Elon Musk and Twitter agree to pay $1 billion severance fee if buyout deal fails

Elon Musk and Twitter have each agreed to pay the other billion dollars if their proposed merger collapses due to the actions of either party.

A regulatory filing revealed on Tuesday that as part of Musk’s proposed $44 billion takeover of the social media company, both parties agreed to pay a termination fee of US$1 billion to the other party if the deal fails for a variety of reasons.

Termination fees are common in buyout offers like the one being offered, to ensure that both parties are negotiating in good faith.

The deal stipulates that Twitter will pay Musk $1 billion if, for some reason, the company’s board of directors recommends that shareholders reject Musk’s offer in favor of someone else’s. Known as the “no-shop” provision, the clause means that the company is not permitted to “solicit, initiate, knowingly encourage or knowingly facilitate any discussion, offer or request of substance that constitutes or could reasonably expect it to lead to a competing acquisition proposal.”

Twitter’s board had rebuffed Musk’s initial attempts to buy the company and adopted a “poison pill” plan designed to make itself harder to support, in a bid to buy time to come up with a alternate offer. No such offer has emerged, and the company says in the agreement that it will drop this poison pill for this proposed merger.

Similarly, Musk is obligated to pay Twitter $1 billion if he backs out of the deal.

Musk has pledged to provide $21 billion in cash as part of his proposed takeover, but so far has provided few details on how he will do so. It is suspected that he may have to sell some of his massive stake in electric car maker Tesla to do so, a possibility that sent Tesla’s value plummeting by $100 billion on Tuesday.

If the merger does not occur “because the equity, debt and/or margin loan financing is unfunded, [Musk] will have to pay Twitter a termination fee of $1.0 billion,” the filing said.

The contract also gives both parties until October 24, 2022 to finalize the deal, but that time frame can be extended as long as certain conditions are met.