About the author: Carliss Chatman is an associate professor at Washington and Lee University School of Law.
When Elon Musk Decided To End His $44 Billion Deal To Buy
the social media company has filed a lawsuit in the Delaware Court of Chancery. Twitter is suing for “specific performance,” a rare remedy that would require Musk to complete the merger. Unfortunately for Twitter, it’s not Elon Musk Inc. but Elon Musk the person who offered to buy the company. This fact alone can block coercion. The legal rationale lies in the 19th century prohibition of slavery in the country.
Twitter’s lawsuit is intended to release Musk from what it believes would be further violations of their contractual relationship, to compel Musk to comply with his legal obligations, and to force the completion of the merger. While there is priority in Delaware for specific achievements, the Musk-Twitter deal is unique. To date, Delaware has forced only one company to buy another. The Court of Chancery has never forced a natural person to go through with a deal. While companies are legal entities with equal rights for many purposes, there are some rights that apply only to natural persons. The 13th Amendment prohibition against involuntary servitude, substantiating the rarity of the remedy of a specific performance, is one of those rights.
Courts will grant specific performance when no other remedy, including the payment of monetary damages, will suffice. This remedy is most common in real estate transactions, as all land is special. Courts also grant specific benefits for unique goods, such as antiques and other goods that are in short supply. But courts never allow specific performance for personal service contracts, in part because under the 13th Amendment, the state can no longer force people to serve.
There are also practical reasons beyond the Constitution for the rare nature of specific remedies and the contempt courts have for coercing people into action. Human nature would lead a person forced to perform a service to do a substandard job. It is simply more practical and legally more efficient to award monetary damages so that the party can find a replacement. In other words, the court could force Elon Musk to buy Twitter, but it would be challenging to force him to operate the company for the benefit of shareholders and other stakeholders.
2001 acquisition of meat packer IBP sets the precedent for specific performance remedy for a Delaware merger. Tyson won a bidding war for IBP, but later tried to withdraw his $3.2 billion bid. The Delaware Court of Chancery ruled that the combination of contract terms and the difficulty of determining monetary damages made specific performance the preferred remedy. Then Vice Chancellor Leo Strine learned that Tyson had breached the contract and that there were no material adverse changes to IBP – Tyson simply regretted the buyer. “Material Adverse Effect,” Strine clarified, is intended to protect the acquirer from unknown events that significantly threaten the target’s overall earning potential in a long-term significant manner; short-term profit declines are not enough.
Tyson accused IBP of misleading the company about earnings and accounting issues, and of failing to disclose information to the Securities and Exchange Commission. Similarly, Musk has accused Twitter of withholding crucial information about the existence of bots from him by not including the information in mandatory periodic reports to the SEC. Strine concluded that Tyson was not misled. Valuation changes reflected changes in the market and higher costs in the supply chain. Musk’s allegations may face a similar determination. While Strine believed that specific performance was the best remedy, he stopped to enforce it, questioning whether the management teams could work together and whether forcing a merger would be best for shareholders and other stakeholders. “The impact of a forced merger on supporters outside the shareholders and executives of IBP and Tyson weighs heavily on my mind,” Strine wrote in his opinion. On September 28, 2001, IBP’s shareholders approved the Tyson purchase.
Even with a merger like IBP-Tyson, the disadvantage of forcing parties to enter into contracts they no longer wanted made the judge silent for a while. This was the case in a case that lacked the personal nature of the Musk-Twitter transaction. Musk is involved in the negotiations as an individual with his full constitutional protection and without any incentive to protect the shareholders and stakeholders who would be involved if he were a company.
There are additional questions. Is Musk’s offer to take over Twitter so unique that a replacement transaction is not possible? Is the lack of a formal auction and bidding process enough to differentiate Twitter from IBP? Tyson faced competitors, measured his options and made the highest bid because he believed the company added value to his business. Musk acquired private shares, played the transaction publicly and largely foregoed due diligence. Finally, there is the question of whether monetary compensation is insufficient.
So while Twitter wants to force Musk to buy the company, a judge is unlikely to grant such a remedy.
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