Banks that agreed to fund Elon Musk’s $44 billion acquisition of Twitter Inc have a financial incentive to help the world’s richest person walk away, but would face protracted legal difficulties, say sources. people close to the agreement and experts in company law.
Twitter sued Musk to force him to complete the deal, dismissing his claim that the San Francisco-based company misled him about the number of spam accounts on its social media platform as a remorse of the buyer following a drop in tech stocks.
The Court of Chancery in Delaware, where the dispute between the two parties is ongoing, has set the bar high for buyers to be allowed to abandon their agreements, and most legal experts have said that the arguments in the case were in favor of Twitter.
Still, there is a scenario where Musk would be allowed to walk away from the acquisition by only paying Twitter a $1 billion break fee, under the terms of their contract. Its $13 billion bank financing for the deal is expected to collapse.
Refusing to fund the deal would hurt the banks’ reputations in the M&A market as reliable sources of debt. However, the banks would have at least two reasons to help Musk exit the acquisition, three sources familiar with the deal said.
Banks could earn lucrative commissions on Musk’s business ventures such as electric car maker Tesla Inc and space rocket company Space, provided they continue to please him.
They also face the prospect of hundreds of millions of dollars in losses if Musk is forced into the deal, the sources said. Indeed, as with any major acquisition, the banks would have to sell the debt to get it off their books.
They would struggle to attract investors given the slowdown in pockets of the debt market since the deal was signed in April and the fact that Musk would be seen as an unwitting buyer of the company, the sources said. The banks would then be faced with the prospect of selling the debt at a loss.
It is unclear whether the banks that agreed to finance the acquisition – Morgan Stanley, Bank of America Corp, Barclays Plc, Mitsubishi UFJ Financial Group Inc, BNP Paribas SA, Mizuho Financial Group Inc and Société Générale SA – will attempt to exit the deal. OK.
The banks are awaiting the outcome of the legal dispute between Musk and Twitter before making any decision, the sources say. The trial is due to begin in October.
Spokespersons for Morgan Stanley, Bank of America, Barclays, Mitsubishi and Mizuho declined to comment, while BNP Paribas and Societe Generale did not immediately respond to requests for comment.
There is a socket at the banks serving as Musk’s escape hatch. He would have to prove in court that the banks refused to honor their debt commitments despite his best efforts, under the terms of his contact agreement with Twitter.
That would be difficult to prove given Musk’s public statements against the deal as well as private communications between Musk and the banks that Twitter may uncover in its request for information, said four corporate lawyers and professors interviewed by Reuters.
“Musk should convince the judge that he is not responsible for the failure of the bank financing. It is difficult to demonstrate, it would require great skill on his part and on the banks’, said Eric Talley, a professor at Columbia Law School.
Representatives for Musk and Twitter did not respond to requests for comment.
Even if the banks can show they’re not acting on Musk’s request, they would have a hard time opting out of the Twitter deal, legal experts said. They pointed to the case of chemical maker Hunstman Corp, which in 2008 sued banks that waived funding for its $6.5 sale to Hexion Specialty Chemicals.
Hexion, owned by private equity firm Apollo Global Management Inc, scrapped the deal after Huntsman’s fortunes deteriorated, but a Delaware judge ruled the deal should proceed. The two banks financing the operation, Credit Suisse Group AG and Deutsche Bank AG, later refused to finance it, arguing that the merged company would be insolvent.
Huntsman sued the banks, and a week after the trial began, they settled. The banks agreed to a cash payment of $620 million and the provision of a $1.1 billion line of credit to Hunstman, who had also earlier secured a $1 billion settlement payment from Apollo .
Banks reluctant to fund Musk’s deal would also have to show that Twitter would be insolvent if the acquisition went through, or that the terms of their debt covenant were somehow breached, a high bar based on the company’s documents. agreement that have been made public, legal experts said.
“If the banks try to pull out of the deal, they will be in the same fight that Musk fought, where Twitter has the best legal case,” said Eleazer Klein, co-chair of mergers at law firm Schulte Roth & Zabel. LLP. , acquisitions and securities group.