Elon Musk Chancery Court

Fate of Elon Musk’s Twitter purchase up to Delaware court

Charles MegginsonBusiness, Headlines

Elon Musk Chancery Court

A Delaware judge will decide whether Elon Musk should be forced to follow through with his $44 billion acquisition of social media giant Twitter.

Musk offered to purchase Twitter on April 14, 2022, after previously acquiring 9.1% of the company’s stock, becoming its largest shareholder.

On July 8, he terminated the deal, claiming that Twitter breached their agreement by refusing to crack down on spam accounts and disclose how many accounts were run by bots.

On Monday, Twitter filed suit against Musk, asking the Delaware Court of Chancery to compel Musk to complete the purchase.

A hearing has been set for July 19 at 11 a.m. before Chancellor Kathaleen St. J. McCormick.

What is the Delaware Court of Chancery?

The Court of Chancery is considered the preeminent forum to decide disputes between corporations and other business entities.

At least one of the parties in any case before the court must be registered in the state of Delaware. Twitter, along with more than 60% of Fortune 500 companies, is registered in Delaware.

The Court of Chancery was established in 1792 and has since become a preferred forum for corporations hoping to resolve disputes quickly with a judge but no jury. 

It’s a court of equity, which means it has the power to compel an entity, by injunction, to do something or stop doing something. In Musk’s case, Twitter hopes the court will enter an order to make him buy the company.

Will Elon Musk have to come to Delaware?

Most likely.

Musk has 20 days from the suit’s filing to respond, though Twitter has asked the court to expedite the case citing irreparable harm from delays. They’re hoping Musk will respond by July 18.

In the filing, Twitter proposed a four-day trial beginning Sept. 19. That’s just over a month before Oct. 24, the date initially agreed upon to complete the sale.

Musk has appeared before the Chancery Court once before. According to The News Journal, Musk testified in Wilmington about Tesla’s 2016 acquisition of SolarCity. 

What does the lawsuit say?

The suit says that when Musk entered the binding merger agreement, he promised to use his best efforts to get the deal done. 

“Now, less than three months later, Musk refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests,” Twitter claims. 

“Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.”

The company says Musk began looking for a way out of the deal after the merger agreement was signed and the market subsequently fell. 

Rather than bear the cost of the market downturn, which Twitter says the agreement requires, Musk wants to pass the burden onto Twitter’s shareholders, the suit says.

“This is in keeping with the tactics Musk has deployed against Twitter and its stockholders since earlier this year, when he started amassing an undisclosed stake in the company and continued to grow his position without required notification.

“It tracks the disdain he has shown for the company that one would have expected Musk, as its would-be steward, to protect. Since signing the merger agreement, Musk has repeatedly disparaged Twitter and the deal, creating business risk for Twitter and downward pressure on its share price.”

Twitter alleges that Musk concocted the spam/bot account reasoning for abandoning the deal as a way to abdicate his duty to complete the purchase.

“In his press release announcing the deal on April 25, 2022, Musk raised a clarion call to ‘defeat the spam bots. But when the market declined and the fixed-price deal became less attractive, Musk shifted his narrative, suddenly demanding ‘verification’ that spam was not a serious problem on Twitter’s platform, and claiming a burning need to conduct ‘diligence’ he had expressly forsworn.”

Twitter calls Musk’s exit strategy “a model of hypocrisy.”

The company asks the court to order Musk to perform his obligations under the merger agreement and consummate the closing in accordance with the terms of the merger agreement.

Chancery Court rulings can be appealed to the Delaware Supreme Court.

Read the lawsuit in its entirety here:

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