Twitter, Elon Musk and the Delaware Chancery Court: Explainer

DOVER, Delaware – Twitter’s lawsuit, which seeks to force billionaire Elon Musk to make good on his promise to buy the social media giant, will be decided in a small but powerful Delaware court specializing in disputes involving high stakes has specialized in operations.

Twitter is suing Musk in the Delaware Court of Chancery to force him to complete a $44 billion acquisition deal reached in April.

Lawyers on both sides are scheduled to receive their first hearing before the court’s chancellor, Kathaleen St. Jude McCormick, on Tuesday.

The video in the player above is from a previous story.


Musk, the richest man in the world, promised to pay $54.20 a share for Twitter but now wants to back out of the deal. He alleges the company failed to provide adequate information about the number of fake or “spam bot” Twitter accounts and that it breached its obligations under the deal by firing top executives and a significant number fired by employees.

Twitter is arguing that Musk, CEO of electric carmaker and solar energy company Tesla Inc., acted in bad faith and is deliberately trying to scupper the deal because market conditions have deteriorated and the acquisition is no longer serving his interests. According to the lawsuit, the value of Musk’s shares in Tesla, which Musk was supposed to use to fund the acquisition, has fallen by more than $100 billion since November.

Either Musk or Twitter would be entitled to a $1 billion break-up fee if the other party is held responsible for the failure of the agreement. However, Twitter wants more and is seeking a court order directing Musk to go through with the deal.


Twitter lawyers are asking the court to expedite the case. They have proposed a four-day trial starting September 19. Musk’s lawyers are opposing Twitter’s request, claiming it would take months to get information from Twitter and expose numerous witnesses to the issue of fake accounts.


Established in 1792, the Court of Chancery descended from the High Court of Chancery of Great Britain, which in turn grew out of an earlier institution in feudal England known as the King’s Chapel. The court, overseen by the Lord Chancellor as “the guardian of the king’s conscience”, served as an alternative to the more rigid and inefficient common law courts. It was empowered to offer remedies such as injunctions, probate, and particularly “certain performance” that may compel a party to enter into a transaction against its will.

The 230-year-old Court of Chancery typically deals with civil cases in which a plaintiff seeks non-monetary damages. Such cases may include disputes over property boundaries and land purchases, guardianship appointments and estates, trusts and wills.

Most often these are business disputes, pitting companies against disgruntled shareholders or parties to failed mergers and acquisitions.


The seven judges of the Delaware Court of Chancery exercise those powers today, making it an important venue for high-stakes business disputes. With a well-established and carefully maintained corporate jurisdiction dating back to 1899, Delaware is the corporate headquarters of more than 1 million companies, including more than 60% of the Fortune 500 companies. In fact, many merger agreements provide for all disputes to be heard by a Delaware Chancery Court judge.

“It’s not that they’re necessarily more brilliant than judges in other states, they’re just very involved with this stuff and quite sophisticated at it,” said Lawrence Hamermesh, executive director of the Institute for Law & Economics at the University of Pennsylvania .


Musk is no stranger to the Court of Chancery. Earlier this year, he emerged victorious in a shareholder lawsuit alleging conflicts of interest in Tesla’s 2016 acquisition of SolarCity, a troubled solar panel company of which Musk was the largest shareholder and also served as CEO.

Hamermesh, a former professor of corporate and business law at Widener University Delaware Law School, noted that the specific benefit Twitter is seeking is a “fairly rare” means and that it’s uncertain whether the court will force Musk to complete the deal .

“There are many cases where a judge could say, ‘Buyer, you are in breach,’ but the remedy is a termination fee,” he said. “From what I’ve seen so far, my gut feeling is that Twitter has the upper hand legally. Whether they get the full specific benefit or just the separation fee is a little harder to say.”


Should the court force Musk to complete the deal, it would not be without precedent.

In 2001, poultry giant Tyson Foods Inc. was ordered to complete its $3.2 billion acquisition of meat packer IBP Inc. when a judge upheld IBP’s claim for certain benefits.

Recently, the same Chancery judge who handled the Twitter case last year ordered private equity firm Kohlberg & Co. to complete the $550 million buyout of DecoPac Holdings Inc., which sells cake decorations and technology sold to supermarkets for in-store bakeries. McCormick said Kohlberg has failed to demonstrate that a drop in DecoPac sales amid the coronavirus pandemic constitutes a “material adverse impact” that allows shoppers to walk away. McCormick, who was sworn in as Chancellor or Chief Justice of the Court just a week after her verdict, described it as “a victory for deal certainty.”

On the other hand, Vice Chancellor J. Travis Laster stated in 2018 that a pharmaceutical company slated for a merger had experienced such a decline in its financial condition that it resulted in a significant disruption that allowed the proposed buyer to acquire the end transaction. The ruling noted the first time the court had found a material adverse effect (MAE) in a business transaction. It allowed German healthcare company Fresenius Kabi AG to walk away from its proposed $4.3 billion takeover of US generics maker Akorn Inc.

Copyright © 2022 by The Associated Press. All rights reserved. Twitter, Elon Musk and the Delaware Chancery Court: Explainer

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