Elon Musk and Twitter agree to pay $1B break fee if takeover deal falls apart

Elon Musk and Twitter have each agreed to pay the other $1 billion if their proposed merger falls apart because of the actions of either side.

A regulatory filing Tuesday revealed that as part of Musk's proposed $44-billion takeover of the social media firm, both sides have agreed to pay a termination fee of $1 billion US to the other side if the deal falls apart for various reasons.

Termination fees are common in takeover deals like the one being proposed, to ensure that both sides are negotiating in good faith.

The deal stipulates that Twitter will pay Musk $1 billion if, for whatever reason, the company's board of directors recommends shareholders reject Musk's offer in favour of someone else's. Known as a "no-shop" provision, the clause means the company is not allowed to"solicit, initiate, knowingly encourage or knowingly facilitate any substantive discussion, offer or request that constitutes or would reasonably be expected 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 take over, in an attempt to buy time to come up with an alternative offer. No such offer emerged, and the company says in the agreement it has "taken all action necessary" to ensure that poison pill will be "inapplicable" to Musk's proposal.

Similarly, Musk is obligated to pay Twitter $1 billion if he walks away from the deal.

Musk has committed to coming up with $21 billion in cash as part of his takeover proposal, but so far has offered few details on how he will do that. It is suspected that he may have to sell part of his massive stake in electric car maker Tesla to do it, a possibility that caused the value of Teslato plummetby $100 billion on Tuesday.

If the merger doesn't happen "because the equity, debt and/or margin loan financing is not funded, [Musk] will be required to pay Twitter a termination fee of $1.0 billion," the filing shows.

The contract also gives both sides until Oct. 24, 2022, to finalize the deal, but that deadline can be extended as long as certain conditions are met.