The theory of executive severance goes something like this. The chief executive officer of a public company wants to run the company. Running the company pays well, it’s prestigious, it makes the CEO feel powerful and important. Also the CEO has probably devoted much of her career to the company, cares about it, and has strong views on how it should be run; she’d be sad if someone else took it over and ran it differently.
But the CEO does not, in the general case, own the company. The company does not belong to her. She works for the shareholders and has a fiduciary duty to do what is in their best interests. Sometimes, it is good for the shareholders — though bad for the CEO — to let someone else take over the company. In particular, sometimes public companies get hostile takeover bids: Somebody else offers to buy all the stock, for cash, at a premium to the current stock price. Sometimes this is bad for shareholders (the company is worth more in the long run, on its own, with current management, than the hostile bidder is willing to pay), but sometimes it is good: The hostile bidder might be willing to pay more for the company than it is worth under current management.
In that case, shareholders want the CEO to say “yep, this bid is good, we should let the hostile bidder run the company and cash out shareholders, I will step aside, it’s been fun.” But of course the CEO might not want to step aside. She wants to run the company, for all the reasons I said above, plus the hostile bidder is hostile: Probably the hostile bidder has said rude things about the CEO and has plans for the company she dislikes. She might want to say no to the bidder.
The CEO of a public company can’t completely prevent a hostile bidder from acquiring the company — if the shareholders want the deal, ultimately the hostile bidder can probably launch a tender offer and a proxy fight and get the company over the CEO’s and the board’s objections — but she can certainly delay and complicate the process. In practice, the chances of a deal getting done are much worse if the CEO adamantly opposes it.
Corporate governance theory and practice have a solution to this problem, which is: Promise the CEO a giant bag of money for walking away. Put a provision in her employment contract saying that, if someone else takes over the company and she leaves,[1] she gets paid a lot of money, probably a multiple of her salary. Handing over the company to a hostile bidder is bad for her in a lot of ways (less prestige, handing her beloved company to a rude interloper) but, with the severance package, it is also good for her in some other important ways (bag of money, doesn’t have to come to the office anymore).
When Elon Musk launched his bid to buy Twitter Inc. in April 2022, I am fairly certain that Twitter’s CEO, Parag Agrawal, rolled his eyes and wished Musk would go away. Agrawal had spent most of his career at Twitter, had fairly recently been promoted to the top job, was getting paidmillions of dollars a year and presumably didn’t want to be kicked out (or start answering to Musk). Also Musk was quite rude to, and about, him, tweeting mean things about Twitter and texting Agrawal huffily to say “what did you get done this week” and “this is a waste of time.”
But Musk offered to pay $54.20 per share, in cash, for Twitter, which was significantly higher than the stock price at the time. Agrawal could have said “no, no, we have a long-term value creation plan that will be worth far more than $54.20 per share, so we must fight off Elon Musk and preserve the company’s independence, for shareholders.” Perhaps, as CEO, he could have persuaded the board of directors to back that approach. Perhaps he could have sold that plan to shareholders — or perhaps he could have just used a poison pill and other takeover-defense tools to frustrate Musk as much as possible.
Perhaps that would have worked: Perhaps Agrawal could have slowed down the deal process enough that Musk would change his mind, either because he generally has a short attention span or because social-media company valuations fell in the spring of 2022 and his bid for Twitter quickly became a bad idea. That would have been good for Agrawal: He could have kept running the company, getting paid and having a nice time. It would have been very bad for Twitter shareholders: They would have missed out on $54.20 per share, and they’d be stuck holding Twitter stock as social-media valuations fell.
But, nope: Agrawal and Twitter’s board rapidly capitulated, with Agrawal giving employees a pretty unstirring speech about how the board had no choice but to take the best deal for shareholders. So they signed a merger agreement to sell the company to Musk for $54.20 per share.
And then Musk tried to get out of it! A few months later, after social-media valuations did fall, Musk did change his mind, and he sent Twitter a letter saying he was terminating the deal! Which would have been a catastrophe for Twitter shareholders — who would be stuck holding Twitter stock — but would have been … kind of nice for Agrawal? Keep his job, keep his paycheck, keep running Twitter, get a chance to turn things around without meddling from Musk?
He could have done that! He could have sent Musk back a letter saying “sorry you feel that way Elon, but we’d never force you to close a deal you don’t want to close, so, bye.”[2] Move on with his life, as Twitter CEO.
But, nope again: Agrawal, and Twitter’s board and executive team, hired lawyers and sued Musk and argued that he had to close the deal, and of course they were right, and ultimately Musk gave up and closed the deal. And Twitter’s shareholders got their $54.20, which was a great result for them under the circumstances. And Agrawal and his executive team got fired, which was an absolutely inevitable result for them under the circumstances: They were the executives of the target in a hostile takeover, so they were going to get fired anyway, but also they ramped up the hostility of the takeover by suing the acquirer to force him to close, so of course they got extra fired. Musk was mad at them! For making him buy Twitter!
