Following the financial crisis, corporate lawyers are seeking to build a final iron merger agreement that protects cold-legged buyers from retreat.
The current bulletproof deal is now facing one of its biggest challenges, as Elon Musk, Tesla’s boss and the world’s richest man, openly enjoys giving up his $ 44 billion deal. for Twitter.
Musk tweeted this week that “the deal can’t go on” until the social media platform provided details about fake accounts, a request that Twitter seems unlikely to fulfill. Meanwhile, the Twitter board has stated its commitment to “complete the transaction at the agreed price and terms as soon as possible.”
Simply abandoning the deal is not an option. Musk and Twitter signed the merger agreement, which states that “the parties … will make reasonable efforts to complete and make effective the transactions provided for in this agreement.”
With the fall in technology stocks – dragging down the price of Tesla shares, which form the basis of Musk’s wealth and collateral for a margin loan to buy Twitter – all eyes are on the billionaire’s next move.
Can Musk leave for $ 1 billion?
The agreement includes a $ 1 billion “termination fee” that Musk will owe if he withdraws from the merger agreement. However, if all other closing conditions are met and the only thing left is for Musk to show up at the close with $ 27.25 billion in equity, Twitter could try to get Musk to close the deal. This legal concept, known as ‘specific performance’, has become a common feature in leverage purchases since the financial crisis.
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In 2007 and 2008, leverage buyouts typically involved a termination fee, which often allowed an acquiring company to pay a modest 2 to 3 percent of the transaction value to exit. At the time, sellers believed that private investment groups would continue and close their deals to maintain their reputations. But some have indeed terminated these agreements, leading to several lawsuits involving well-known companies such as Cerberus, Blackstone and Apollo.
Since that era, sellers have introduced much higher termination fees, as well as specific performance clauses that effectively require buyers to close. Most recently, a court in Delaware in 2021 ordered the private investment group Kohlberg & Co to close the purchase of a business for cake decorations called DecoPac.
Kohlberg claims he was allowed to withdraw from the deal because DecoPac’s business suffered a “significant adverse effect” when the pandemic struck between signing and closing. The court rejected this argument and ruled that DecoPac could force Kohlberg to close – which it did.
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