Twitter deal leaves Elon Musk with no easy way out

Since the financial crisis, corporate lawyers have been looking to build a strict merger contract that keeps buyers from holding back.

The recent “bulletproof” deal deal now faces one of its biggest tests, as Elon Musk, Tesla’s boss and the world’s richest person, publicly floats the possibility of dropping his $44 billion deal on Twitter.

Musk said in a tweet this week that “The deal can not go forwardUntil the social media platform provides detailed data on fake accounts, a request that Twitter seems unlikely to meet. Meanwhile, Twitter’s board of directors has declared its commitment to “complete the transaction at the agreed price and terms as quickly as practicable.”

Just giving up the deal is not an option. Musk and Twitter have signed the merger agreement, which states that “the parties … will use their reasonable efforts to complete and make the transactions set forth in this agreement effective.”

With tech stocks plunging — lowering the price of Tesla shares that form the basis of Musk’s fortune and collateral for a marginal loan to buy Twitter — all eyes are on the mercurial billionaire’s next move.

Can Musk get away with a billion dollars?

The agreement includes a $1 billion “reverse termination fee” that Musk will owe if he withdraws from the merger agreement. However, if all other closing conditions are met, and the only thing left is for Musk to appear at the close with a balance of $27.25 billion, Twitter could seek to get Musk to close the deal. This legal concept, known as “specific performance,” has become a common feature of leveraged buyouts since the financial crisis.

In 2007 and 2008 leveraged buyouts typically included a reverse termination fee which often allowed the company backing the takeover to pay a modest 2 to 3 percent of the deal 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 withdrew these agreements, which led to several court battles involving notable companies such as Cerberus, Blackstone and Apollo.

Since that era, sellers have implemented much higher termination fees as well as specific performance terms that actually require buyers to close. More recently, in 2021 a Delaware court ordered private equity group Kohlberg & Co to close a deal to buy a cake decorating company called DecoPac.

Kohlberg argued that he was allowed to walk out of the deal because the DecoPac business suffered a “material negative impact” when the pandemic fell between signing and closing. The court rejected this argument and ruled that DecoPac could force Kohlberg to close – which it did.