Elon Musk has spent the past two months dragging Twitter through the mud. He divulged internal company data about its bot check sample size. He claimed chief executive Parag Agrawal misrepresented Twitter’s daily user estimate. He even accused the company of lying about the number of spambots and fake accounts on the platform — going as far as to urge the Securities and Exchange Commission to investigate disclosures regarding the issue.
Twitter responded July 12 by suing Musk in the Delaware Court of Chancery after he announced in a letter that he was abandoning a $44 billion takeover of the social media platform, arguing he’s required to consummate the deal.
In its lawsuit against the Tesla mogul, the platform devotes dozens of pages to calling out his public disparagement of the company. Twitter’s lawyers describe his behavior as the “model of hypocrisy” and “bad faith.” They say he sunk Twitter’s value.
Yet, Twitter’s suit ends by seeking to force Musk to buy the platform despite the “disdain he has shown for the company.”
Several legal observers note that Twitter has the upper hand in court. After all, Musk agreed to specific performance, a remedy forcing a party to comply as closely as possible with the terms of a contract, and it doesn’t appear as if Twitter violated the merger agreement. But the case puts the court in the awkward position of possibly forcing an unwilling buyer who’s actively trying to sabotage a deal to purchase a multibillion-dollar company.
“There’s a real paradox at the heart of this litigation,” says Todd Henderson, professor at the University of Chicago Law School. Greg Varallo, a partner at law firm Bernstein Litowitz Berger & Grossmann, who regularly argues cases in the Delaware court, observes, “It’s a little weird to have parties that don’t want to get married and say, ‘No you have to get married.’”
Specific performance is sparingly used and typically reserved in cases when there’s no other choice. Henderson calls it the “ultimate act of coercion.” If Musk is ordered to follow through on his bid to acquire Twitter, he compares it to a worker being forced to comply with a contract to paint a house. “Instead of sitting back in your house and knowing he’ll do a good job because his reputation is at stake, now I’m worried that he won’t do a good job because he’s being coerced,” Henderson notes.
Larry Hamermesh, professor at Delaware Law School, says the court might “feel a little funny about ordering specific performance for a buyer that doesn’t want to do [a deal] at all and is maybe interested in tearing apart the company.”
Still, there’s precedent for the Delaware court issuing such an order. The court as recently as April 2021 refused to allow a private equity firm to back out of an agreement to purchase DecoPac, a cake decorating company. Before that, in 2001, chancellors handling a suit over a merger between Tyson Foods and IBP issued specific performance, forcing the meat giant to consummate the deal. They declined to find a “material adverse effect” — the same argument that Musk is making to back out of the Twitter takeover — that would have allowed the meat giant to walk away from the agreement.
But even in that case, one of the chancellors questioned whether forcing Tyson to go through with the deal was the appropriate course of action.
“Probably the concern that weighs heaviest on my mind is whether specific performance is the right remedy in view of the harsh words that have been said in the course of this litigation,” wrote Chancellor Leo Strine in the ruling. “Can these management teams work together? The answer is that I do not know. [Chancellors] Peterson and Bond say they can. I am not convinced.”
Musk has uttered more than harsh words leading up to Twitter’s suit, accusing the company at one point of violating securities laws. His actions — and tweets — will be considered by the court in deciding whether to force him to consummate the deal, according to Iman Anabtawi, professor at UCLA School of Law. Even though both sides agreed to specific performance, the chancellor overseeing the case will have the discretion to decide whether it’s a proper fix. The Delaware court isn’t bound by any single remedy, regardless of what was stipulated in the merger agreement.
“The awkwardness aspect of this goes to the discretion of the court to decide whether or not to award specific performance, which is based on the practicality of that remedy,” Anabtawi says. “The question of whether Musk is an unwilling buyer goes to if it’s feasible. That’s part of the analysis.”
Hamermesh notes there are “cases where there have been similar specific performance agreements, and the court has declined to follow them.” He explains that courts disfavor such remedies of coercion because it’s “awkward to make someone do something they don’t want to do,” especially in a deal of this size.
According to a Wisconsin Law Review article analyzing over 1,000 merger and acquisition contracts, over 80 percent of them included and chose specific performance as their favored remedy. Yet, such a fix is widely regarded to be reserved for extraordinary circumstances.
The reason specific performance is rarely issued might be because botched deals that land in court often result in renegotiation. Twitter may have a strong case, but litigation is unpredictable. In a similar case that ended in a settlement in 2020, Tiffany sued French luxury goods giant LVMH in Delaware court. The company alleged that the Louis Vuitton owner was trying to walk away from the $16 billion takeover. LVMH eventually consummated the agreement at a discount — albeit a small one — valuing Tiffany at $15.8 billion.
“It’s not at all unusual for deals to be renegotiated by the parties once cooler heads prevail,” Varallo notes. The market doesn’t believe the deal will go through, at least not at the agreed-upon price. If it did, Twitter shares would be floating closer to the $54.20 a share that Musk offered to buy the company.
“If you were 100 percent convinced that the judge would issue specific performance, then you could buy Twitter today at $36 and two months [later] when that happens, you get $54.20,” Henderson says, “Everybody would be buying. The [current] price reflects uncertainty that the deal will close at that price.”
There’s also the question of enforcement if Musk is forced to go through with purchasing Twitter. If he is, Musk would have to go back to the entities financing the deal to make sure they’re still on board. If they’re not, he’d then have to sue them in New York court to make them follow through with their obligations. In this scenario, Musk may have a conflict of interest because he’d be motivated to not have the deal go through.
“He can tell his lawyers ‘Look, do a [bad] job — we don’t want to win this case,’” Henderson says. “All the while, Twitter is in limbo.”
The aftermath of a ruling ordering Musk to consummate the deal, Henderson says, raises concerns of collateral litigation and slow-walking the financing. The court is unlikely to hold Musk in contempt if it at least appears as if he’s trying to follow through with financing the purchase. In the short term, Twitter will likely move to fast-track the case. Trial may be scheduled as soon as October.
