Why Elon Musk can not escape buying Twitter even if his bankers go on bail


When Elon Musk agreed to buy Twitter in April for $ 44 billion, he had a proposal to make the company better by adding new features, averting spambots and being more transparent about its algorithms. He won the support of a consortium of banks, which agreed to lend him more than half the total price to take over the company.

But now Musk wants to go out and blame Twitter for not giving him more information and what he sees as the company’s weak business prospects. Twitter is suing him for closing the deal, saying his reasons for stepping down are excuses to get out of a financial commitment that he no longer wants to honor. His financial backers, meanwhile, are stuck.

Twitter claims that its deal with Musk clearly requires him to do what he can to finish what he started. Similarly, the banks that agreed to give Musk billions in loans to help him buy Twitter signed legal agreements that prevented them from simply walking away if they changed their minds, according to legal experts.

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“They have signed letters of commitment so they are essentially committed,” said Adam Badawi, a law professor at the University of California at Berkeley. Banks also have a reputation to cherish. “Other companies would not want to work with them if they said no,” he said.

Even if they find a reason to get out of the deal – for example, by arguing that Musk’s face has made the deal significantly more risky for them – Musk may 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 world’s richest man, valued at $ 218 billion according to the Bloomberg Billionaire Index, but even he does not have $ 44 billion in hard cash under his mattress. He signed two agreements with banks including Morgan Stanley, Bank of America and Barclays to borrow a total of $ 25.5 billion. He pledged a significant portion of his own fortune in the form of Tesla shares as collateral if he could not repay the loans. The rest of the deal was to be financed with cash, split between Musk himself and a consortium of hedge funds and sovereign wealth funds, which later agreed to help him buy the business and would be co-owners if the deal was successful.

Spokesmen for Bank of America and Barclays declined to comment. A spokesman for Morgan Stanley did not respond to a request for comment. Musk did not immediately respond to a request for comment, and neither did a Twitter spokesman.

Before saying he wanted to leave the deal, Musk had increased the portion he wanted to pay in cash, raising $ 33.5 billion of the total amount.

Now that Musk says he is terminating the deal, the calculation may change for the banks that agreed to lend to him.

“Musk does not want to own Twitter, the banks do not want to finance it. We are in this strange ‘Alice in Wonderland’ situation where we are trying to force this guy to buy a company he does not want to buy,” said M Todd Henderson, professor at the University of Chicago Law School. “Do you want to fund a guy to own a business he does not want to own?”

Why have the banks not already tried to get bail?

Banks are only on the hook to fund the deal if it closes, and many people do not believe Twitter will succeed in getting a court to force Musk’s hand. A more likely outcome is that the judge in Delaware Chancery Court, where the trial will take place, will force a compromise, prompting Musk to pay Twitter a hefty fee for exposing it to so many problems, but letting him go eventually, said Carl Tobias, a law professor at the University of Richmond.

In that case, the banks will still receive a small fee from Musk for carrying out the work, and they will no longer have to lend him anything.

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There’s another reason why they might agree with Musk for now – they want to stay in his good books, and arguing that he’s acting in bad faith may jeopardize it. Musk is still the richest man in the world and will have a great need for debt financing in the future, no matter how the Twitter situation ends, Tobias said. “You want to keep his business if you’re a bank because I think it’s pretty lucrative,” he said.

If the banks find a way to withdraw, does that give Musk an out?

No, Musk’s deal with Twitter has a clause that requires him to go through the deal even if his debt financing becomes unavailable.

“His cancellation of the deal may in itself be a form of breach, but Twitter will say it’s your fault and 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’s investors, and then Twitter itself (now owned by him) would take on the debt itself to finish paying the old shareholders, according to Henderson.

Musk could also go to court to force the banks to abide by their agreement and lend him the money. If he did not want to do so, the court could even appoint a special representative to act in his place and sue the banks, Henderson said.

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Has this happened before?

If Musk’s debt arrangements become a factor in a potential settlement or lawsuit, it would not be the first time that financing became a factor in a lawsuit over a merger deal. Last year, Delaware Chancery Court Judge Kathaleen McCormick, who experts expect will preside over the Twitter case, oversaw a lawsuit with a private equity fund that tried to pull out of a deal to buy cake decorating company DecoPac by blaming the economic downturn. caused by the pandemic. McCormick said the private equity firm that took over DecoPac had to move on, even though they no longer had the initial financing 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 tend to punish it.”

Why does Twitter want the deal to go through at this point?

The main role of the Twitter board is to serve its shareholders – the banks, the pension funds, the hedge funds and individuals who own its shares. Right now, Twitter shares are trading at around $ 36, much less than the $ 54 a stock Musk has agreed to pay these shareholders to buy the company. If Twitter’s board were to let Musk go, it would leave a significant amount on the table and could expose them to shareholder litigation.

The entire episode has done significant damage to the company’s reputation and work ethic, with Musk’s attacks fueling existing concerns about its business. It is likely that the company’s stock price will fall even more if Musk goes completely away.

Many Twitter users and employees do not want the company to be sold to Musk if other companies have been the subject of lawsuits and complaints about employee treatment.

One of Twitter’s founders, Ev Williams, said that if he was still on the board, he would “ask if we can just let this whole ugly episode blow over.”

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