Elon Musk can’t just walk away from his Twitter deal by paying a $1 billion breakup fee

USA, May 15: Elon Musk can’t just walk away from his deal to acquire Twitter by paying an agreed-upon $1 billion breakup fee. It’s not that simple.

Swati Bhat

Pic Courtesy: Twitter

Musk tweeted Friday that he has decided to put his acquisition of Twitter “on hold” as he researches whether the amount of fake/spam accounts on Twitter is actually just 5%, as the company has long claimed.

He followed that tweet with another reiterating that he is still committed to the acquisition.

But he risks a lawsuit from Twitter for breach of contract that could cost the world’s wealthiest person many billions of dollars.

More than a breakup fee

Musk and Twitter agreed to a so-called reverse termination fee of $1 billion when the two sides reached a deal last month. Still, the breakup fee isn’t an option payment that allows Musk to bail without consequence. A reverse breakup fee paid from a buyer to a target applies when there is an outside reason a deal can’t close, such as regulatory intermediation or third-party financing concerns. A buyer can also walk if there’s fraud, assuming the discovery of incorrect information has a so-called “material adverse effect.” A market dip, like the current sell-off that has caused Twitter to lose more than $9 billion in market cap, wouldn’t count as a valid reason for Musk to cut loose — breakup fee or no breakup fee — according to a senior M&A lawyer familiar with the matter.

If Musk were to abandon a bid simply because he felt he overpaid, Twitter could sue him for billions in damages in addition to collecting the $1 billion fee, the lawyer said. This has happened before, such as when Tiffany sued French luxury goods conglomerate LVMH in 2020 for trying to back out of its agreed-upon deal. That suit settled when Tiffany agreed to lower its sale price from $16.2 billion to roughly $15.8 billion.

Musk and investors may want a better deal

Musk’s reasoning for putting a transaction on hold may be similar: He might want Twitter to lower its sale price. Twitter shares fell more than 8% on Friday and are down about 23% from Musk’s agreed-upon purchase price of $54.20 per share. Part of the dip is related to an overall slump in technology stocks this month. The Nasdaq has fallen another 11% since the market close on April 25, the day Twitter accepted Musk’s offer. “This is probably a negotiation tactic on behalf of Elon,” Toni Sacconaghi, Bernstein senior research analyst, said Friday on CNBC’s “Squawk Box.” “The market has come down a lot. He’s probably using the guise of true active users as a negotiation ploy.”