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BFV Perspectives, Corporate Matters, | Jul 29, 2022

Breaking Down Twitter’s Lawsuit Against Elon Musk

By now, you’ve likely heard that Twitter filed a lawsuit against Elon Musk to force Musk to complete his planned acquisition of Twitter. To recap, earlier this year Musk publicly announced his intention to buy Twitter. After Twitter initially attempted to fend off the takeover, the parties came to terms and entered into a binding merger agreement. Given Musk’s mercurial nature, many doubted he intended to follow through on the deal. Those suspicions appeared to be well-founded as Musk continued to publicly criticize Twitter in a series of tweets on the platform itself. On July 8, Musk’s lawyers sent a letter to Twitter purporting to terminate the merger agreement.

Musk alleges Twitter breached the merger agreement when it made false and misleading representations regarding “the prevalence of fake or spam accounts on Twitter’s platform.” Twitter disputes Musk’s allegations and it fired back at him via a lawsuit filed in the Delaware Court of Chancery on July 12.

What is the Court of Chancery and Why Sue There?
The Delaware Court of Chancery holds itself out as “the nation’s preeminent forum for the determination of disputes involving the internal affairs of … business entities.” Although formed in 1792, the Court of Chancery did not evolve into its modern role until the latter half of the twentieth century. In today’s practice, the litigation in the Court of Chancery consists largely of corporate matters, trusts, estates, and other fiduciary matters, disputes involving the purchase and sale of land, questions of title to real estate, and commercial and contractual matters in general.

Twitter is a Delaware corporation, as are both the parent and acquisition sub entities that Musk formed to acquire Twitter. Additionally, the merger agreement between the parties specifies that the Chancery Court has exclusive jurisdiction over any disputes arising out of the agreement.

What Claim is Twitter Asserting?
Twitter filed a 61-page Verified Complaint. The first 59 pages include a detailed recitation of the background facts, including several screenshots of Musk’s tweets. Twitter only asserts a single cause of action – breach of contract. Twitter alleges that (1) the parties entered into a valid and enforceable agreement, (2) Twitter has fully performed its obligations, (3) Musk (and his entities) have breached the agreement, and (4) Twitter has been damaged by the breach. Twitter is seeking both specific performance and an injunction to prevent further breaches of the merger agreement.

Specific Performance
Under Delaware law, “A claim for specific performance is a specialized request for a mandatory injunction, requiring a party to perform its contractual duties. Its purpose is to place the aggrieved party in the position that it would have been in but for the breach. A party seeking specific performance must establish that:
(1) a valid contract exists,
(2) he is ready, willing, and able to perform, and
(3) that the balance of equities tips in favor of the party seeking performance.” Supernus Pharms., Inc. v. Reich Consulting Grp., Inc., 2021 WL 5046713, at *3 (Del. Ch. Oct. 29, 2021).

While specific performance is an extraordinary remedy in a case like this – essentially forcing a party to close on an M&A transaction, in Delaware, there is legal precedent for such relief, especially when the parties’ contract specifically provides for it. See Snow Phipps Grp., LLC v. Kcake Acquisition, Inc., 2021 WL 1714202, at *51 (Del. Ch. Apr. 30, 2021).

In this case, Twitter has cited portions of the merger agreement which appear to provide for the remedy of specific performance, so long as certain conditions have been satisfied. Musk will likely respond by arguing that those conditions have not been met, and he may assert counterclaims, arguing that Twitter made certain fraudulent misrepresentations to induce him to enter into the agreement in the first place, such that he has the right to terminate the agreement.

What’s Next?
Musk’s Answer is due to the Court in early August. Twitter initially requested an expedited trial as early as September. In a hearing earlier this month, Judge Kathleen McCormick scheduled a five-day trial in October. If the Court ultimately declines to order an injunction or specific performance, it still may order Musk to pay damages. The merger agreement caps those damages at $1 billion.

How Can We Help?
If your company needs advice regarding a breach of contract claim, or seeking specific performance of a contract, please reach out to me.

BFV Perspectives, Corporate Matters, | Jul 29, 2022
Katherine M. Silverman
Katherine M. Silverman

Katherine Silverman is a business litigator with a unique depth of experience in handling commercial real estate disputes.