If Musk has second thoughts about buying Twitter, walking away wouldn’t be as simple as paying a $1 billion break-up fee

On Tuesday, Tesla CEO and potential future owner of Twitter, Elon Musk, tweeted that his proposed $44 billion purchase of the social media platform couldn't proceed unless Twitter could verify—as the company recently reported—that fewer than 5% of accounts on site were fake.

Twitter CEO Parag Agrawal had earlier tweeted out an explanation for how the company arrived at its 5% figure, in a thread that culminated in Musk tweeting a poo emoji at the business leader. Musk later claimed on a podcast that his "lowest estimate" for how many of Twitter's users are bots "would be probably 20%." On Wednesday, Musk tweeted at the SEC asking them to investigate Twitter’s user numbers.

Some observers suspect Musk's obsession with Twitter's bot numbers shows that the bombastic entrepreneur is seeking some justification for backing out of his surprise take over attempt, or is at least angling to negotiate a lower price. But Twitter isn't buying it. On Tuesday, Twitter's board told Bloomberg that it "intend[s] to close the transaction and enforce the merger agreement" with Musk, at the price he originally offered.

With Twitter now intent to sell, is it too late for Musk to walk away from the deal he initiated?

Breaking up is hard to do

If Musk did abandon his unsolicited Twitter takeover bid, the Tesla CEO would be on the hook for a $1 billion break-up fee written into the preliminary acquisition contract. If Musk really is having buyer's remorse, that break-up fee might look like a cheap way out. The $1 billion sum is far smaller than Musk's $44 billion offer to buy Twitter, and only a fraction of Musk's $230 billion net worth.

But that fee obscures how difficult it would be for Musk to walk away.

"A breakup fee is not an option to walk away," Professor Mitu Gulati told Axios. Break up clauses are normally only triggered under specified circumstances—and not just because the buyer thinks they've paid too much. In theory, Twitter could sue for damages if Musk just decides to walk away—although the deal both parties have signed caps potential damages at the value of the termination fee, or $1 billion.

Twitter does have another ace up its sleeve, however. Under the company’s sales agreement with Musk, Twitter can sue its potential suitor for “specific performance”, where a court orders the defendant to carry out a specific action—such as fulfil a contract they signed.

However, forcing Musk to carry out his purchase would be only one possible outcome of such a lawsuit. Twitter might settle with Musk, either agreeing to sell the company at a discount, or letting Musk pay a higher fee to call the deal off. Alternatively, the suit might fail entirely, and a judge could decide to let Musk walk away from the deal.

The social media platform might also decide pursuing a lawsuit is too risky and costly. Mergers and acquisitions often lead to job losses, as employees choose to leave rather than work under new management. That means a company in the middle of being bought is already “losing a lot of key employees already as if the new owner were already in charge,” James Woolery, founding partner in law firm Woolery & Co and expert in hostile takeovers, told Fortune. “So they’re willing to settle for a lower price, but not a huge discount.”

Second thoughts

Fake Twitter accounts have been a longtime gripe for Musk, who pledged to get rid of bots when first announcing that he wanted to buy Twitter. But, since purging the site of bots was a key impetus for Musk trying to take the company private, there may be other reasons why Musk might be having second thoughts.

For one, Twitter shares have fallen amid a broader collapse in tech stocks. Twitter’s share price is back to where it was on April 1, when Musk first announced that he’d purchased a 9.2% stake in the social media platform. Tesla stocks have also taken a beating, falling 25% since Musk announced his Twitter deal, as investors worry how the purchase might rebound on the electric carmaker.

The drop in Tesla share price not only makes Musk less wealthy, it complicates his ability to finance the Twitter buyout, as the CEO has offered Tesla share as collateral for some loans. Investors are also noticing that the Twitter deal loads the social media platform with significantly more debt.

Under the terms of the Musk-Twitter deal, estimates research firm CreditSights, Twitter’s debt interest payments will jump from $51 million in 2021 to $900 million after the deal is signed. Servicing those looming debt piles would leave Musk with much less room to risk profits on transforming Twitter's business model.

“This is just a bad capital structure to put on a business like Twitter that has never proven to be highly profitable,” John McClain, portfolio manager at Brandywine Global Investment Management, told Bloomberg.

But despite the noise, advisors on both sides of the deal—who stand to make $133 million if it closes—are continuing to work as if it's going ahead. On Tuesday, Twitter filed a 139-page document—reportedly also approved by Musk—to the SEC explaining the background behind the buyout offer and why Twitter accepted it.

This story was originally featured on Fortune.com