When Elon Musk agreed to buy Twitter in April for $44 billion, he had a pitch to make the company better by adding new features, fending off spam bots and being more transparent about its algorithms.
He won support from a consortium of banks who agreed to loan him more than half the total deal price to take over the company.
But now Musk wants out, blaming Twitter for not giving him more information and what he sees as the company's dimming business prospects.
Twitter is suing him to close the deal, saying his reasons for stepping away are excuses to get out of a financial commitment that he no longer wants to honour.
His financial backers, meanwhile, are stuck.
Twitter argues its agreement with Musk clearly requires him to do whatever he can to finish what he started.
Similarly, the banks that agreed to give Musk billions in loans to help him buy Twitter signed legal agreements barring them from simply walking away if they change their minds, according to legal experts.
"They've signed commitment letters so they're essentially committed," said Adam Badawi, a law professor at the University of California at Berkeley. The banks have reputations to uphold, too. "Other companies wouldn't want to work with them if they reneged," he said.
Even if they do find a reason to get out of the deal - for example, by arguing Musk's about-face has made the agreement significantly riskier for them - Musk could be forced by a judge to find another source of funding.
Q: What role does debt play in Musk's original agreement to buy Twitter?
A: Musk is the world's richest man, valued at $218 billion, according to the Bloomberg Billionaire Index, but even he doesn't have $44 billion in hard cash sitting under his mattress. He signed two agreements with banks including Morgan Stanley, Bank of America and Barclays to loan a total of $25.5 billion. He put up a significant amount of his own wealth in the form of Tesla shares as collateral, should he not be able to pay the loans back. The rest of the deal was to be funded with cash, split between Musk himself and a consortium of hedge funds and sovereign wealth funds who later agreed to help him buy the company and would be co-owners if the deal is successful.
Spokespeople for Bank of America and Barclays declined to comment. A spokesperson for Morgan Stanley did not respond to a request for comment. Musk did not immediately respond to a request for comment, nor did a Twitter spokesperson.
Before saying he wanted to quit the deal, Musk had upped the portion he would pay in cash, putting up $33.5 billion of the total.
Now that Musk says he's terminating the deal, the calculus may be changing for the banks who agreed to lend to him.
"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?"
Q: Why haven't the banks tried to bail already?
A: The banks are only on the hook to fund the deal if it closes, and many people don't believe Twitter will be successful in getting a court to force Musk's hand. A more likely outcome is that the judge in Delaware Chancery Court, where the trial will take place, will force a compromise, making Musk pay Twitter a hefty fee for putting it through so much trouble, but letting him walk away in the end, said Carl Tobias, a law professor at the University of Richmond.
In that case, the banks will still get a small fee from Musk for doing the work and they no longer have to lend him anything.
There's another reason they might be sticking with Musk for now - they want to stay in his good books, and arguing that he's acting in bad faith might jeopardize that. Musk is still the world's wealthiest man and will have a lot of need for debt financing in the future regardless of how the Twitter situation ends, Tobias said. "You want to keep his business if you're a bank, because I think it's pretty lucrative," he said.
Q: If the banks do find a way to pull out, does that give Musk an out?
A: No, Musk's agreement with Twitter has a clause that requires him to go through with the deal even if his debt financing becomes unavailable.
"Him canceling the deal might itself be some sort of breach, but Twitter's going to say that's your fault not ours," Anthony Casey, a law expert at the University of Chicago.
In that case, Musk would have to pay the cash part of the deal to Twitter's investors, and then Twitter itself (now owned by him) would take on the debt itself to finish paying the old shareholders, according to Henderson.
Musk could also go to court to force the banks to honor their agreement and loan him the money. If he didn't want to do that, the court could even appoint a special representative to act in his stead and sue the banks, Henderson said.
Q: Has this happened before?
A: If Musk's debt arrangements do become a factor in a potential settlement or trial, it wouldn't be the first time financing became a factor in a court case over a merger agreement. Last year, Delaware Chancery Court Judge Kathaleen McCormick, who experts expect will preside over the Twitter case, oversaw a court case featuring a private equity firm that tried to pull out of an agreement to buy cake-decorating supply company DecoPac by blaming the economic downturn brought on by the pandemic. McCormick said the private equity firm acquiring DecoPac had to move forward, even though they no longer had the original financing to complete the deal.
"When they see bad faith behavior, they tend to not like it," Badawi, the Berkeley law professor, said of the Delaware court and its judges. "They tend to punish it."
Q: Why does Twitter want the deal to go through at this point?
A: The Twitter board's main role is to serve its shareholders - the banks, pension funds, hedge funds and individuals who own its stock. Right now, Twitter shares are trading at around $36, a lot less than the $54 a share Musk has agreed pay those shareholders to buy the company. If Twitter's board were to let Musk walk away, it would be leaving a significant amount of money on the table, and could expose them to shareholder lawsuits.
The entire episode has done significant damage to the company's reputation and workplace morale, with Musk's attacks inflaming existing concerns about its business. It's likely the company's stock price will drop even further if Musk walks away completely.
Many Twitter users and employees don't want the company to be sold to Musk, whose other companies have faced lawsuits and complaints over treatment of employees.
One of Twitter's founders, Ev Williams, said that if he was still on the board, he'd "be asking if we can just let this whole ugly episode blow over."
The Washington Post