From April to as recently as July, the Twitter acquisition was among the headlinegrabbers. News about the potential acquisition of Twitter by Elon Musk, the eventual termination and the ensuing litigation by Twitter thereafter has hogged media space.

The whole transaction process caught the attention of stakeholders in the world of M&A and fund raising, and even the boardrooms of India Inc. The events that unfolded are a reminder to think through concepts pertaining to deal certainty and walk-away rights in transactions.

The failure of any deal does have a deep impact on the parties involved — erosion of stakeholder value, stigmatisation of future M&As, fall in the morale of employees and change in perception of vendors/customers are some of the possible consequences. On top of these, the time, effort and advisors’ fees that have gone into undertaking the deal get wasted.

These potential consequences call for having in place mitigation measures/safeguards by the parties in the event a deal is called off.

In the termination notice to Twitter, Elon Musk’s lawyers mentioned thus: “Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement, and is likely to suffer a Company Material Adverse Effect (as that term is defined in the Merger Agreement)”.

Considering the use of concepts such as “representations” and “material adverse effect” to terminate the Twitter deal, the spotlight needs to shift to these concepts.

Key takeaways

When deals fall through, the first port of call for any aggrieved party is the terms of the transaction document (be it be a share purchase agreement, a business transfer agreement or any other agreement). Therefore, it’s critical that such agreements are drafted in a way that mitigate the risk for the parties, take care of deal uncertainty, and do not expose one party to excessive impact on account of a failed deal.

In fact, transactions which are contingent on complex events, such as acquirer raising funds/ debt to complete the acquisition or which are subject to complicated approval processes, these concepts become paramount.

Both acquirers and sellers need to be careful about the due-diligence process to avoid any future disputes or issues (particularly, in strategic deals).

Often, a lot of confidential and commercially sensitive data is shared by the sellers with potential acquirers/investors. Thus, necessary safeguards should be created to account for deal uncertainty even while disclosing and sharing such confidential data — ranging from signing NDAs (non-disclosure agreements), forming clean team/Chinese walls or redacting price-sensitive information.

The list of conditions precedent also needs to be carefully negotiated and agreed upon, with well-defined and realistic timelines.

Often sellers, in the interest of expediting deal closure, agree on a laundry list of conditions precedent and later realise that satisfying them may not be possible or may not be possible within the agreed timelines — and, thereby, giving walk-away rights to the acquirer and leaving room for deal uncertainty. The lesson here is that all such conditions and respective deadlines should be reviewed carefully.

Similarly, if any representations and warranties turn out to be incorrect or misleading, the acquirer can simply walk away from a deal. Therefore, the sellers should ensure these are not worded vaguely or in a catch-all manner.

For instance, the notice terminating the Twitter deal mentions that the data and information necessary to “make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform” were not provided, and the same was a key reason for terminating the transaction.

MAE clauses

A material adverse effect (MAE) clause also gives the acquirer a chance to wriggle out of a deal and it’s common in the Indian M&A context as much as it is globally. In any MAE clause, the devil always lies in the details, which at times can be nuanced and complex.

The current trend is that and the acquirer wants to word it broadly and the sell side tries to keep it limited and include as many carve-outs and circumstances to ensure that the acquirer does not have an easy escape route. The importance of this can be seen in Twitter’s Merger Agreement which provided for nine such carve-outs to the MAE clause.

Deal certainty requirements may be equally important for the acquirer and the seller. No one wants to put in time, effort and resources to close a deal only for the acquirer to eventually walk away or the seller to wriggle out of the deal because it has received a better offer.

Accordingly, parties consider adding a termination fee (known as break fee or reverse break fee) for certain events or specified reasons of a deal failing to close. However, foreign exchange regulations need to be factored in and examined for structuring these provisions with respect to cross-border deals in India.

It is worth noting that the Twitter Merger Agreement had $1 billion as the termination fee in the event the deal is terminated in specified circumstances which are detailed out in the agreement — this may look like a very high amount to Indian observers, but it still did not act as a deterrent for termination in this case.

The aforementioned key concepts are only illustrative. In the legal world, there are several other tools that can be adopted — for instance, escrow mechanisms, “no-shop” clauses, “hell or high water” clauses, interim and standstill covenants — which may help in mitigating risk or dis-incentivising deal termination (both from the acquirer’s perspective or from sellers).

The Twitter saga is one which will be etched in our memories as it involves not only some of the biggest and most iconic names in world business, but also the best law firms to advise the litigating parties. Irrespective of the outcome and the facts of the case, there is a lot to consider for Indian companies while working on deals to ensure deal certainty and mitigate the effects of a deal being terminated.

Jain is Partner, and Chattopadhyay is Senior Associate, JSA. Views expressed are personal

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