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. Musk

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

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2022-05-15 00:00:07

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.

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.

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

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.