In April, Elon Musk agreed to buy Twitter for $44 billion, promising to add new features, fend off spam bots, and be more transparent about its algorithms. He won support from a variety of banks, which loaned him more than half the total price to buy Twitter.
However, Musk now wants to pull out of the deal, allegedly because Twitter has not given him enough information and that the company now has dimming business prospects. Twitter is suing him to close the deal, saying that Musk wants to get out of a financial commitment that he no longer wants to honor.
The banks which agreed to lend money to Musk are legally prevented from and bailing the deal. This makes it nearly impossible for him to pull out from buying Twitter.
Twitter argues that its agreement with Musk requires him to do whatever he can to finish the deal. Similarly, the banks signed legal agreements that prevented them from drawing out of the loan easily.
Musk signed two agreements 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 own wealth in the form of Tesla shares as collateral. He planned to pay the rest of the deal using cash from himself, hedge funds, and sovereign wealth funds through the co-ownership of the company once the deal is completed.
Musk also increased the amount he would pay in cash to $33.5 billion before he decided to pull out. Now that the deal will be canceled, the banks face a difficult situation too.
“Musk doesn’t want to own Twitter, the banks don’t want to fund 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 want to fund a guy to own a company that he doesn’t want to own?”
The banks have not tried to bail yet because they only need to fund the deal if it closes, and they do not believe that Twitter will successfully force Musk to complete the deal. A more likely outcome is that Musk will be forced to pay Twitter a fee for putting it through trouble but end the deal, said Carl Tobias, a law professor at the University of Richmond. In this case, the banks would still get a small fee from Musk for doing the work.
Another reason that the banks have not drawn out now is that they want to stay in a good relationship with Musk. He is the world’s richest man, and the banks would have business with him no matter how the Twitter situation ends. “You want to keep his business if you’re a bank, because I think it’s pretty lucrative,” Tobias said.
Even if the banks do pull out, Musk still needs to complete the deal because in his agreement with Twitter, there is a clause that requires him to go through with the deal even if his financial funding becomes unavailable. In that case, he will have to pay the cash part of the deal to Twitter’s investors, and Twitter itself, after Musk takes over, would take on the debt to finish paying.
At this point, Twitter wants the deal to go through because it could be exposed to shareholder lawsuits. The Twitter board’s main role is to serve its shareholders, including banks, pension funds, hedge funds, and individuals. Now, its shares are trading at around $36, only sixty-seven percent of the $54 per share Musk agreed to buy the company for. If the deal were canceled, the shareholders would lose a significant amount of money that they could have gained.
Many of Twitter’s employees also do not want the company to be sold to Musk, as other companies under Musk have faced complaints and lawsuits for employee treatment.
However, Musk now wants to pull out of the deal, allegedly because Twitter has not given him enough information and that the company now has dimming business prospects. Twitter is suing him to close the deal, saying that Musk wants to get out of a financial commitment that he no longer wants to honor.
The banks which agreed to lend money to Musk are legally prevented from and bailing the deal. This makes it nearly impossible for him to pull out from buying Twitter.
Twitter argues that its agreement with Musk requires him to do whatever he can to finish the deal. Similarly, the banks signed legal agreements that prevented them from drawing out of the loan easily.
Musk signed two agreements 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 own wealth in the form of Tesla shares as collateral. He planned to pay the rest of the deal using cash from himself, hedge funds, and sovereign wealth funds through the co-ownership of the company once the deal is completed.
Musk also increased the amount he would pay in cash to $33.5 billion before he decided to pull out. Now that the deal will be canceled, the banks face a difficult situation too.
“Musk doesn’t want to own Twitter, the banks don’t want to fund 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 want to fund a guy to own a company that he doesn’t want to own?”
The banks have not tried to bail yet because they only need to fund the deal if it closes, and they do not believe that Twitter will successfully force Musk to complete the deal. A more likely outcome is that Musk will be forced to pay Twitter a fee for putting it through trouble but end the deal, said Carl Tobias, a law professor at the University of Richmond. In this case, the banks would still get a small fee from Musk for doing the work.
Another reason that the banks have not drawn out now is that they want to stay in a good relationship with Musk. He is the world’s richest man, and the banks would have business with him no matter how the Twitter situation ends. “You want to keep his business if you’re a bank, because I think it’s pretty lucrative,” Tobias said.
Even if the banks do pull out, Musk still needs to complete the deal because in his agreement with Twitter, there is a clause that requires him to go through with the deal even if his financial funding becomes unavailable. In that case, he will have to pay the cash part of the deal to Twitter’s investors, and Twitter itself, after Musk takes over, would take on the debt to finish paying.
At this point, Twitter wants the deal to go through because it could be exposed to shareholder lawsuits. The Twitter board’s main role is to serve its shareholders, including banks, pension funds, hedge funds, and individuals. Now, its shares are trading at around $36, only sixty-seven percent of the $54 per share Musk agreed to buy the company for. If the deal were canceled, the shareholders would lose a significant amount of money that they could have gained.
Many of Twitter’s employees also do not want the company to be sold to Musk, as other companies under Musk have faced complaints and lawsuits for employee treatment.
