The headlines read, “Musk Buys Twitter,” and the chatter is about free speech. But it’s important to note that while the purchase has been agreed as between Elon Musk  and the board of Twitter, there are several steps yet to come for Musk to actually own the shares of the company and thus control Twitter.

Although it played out quickly and very much in the public eye, Musk’s efforts to acquire Twitter followed a common path of many corporate merger and acquisitions (M&A) transactions. On April 4, Musk made a required filing with the SEC on Schedule 13G, which revealed his ownership of 9.2% of Twitter’s common stock. Schedule 13G is filed when the shareholder intends to remain passive. The next day, Twitter announced that Musk had agreed to both join the board effective April 9th and not increase his holdings of Twitter shares beyond 14.9%  while a director or for 90 days thereafter (commonly referred to as a “standstill” agreement). However, on Sunday April 10, Twitter’s CEO announced that Musk had informed the company that he would not be taking a board seat (thus essentially voiding the standstill). Musk refiled with the SEC on Schedule 13D on April 11 (required for 5% and greater shareholders that intend to effect a “change in control” or seek the election of their own directors), later amended on April 13, indicating his intent to take Twitter private at $54.20 a share. It was not clear at that time that Musk had the necessary financing to follow through on this pronouncement. Notably, Musk had settled with the SEC in 2018 over allegedly fraudulent statements about taking Tesla private, with “financing secured.”

In any M&A transaction, the board of a company has a fiduciary obligation to maximize shareholder value—to achieve the best price, taking into account the ability of the potential acquirer to finance and close the transaction. Typically when receiving an unsolicited bid (often referred to as “hostile”), the board will quickly assess the likelihood that another bidder (that is more acceptable to management) will come along with a higher bid and/or higher likelihood of completing the deal (a “white knight”) and commission a valuation of the company to determine its value. Importantly, the board must determine whether the hostile bidder (or any white knight) offer is “fair” to shareholders, and experts are retained to assist in this determination.

In order to strengthen its hand against an unsolicited bid, and for the stated reason of protecting shareholders, the board of a company can adopt a so-called “poison pill” (technically a “shareholder rights plan”). Twitter’s board moved swiftly to do so. Twitter’s poison pill essentially provided that if any shareholder (i.e., Musk) were to acquire more that 15% of Twitter shares, all other shareholders would be entitled to buy shares at a discount. For all practical purposes, the rights plan prevented Musk from buying more than 15% of the stock, either in the open market or in a tender offer. In order to buy more shares, Musk needed to strike a deal with the board to get rid of the pill; he couldn’t just go directly to the shareholders to buy shares, as triggering the pill would significantly dilute his existing Twitter shareholdings.

On April 20, Musk filed amendment #3 to Schedule 13D which set out the financing for the transaction (whether agreed to by the board or through a tender offer). Musk indicated that he had sufficient financing of $43 billion to buy the 91% of Twitter shares he didn’t already own. The financing came in three forms: 1) commitment letters from banks offering to lend $13 billion to Twitter, if Musk buys it, with $7 billion of that coming in the form of senior secured bank loans and $6 billion coming in the form of bonds; 2) commitment letters from banks offering to lend him $12.5 billion personally, secured by $62.5 billion worth of his Tesla stock (depending on market value this represents roughly one-third of his Tesla stake); and 3) an agreement by Musk himself to put up the other $21 billion in cash. (Note: On May 5, 2022, Musk filed another amendment to Schedule 13D indicating that additional named investors have committed to participate, reducing his outlay by approximately $7 billion.) 

At this point, and with apparently no white knight emerging with a better offer, Musk and the board entered into negotiations. Musk had stated early on that $54.20 per share was his best and final offer, so these negotiations likely centered on the conditions that needed to be met (by both Twitter and Musk) in order for the transaction to close, and provisions for a “break up fee” if it didn’t. A joint announcement was made on April 25, and Twitter filed the merger agreement with the SEC the next day. To avoid having the acquisition trigger the pill, Twitter amended the rights agreement on the same day to provide that neither the execution of the merger agreement nor the acquisition itself will trigger the pill. Among other things, the parties agreed to a break up fee of $1 billion, which Twitter will pay to Musk if it finds another buyer (at a better price), and Musk will pay to Twitter if the financing fails to come through or he otherwise walks away from the deal (assuming Twitter meets all conditions).

Musk’s acquisition of Twitter is structured as a reverse triangular merger, meaning that a shell subsidiary of the acquirer (or of an entity controlled by the acquirer) merges into the target with the target surviving as a wholly-owned subsidiary of the acquiring entity. Musk formed two entities to effectuate the merger: X Holdings I, Inc., and its wholly-owned subsidiary, X Holdings II, Inc. The latter will merge into Twitter at the closing, with Twitter surviving as a wholly-owned subsidiary of X Holdings I, which is wholly owned by Musk.

Musk does not own Twitter yet. Importantly, shareholders (excluding Musk) must vote to approve the transaction. A date has not yet been set for the shareholder meeting. After this is set, Twitter and Musk will prepare a proxy statement, file it with the SEC, and send it to shareholders. The proxy statement will include required information about the transaction (including any discussions with potential alternative bidders and the “fairness” of the transaction) so that shareholders will have sufficient information to evaluate it. It’s possible but unlikely (given current market conditions) that some shareholders would seek to negotiate a higher price as a condition of voting to approve. This process alone can take months.

In addition, the deal will need to satisfy any regulatory requirements, including antitrust clearances. It seems that the FTC, DOJ, or even foreign competition authorities would have few antitrust concerns given that Musk is not currently engaged in any businesses similar to Twitter, but politics loom large these days in antitrust enforcement, which could slow the close of transaction.

Until the deal closes, it will be business as usual at Twitter.

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. To join the debate, please email us at info@fedsoc.org.