Twitter: Musk can not just leave the deal by paying the $ 1 billion clause.

Elon Musk can not simply withdraw from his agreement to acquire Twitter by paying an agreed amount of $ 1 billion for the withdrawal clause. But it is not so simple, notes CNBC.

Musk wrote on Twitter on Friday that he had decided to put the takeover of Twitter “on hold” as he investigates whether the number of fake / spam Twitter accounts is actually just 5%, as the company has long claimed.

This was followed by another tweet in which he reiterated that he is still committed to the acquisition.

But he risks being sued by Twitter for violating the agreement, a fact that could cost the richest man in the world billions of dollars.

Withdrawal clause

Musk and Twitter agreed on a withdrawal clause in the $ 1 billion takeover deal when the two sides reached an agreement last month. However, the withdrawal clause is not a payment that allows Musk to leave without consequences.

The withdrawal clause applies when there is an external reason why an agreement cannot be concluded, such as regulatory mediation or concerns about third party funding. A buyer can also leave if there is fraud, as long as the discovery of incorrect information has the so-called “substantial adverse effect”. A market downturn, such as the current sell-off that caused Twitter to lose more than $ 9 billion in market capitalization, could not be considered a valid reason for Musk to leave – with or without a withdrawal clause – according to a senior merger lawyer. and acquisitions with knowledge of the issue.

If Musk abandons the takeover offer simply because he feels he has overpaid, Twitter could sue him for billions in compensation in addition to $ 1 billion, the lawyer said. This has happened in the past, such as when Tiffany sued the French luxury goods group LVMH in 2020 for trying to pull out of the deal. That lawsuit was settled when Tiffany agreed to reduce its sale price from $ 16.2 billion to about $ 15.8 billion.

Musk and investors may want a better deal

Musk’s reason for suspending the transaction may be similar: Twitter may want to reduce the selling price. Shares of Twitter fell more than 8% on Friday and have fallen about 23% from Musk’s agreed purchase price to $ 54.20 per share. Part of the drop is related to the overall drop in tech stocks this month. The Nasdaq has fallen 11% since closing the market on April 25, the day Twitter accepted Musk’s offer.

“It’s more of a bargaining chip on Musk’s part,” Toni Sacconaghi, a senior Bernstein analyst, told CNBC on Friday. “The market has fallen a lot. It probably uses the guise of real active users as a bargaining chip.”

Musk may feel pressured or compelled by other potential Twitter investors to lower the price.

Musk is in discussions with outside investors about equity, If he can get a lower price for Twitter, the returns could be higher for outside investors, if and when Twitter returns to public ownership or is resold.

Because he may try to leave

Although he has stated that he remains committed to the Twitter market, Musk may be tempted to pull out of the deal, given the loss of ownership of Tesla’s share capital. Tesla shares have fallen about 24% in the last month.

If Musk believes that Tesla’s losses are related to the acquisition of Twitter and are significant enough to potentially offset both the $ 1 billion retirement clause and any additional damages to be awarded in court if he loses, he could decide that it makes sense to leave.

But it will also have to deal with damage to the reputation associated with breaking a deal. It is not clear that any future company would risk being sold to Musk with this history.

Twitter may need to renegotiate

Just as Tiffany and LVMH eventually reconciled, Twitter may not have many good options other than renegotiating with Musk. The company would probably like to avoid a costly protracted lawsuit. The employees may leave, as the company would not have a clear future plan. Twitter is already cutting costs. He fired two executives on Thursday and said he was freezing recruitment.

When Twitter agreed to sell to Musk for $ 54.20 a share, the board did not bother to push for a higher price in part because there were no other interested buyers at that price. Twitter’s board concluded that it was unlikely to return to higher trading levels any time soon, given this year’s decline in valuations at similar technology companies such as Facebook and Snap.

The best option for Twitter may just be to accept a lower bid from Musk