Comment When Elon Musk agreed to buy Twitter in April for $44 billion, he had a leg up to improve the company by adding new features, fending off spam bots and being more transparent about its algorithms. He won backing from a consortium of banks that agreed to lend him more than half of the total deal price to take over the company. But now Musk wants out, blaming Twitter for not giving him more information and what he sees as a diminution of the company’s business prospects. Twitter is suing him to close the deal, saying his reasons for leaving are excuses to get out of a financial commitment he no longer wants to keep. His financial backers, meanwhile, are stuck. Twitter argues that its deal with Musk clearly requires him to do everything 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 bar them from simply walking away if they change their minds, according to legal experts. What you need to know as Elon Musk’s rocky deal with Twitter heads to court “They’ve signed letters of commitment, so they’re essentially bound,” said Adam Badawi, a law professor at the University of California, Berkeley. Banks also have a reputation to uphold. “Other companies wouldn’t want to work with them if they refused,” he said. Even if they find a reason to back out of the deal — for example, arguing that Musk’s persona has made the deal too risky for them — Musk could be forced by a judge to find another source of funding.
What role did debt play in Musk’s original deal to buy Twitter? Musk is the world’s richest man, worth $218 billion, according to the Bloomberg Billionaires Index, but even he doesn’t have $44 billion in cash under his mattress. It signed two deals with banks including Morgan Stanley, Bank of America and Barclays to lend a total of $25.5 billion. He put up a significant amount of his wealth in the form of Tesla shares as collateral if he was unable to 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 that later agreed to help him buy the company and would be co-owners if the deal was successful. Representatives for Bank of America and Barclays declined to comment. A Morgan Stanley spokesman did not respond to a request for comment. Musk did not immediately respond to a request for comment, nor did a Twitter representative. Before saying he wanted out of the deal, Musk had increased the percentage he would pay in cash, raising $33.5 billion of the total. Now that Musk says he’s ending the deal, the calculus may change for the banks that agreed to lend to him. “Musk doesn’t want to own Twitter, the banks don’t want to finance 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 finance a man to own a company he doesn’t want to own?”
Why haven’t the banks already tried to bail out? Banks are only willing to finance the deal if it closes, 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 in Delaware Court, where the trial will be held, will force a settlement, forcing Musk to pay Twitter a hefty fee for so much trouble, but ultimately let him go, he said. Carl Tobias, Professor of Law at the University of Richmond. In this case, the banks will still receive a small commission from Musk for doing the work and no longer need to lend him anything. Twitter sued Elon Musk, setting the stage for an epic legal battle 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 in the world and will have a big need for debt financing going forward, regardless of how the situation at Twitter 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 out, does that give Musk an out? No, Musk’s deal with Twitter has a clause that obligates him to complete the deal even if his funding isn’t available. “Cancelling the deal may be some kind of violation in itself, but Twitter will say it’s your fault, not ours,” said 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 investors, and then Twitter itself (now owned by him) would take on the debt itself to complete the payment to the 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 didn’t want to do that, the court could even appoint a special representative to act in his place and sue the banks, Henderson said. In a leaked memo, Facebook tells managers that underperformers don’t belong
Has this happened before? If Musk’s debt arrangements do become a factor in a potential settlement or trial, it wouldn’t be the first time financing has become a factor in a court case over a merger deal. Last year, Delaware Chancery Court Judge Kathaleen McCormick, who experts expect will preside over the Twitter case, oversaw a court case with a private equity firm that tried to back out of a deal to buy cake decorating supplies company DecoPac blaming the economic downturn brought on by the pandemic. McCormick said the private equity firm that bought DecoPac had to go ahead, even though they no longer had the initial funding to complete the deal. “When they see bad faith behavior, they tend not to like it,” Badawi, a law professor at Berkeley, said of the Delaware court and its judges. “They tend to punish it.”
Why does Twitter want the deal done at this point? The main role of Twitter’s board is to serve its shareholders — banks, pension funds, hedge funds and the people who own its stock. Twitter shares are currently trading at around $36, well below the $54 per share Musk has agreed to pay those shareholders to buy the company. If Twitter’s board were to let Musk go, it would leave a significant amount of money on the table and could expose them to shareholder lawsuits. The whole episode has caused significant damage to the company’s reputation and morale in the workplace, with Musk’s attacks fueling existing concerns about its business. It’s possible the company’s stock price could fall even further if Musk steps down altogether. Many Twitter users and employees do not want the company to be sold to Musk, whose other companies have faced lawsuits and complaints about the treatment of workers. One of Twitter’s founders, Ev Williams, said that if he were still on the board, he would “ask if we can just let this whole ugly episode be over.”
