Elon Musk can walk away from his $44bn takeover of social media platform Twitter for $1bn, a significantly lower penalty than in the typical leveraged buyout.
The “reverse termination fee”, revealed in a regulatory filing by Twitter on Tuesday, means Musk could abandon the deal by paying less than 1 per cent of his net worth and a fraction of the $21bn of equity he has committed to complete the acquisition .
The precise terms of the potential penalty had been hotly awaited on Wall Street after Musk said he would fund the $44bn takeover with $13bn of debt from Wall Street’s largest lenders, as well as a $12.5bn loan secured against his Tesla stake and a pledge to finance the remaining $21bn of equity himself.
Musk has not said how he will raise the equity. One option is to sell billions of dollars worth of his shares in Tesla, the electric vehicle maker he leads, which accounts for the vast majority of his net worth of more than $200bn.
On Tuesday, Tesla shares slid more than 12 per cent, wiping more than $125bn off the electric carmaker’s valuation and more than $10bn from Musk’s net worth. The sell-off came a day after he clinched a deal to buy Twitter following a weekend of negotiations.
“No matter what Musk does, he knows his liability is capped at $1bn,” said Daniel Rubin, a mergers and acquisitions attorney at Dechert, the US corporate law firm. The fee is just 2.27 per cent of the overall deal value, less than half the penalty a private equity firm would typically pay if it were to abandon a takeover, Rubin added.
The fee also obligates Twitter to pay Musk $1bn if it walks away from the takeover for reasons including regulatory issues or a higher bid from another buyer.
According to the merger contract, Twitter could sue Musk for failing to provide the equity financing after all other closing conditions have been met. However, the damages would be limited to $1bn.
“[I]n no event shall the Company be permitted or entitled to receive monetary aggregate damages in excess of the Parent Termination Fee,” according to the contract.
Rubin said the termination fee was “not even close to the market” and was a “much . . . better deal for Musk” than Twitter.
Typically, private equity firms are liable to pay about 6 per cent or more of the deal value to the seller if they abandon a transaction.
The fee demanded by sellers jumped substantially after 2008 when several private equity firms that struck deals just prior to the onset of the financial crisis walked away from signed agreements.
“If I were the seller, I would demand a substantial reverse termination fee — if it is only 2.27 per cent, it doesn’t strike me as very large,” said Brian Quinn, an associate professor of law at Boston College.
Twitter declined to comment.