Elon Musk can walk away from his $44 billion (€41.5 billion) takeover of social media platform Twitter for $1 billion, a significantly lower penalty than in the typical leveraged buyout.
The “reverse termination fee”, revealed in a regulatory filing by Twitter on Tuesday, means Mr Musk could abandon the deal by paying less than 1 per cent of his net worth and a fraction of the $21 billion of equity he has committed to complete the acquisition.
The precise terms of the potential penalty had been hotly awaited on Wall Street after Musk said he would fund the $44 billion takeover with $13 billion of debt from Wall Street’s largest lenders, as well as a $12.5 billion loan secured against his Tesla stake and a pledge to finance the remaining $21 billion of equity himself.
The merger agreement also reveals that Mr Musk’s own tweets are bound by a non-disparagement agreement, in an apparent attempt to rein in the Tesla chief’s erratic Twitter posts, which have criticised the company and caused clashes with regulators.
Mr Musk has not said how he will raise the equity to finance his deal. One option is to sell billions of dollars worth of his shares in Tesla, the electric vehicle maker he leads, which accounts for the vast majority of his net worth of more than $200 billion.
Tesla shares on Tuesday slid more than 12 per cent, wiping more than $125 billion off the electric car maker’s valuation and more than $10 billion from Mr Musk’s net worth. The sell-off came a day after Mr Musk clinched a deal to buy Twitter following a weekend of negotiations.
"No matter what Musk does, he knows his liability is capped at $1 billion," said Daniel Rubin, a mergers and acquisitions attorney at Dechert, the US corporate law firm. The fee is just 2.27 per cent of the overall deal value, less than half the penalty a private equity group would typically pay if it were to abandon a takeover, Mr Rubin added.
Regulatory issues
The fee also obligates Twitter to pay Mr Musk $1 billion if it walks away from the takeover for reasons including regulatory issues or a higher bid from another buyer.
According to the merger contract, Twitter could sue Mr Musk for failing to provide the equity financing after all other closing conditions have been met. However, the damages would be limited to $1 billion.
“[I]n no event shall the Company be permitted or entitled to receive aggregate monetary damages in excess of the Parent Termination Fee,” according to the contract.
Mr Rubin said the termination fee was “not even close to the market” and was a “much ... better deal for Musk” than Twitter.
Typically, private equity groups are liable to pay about 6 per cent or more of the deal value to the seller if they abandon a transaction.
The fee demanded by sellers jumped substantially after 2008 when several private equity groups that struck deals just before the onset of the financial crisis walked away from signed agreements.
"If I were the seller, I would demand a substantial reverse termination fee - if it is only 2.27 per cent, it doesn't strike me as very large," said Brian Quinn, an associate professor of law at Boston College.
Twitter declined to comment on the fees.
The merger agreement also states that Mr Musk “shall be permitted to issue tweets about the merger ... so long as such tweets do not disparage the company or any of its representatives”. In 2018, Mr Musk paid $20 million to settle the US Securities and Exchange Commission’s fraud charges over his tweet that he had “funding secured” to take Tesla private.
Complaint
Earlier this month, soon after his initial 9 per cent stake in Twitter had been made public, Mr Musk complained that many of the site’s most widely followed users rarely post a tweet, asking his followers: “Is Twitter dying?”
Shortly after the merger agreement was published, Mr Musk on Tuesday night appeared to criticise Twitter's decision to temporarily suspend the New York Post's account in 2020, after its controversial story about Hunter Biden.
“Suspending the Twitter account of a major news organisation for publishing a truthful story was obviously incredibly inappropriate,” Mr Musk said in a tweet. – Copyright The Financial Times Limited 2022
