Twitter’s lawsuit to force billionaire Elon Musk to keep his promise to buy the social media giant will be resolved by a small but powerful Delaware court specializing in high-stakes business disputes.
What is the lawsuit about?
Musk, the world’s richest man, has pledged to pay $54.20 per share for Twitter but now wants out of the deal. He claims that the company has not provided adequate information on the number of fake Twitter accounts, called or ““, and that it breached its obligations under the agreement by firing senior executives and laying off a significant number of employees.
Twitter claims that Musk, CEO of electric car maker and solar energy company Tesla Inc., acted in bad faith and is deliberately trying to frustrate the deal because market conditions have deteriorated and the acquisition no longer serves its interests. According to the lawsuit, the value of Musk’s shares in Tesla, which he was to draw on to help fund the acquisition, has declined by more than $100 billion since November.
Musk or Twitter would be entitled to a $1 billion severance fee if the other party is found to be responsible for the failure of the deal. However, Twitter wants more and is seeking a court order ordering Musk to follow through on the deal.
When does the trial start?
Twitter lawyers are asking the court to expedite the case. They proposed a four-day trial starting September 19.
What is the Court of Chancery?
The Court of Chancery, established in 1792, has its roots in Britain’s High Court of Chancery, which in turn evolved from an earlier institution in feudal England known as the King’s Chapel . The court, overseen by the Lord Chancellor as “Keeper of the King’s conscience”, served as an alternative to the more rigid and inefficient common law courts. He held the power to offer remedies such as injunctions, administration of the estate and, notably, “specific execution”, which can force a party to enter into a transaction against his will.
The 230-year-old Court of Chancery typically deals with civil cases in which a plaintiff seeks non-pecuniary damages. Such cases may include disputes over property lines and land purchases, guardianship appointments, estates, trusts and wills.
Most often, these are business disputes pitting companies against disgruntled shareholders, or parties to failed mergers and acquisitions against each other.
How does the Court of Chancery work today?
The seven judges of the Delaware Court of Chancery today exercise these powers, making it a key venue for high-stakes commercial litigation. Delaware has a well-established and carefully maintained body of corporate case law dating back to 1899 and is home to over one million business entities, including over 60% of Fortune 500 companies. In fact, many merger agreements specify that any dispute will be heard by a judge of the Delaware Chancery Court.
“It’s not that they’re necessarily smarter than judges in other states; they’re just very exposed to this stuff and are quite sophisticated about it,” said Lawrence Hamermesh, executive director of the University of Pennsylvania Institute of Law and Economics.
Has Musk ever been in this court?
Musk is no stranger to the Court of Chancery. Earlier this year, he won a shareholder lawsuit accusing him of a conflict of interest in Tesla’s 2016 acquisition of SolarCity, a struggling solar panel company of which Musk was the largest shareholder. and also served as Chairman of the Board.
Hamermesh, a former professor of corporate and business law at Widener University Delaware Law School, noted that the specific performance Twitter is seeking is a “pretty rare” remedy and that it’s unclear whether the court will compel Musk to conclude the agreement.
“There are a lot of cases where a judge could say, ‘Buyer, you’re in breach,’ but the remedy is termination compensation,” he said. “Given what I’ve seen so far, my instinct is that Twitter legally has the upper hand. Whether they get the full specific performance or just the breakup fee is a little harder to tell. “
How has the court acted in the past?
If the court forced Musk to make the deal, it wouldn’t be unprecedented.
In 2001, poultry giant Tyson Foods was ordered to complete its $3.2 billion acquisition of meatpacker IBP when a judge granted IBP’s request for specific performance.
More recently, a chancery judge last year ordered private equity firm Kohlberg & Co. to complete its $550 million purchase of DecoPac Holdings Inc., which sells cake toppers and technology. to supermarkets for in-store bakeries.
Vice Chancellor Kathaleen St. Jude McCormick said Kohlberg failed to demonstrate that a drop in DecoPac sales amid the coronavirus pandemic was a “significant adverse effect” driving buyers away. McCormick, who was sworn in as chancellor or chief justice of the court, just a week after her decision, described it as “a victory for the certainty of the deal”.
On the other hand, Vice Chancellor J. Travis Laster said in 2018 that a pharmaceutical company targeted for a merger experienced such a deterioration in its financial condition that it amounted to a material adverse effect, allowing the proposed buyer to terminate the agreement.
The ruling marked the first time the court has found a material adverse effect, or MAE, in a business transaction. This allowed German healthcare company Fresenius Kabi AG to drop its planned $4.3 billion acquisition of US generic drug maker Akorn Inc.