Elon Musk’s tumultuous courtship with Twitter is spiraling toward a split as Musk has filed to terminate his $44 billion takeover. But Twitter refuses to accept Musk’s bid to walk away from the deal and has instead filed suit in a bid to compel the union.
Musk’s latest move in the relationship between the world’s richest man and the social networking giant focuses on the terms of the merger announced in April. Both sides parse the language of the agreement in their battle — and the details of certain phrases will spell the victor.
Looming over the potential breakup is the deal’s sizable termination fee, whereby Musk agreed to pay Twitter $1 billion if he fails to follow through on the acquisition. According to Matterhorn’s M&A database, which harnesses both AI and attorneys to digest the granular deal points of publicly announced transactions, termination fees are not typical – employed in approximately 20% of deals. This deal’s termination fee is relatively low at just over 2% of the transaction value, while the historical norm is approximately 3%. But like the vast majority of agreements, the termination section protects Musk from this $1 billion penalty if Twitter “shall have breached or failed to perform any of its representations, warranties, covenants or other agreements.” This is precisely what Musk seeks to use.
Musk cited to the SEC multiple failings on Twitter’s side, such as not providing the information he needs as to fake or “bot” accounts. Musk indicated awareness of at least some bots going into the deal, writing in the press release announcing the agreement, “I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans.” But he claims that Twitter, in the 49 tebibytes worth of data provided, did not give the information he needed to ascertain the level of fake accounts.
Further, Musk argues that he is entitled under Section 6.4 of the Merger Agreement to “all information concerning the business … of the Company … for any reasonable business purpose related to the consummation of the transactions” and under Section 6.11 of the Merger Agreement, to information “reasonably requested” in connection with his efforts to secure the debt financing necessary to consummate the transaction.
Twitter counters that Musk’s claims are mere pretext to exit the deal, now that the stock market has declined significantly since April – and Twitter’s along with it. Twitter’s share price declined by approximately 30% between Musk’s announcement of the merger and when he filed the letter the SEC seeking to cancel the merger. While some agreements include powerful language designed to protect the buyer from market declines, Musk purportedly “caved on requests related … collapse in market price.”
This bad romance will surely continue as the two parties battle in court.
