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When Elon Musk agreed to buy Twitter for $44 billion in April, he had a pitch to improve the company by adding new features, fending off spam bots and making its algorithms more transparent. He gained support from a consortium of banks that agreed to lend him more than half of the total price to take over the company.
But now Musk wants out, accusing Twitter of not giving him more information and what he saw as the company’s bleak business prospects. Twitter is suing him to complete the deal, saying his reasons for resigning are excuses to get out of a financial commitment he no longer wants to honor. Meanwhile, his financiers are stuck.
Twitter argues his agreement with Musk clearly requires him to do whatever it takes 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 bar them from walking away if they change their minds, legal experts say.
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“They signed commitment letters, so essentially they’re committed,” said Adam Badawi, a law professor at the University of California, Berkeley. The banks also have to protect their reputation. “Other companies wouldn’t want to work with them if they pulled out,” he said.
Even if they find a reason to get out of the deal — say, by arguing that Musk’s about-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 Agreement to Buy Twitter?
Musk is the richest man in the world, estimated at $218 billion according to the Bloomberg Billionaire Index, but even he doesn’t have $44 billion in cash under his mattress. He signed two agreements with banks including Morgan Stanley, Bank of America and Barclays to provide loans totaling $25.5 billion. He pledged a significant portion of his own wealth in Tesla stock as collateral in case he fails to repay the loans. The remainder of the deal was to be funded with 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 become a co-owner if the deal goes through.
Bank of America and Barclays spokesmen declined to comment. A spokesman for Morgan Stanley did not respond to a request for comment. Musk didn’t immediately respond to a request for comment, nor did a Twitter spokesman.
Before Musk said he wanted to walk away from the deal, he had upped the stake he would pay in cash to $33.5 billion.
Now that Musk says he’s ending the deal, the calculus could change for the banks that have agreed to lend him.
“Musk doesn’t want to own Twitter, the banks don’t want to fund it. We’re in this weird Alice in Wonderland situation trying to force this guy to buy a company he doesn’t want to buy,” said M. Todd Henderson, a professor at the University of Chicago Law School. “Would you want to fund someone to own a business they don’t want to own?”
Why haven’t the banks already tried to bail out?
The banks are only on the hook to fund the deal if it goes through, and many people don’t think Twitter will be able to get a court to force Musk’s hand. A more likely outcome is that the judge at the Delaware Chancery Court, where the trial will take place, will force a compromise that will see Musk pay Twitter a hefty fee for going through so much trouble but end up walking it leaves, he told Carl Tobias, a law professor at the University of Richmond.
In this case, Musk’s banks still get a small fee for the work and don’t have to lend him anything anymore.
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There’s another reason they might stick with Musk for now — they want to stay in his good books, and arguing that he’s acting in bad faith could jeopardize that. Musk is still the richest man alive and will have a great need for leverage going forward regardless of how the Twitter situation ends, Tobias said. “You want to keep his business if you’re a bank because I think it’s quite lucrative,” he said.
If the banks find a way to pull out, does that give Musk a way out?
No, Musk’s agreement with Twitter includes a clause that obliges him to complete the deal even if his debt financing is no longer available.
“His canceling the deal might itself be a violation of some kind, but Twitter will say it’s your fault, not ours,” Anthony Casey, a legal 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 it) would take on the debt itself to pay old shareholders, according to Henderson.
Musk could also go to court to force the banks to honor their agreement and lend him the money. If he doesn’t want that, the court could even appoint a special counsel to act on his behalf and sue the banks, Henderson said.
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Has this happened before?
If Musk’s debt arrangements become a factor in a possible settlement or lawsuit, it wouldn’t be the first time that funding has become a factor in a lawsuit over a merger agreement. Last year, Chancery Court Judge Kathaleen McCormick in Delaware, who experts expect will preside over the Twitter case, presided over a court case with a private equity firm that was trying to break out of an agreement to buy the cake decorating supplier withdraw DecoPac by blaming it on the economic downturn triggered by the pandemic. McCormick said the private equity firm acquiring DecoPac had to go ahead, even though it no longer had the original funding to complete the deal.
“When they see malicious behavior, they usually don’t like it,” Badawi, the 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 primary purpose of the Twitter board is to serve its shareholders – the banks, pension funds, hedge funds, and individuals who own its stock. Right now, Twitter shares trade at around $36, much less than the $54 per share Musk awarded those shareholders for buying the company. If Twitter’s board of directors let Musk go, it would leave a significant amount of money on the table and could expose it to shareholder lawsuits.
The entire episode did significant damage to the company’s reputation and work ethic, with Musk’s attacks reigniting concerns about his business. It’s likely that the company’s stock price will fall even further if Musk walks away completely.
Many Twitter users and employees don’t want the company to be sold to Musk, whose other companies have faced lawsuits and complaints about the treatment of employees.
One of the founders of Twitter, Ev Williams, said that if he were still on the board, he would “ask if we could just let this whole ugly episode pass.”