The Merger Agreement

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Friday, July eighth, two thousand twenty-two. Fourteen minutes past five in the afternoon, after the market closed for the weekend. A law firm's letter lands on EDGAR as an exhibit, and its first sentence tries to end a forty-four-billion-dollar deal. "Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of multiple provisions of that Agreement."

The price of leaving▶ ≈0:00

By Saturday morning the whole world knew the price of leaving. One billion dollars. It was in the contract. Everyone had read about it.

Four days later, Twitter filed a sixty-two-page complaint in Delaware to explain that everyone had read the contract wrong.

This is episode fourteen, and it teaches four things. What a merger agreement is. What a leveraged buyout is, and whose balance sheet the debt lands on. What "specific performance" means, and why a one-billion-dollar fee was never an exit. And what happens to thirteen billion dollars of bank loans when nobody wants to buy them.

Nine percent to forty-four billion▶ ≈1:00

Start with how he came to own nine percent of a company that was about to sue him, because the first document in this story is the wrong one.

He began buying Twitter stock on the last day of January. By March fourteenth he owned more than five percent. Securities law gives a holder ten days after crossing five percent to file a public notice, and the notice comes in two flavors: a Schedule thirteen G for a passive investor, or a Schedule thirteen D for one who intends to influence control. He filed the passive one, on April fourth, eleven days late by the government's count, showing nine point two percent. The stock rose twenty-seven percent that day. The S E C would sue over those eleven days in January of two thousand twenty-five, and the case ended this July in a settlement, not a finding: his trust paid one and a half million dollars without admitting or denying the allegation, the claim against him personally was dismissed, and the judge entered the judgment over what she called significant misgivings. The rule has since changed: the window is now five business days. Hold the thirteen D for later. The buyer who files it is announcing that he wants control.

April thirteenth. A letter to Twitter's chairman: fifty-four dollars and twenty cents a share, cash, "my best and final offer." Fifty-four twenty. The listener from episode eleven will notice the number ends in twenty. April fifteenth, the board adopts a poison pill to slow him down. April twentieth, he signs commitment letters for forty-six and a half billion dollars of financing, disclosed the next day, and the offer stops being conditional. April twenty-fifth, a Monday, the board signs. Forty-four billion dollars, widely reported as the largest purchase of a public company by a single person on record.

Now the money, because the structure is the first lesson.

The purchase was a leveraged buyout, and the word to hold is "leveraged." Of the price, about thirteen billion dollars was committed by a lender group the filing names only as Morgan Stanley and certain other financial institutions. The press counted seven banks. The banks lent it to Twitter, and Twitter would owe it. That is what every leveraged buyout is: the buyer borrows against the company being bought, and the company being bought pays the interest afterward. The rest was equity. Around seven billion came from outside investors, the Oracle founder's trust and Sequoia and a Qatari fund among them, with a Saudi prince rolling his existing shares into the group; and the remainder, somewhere above twenty billion dollars, reported as roughly twenty-seven, came from him, which is what the roughly twenty-three billion dollars of Tesla sold in episode thirteen was for.

Section nine point nine▶ ≈4:00

Then the document. The Agreement and Plan of Merger, filed as an exhibit the next day, and its Section nine point nine, titled "Specific Performance."

Understand the ordinary version first. When a buyer breaks a merger contract, the seller usually gets money, and the amount is usually capped at a reverse termination fee. This contract had one: "Parent Termination Fee," one billion dollars, defined in so many words. The legend read that clause and stopped. He can pay a billion and walk.

The clause did not say that. The fee was owed only if Twitter chose to terminate, and the contract called it Twitter's "sole and exclusive monetary remedy," "subject to Section nine point nine." Nine point nine says the parties agree that a breach would cause "irreparable damage for which monetary damages, even if available, would not be an adequate remedy." It says each side "will not oppose" an order of specific performance. And in the sentence that decided the summer, it says that "notwithstanding anything herein to the contrary, including the availability of the Parent Termination Fee," Twitter is entitled to specific performance "to cause the Equity Investor to fund the Equity Financing" and "to consummate the Closing," as long as the closing conditions were met and the bank debt was there to be funded.

Specific performance is a court ordering you to do the thing you promised, rather than pay for having failed to. Delaware's Court of Chancery is a court of equity, and equity can order a closing. The one-billion-dollar fee was Twitter's option, never his. There was no clause anywhere in the agreement under which he could pay and leave.

