Elon Musk is try to walk away from its $44 billion takeover of Twitter, but the Court of Chancery in Delaware, where the company was founded and is now suing Mr. Musk, should order him to buy the social media company.
Forcing a party to keep a promise in a contract – what lawyers call “concrete performance” – is a remedy that is rarely invoked in merger cases and rightly so. A forced marriage within the company can be harmful to both parties and ultimately damage the value of the company. If Mr. Musk and Twitter aren’t the right fit, joining them could undermine Twitter while also eroding the value of Mr. Musk’s other companies. In this view, awarding Twitter damages rather than affirming Mr. Musk’s obligation to buy the company would make both of them better off and allow them to go their separate ways.
But keeping both sides in their deal – especially one of this economic importance – can also create value for Twitter, as opposed to monetary damages. By ordering Mr. Musk to fulfill the terms of the contract, the courts can create stability and certainty for future participants in merger contracts – and for the parties involved. this agreement to negotiate their exit if both no longer want to make the deal.
Mr. Musk seemed excited about Twitter in April after reaching a deal to acquire the company, saying, “Twitter has huge potential – I’m looking forward to working with the company and the user community to unlock it. it”. But then the S&P 500 fell 6% over the next two and a half weeks, and technology stocks were particularly hard hit. At that time, Mr. Musk, in special style, threatened to terminate the deal if Twitter refused to provide him with data related to the “bot” account. These exchanges culminated in his decision this week to end the acquisition.
While his lawyers have given some excuse As for his decision, many market observers think it is strange that Mr. Musk had breached his contract. The merger agreement Specifics: As long as Twitter fulfills its obligations and banks finance their commitments, Twitter “will be entitled to specifically fulfill” Mr. Musk’s promise to buy the company at a price it has come to an agreement. Twitter responded to Mr Musk’s attempt to flee by hiring corporate law giants Wachtell, Lipton, Rosen & Katz and suing Mr Musk in Delaware to force him to close the deal.
Some observers responded with suspicion; doubt; skeptic that the court would agree, noting that specific performance as a remedy is rarely a breach of a merger contract. However, it should be called in this case, for three reasons.
First of all, although this issue is still poorly researched, every one of us has show in empirical research that the market reacted positively in a small number of cases when the Delaware courts forced complex parties to close down agreement mergers. The reason is clear: As investors, companies, and employees align their work around a series of promises, it can be costly to break them.
Second, the damage will not be able to compensate Twitter for the damage Mr. Musk has caused. The reason is that the contract limits damages to $1 billion. Knowing this, the parties and their attorneys – and Mr. Musk’s very sophisticated when they arrived – explicitly agreed that Twitter may be authorized to undertake specific activities. Delaware’s courts have said before that the language is beneficial for forcing the consolidation parties to close, and this case is no different.
Third, the measure the court chooses will affect not only Twitter, but the merger market as a whole. Allowing Mr. Musk to walk away from this acquisition on flimsy grounds while paying a fraction of the damage he caused would make future sellers hesitant before pursuing profitable mergers. can create value for investors. That’s why the courts in Delaware have taken the unusual step of requiring mergers to be closed in the past. A failure to keep Mr. Musk with his bargain could reverberate through corporate boardrooms, hindering profitable mergers for years to come.
Sure, forcing Mr. Musk to buy Twitter could get the court into the mess Mr. Musk has created. However, his banks could also pull out, both to strengthen his litigation position and to give their customers what he wanted. Mr Musk could also ignore the court order, raising more fundamental questions about whether the courts can be trusted to enforce the law. And those who want, for political reasons, Mr. Musk not to own Twitter will wonder why a corporate law court would force that outcome.
These considerations should not be decisive. If Musk’s banks continue to live up to their commitments, they should and will likely be held accountable for it. If Mr. Musk, CEO of Tesla and Space X, also Delaware companies, ignore the will of the state courts, there will be consequences for that too. And corporations long ago chose the courts of Delaware over their disputes precisely because political considerations – such as who might enjoy control of Twitter and its overwhelming influence – are not considered to influence decisions on corporate law. surname.
The fact that Mr. Musk and Twitter may not be the right fit should give the court no pause. The parties can still freely negotiate with each other about the separation after the court has ruled. The question is what should be the starting point for those negotiations. The answer should be given by the agreement Mr. Musk signed, not by his actual post-deployment.
The remedy in this case would set expectations that would shape the merger market for decades. Advocates have long said that bad facts make bad laws. Allowing Mr. Musk to walk out of the deal he signed would do just that. Instead, given evidence that the market has welcomed such steps in the past, the court should order Mr. Musk to perform the contract he signed.
Yair Listokin is a professor and associate dean at Yale Law School. Jonathon Zytnick is an associate professor at the Georgetown University Law Center.
