I think the most sensible thing would be for everybody to sit down and work out some face-saving solution where Musk doesn’t end up owning Twitter – but Twitter gets to take a pretty good chunk out of Musk’s hide.
20 July 2022 – Most nonlawyers probably have no idea that the Delaware Chancery Court even exists. Thanks to Elon Musk and Twitter, it’s becoming world-famous.
In brief: the Delaware court is the principal forum for legal disputes involving public corporations in the U.S. That’s because most corporations take advantage of the state’s corporation-friendly laws and procedures by incorporating in Delaware, which gives the chancery court jurisdiction over a huge universe of business disputes.
Yesterday the Chancery Court judge in the Musk/Twitter case ruled that Twitter’s lawsuit against Elon Musk will receive a four-day trial in October.
The judge is Chancellor Kathaleen St. J. McCormick, in effect the court’s chief judge, who assigned herself the Musk/Twitter dispute. I see a book coming out when she retires.
That’s a win for Twitter, which is trying to get Musk to complete the $44 billion agreement that he signed as quickly as possible. And it’s a loss for Musk, who hoped to punt the case into next year, as a precursor to nuking it from orbit. You could listen to the entire hearing via the court’s media channel (my team recorded it for my later use). I was immediately struck anew by the weakness of Musk’s case. Elizabeth Lopatto also listened in on the hearing for The Verge and noted on her blog:
“In court, Twitter’s counsel said that Musk’s conduct was ‘inexcusable’. Musk has held up an employee retention plan, and is engaging in ‘needless value destruction’. In response, Musk’s lawyers suggested that Twitter was giving Musk the run-around with bot data. Both teams agreed that Musk’s team has run millions of queries on Twitter’s firehose, a real-time feed of Tweets as they are sent. Musk’s lawyers also indicated The New York Times got a copy of Twitter’s lawsuit before they did”.
After a 10-minute recess, McCormick said that a delay threatened irreparable harm to Twitter. Though an October court date is a quick turn-around, McCormick indicated she was confident the teams of lawyers would rise to the occasion. I’ve done enough Chancery cases to know: that court is built for speed; no jury, no opening arguments.
And I think the judge was fed up and also saw the weakness of Musk’s case. She ruled in less than the time it takes me to eat a sandwich. If this is any indication of how the trial is going to go, Elon Musk could be in for a rough October.
But an important note. Twitter raised the point that Musk was engaging in “needless value destruction”. I think it is very possible a judge would choose to have Musk pay damages rather than enforce ownership, especially with Musk’s track record of flouting government rules and regulations. A judge may be concerned that if Musk doesn’t want to buy Twitter, he could make an ownership transition so difficult that the collateral damage would be brutal. I think the judge will note her responsibility extends to preventing Musk from doing any more damage to Twitter – either through ownership or in spite.
The smart money is saying Twitter will settle with Musk (let’s ignore the many fiduciary issues such a settlement would raise) for billions (plural). The talk-on-the-street is $6-6 billion. But I certainly see some difficulty in finding the proper number, so my guess is the Chancery Court will accept whatever the parties agree.
Which would be more than all of the income Twitter has earned during the 17 years of its existence. Twitter’s stock is now trading around $36 – above when Elon began acquiring shares, below the purchase price, while the stocks of its peer group are off 15% to 60% since then. Similar to Yahoo and MicroStrategy, which became tracking stocks for Alibaba and Bitcoin, Twitter is now a tracking stock for a contract law case.
Oh, yes. Specific performance. The black letter law in the U.S. is that money damages are the preferred remedy for contract breach and that specific performance is reserved for extraordinary circumstances. Contract theory tells us that default rules generally reflect what a majority of contracting parties would agree to had they considered the matter.
The Delaware Chancery Court has not been shy about issuing specific performance orders on numerous occasions where the provision is explicitly contemplated in a merger agreement negotiated by sophisticated parties represented by sophisticated lawyers, as is the case here. It’s true that the court has some flexibility about ordering a merger to go through when one party balks. In an oft-cited 2006 case, the court observed that “when balancing the equities ‘[we] must be convinced that specific enforcement of a validly formed contract would [not] cause even greater harm than it would prevent.’”
And I think “greater harm” is going to be front-of-mind for Chancellor McCormick. I think the court will consider the appropriateness of requiring a merger against an unwilling buyer for a company this size and this kind of social footprint.
And there has been a lot of talk on social media that if Musk was slapped with an unfavorable judgment – either an order that he complete the acquisition or pay significantly more than $1 billion in damages – he’d ignore it, fight, throw a hissy fit.
No. He will be under tremendous pressure to comply. First, some of that pressure will come from his lawyers. His professionals’ reputations will be on the line. The lawyers know that if they have a noncompliant client in Delaware, where they have to appear as litigators, there’s risk for them.
Second, Delaware law allows it to essentially take control of Musk’s assets – chiefly Tesla shares – and to satisfy the judgment by selling them on the auction block. The court could appoint a receiver with the authority to sell the shares, if necessary.
Third, there’s the basic reality that Tesla, as a Delaware company, is subject to Delaware courts’ authority in myriad ways. I don’t think as a practical matter you can be the head of a public company incorporated in Delaware and be constantly in contempt of the Delaware courts.
BOTTOM LINE? I think the most sensible thing would be for everybody to sit down and work out some face-saving solution where Musk doesn’t end up owning Twitter – but Twitter gets to take a pretty good chunk out of Musk’s hide.