And one more line, from the first page: he signed the agreement personally, as the "Equity Investor," "solely for purposes of" a short list of sections. Nine point nine is on the list. That is why Twitter could sue the man and not just his acquisition vehicles.

The summer against the paper▶ ≈6:00

Watch the summer against the paper.

May thirteenth: "Twitter deal temporarily on hold," over the share of accounts that were spam. Two hours later, "still committed." July eighth: the termination letter. July twelfth: the complaint. Its first paragraph says the buyer believes he "is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away." Its sixth paragraph is four words: "So Musk wants out." July nineteenth: the Chancellor grants an expedited trial. Delay, she said from the bench, as reported, threatens irreparable harm. Five days in October. September thirteenth: Twitter's shareholders approve the deal, ninety-eight point six percent of votes cast. They were voting for fifty-four twenty in cash, from a buyer who had sent three letters that summer terminating the agreement.

October third, two weeks before trial. A letter from his lawyers: the Musk parties "intend to proceed to closing of the transaction," on the original terms, at the original price. Twitter's reply to the court, as reported: "'Trust us,' they say, 'we mean it this time.'" The Chancellor stayed the case until five p.m. on October twenty-eighth to let them close. On October twenty-seventh they closed. Nine directors out, one director in. The next morning the New York Stock Exchange suspended trading in the stock, and within two weeks the company deregistered. Going private, in the paper, is two forms: a Form twenty-five to delist and a Form fifteen to stop reporting. From that day, Twitter owed the public nothing, and owed the banks the better part of thirteen billion dollars.

The loans nobody photographed▶ ≈7:40

Which is the last mechanism, and the one nobody photographed.

When a bank commits to a buyout loan, it plans to sell the loan on to investors before the ink dries, and to keep a fee. By October two thousand twenty-two, interest rates had risen, the buyer had spent five months disputing the company's numbers in public, and no investor wanted the paper at the price the banks had promised. So the banks kept it. The industry word is hung. None of this side of the deal is in a filing. By the trade press: the banks held some thirteen billion dollars of loans, the company paid more than a billion dollars a year in interest, and bids on the riskiest slice ran near sixty cents on the dollar. They held it for more than two years, longer than any comparable deal since the financial crisis, and sold most of it in early two thousand twenty-five at about ninety-seven cents. By the spring of two thousand twenty-six the last of it had been refinanced away entirely, inside a company this series has not gotten to yet. The Twitter loans no longer exist. The interest was paid, every quarter, by the company, which is the leveraged-buyout lesson in one line. The buyer borrowed. The bought company paid.

Made expensive by a contract▶ ≈9:05

The audit.

The legend says he could have walked for a billion dollars. The paper says the fee was the seller's remedy, subordinate to a clause he signed personally that priced his exit at the full purchase price. The legend says Delaware forced him to close. The paper says no judge ever ruled on the merits; he agreed to close two weeks before trial, and the court's last order was to stay out of the way. The legend says he overpaid. This series says nothing about what Twitter was worth, then or now; it says what the contract said, which is that the price was fixed on April twenty-fifth and the exit was not.

Franklin Hugh Money's judgment, in its own voice. The most expensive change of mind on record was made expensive by a contract, and never by a court. He signed the clause that removed his own exit, and then spent a summer looking for the door. Every lesson in Act Two about control was about who can remove you. This one is about what you cannot remove yourself from once you sign.

The other side of the trade▶ ≈10:15

Now the camera, because your index fund was on the other side of this trade.

If you owned a broad stock fund in two thousand twenty-two, you owned Twitter, and on October twenty-seventh your fund received fifty-four dollars and twenty cents a share in cash, because a clause in a contract held. Through that summer the stock traded far below the deal price, which is the market's way of measuring doubt: the spread between where a stock trades and what a signed buyer has promised is the price of the market's belief that the buyer will not show up. In July, the market priced a walk-away the contract did not permit. What closed the gap in October was the clause, and not a change of view about the company. The next time a company you own agrees to be bought, the number that matters is on page one, and the clause that matters is near the back.

He had bought total control of one company for forty-four billion dollars. At his other public company, he was the largest holder, and a shareholder with a handful of shares had sued in two thousand eighteen over his pay. In January two thousand twenty-four, a judge in Delaware voided the largest compensation package in corporate history. That ruling did not survive appeal, which is episode fifteen's business. He answered the same night, in one line, with the venue change that closes this act.

What a board owes, what a proxy vote decides, and how a state loses a company, is episode fifteen. The Pay Package.