Elon Musk Could Still Lose Twitter Deal If Higher Offer Is Made

Elon Musk Could Still Lose Twitter Deal If Higher Offer Is Made
Elon Musk's twitter account is seen on a smartphone in front of the Twitter logo in this photo illustration taken on April 15, 2022. (Dado Ruvic/Reuters)
Andrew Moran
Emel Akan

Several new developments have been revealed after Twitter accepted Elon Musk's $44 billion takeover proposal on April 25.

According to a Securities and Exchange Commission (SEC) filing that shows the deal agreement, Musk agreed to pay a $1 billion termination fee if he abandons the acquisition.

At the same time, the social media platform would be required to pay the same amount if the company chooses to accept a better offer.

A former investment banker, who requested anonymity, said the clause is a standard practice in merger agreements.

“The board has to act as fiduciary, so if a higher price comes, they need to consider it,” he said.

“But if a higher price does come, Musk can always up his offer,” he noted. “Practically speaking though, there are no other potential buyers right now.”

The agreement also contains a time limit. If the merger isn't finalized by Oct. 24, either party could exit the deal. There's also a six-month extension attached to the deadline should there be any regulatory hurdles to overcome.

A mergers and acquisitions (M&A) lawyer working for an international law firm in New York City says that the “fiduciary out” is a standard provision in merger agreements that give the selling company’s board a limited right to entertain competing proposals for a limited time period.

The lawyer, who wished to remain anonymous, said the board's ability to exit the deal is “significantly limited” despite this “fiduciary out” provision.

The logo for Twitter appears above a trading post on the floor of the New York Stock Exchange, on Nov. 29, 2021. (Richard Drew/AP Photo)
The logo for Twitter appears above a trading post on the floor of the New York Stock Exchange, on Nov. 29, 2021. (Richard Drew/AP Photo)

“To be clear, they can only engage with third-party offers that are superior to Elon Musk's or that the board believes could lead to a superior transaction,” he said.

Twitter is subject to “no-shop” restrictions, according to the agreement.

“That's a provision that prohibits the board and its representatives from going out and soliciting bids now that they have a deal with Elon Musk. They can't go and shop around Twitter anymore.”

Any offer that comes in after the stockholders approve the deal is ineligible for consideration by the board. Furthermore, the board of directors can't approve the third-party proposal without first giving Musk up to four business days to respond, the lawyer said.

“Four business days in M&A world is a long time.”

Closing the Deal

According to M&A experts, the closure of the deal might take a few months. However, regulatory approvals and specific filings with telecommunications regulators around the world may affect the closing time.
Still, the $1 billion breakup fee is “insane,” says Aron Solomon, chief legal analyst at Esquire Digital.

"It’s the Twitter board again trying to ensure that Musk doesn’t try to weasel out," he told The Epoch Times.

Financing arrangements also were highlighted in the securities filing.

Musk committed $21 billion in equity, $13 billion from Morgan Stanley, and $12.5 billion in margin loans from the bank and other financial institutions. This could be a significant provision because the margin loans force him to provide Tesla shares as collateral.

In this scenario, Musk would offer more than 71 million Tesla shares at $876.42 (April 26 closing price), totaling about $62.5 billion to secure the loan. If Tesla's stock price plunges to $500, it will trigger a margin call, meaning Musk would have to find billions in cash for additional collateral—the deal restricts him from using more Tesla shares.

This year, Tesla Motors shares have joined the broader tech selloff, falling about 25 percent to less than $900. Since Musk's proposal went public earlier this month, the electric vehicle maker has seen its stock tumble nearly 18 percent.

Twitter stock headed in the other direction. Over the past month, shares have rallied close to 25 percent to nearly $49. Year-to-date, the stock has gained 14 percent.

Meanwhile, three holding corporations, each with a name that is a version of "X Holdings," were created by Musk last week in Delaware.

According to the agreement, X Holdings II Inc., a wholly owned subsidiary of X Holdings I Inc., will merge with Twitter. Twitter will survive the merger. This way, Twitter will become a wholly owned subsidiary of X Holdings I Inc.

'An Incredible Event'

Many people are watching the Twitter–Musk corporate saga that Wedbush Securities analyst Dan Ives calls a "'Game of Thrones' real-life battle."
Speaking at the Senate GOP leadership press briefing on April 26, Senate Minority Leader Mitch McConnell (R-Ky.) described the situation as "an incredible event."

"It'll be interesting to see what impact it has on the way Twitter operates," he said. "But we're all watching it with a great deal of interest because there's certainly been our share of complaints about the way it's been run in the past."

Senate Majority Leader Chuck Schumer (D-N.Y.) told reporters: "In many ways, Twitter has been a dark, dark place. I hope it doesn't get any darker."

Following the announcement that the board accepted Musk’s offer, there were notable "fluctuations in follower counts" that originated from "organic" account creations and deactivations, Twitter confirmed in a statement.

“While we continue to take action on accounts that violate our spam policy which can affect follower counts, these fluctuations appear to largely be a result of an increase in new account creation and deactivation,” the company said.

One Twitter executive accused Musk of misogyny after he criticized Twitter's top lawyer, Vijaya Gadde, and its chief marketing officer, Leslie Berland.

"Color me shocked SHOCKED that people are coming for two of our prominent female executives on day 1 of this thing," posted Lara Cohen, Twitter's global head of partners.

Musk lambasted the two women for censoring news reports surrounding Hunter Biden’s laptop before the 2020 election.

The Open Markets Institute—a nonprofit organization that opposes monopolies and advocates for better competition policy—urged the Federal Communications Commission (FCC), the Federal Trade Commission, and the Department of Justice to block Musk's purchase of Twitter. FCC Commissioner Brendan Carr rejected the request.

"The FCC has no authority to block Elon Musk’s purchase of Twitter, and to suggest otherwise is absurd," he said in a statement. "I would welcome the full FCC making it clear that we will not entertain these types of frivolous arguments.”

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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