Page 13 - Delaware Lawyer - Fall 2022

The Court of Chancery. (Seated left to right) Vice Chancellor Morgan T. Zurn, Vice Chancellor J. Travis Laster, Chancellor Kathaleen St. J. McCormick, Vice Chancellor Sam Glasscock III, Vice Chancellor Paul A. Fioravanti, Jr. (Standing) Master in Chancery Patricia W. Griffin (retired), Vice Chancellor Lori W. Will, Vice Chancellor Nathan A. Cook, Master in Chancery Selena E. Molina
to mention throwing pending and future merger agreements into chaos). It seems exceedingly unlikely that a Delaware court would ever find that Texas had the greater interest in this dispute in the first instance: Musk gave away that argument when he agreed to litigate any disputes in a Dela- ware forum.
It was therefore hard to see any of Musk’s arguments being winners. To the contrary, Musk seemed overwhelmingly likely to be found to have knowingly and willfully breached the agreement himself. But that was only half of the issue. The question of remedy turned out to be what kept most commentators (or at least us) up at night.
Remedy Roulette
When it came to a remedy, the first and most obvious question concerned whether a Delaware court would really go to the mattresses to force a remorseful buyer to close. Certainly, Delaware courts — and Chancellor Kathaleen St. J. McCormick herself — had ordered similar remedies in the past,12 but none involving deals this large, personalities this big, and companies with the kind of political and social foot- print of Twitter. The only other case that resulted in an ordered buyout of a public company, IBP v. Tyson,13 inspired a great deal of handwringing from then-Vice
Chancellor Leo E. Strine, Jr. over the po- tential negative effects on stakeholders like employees, and the extent to which the ac- rimonious dispute itself might have perma- nently impaired any working relationships. And IBP did not have nearly the public importance of Twitter.
Second, specific performance is, at core, an equitable remedy available only when legal remedies are inadequate. And though an express stipulation to that effect carries great weight, there remains the reality that a Chancery court has never ordered specif- ic performance for the purchase of a public company in an all-cash sale.14 An argument could be made that cash damages would, in fact, have been sufficient (assuming they were uncapped), because any cash award to Twitter would be reflected in Twitter’s stock price, and those Twitter stockholders who preferred cash would immediately be able to sell their shares on the open market. To be sure, the damages cap in the merger agreement would have plausibly compli- cated this outcome, but the cap itself likely would not have been part of the calculus as to whether legal remedies were deemed sufficient in the first instance.
Third, by the terms of the merger agreement, specific performance would be unavailable to Twitter if certain condi- tions failed, such as the banks’ funding of the debt contributions, or lack of approval
from regulatory agencies. And Musk him- self had a lot of control over whether those contingencies eventuated. To be sure, Chancellor McCormick had — in a case with nearly identical conditions — ordered a reluctant buyer to complete a deal pursu- ant to the “prevention doctrine” after con- cluding the buyer had sabotaged its own fi- nancing,15 but there remained questions as to how that would play out if Musk fought every battle. Compounding these issues was the fact that Musk (the natural person) was not contractually obligated to pay any- thing beyond his specified equity contribu- tion. Only X Holdings — a separate entity with limited liability — was charged with forking over the remaining balance. This raised the question of what would happen if Musk’s machinations induced the banks to refuse to fund the debt. Chancellor Mc- Cormick could theoretically have ordered specific performance for both Musk and X Holdings, similar to her actions in the prior case, on the ground that Musk himself was responsible for the financing failure; but that would not solve the problem that X Holdings was now roughly $13 billion short of the purchase price and Musk had made no contractual promises to make up the deficiency. Where would the missing funds come from?
Even with those doubts, we conjecture that a specific performance remedy was
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