Banks are Twitter-deal escape hatch that Musk would battle with By Reuters

By Anirban Sen and Greg Roumeliotis

(Reuters) – The banks that agreed to finance Elon Musk’s $44 billion acquisition of Twitter Inc (NYSE:) have a monetary incentive to assist the world’s richest particular person stroll away however would face lengthy authorized odds, based on individuals near the deal and company regulation consultants.

Twitter has sued Musk to pressure him to finish the transaction, dismissing his declare that the San Francisco-based firm misled him in regards to the variety of spam accounts on its social media platform as purchaser’s regret within the wake of a plunge in know-how shares.

The Delaware Court docket of Chancery, the place the dispute between the 2 sides is being litigated, has set a excessive bar for acquirers being allowed to desert their offers, and most authorized consultants have mentioned the arguments within the case favor Twitter.

But there’s one state of affairs through which Musk can be allowed to desert the acquisition by paying Twitter solely a $1 billion break-up payment, based on the phrases of their contract. His $13 billon financial institution financing for the deal must collapse.

Refusing to fund the deal would weigh on the banks’ fame out there for mergers and acquisitions as dependable sources of debt. Nevertheless, the banks would have at the least two causes to assist Musk get out of the acquisition, three sources near the deal mentioned.

The banks stand to earn profitable charges from Musk’s enterprise ventures akin to electrical automobile maker Tesla (NASDAQ:) Inc and area rocket firm House, supplied they proceed to curry favor with him.

In addition they face the prospect of a whole bunch of hundreds of thousands of {dollars} in losses if Musk is pressured to finish the deal, the sources mentioned. It’s because, as with each large acquisition, the banks must promote the debt to get it off their books.

They might battle to draw buyers given the downturn in pockets of the debt market for the reason that deal was signed in April, and the truth that Musk can be seen as an unwilling purchaser of the corporate, the sources mentioned. The banks would then face the prospect of promoting the debt at a loss.

It’s unclear whether or not the banks that agreed to finance the acquisition — Morgan Stanley (NYSE:), Financial institution of America Corp (NYSE:), Barclays (LON:) Plc, Mitsubishi UFJ (NYSE:) Monetary Group Inc, BNP Paribas (OTC:) SA, Mizuho Monetary Group Inc and Societe Generale (OTC:) SA — will try to get out of the deal.

The banks are ready for the end result of the authorized dispute between Musk and Twitter earlier than making any selections, based on the sources. The trial is scheduled to begin in October.

Spokespeople for Morgan Stanley, Financial institution of America, Barclays, Mitsubishi and Mizuho declined to remark, whereas BNP Paribas and Societe Generale didn’t instantly reply to requests for remark.

There’s a catch to the banks serving as Musk’s escape hatch. He must present in courtroom that the banks refused to ship on their debt commitments regardless of his finest efforts, based on the phrases of his deal contact with Twitter.

This might be difficult to show given Musk’s public statements in opposition to the deal in addition to personal communications between Musk and the banks that Twitter could uncover in its request for data, 4 company legal professionals and professors interviewed by Reuters mentioned.

“Musk must persuade the decide he’s not liable for the financial institution financing falling by. That’s onerous to indicate, it might require an incredible diploma of deftness from him and the banks,” mentioned Columbia Legislation College professor Eric Talley.

Musk and Twitter representatives didn’t reply to requests for remark.

HUNTSMAN PRECEDENT

Even when the banks can present they don’t seem to be appearing at Musk’s behest, they’d discover it tough to get out of the Twitter deal, the authorized consultants mentioned. They pointed to the case of chemical maker Hunstman Corp, which in 2008 sued the banks that walked away from financing its $6.5 sale to Hexion Specialty Chemical substances.

Hexion, owned by personal fairness agency Apollo International Administration (NYSE:) Inc, deserted the deal after Huntsman (NYSE:)’s fortunes deteriorated, however a Delaware decide dominated that the transaction ought to go forward. The 2 banks financing the deal, Credit score Suisse Group AG and Deutsche Financial institution AG (NYSE:), then refused to fund it, arguing the mixed firm can be bancrupt.

Huntsman sued the banks and, one week into the trial, they settled. The banks agreed to a $620 million money fee and the availability of a $1.1 billion credit score line to Hunstman, which had additionally secured earlier a $1 billion settlement fee from Apollo.

The banks balking at funding Musk’s deal would even have to indicate that Twitter can be bancrupt if the acquisition occurred, or that phrases of their debt dedication have been by some means breached, a excessive bar primarily based on the deal paperwork which have been made public, the authorized consultants mentioned.

“If the banks attempt to get out of the deal, they’ll stroll into the identical struggle that Musk has taken on, the place Twitter has the higher authorized arguments,” mentioned Eleazer Klein, co-chair of regulation agency Schulte Roth & Zabel LLP’s mergers, acquisitions and securities group.