Elon Musk is to attempt to walk away from his $44 billion deal to buy Twitter, but the Delaware Court of Chancery, where the company was founded and is now suing Mr. Musk, should order him to buy the social media company.
Forcing a party to honor a contractual promise — what lawyers call “specific performance” — is a rarely invoked remedy in merger cases, and with good reason. A forced business marriage can be bad for both parties and ultimately hurt a company’s value. If Mr. Musk and Twitter are a bad match, taking part in Twitter could undermine Twitter while eroding the value of Mr. Musk’s other companies. According to this view, awarding monetary damages to Twitter rather than affirming Mr. Musk’s obligation to buy the company would both be better off and allow them to go their separate ways.
But keeping both sides to their deal — especially one of this economic size — can also generate value for Twitter, as opposed to monetary damage. By ordering Mr. Musk to honor the terms of the contract, the court can create stability and security for future participants in merger contracts – while giving the parties to this agreement the leeway to negotiate their way out if both no longer wish to proceed. the agreement.
Mr. Musk seemed excited about Twitter in April after signing a deal to buy the company, saying, “Twitter has tremendous potential — I’m looking forward to working with the company and the user community to unlock it.” But then the S&P 500 fell 6 percent over the next two and a half weeks, and technology stocks were hit especially hard. At that point, Mr. Musk said in his… distinctive style, threatened to end the deal if Twitter refused to give him data related to “bot” accounts. These exchanges culminated this week in his decision to end the acquisition.
While his lawyers gave some pretext before its decision, many market observers think it Transparent that Mr. Musk has breached his contract. The merger agreement was specific: As long as Twitter honors its obligations and the banks fund their commitments, Twitter is “entitled to specific execution” of Mr. Musk’s promise to buy the company for the agreed price. Twitter responded to Mr. Musk’s attempt to run away by hiring corporate law titan Wachtell, Lipton, Rosen & Katz and suing Mr. Musk in Delaware to force him to close the deal.
Some observers have responded with: skepticism that the court will agree, noting that specific performance is a rare remedy for breach of a merger agreement. In this case, it must nevertheless be invoked, for three reasons.
First, although the matter has been little studied, one of us shown in empirical work that the market has responded positively to the few times Delaware courts have forced sophisticated parties to enter into agreed-upon mergers. The reasons are obvious: When investors, companies and employees settle their business around a series of promises, breaking them is costly.
Second, the damage won’t come close to compensating Twitter for the damage Mr. Musk has caused. The reason is that the contract limits the damage to $1 billion. Knowing this, the parties and their attorneys — and Mr. Musk’s are refined as they come — had explicitly agreed that Twitter could be entitled to specific benefits. The courts of Delaware have said earlier that this language has the advantage of forcing merging parties to close, and this case is no different.
Third, the remedy the court chooses will not only affect Twitter, but the merger market as a whole. by mr. Allowing Musk to abandon this acquisition on shaky grounds while paying a fraction of the damages he has caused will make future sellers hesitant before pursuing mergers that can create value for investors. That is why the Delaware courts have taken the extraordinary step of requiring mergers to be closed in the past. If Mr. Musk doesn’t stick to his deal, that could reverberate in corporate boardrooms for years to come, discouraging otherwise favorable mergers.
To be sure, forcing Mr. Musk to buy Twitter could ensnare the court in the swamp Mr. Musk has created. To begin with, his banks can also withdraw, both to strengthen his litigation position and to give their clients what they want. Mr. Musk could also ignore the court order and raise even more fundamental questions about whether courts can be counted on to enforce the law. And those who, for political reasons, would prefer Mr. Musk not to own Twitter will wonder why a corporate court enforced that outcome.
These considerations should not be decisive. If Mr. Musk’s banks fail to meet their obligations, they should and probably be held accountable. If Mr. Musk, who is the CEO of Tesla and Space X, also Delaware companies, ignores the will of the state courts, there will also be consequences. and companies have long elected to the courts of Delaware for their disputes precisely because political considerations — such as who you might prefer to control Twitter and its disproportionate influence — are not seen as influencing their corporate judgments.
The fact that Mr. Musk and Twitter might be a bad match shouldn’t give the court a break. The parties are still free to negotiate a break between themselves after the court decides. The question is what the starting point of those negotiations should be. The answer must come from the deal Mr Musk signed, not his backward maneuvers.
The remedy in this case will create expectations that will shape the merger market for decades. Lawyers have long said that bad facts make bad law. Allowing Mr Musk to walk away from the deal he made would do just that. Instead, in light of the evidence that the market has welcomed such moves in the past, the court should order Mr. Musk to perform the contract he signed.
Yair Listokin is a professor and deputy dean at Yale Law School. Jonathon Zytnick is an associate professor at Georgetown University Law Center.