"Funding Secured" is a material statement that can affect stock prices. It better be true.
Mr. Musk’s audacious offer to take private Tesla, the innovative auto company he founded and leads as chairman and chief executive, will surely go down as one of the most unorthodox takeover bids ever.
At two sentences and just 53 characters — “Am considering taking Tesla private at $420. Funding secured.” — it was probably the shortest offer ever. (General Motors’ prospectus in 2010 was over 230 pages.)
Mr. Musk offered no basis for the $420 offering price, which would ordinarily be arrived at after reams of analysis by investment bankers and negotiations with a committee of independent Tesla directors.
It was Mr. Musk’s “funding secured” statement on Twitter that may put the iconoclastic founder most at risk. He provided no details about how much funding had been secured, from whom or under what conditions. His email to employees did not mention anything about the funding.
“That’s a clear factual statement,” said John C. Coffee Jr., a professor at Columbia Law School who specializes in corporate law and securities fraud. “If it’s not fully secure, that’s potentially a very material misrepresentation, and a very straightforward violation of Rule 10b-5” of the securities law — in short, securities fraud.
It is illegal for a director or officer of a public company “to knowingly or recklessly make material misstatements about that company,” said John Coates, a professor at Harvard Law School who teaches mergers and acquisitions. Mr. Musk’s “tweets seem cryptic at best, and it is hard to see how he has complied with his duty to not be misleadingly incomplete.”
Even at a time when Twitter is the preferred medium for presidential communiqués, this is no way to commence a takeover bid. “It’s crazy,” Professor Coates said. “If I assigned this scenario to my students, the list of legal issues would fill many pages.”
For one thing, it is doubtful that a private Twitter account provides adequate notice for a public announcement of a $72 billion deal that is likely to move a stock’s price. (By the end of the day, Tesla shares had shot up over 10 percent.)
Mr. Musk has also put the company itself in an awkward situation. “If I were their lawyer, I’d tell them to have an 8-K filing at the S.E.C. the first thing in the morning,” Professor Coates said, referring to a regulatory filing used to disseminate information that may be important to shareholders. “It needs to explain if this was a joke or a mistake, and if not, what he really meant.”
Largest LBO in History
At $420 a share, Tesla would have an enterprise value of about $82 billion including debt. To take it private, the billionaire would have to pull off the largest leveraged buyout in history, surpassing Texas electric utility TXU’s in 2007.
The buyout is “highly unlikely,” said Joel Levington, analyst at Bloomberg Intelligence. “Funding $50 billion plus for a negative free cash flow business would be difficult, if not extraordinary.”
He better be able to prove his statements, and soon.
Mike "Mish' Shedlock