Since the financial crisis, corporate lawyers have yearned to construct the ironclad merger contract that keeps cold-footed buyers from backing down.
The modern ‘bulletproof’ deal now faces one of its greatest tests, as Elon Musk, Tesla boss and world’s richest person, openly considers the possibility of drop its $44 billion deal for Twitter.
Musk said in a tweet this week that the “deal can’t move forward” until the social media platform provides detailed data on the fake accounts, a request Twitter seems unlikely to meet. Twitter’s board, meanwhile, declared its commitment “to complete the transaction at the agreed-upon price and terms as quickly as possible.”
Simply abandoning the deal is not an option. Both Musk and Twitter signed the merger agreement, which states that “the parties … will use their best efforts to complete and effect the transactions contemplated by this agreement.”
With tech stocks plummeting – driving down the price of Tesla shares that form the basis of Musk’s fortune and securing a margin loan to buy Twitter – all eyes are on the mercurial billionaire’s next move.
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The deal includes a $1 billion “reverse termination fee” that Musk would owe if he pulled out of the merger deal. However, if all other closing conditions are met and the only thing left is for Musk to show up at closing with his $27.25 billion in equity, Twitter may seek to have Musk close the deal. deal. This legal concept, known as “specific performance”, has become common in leveraged buyouts since the financial crisis.
In 2007 and 2008, leveraged buyouts typically included reverse termination fees that often allowed a company backing the acquisition to pay a modest 2–3% of a deal’s value to get out. Sellers believed at the time that private equity groups would track and close their deals in order to maintain their reputation. But some have terminated those deals, leading to several court battles involving top companies such as Cerberus, Blackstone, and Apollo.
Since that time, sellers have implemented much higher termination fees as well as specific performance clauses that effectively force buyers to close. More recently, a Delaware court in 2021 ordered private equity group Kohlberg & Co to complete a takeover of a cake decorating company called DecoPac.
Kohlberg had argued that he was allowed to walk away from the deal because the DecoPac business suffered a “material adverse effect” when the pandemic hit between signing and closing. The court rejected this argument and ruled that DecoPac could force Kohlberg to close, which it did.