My point here is that few CEOs have ever deserved their severance package more than Parag Agrawal. This is not a commentary on his performance running Twitter: That performance was, you know, bad enough that Elon Musk bought the company. But a severance package is not a reward for good performance as CEO! A severance package is a reward for getting out of the way and letting someone else take over. And few CEOs have worked harder, or had a more unpleasant time, getting out of the way. He earned his millions.
But then Musk didn’t pay him, so he’s suing:
Four ex-Twitter executives, including former Chief Executive Officer Parag Agrawal, sued company owner Elon Musk for allegedly stiffing them on more than $128 million in severance payments after they were ousted from the company.
The former top officials said Musk showed “special ire” toward them after he took over the social-media platform in 2022, publicly vowing to withhold their severance to recoup about $200 million from the $44 billion deal, according to a lawsuit filed Monday in federal court in northern California.
Twitter, which Musk renamed X, has been accused in multiple suits of numerous labor and workplace violations, including failing to pay severance to thousands of workers laid off in the months after the takeover. The company also was accused in a raft of suits of failing to pay millions owed to vendors and landlords while purportedly trying to stay financially solvent.
“Under Musk’s control, Twitter has become a scofflaw, stiffing employees, landlords, vendors, and others. Musk doesn’t pay his bills, believes the rules don’t apply to him, and uses his wealth and power to run roughshod over anyone who disagrees with him,” lawyers for Agrawal and the other ex-executives said in the 38-page complaint.
Here is the complaint. Agrawal and the other executives — former Chief Financial Officer Ned Segal, Chief Legal Officer Vijaya Gadde and General Counsel Sean Edgett — had severance deals entitling them to get paid if Twitter was taken over and they were terminated “without cause.” “‘Cause’ under the severance plans is limited to extremely narrow circumstances, such as being convicted of a felony or committing ‘gross negligence’ or ‘willful misconduct.’” Musk fired them immediately after the takeover — racing to fire them before they could resign and get severance — and claimed it was for “cause.” The supposed “cause” was things like the executives paying lawyers to sue Musk to make him close the deal, which Musk argued was a waste of corporate resources. That is not how severance is supposed to work! The complaint says:
Severance plans are an important feature of modern corporate governance, aligning the economic interests of executives and shareholders in the face of a corporate takeover, especially one as contentious as Musk’s acquisition of Twitter. Severance plans encourage everyone to work toward getting the deal done. For example, without severance plans, executives could have a financial incentive to oppose an acquisition even when that acquisition is in the best interests of shareholders. Executives could also have a professional incentive to leave the company before the closing, which could jeopardize the company’s ability to close the transaction and the public shareholders’ ability to get the control premium provided by the acquisition. Executives’ severance benefits are designed to be legally resilient, as they must be, because severance payments are necessarily made by the acquired entity only after it passes into the hands of its acquiror. If executives could not count on getting their contractual severance, they would have no incentive to stay through the acquisition to run the business, oversee the acquisition process, and make sure the shareholders get paid.
The problem is that Twitter’s old executives were working on behalf of its old public shareholders, and they got a good deal for those shareholders. But to do that, they had to work against its new owner, Musk, so they got him a bad deal. And the public shareholders agreed to the severance package, but Musk has to pay it. Of course he doesn’t want to!
Elsewhere in Twitter/X and its bills:
A bank group spearheaded by Morgan Stanley held discussions with Elon Musk and his team about refinancing a roughly $12.5 billion debt package that supported the tech billionaire’s take-private of the social media platform X, according to people with knowledge of the matter.
In talks that faltered earlier this year, certain banks and Musk’s team explored options to strengthen the debt package, said the people, who asked not to be identified discussing confidential talks. The parties discussed options that could reduce the cost of the debt and make it less risky for banks to hold, one of the people said.
A group of seven banks, led by the New York-based lender, has been stuck holding the debt since 2022. They’ve repeatedly renewed an agreement not to individually offload their holdings, with the goal of coordinating a sale when X — formerly known as Twitter — is on firmer financial footing with stable advertising revenues, subscription growth and further traction from a planned peer-to-peer payments platform, one of the people said.
Hmm. “Options that could reduce the cost of the debt and make it less risky for banks to hold.” What do you think that means? Here’s one possibility: If you have debt that pays very high interest and makes your lenders nervous, there is a potential win-win transaction in which you put up more collateral (making the debt safer) and the banks cut the interest rate (to reflect its increased safety and to compensate you for encumbering collateral).
Here I am not particularly convinced that X has much in the way of collateral that could improve the profile of this debt. But … I mean … Elon Musk does? Like, obviously? Like if he were to pledge $12.5 billion — or $25 billion, or frankly $5 billion — of Tesla Inc. stock to these lenders, that would make them a lot more comfortable and probably buy down his interest rate. Or if he were to co-sign the debt — if he agreed to guarantee or be a co-obligor on it, with recourse to him — then, fine, investment-grade rating and lower interest payments.[3] “It’s a win-win Elon, you get a lower interest rate just for signing your name here!” He’s not gonna fall for that, but it was worth a shot for the banks.