had to move forward, even though they no longer had the original funding to complete the deal.
“When they see bad faith behavior, they tend to dislike it,” Badawi, a Berkeley law professor, said of the Delaware court and its judges. “They usually punish him.”
Why does Twitter want the deal fulfilled right now?
The main function of Twitter’s board is to serve its shareholders: banks, pension funds, hedge funds, and people who own its shares. Right now, Twitter shares are trading around $ 36, far less than the $ 54 Musk has agreed to pay shareholders to buy the company. If the Twitter board let Musk go, it would leave a significant amount of money on the table and expose it to shareholder lawsuits.
The entire episode has done significant damage to the company’s reputation and workplace morale, with Musk’s attacks igniting existing concerns about his business. The company’s stock price is likely to drop further if Musk leaves completely.
Many Twitter users and employees do not want the company to be sold to Musk, whose other companies have faced lawsuits and complaints about employee treatment.
One of the founders of Twitter, Ev Williams, said that if he were still on the board, “I would be wondering if we can let this whole ugly episode be wanted.”