What if Elon Musk did not go through with the takeover of Twitter? On April 27, a Reuters opinion piece put the issue on the table, and quickly resonated with the press and some analysts. The billionaire, often unpredictable, has a bad reputation for respecting his commitments, to the point that a site lists his promises left unanswered.
Some see in the brutality of his takeover of Twitter a mood, which could only be temporary. Going in less than a month from a simple user to the first shareholder, then to a member of the board of directors, then to a candidate for the buyout of all the shares of the social network, Elon Musk gave the impression of constantly changing his opinion on his project for Twitter.
But when he signed the deal for his $43 billion bid with the company’s board on April 25, he made several commitments. Result: if a possible failure of the transaction cannot yet be ruled out, it will not be, in any case, the mere will of the businessman.
Elon Musk has (almost) no way out
“The agreement that has been signed is different from the one initially proposed by Elon Musk in his first letter, which was received with surprise by everyone“, reports to La Tribune Pierre-Emmanuel Perais, M&A lawyer at Linklaters. “It is ultimately not a takeover bid, but a consensual agreement, unanimously approved by the board of directors.“.
Concretely, the leaders of Twitter have signed a contract which binds the social network to a company owned by Elon Musk – a shell for the moment empty, created for the occasion. Who says contract, says obligations between the two parties, both during the closing period of the agreement (whose deadline is October 24, 2022) but also afterwards. For example, Elon Musk must give his approval if certain strategic decisions for the company were to be taken. “The contract is binding for both parties, and the exit conditions are very limited“, recalls the specialist.
“Elon Musk can’t get out of the contract unless it’s in the contract“adds Karl Hepp de Selevinges, associate lawyer at Jeantet, also an M&A specialist. The clauses of the contract between Twitter and Elon Musk are “classic”, assesses the lawyer. The text includes in particular the clause of “significant adverse events“, a term of the jargon to evoke “events that endanger the economics of acquisition“. But the endangerment must be particularly serious, both in substance and over time. Karl Hepp of Selevinges cites a case where the acquired company lost 90% of turnover over the period between the signature of the contract and its termination, or even a case where one of the managers of the acquired company embezzled 2.6 million euros from the company. Conversely, major trends with macroeconomic effects, such as the war in Ukraine or the Covid-19 pandemic, cannot trigger the clause. Finally: even if the clause is rightly activated, Elon Musk has undertaken in the contract to pay a penalty of one billion dollars in the event of a cancellation of the operation.
In short: it is very unlikely that these termination clauses can be invoked. On the other hand, two conditions precedent could put an end to the agreement before its completion, and they will be observed closely in the months to come.
The vote of the general meeting of Twitter, a step at risk?
The first condition precedent would be a negative vote of the general meeting (GA) of Twitter against the takeover offer proposed by Elon Musk. In the next two or three months, following the publication of other documents relating to the transaction, the shareholders of the social network will meet. If more than 50% of them accept the offer, a simple majority will emerge, and all the company’s shares will be sold to the businessman.
“Until this vote is obtained, the agreement is not concluded. In the case of Twitter, the vote has a political aspect in addition to the financial aspect, because of the positions taken by Elon Musk. We can therefore expect activism from some shareholders opposed to the agreement. But it is difficult to think that the political aspect will overtake the financial aspect in the final decision“, diagnoses Pierre-Emmanuel Perais.
Some shareholders, like Prince Al-Walid bin Talal representative of the Saudi sovereign wealth fund, have already expressed their dissatisfaction with the price of the operation, and affirmed that they would oppose it. Problem for them: the procedure does not provide for a blocking minority. If they maintain their opposition but the agreement is voted on, they will still have recourse to the Court of Delaware. The latter will have the task of verifying that the price offered is fair, and it will have to propose a more interesting agreement for the sellers if this is not the case.
“Delaware law imposes fiduciary duties on the board of directors. It focuses on premium [différence entre le prix proposé et celui du marché, ndlr] of Elon Musk’s offer, and he’s not going to look at other metrics, like the offer’s intrinsic shareholder value“, recalls Pierre-Emmanuel Perais. With a premium of 38%, the billionaire has made an offer that seems sufficient to navigate these remedies.
By the time the vote takes place, another hazard could disrupt the operation: the arrival of a “white knight” at the last minute. If no alternative buyer to Elon Musk has yet presented himself publicly, it is not too late to do so, as long as the takeover has not been voted on by the general meeting of shareholders. Faced with a better offer, the board of directors would be legally obliged to put it to the vote. For Elon Musk, this risk is however reduced by certain mechanisms of the contract. For example, he must be made aware of competing offers, and he retains priority if he matches the new price. Another clause prevents Twitter from soliciting offers. “There is no doubt that before signing the agreement, the company’s board of directors consulted with other potential buyers“, however, notes Pierre-Emmanuel Perais. And if the leaders signed the contract, it is because they would not have found an alternative. “Once the agreement of the general assembly has been obtained, this hazard will no longer exist, since it will be too late for a third party to intervene.“, concludes the lawyer.
The passage in front of the regulator, a formality?
The second condition precedent would be a ban issued by the financial watchdog (the SEC) or the competition watchdog (the Federal Trade Commission), who will assess the transaction.
“The FTC will do a verification process, but there is only a very low risk that the buyout will be refused for competition“, diagnoses Karl Happ de Selevinges. Elon Musk’s business portfolio is for the moment essentially industrial with Tesla (electric cars), SpaceX (rocket and satellite) or The Boring Company (transport tunnels). In other words, sectors very far from that of the media and social networks, where Twitter stands out.Not enough to mobilize the regulator.
“In contrast, Elon Musk has a history with the SEC. He had to resign from the direction of Tesla because of certain tweets“, recalls the lawyer. In 2018, the financial policeman had pushed the billionaire towards the exit following tweets on his financial projects for the company – which he should have presented beforehand to the shareholders. If he is very little likely that the SEC cancels the transaction, it could however fine Elon Musk on the details of the modus operandi of his offensive against Twitter.
Twitter has provided clauses against Musk’s escapades
“Twitter added a very specific clause to the contract, relating to the identity of Elon Musk“, slips Pierre-Emmanuel Perais. If the company was affected in any way by the comments made by Elon Musk, this could not be taken into account in the criteria for termination. “This is the end of Twitter, because Elon Musk could have attempted communication maneuvers in order to destabilize the company, and conclude that he could no longer buy it“, evaluates the lawyer.
The consequences of the agreement prove the social network right. Since his offer was accepted by the company’s board of directors, the whimsical billionaire has not kept a low profile, on the contrary: he has multiplied incisive tweets on the economic model of the social network, the freedom of expression or the decisions of certain leaders. However, another clause of the contract – integrated into a standard clause on communications – touches on Elon Musk’s tweets: he is expressly authorized to comment on the transaction, on the sole condition that his messages do not denigrate the company or its leaders. “Twitter took into account Musk’s history and this clause proves that the council had reservations about his personality. I have rarely seen a personality crystallize the risk so much in acquisition files“, notes Pierre-Emmanuel Perais.