Elon Musk's bid to acquire Twitter is one of the most covered hostile takeovers in history. Not only is this potential buyout popular because the famous Elon is interested in buying Twitter, but this acquisition is also seen as a political statement demonstrating the current culture war currently going on in the US.
It started when Elon made his takeover bid on April 25th, catching the Twitter board by surprise. They quickly reacted by assembling a shareholder rights plan called a "poison pill" which is used to fend off a hostile takeover by diluting the share price of the company in hopes this would make them appear less valuable. Elon reacted to this move by the board by jumping on Twitter and announcing that he was hinting at taking the offer directly to Twitter's shareholders rather than the board of directors. He also pointed out that Twitter's board could be liable for taking action contrary to the views of its shareholders. This could have opened Twitter up to legal action from its shareholders. The Twitter board finally acquiesced and agreed to accept Musk's $54.20 a share offer to take the social media platform private. The total purchase price Musk agreed to pay would be $44 Billion.
But on July 8th, Musk to no one's surprise, exercised X Holdings I, Inc.’s (sponsor company) right to terminate the merger agreement.
The main cause for the termination of the agreement according to Musk and his attorneys is "Twitter’s true mDAU (global monetizable daily active users) count is a key component of the company’s business, given that approximately 90% of its revenue comes from advertisements. For this reason, to the extent that Twitter has underrepresented the number of false or spam accounts on its platform, that may constitute a Company Material Adverse Effect under Section 7.2(b)(i) of the Merger Agreement" SEC
This had been a long-standing and open concern of Musk's since the beginning of the merger agreement; that there were multiple fake accounts on Twitter. One needs not look into the archives of the SEC files to find Musk's skepticism about how many Twitter accounts were bots. You can find his concerns laying openly on Twitter, specifically his Twitter response to the CEO Parag Agrawal back in May.
Elon's deal to acquire Twitter was not only popular among his fan base, but it garnered much interest from high-profile family offices and other investment firms who were willing to finance his Twitter buyout.
Some of the top investors who committed capital to finance Elon's buyout include Larry Ellison who committed $1 billion, and Prince Alwaleed bin Talal who is a Twitter shareholder offered to roll over his $1.9 Billion shares of Twitter, and a secretive investment firm called VY Capital based out of Dubai, as well as Qatar's sovereign wealth fund all pledged capital to Elon's buyout.
According to multiple media sources, since the deal is now "terminated" that means that the deal is now over.
Or is it???
Elon and his lawyers had sought to gain information from Twitter in a series of letters dated June 6th, June 17th, and June 29th, 2022 referencing the rights of Musk to gain sufficient information to perform a spam analysis, according to the termination letter,
"his information rights under Section 6.4 of the Merger Agreement. Twitter has thus been on notice of the information sought by Mr. Musk—and the contractual bases for these requests—for two months. For the past month, Mr. Musk has been clear that he views Twitter’s non-responsiveness as a material breach of the Merger Agreement giving him the right to terminate the Merger Agreement if uncured"
Musk and his legal team are terminating the agreement using what's called a MAC Clause (Material Adverse Change Clause) to terminate the purchase of Twitter.
WHAT IS A MAC CLAUSE?
A MAC Clause is commonly used in M&A deals as a way for a buyer to exit the proposed agreement.
Benesch Law gives a good definition of a MAC Clause:
"A MAC clause is a tool believed to allocate economic risk among the parties. In general, a MAC clause allows the buyer to terminate an agreement if there is a material adverse change that affects the target company or its assets between the time that the agreement is executed and the closing. Although the parties define a MAC within the agreement, generally a MAC is a change in circumstances or an event that causes a material adverse effect on the business’s assets or its financial condition. Some MAC clauses focus not only on consequences that occur before the consummation of the transaction but also on consequences that may have an impact on the post-consummation earnings potential of the target company.
A MAC clause typically does not include changes in political, general business, economic, or market conditions unless the change affects the target company disproportionately. And, while theoretically a MAC clause can include or exclude virtually anything to which the parties agree, whether a court will enforce the MAC clause is becoming increasingly questionable."
Once in court Elon will have to prove the seriousness of events or circumstances that lead to Twitter breaching the MAC Clause. The series of events that Musk's legal team might use are the multiple letters sent to Twitter asking for more information, which they believe was withheld from them.
HOW SUCCESSFUL ARE MAC CLAUSES WHEN TERMINATING A DEAL?
History has shown that MAC litigation is quite expensive and is used by a business acquirer as a useful tool when renegotiating a deal. When acquirers execute a MAC Clause, it can benefit them because the conditions for executing the clause in the first place can be quite subjective. When crafting a MAC Clause business buyers tend to not set specific objective criteria for the conditions which would enable the buyer to execute the clause but tend to keep the wording quite vague.
The MAC Clause can be quite a useful card for the buyer to use to renegotiate a deal at the last minute. An example of this was when "J. C. Flowers & Company successfully leveraged a standard subjective MAC to renegotiate its highly publicized failed $25 billion acquisition of Sallie Mae (and avoid a $900 million breakup fee) after the federal government cut subsidies to certain student lenders."
A most recent example of a company using the MAC Clause was Bernard Arnault's (aka "The Sun Zu of Luxury or Wolf in Cashmere") takeover of Tiffany by his luxury conglomerate, LVMH, back in 2020. Bernard built LVMH through a series of corporate takeovers of prestigious and historic luxury brands. In 2019 he eyed Tiffany as one of his next takeovers to add to the LVMH portfolio.
In late November 2019, LVMH had agreed to a $135 a share purchase agreement with Tiffany for a total of $16.2 Billion. It didn't take too much time between when they struck the deal, that COVID-19 struck and Tiffany temporarily closed many of its stores. This resulted in Tiffany losing over 40% of its Q1 revenue from the year prior. LVMH claimed the pandemic was a material adverse change.
LVMH claimed that COVID was a material adverse effect that resulted in LVMH executing a MAC clause which they used to back out of the Tiffany purchase. Tiffany quickly responded by immediately suing LVMH to complete the acquisition at $135 a share, and a trial date was set for January 15th, 2021.
Long story short, what ended up happening was Tiffany and LVMH went back to the negotiating table and LVMH renegotiated a $131.50 share purchase agreement, which saved LVMH around $300 million on the takeover of Tiffany.
History has proven that when buyers execute the MAC Clause it doesn't necessarily mean the deal is off, but it is a great way to get the buyer and seller back to the negotiating table to hash out the deal.
This may be Musk's strategy in the case of the Twitter bid, where he plans to negotiate a better price. Also, if Twitter plans on having a legal battle with Elon, which they could likely win, it will come at a great cost to Twitter which has already been embroiled in controversy. A drawn-out legal battle will more than likely be extremely costly, anger shareholders, and possibly expose any fraud with the mDAU count, if any; and if there is, it would tank Twitter stock even more and they would lose advertisers.
While not all MAC Clauses when terminated end up with a favorable result for the buyer, history has shown that it at least gives the buyer more time to negotiate a favorable price.
Disclaimer: (Please note that we are not attorneys and this is not legal advice. For more information on setting up your own legal strategies, please consult a legal expert.)