Page 11 - Delaware Lawyer - Fall 2022

Merits of the Claims/Defenses
By now, most readers are familiar with the story. On April 4, 2022, Elon Musk revealed he had acquired a 9.1% stake in Twitter.1 After agreeing, and then not agreeing, to join Twitter’s board, Musk made an unsolicited offer to buy all of Twitter’s stock at $54.20 per share. (420 is a weed joke.2) While above Twitter’s then- current trading price, the offer seemed at the time to be disturbingly low, as Twit- ter had been trading in the $60-70 range only a year earlier. Doubts about Musk’s level of commitment were partially allayed, however, when he lined up a consortium of banks to fund about $13 billion of the total $44 billion purchase price,3 secured
by Twitter’s cash flows, with Musk and any potential co-investors making up the difference. After initially responding with a poison pill (which itself echoed a 420 meme), Twitter’s board rapidly agreed to the deal on Musk’s offered terms, and, over a weekend, signed onto a merger agreement.
The merger agreement itself bore a strong family resemblance to other pri- vate equity deals, but it contained several features that would loom large as the ker- fuffle unfolded. First, Musk disclaimed reliance on any statements other than the representations and warranties contained in the merger agreement itself, and those reps and warranties guaranteed the accu- racy of only those Securities and Exchange Commission (SEC) reports that had been filed after January 1, 2022. That’s a break from more standard practices, which typi- cally pull in filings going back some years. Moreover, closing was only conditioned on these SEC representations not being so false that they would qualify as a “ma- terial adverse effect” (MAE). In turn, the MAE definition was itself mostly standard, though it contained a very non-standard carve-out that excluded idiosyncrasies that might emerge “by reason of the identity of Elon Musk.”4 Second, the parties stipu- lated that damages would be inadequate to remedy a breach by either party, and therefore a specific performance injunc- tion would be appropriate; the parties even went so far as to agree they would not even attempt to argue in court that spe- cific performance was unwarranted. Third, the specific performance provision itself contained its own conspicuous carve-out, under which injunctive relief would be un- available if (inter alia) Musk’s lenders did not pony up their required contributions to the purchase price. And, in the event damages were awarded (rather than spe- cific performance) as a remedy for breach, the amount appeared to be capped at $1 billion for either side. Fourth, closing was conditioned on the usual regulatory ap- provals and the absence of an MAE. Final- ly, and unremarkably (though critically),
the agreement provided that it would be governed by Delaware law, and all disputes would be litigated in a Delaware forum.
Almost immediately after the acquisi- tion was signed, tech stocks began a sec- tor-wide swoon, and what had looked like a great deal for Musk in late April rapidly began losing its luster. The broad market retrenchment even hit shares of Tesla Inc., kneecapping Musk’s personal (paper) wealth. And not coincidently, shortly after signing, Musk embarked on a perplex- ing path of indecision, first tweeting that the Twitter deal was “on hold” on May 13, but then subsequently claiming to be committed to going forward. At the same time, Musk’s attorneys began trading in- creasingly dyspeptic — and public — let- ters with Twitter about the company’s at- tempts to combat spam on the platform. Finally, on July 8, 2022, Musk purported to formally terminate the deal, with Twit- ter responding a few days later by filing suit in the Delaware Court of Chancery.
In his answer and counterclaims, Musk offered a variety of legal arguments for why he should be permitted to rescind or otherwise terminate the deal. But none seemed all that convincing based on pub- lic information; it soon became evident to most legal commenters (ourselves in- cluded) that this dispute — shorn of its celebrity trappings — appeared to be little more than a standard case of buyer’s re- morse, a conclusion that grew stronger with Musk’s incessant proclivity to post tweets that often worked to undermine his most plausible legal arguments. Even the surprise appearance of a whistleblower – who surfaced once discovery was nearly completed – alleging a wide variety of new problems at Twitter, failed to move the needle.
Shaky as his defenses and counterclaims seemed to be on the surface, of course, discovery might reveal more. And in this spirit, Musk pursued three principal path- ways for escaping the deal: contract claims, fraud claims, and — somewhat unexpect- edly — claims under Texas’s blue sky law. We address each in turn.
FALL 2022 DELAWARE LAWYER 9