Elon Musk Could Struggle With His Twitter Deal Escape Hatch, Experts Say

The banks that agreed to finance Elon Musk’s $44 billion (roughly Rs. 3,37,465 crore) acquisition of Twitter have a monetary incentive to assist the world’s richest individual stroll away however would face lengthy authorized odds, in keeping with folks near the deal and company regulation specialists.

Twitter has sued Musk to pressure him to finish the transaction, dismissing his declare that the San Francisco-based firm misled him in regards to the variety of spam accounts on its social media platform as purchaser’s regret within the wake of a plunge in expertise shares.

The Delaware Court of Chancery, the place the dispute between the 2 sides is being litigated, has set a excessive bar for acquirers being allowed to desert their offers, and most authorized specialists have mentioned the arguments within the case favour Twitter.

Yet there’s one situation wherein Musk can be allowed to desert the acquisition by paying Twitter solely a $1 billion (roughly Rs. 7,924 crore) break-up payment, in keeping with the phrases of their contract. His $13 billion (roughly Rs. 103 crore) financial institution financing for the deal must collapse.

Refusing to fund the deal would weigh on the banks’ repute out there for mergers and acquisitions as dependable sources of debt. However, the banks would have no less than two causes to assist Musk get out of the acquisition, three sources near the deal mentioned.

The banks stand to earn profitable charges from Musk’s enterprise ventures akin to electrical automotive maker Tesla and house rocket firm Space, supplied they proceed to curry favour with him.

They additionally face the prospect of a whole lot of tens of millions of {dollars} in losses if Musk is compelled to finish the deal, the sources mentioned. This is as a result of, as with each massive acquisition, the banks must promote the debt to get it off their books.

They would wrestle to draw traders given the downturn in pockets of the debt market because the deal was signed in April, and the truth that Musk can be seen as an unwilling purchaser of the corporate, the sources mentioned. The banks would then face the prospect of promoting the debt at a loss.

It is unclear whether or not the banks that agreed to finance the acquisition — Morgan Stanley, Bank of America, Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho Financial Group and Societe Generale — will try to get out of the deal.

The banks are ready for the end result of the authorized dispute between Musk and Twitter earlier than making any selections, in keeping with the sources. The trial is scheduled to start out in October.

Spokespeople for Morgan Stanley, Bank of America, Barclays, Mitsubishi and Mizuho declined to remark, whereas BNP Paribas and Societe Generale didn’t instantly reply to requests for remark.

There is a catch to the banks serving as Musk’s escape hatch. He must present in courtroom that the banks refused to ship on their debt commitments regardless of his finest efforts, in keeping with the phrases of his deal contact with Twitter.

This can be difficult to show given Musk’s public statements in opposition to the deal in addition to non-public communications between Musk and the banks that Twitter could uncover in its request for info, 4 company legal professionals and professors interviewed by Reuters mentioned.

“Musk would have to convince the judge he is not responsible for the bank financing falling through. That is hard to show, it would require a great degree of deftness from him and the banks,” mentioned Columbia Law School professor Eric Talley.

Musk and Twitter representatives didn’t reply to requests for remark.

Huntsman precedent

Even if the banks can present they aren’t appearing at Musk’s behest, they might discover it troublesome to get out of the Twitter deal, the authorized specialists mentioned. They pointed to the case of chemical maker Hunstman, which in 2008 sued the banks that walked away from financing its $6.5 (roughly Rs. 500) sale to Hexion Specialty Chemicals.

Hexion, owned by non-public fairness agency Apollo Global Management, deserted the deal after Huntsman’s fortunes deteriorated, however a Delaware choose dominated that the transaction ought to go forward. The two banks financing the deal, Credit Suisse Group AG and Deutsche Bank AG, then refused to fund it, arguing the mixed firm can be bancrupt.

Huntsman sued the banks and, one week into the trial, they settled. The banks agreed to a $620 million (roughly Rs. 4,912 crore) money fee and the supply of a $1.1 billion (roughly Rs. 8,716 crore) credit score line to Hunstman, which had additionally secured earlier a $1 billion (roughly Rs. 7,924 crore) settlement fee from Apollo.

The banks balking at funding Musk’s deal would even have to indicate that Twitter can be bancrupt if the acquisition occurred, or that phrases of their debt dedication have been one way or the other breached, a excessive bar primarily based on the deal paperwork which have been made public, the authorized specialists mentioned.

“If the banks try to get out of the deal, they will walk into the same fight that Musk has taken on, where Twitter has the better legal arguments,” mentioned Eleazer Klein, co-chair of regulation agency Schulte Roth & Zabel LLP’s mergers, acquisitions and securities group.

© Thomson Reuters 2022