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A CNBC analyst thinks Elon Musk might end up in jail after terminating a deal to acquire Twitter, Inc.
Monday, David Faber warned Musk that he better take seriously a threat from Twitter chairman Bret Taylor who says he will take legal action against Musk for backing out of the deal.
Musk announced on Friday that he is terminating the deal after accusing the company of misreporting the number of fake/spam accounts on the service. Musk claims the number is well over the 5 percent that Twitter reports and could be as high as 20 percent.
Faber argues this claim is unsubstantiated and is thereby sinking the perceived value of Twitter. As a result, Faber concludes there’s “no way” the board will let Musk walk away with only a $1 billion “breakup fee.”
“Then the question is: you are forcing Mr. Musk to buy the company, does he actually agree to do it? There is this argument being said lately that, well, maybe he will not comply with that. Then we would have a situation where they could put him in jail.”
The hosts on the desk giggled at the notion Musk could end up in jail for breaking the deal, but Faber maintained it’s a possibility.
“That’s where we could end up,” Faber countered.
Nonetheless, a senior Mergers and Acquisitions lawyer familiar with the matter told CNBC that Twitter could sue Musk for billions of dollars in damages if his reason for torpedoing the deal is that he feels like he simply “overpaid.”
The lawyer says:
“A reverse breakup fee paid from a buyer to a target applies when there is an outside reason a deal can’t close, such as regulatory intermediation or third-party financing concerns. A buyer can also walk if there’s fraud, assuming the discovery of incorrect information has a so-called “material adverse effect.” A market dip, like the current sell-off that has caused Twitter to lose more than $9 billion in market cap, wouldn’t count as a valid reason for Musk to cut loose — breakup fee or no breakup fee — according to a senior Mergers and Acquisitions lawyer familiar with the matter.”
Ironically a lawsuit could still lead to Musk acquiring the company for a lower price, which some analysts say is his preferred outcome.
For reference, Tiffany & Co. sued a French luxury goods conglomerate known as LVMH in 2020 for trying to back out of its agreed-upon deal. Ultimately, the two sides settled with Tiffany agreeing to lower its sale price from $16.2 billion to roughly $15.8 billion.
Maybe Musk really is playing 3‑D chess, after all.
Either way, I’ll take the odds that Musk does not end up behind bars in an orange suit.