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7 Deal Protection Measures to Help Avoid the Musk & Twitter M&A Drama

Published:

October 28, 2022

Author(s):

• David Wallace

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Finally closing on October 27, 2022, the tumultuous Elon Musk/Twitter M&A deal drama has been unfolding for months, with both sides making strong accusations. But while this US$44B deal might involve the world’s richest man and one of the largest social media platforms on the planet, the “pre-closing” tactics (some call them “games”) Musk has employed since he entered the binding purchase agreement to acquire Twitter are risks that all sellers and buyers – big or small, private or public – should seek to limit or eliminate by including certain language in their purchase agreements. Here’s a breakdown of what happened between Elon Musk and Twitter, why it happened, and how you can prevent the expensive back-and-forth and lengthy delays of this ground-breaking deal.

What happened?

Here’s a quick breakdown of what happened between Musk and Twitter:

• Musk first offered to buy Twitter in April 2022 after accumulating a 9.2% share, making him its biggest shareholder. The parties entered into a binding purchase agreement shortly thereafter.

• In July 2022 – when tech stock prices, including Twitter’s, fell – Musk sent a letter to Twitter terminating the deal, claiming (among other things) that Twitter was in material breach of multiple provisions of their agreement (primarily related to Twitter’s alleged failure to provide Musk with all reasonable data and information related to the consummation of the transaction) and appeared to have made false and misleading representations upon which Musk relied when entering into the agreement (principally related to the number of false or spam accounts on the platform).

• Within days, Twitter sued Musk for trying to get out of the deal after entering a binding agreement and refusing “to honor his [contractual] obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests.”

• Days later, Musk countersued. After another round of failed negotiations, Musk publicly said he’d abandoned the deal but surprised everyone earlier this month when he renewed his original offer, finally closing on October 27, 2022.

Why did this happen?

From the sidelines (and probably even from the perspective of the major players in the middle of this high-stakes game of cat and mouse), it’s difficult to determine whether Musk’s series of “about faces” and other pre-closing maneuvers were exercised in good faith, as he claims. For its part, Twitter believes that Musk’s actions were strategic and pursued in bad faith, specifically designed to squeeze the company into agreeing to a more buyer-friendly deal by introducing business risk and exerting downward pressure on the platform’s share price.

How can you prevent this from happening?

Regardless of why it happened, it’s always advisable for a seller in any M&A transaction to include one or more “deal protection” provisions in their purchase agreements to prevent exactly what happened with Musk and Twitter. Of course, the extent and specifics of such provisions are informed by many factors – not the least of which is the seller’s relative bargaining power to that of the buyer – but here are seven deal protection measures a seller can insist on to help ensure that their transaction closes in accordance with its terms.

1. Include a Reverse Break Fee (a.k.a. Reverse Termination Fee). A payment of liquidated damages in a negotiated and fixed amount that a buyer can agree to make to a seller / target company if an acquisition agreement is terminated because of certain actions by the buyer. The Twitter agreement included a US$1B reverse break fee – something that didn’t seem to bother the world’s richest man.

2. Include terms that provide Financing Failure Protection. The seller can mitigate the risk that the third-party financing the buyer requires to close the deal isn’t available by requiring the buyer to include “SunGard” provisions in their third-party financing agreement / commitment letter. Such “SunGard” provisions replace traditional funding conditions and reduce the number and scope of the conditions precedent to funding the debt.

3. Narrow the definition & scope of a “Material Adverse Event” (MAE) or “Material Adverse Change” (MAC) in the Purchase Agreement (& the Debt Financing Agreement, if possible). In some cases, a MAE or MAC in the period between signing the agreement and closing the deal can be contractual grounds for a buyer to terminate the deal. To limit the effect of such a provision, the seller should ensure that any such MAC / MAE is limited to the target company, and not the target’s industry in general. This has the effect of contractually forcing the buyer to bear the cost of any general market downturn in the period between signing and closing.

4. Include seller-friendly Survival & Effect of Termination Provisions. Sellers should attempt to include a “survival” and “effect of termination” provision that ensures certain of the buyer’s liabilities continue even after the agreement is terminated. For example, the ability to sue the seller for willful (or, in some cases, other) breaches of the agreement after it’s terminated to recover monetary damages (the amount of which won’t be capped unless otherwise specifically provided under the terms of the purchase agreement and a court will determine) can provide a powerful incentive to complete a deal in accordance with its terms.

5. Provide for Expense Reimbursement. In general, the parties agree to pay their own out-of-pocket expenses relating to an M&A transaction. However, the seller can negotiate an expense reimbursement provision under which the buyer will agree to pay the seller’s expenses in certain specified circumstances that don’t involve the payment of a reverse termination fee. For example, if the agreement is terminated as a result of the buyer’s general breach of a representation or covenant that can’t otherwise be cured and causes the failure of a closing condition under the terms of the acquisition agreement.

6. Include strong Indemnification Provisions. Related to expense reimbursement, indemnification provisions that clearly cover seller losses / buyer breaches that occur in the period between signing and closing.

7. Include seller-friendly Publicity Provisions. Subject to applicable law, the seller can negotiate a provision requiring that all publicity concerning the transaction must be jointly planned and coordinated by the parties and/or approved by the seller. This permits the seller to control the public narrative before closing and can neutralize a buyer (who can manipulate the public market) from creating more favourable economic terms for itself.

Please contact your McInnes Cooper lawyer or any member of our Mergers & Acquisitions Team @ McInnes Cooper for help negotiating and closing your M&A transaction.

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