Normally, when you breach a contract, you have to pay damages. Sometimes, the courts will make you "specifically perform" (ie, do) what you promised you would. So, what about if you're Elon Musk?
Mr Musk's journey from a user to owner of Twitter has been well documented since he signed a binding agreement to buy the company for US$44 billion. His walking back of the agreement has already attracted the same attention. Mr Musk has said via his lawyers (see their letter here) that he "intends to terminate" the agreement due to alleged material breaches. Twitter has said that it "is committed to closing the transaction on the price and terms agreed upon with Mr Musk and plans to pursue legal action to enforce the merger agreement". Twitter has since hired Wachtell, Lipton, Rosen & Katz to handle the anticipated suit, a firm that just happens to have a former Chancellor of the Delaware Chancery Court as Of Counsel.
Putting to one side the (realistic) chance that this is all part of a negotiation strategy, there are two questions, one far more important than the other. First – is Mr Musk right that he can walk away from the deal? I cover that further below – and in my view, probably not. Second – if Mr Musk is wrong, what remedy would the courts order in Twitter's favour? He could face a US$1 billion termination fee. Small beer, for the world's richest person. More worryingly for Mr Musk, he could instead be forced to complete the transaction – which would involve raising US$44 billion and becoming the owner of Twitter.
Specific performance – completing the transaction
The remedy of specific performance is equitable, and well recognised throughout the common law world. The jurisdiction for Mr Musk and Twitter is Delaware, a popular state for US companies for many reasons, including Delaware's well-respected Court of Chancery. Professor John C Coffee of Columbia Law School (who I was a research assistant to during my time there) has said of the Twitter spat, "I think we are going to see if Elon Musk is above the law. I am confident that in the Delaware courts the answer is no."
Specific performance in New Zealand is typically ordered where damages are inadequate. For example, land is generally unique and so a purchaser can often specifically enforce against a vendor of land that fails to complete. The remedy is discretionary, and the court here has an "eye to the substantial justice of the case". The courts do not like ordering specific performance if there will be a requirement for ongoing court supervision. The effect of specific performance on any third parties is a contentious issue, and hardship to third parties can assist the defendant's case.
The law in Delaware is remarkably similar. The argument for Twitter could be – the merger agreement expressly provides for specific performance, and this is a "one time only" opportunity to secure value for shareholders (Mr Musk's offer was at $54.20 a share, and the current market price is $32.65). This is (they could argue) a brazen attempt to avoid a binding agreement and the courts should hold Mr Musk to his bargain. Buyer's remorse over a high price and increased funding costs are not a basis to terminate the merger agreement. The Delaware courts have forced purchasers to complete acquisitions previously and should do so again.
There are three particularly interesting dimensions to an order for specific performance here. First, the role of the banks, which would need to provide $13 billion in financing pursuant to commitment letters. How would the Delaware courts feel about (indirectly) ordering banks to provide that kind of funding? Such an order may well result in satellite litigation to determine whether the banks are obliged to provide the committed financing. Second, there is the "above the law" point. What if Mr Musk is ordered to specifically perform and says no? Would the courts then hold him in contempt and put him in jail? Mr Musk is now based in Texas and seems to have the support of its Attorney-General (who has already opened an investigation into Twitter's bot issue). Third, there is the public policy question – how would the Delaware courts weigh the importance of upholding merger agreements as against forcing an unwilling purchaser to complete? Difficult questions for the Delaware chancellor that gets to decide this case (if it makes it that far).
Can Mr Musk terminate the agreement?
So, is Mr Musk right that he can terminate? He gives three reasons. First, Mr Musk says Twitter has not provided him with the information he has requested, contrary to the merger agreement. This is obviously a question of fact, but Twitter seems to have provided a significant amount of information to Mr Musk and the obligation in the agreement is not without limits.
Second, Mr Musk says that Twitter has materially misrepresented the number of bot or spam accounts. This is the most serious allegation, essentially that Twitter has been lying in its security filings for years, and will be hotly contested. The allegation is couched in a very preliminary manner: "Mr Musk has reason to believe". Leading commentators (eg Matt Levine of Bloomberg) have pointed out that the bot issue was one of Mr Musk's reasons for buying Twitter in the first place, which could be seen as undermining the bona fides of this complaint.
Third, that Twitter has failed to conduct its business in the "ordinary course" largely because it fired two high-ranking employees. This seems a difficult basis (by itself) to overturn a $44 billion deal.
Where to from here? We will see, but given developments so far litigation between Mr Musk and Twitter (and potentially satellite suits, including by Twitter's shareholders) seem all but inevitable. Note – this is a technical legal area, and for further detail I recommend the chapter that I author on specific performance in the forthcoming edition of Equity & Trusts in New Zealand (edited by Andrew Butler).
This article follows on from a recent NBR article which includes further commentary from Russell McVeagh partner Nathaniel Walker.
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