Twitter’s Lawsuit Towards Elon Musk Seems to be Like a Loser

The merger settlement on this case might be learn in a manner that allows a court docket to order Mr. Musk to purchase Twitter—he and two entities he controls agreed they might “not oppose” such an order—by way of a treatment referred to as “particular efficiency.” Though litigation is all the time unsure, it’s onerous to think about a court docket would pressure the acquisition of a $44 billion company.

Particular efficiency is used fleetingly, and for good motive. It’s the final act of coercion, and it is sensible solely when there isn’t any various. If one agrees to promote Hearst Citadel, however tries to again out when the next bid emerges, a court docket might particularly implement the contract. There is just one Hearst Citadel, and no different treatment could make the jilted purchaser complete.

However the place options exist, different cures normally make extra sense. Think about the contract was to color Hearst Citadel, and the painter walked away. A court docket could be reluctant to pressure the painter to do the job. Nobody desires to have his home painted by somebody underneath court docket order. A coerced painter may skimp on high quality, which might require the court docket to become involved once more.

Because of this, Delaware courts have not often ordered particular efficiency in merger agreements. If Mr. Musk doesn’t wish to purchase Twitter, it doesn’t make a lot sense for a court docket to make him accomplish that. Twitter is perhaps worse off underneath his possession at this level, a destiny Twitter’s board is legally obligated to attempt to keep away from. There are additionally different potential consumers for Twitter.

What occurs if the court docket orders particular efficiency and Mr. Musk refuses? The one means the court docket has to compel him to line up financing and affix his signature to a deal is by holding him in contempt if he refuses. But it surely isn’t Mr. Musk that promised to purchase Twitter, however two entities underneath his management. The court docket might maintain them in prison contempt, however as Lord Thurlow noticed, “firms have neither our bodies to be punished, nor souls to be condemned.” Mr. Musk promised to “trigger” these entities to consummate the deal, however a court docket is unlikely to jail him if he shirks or refuses. Mr. Musk might play a high-stakes sport of rooster that in the end reveals that courts are extraordinarily restricted in circumstances like this if the events don’t wish to play alongside.

Damages are simpler to implement. The court docket might order the painter who walked away to pay the distinction between the value agreed and the value of hiring a substitute. Within the case of Twitter, nonetheless, this treatment appears unavailing. It isn’t clear how Twitter is made worse off by Mr. Musk’s strolling away. Twitter shareholders are certainly worse off as a result of the merger settlement would have cashed them out at $54.20 a share. However the shareholders aren’t get together to the settlement. Solely Twitter Inc. is a celebration, and it’s a separate and distinct authorized entity. Twitter must show hurt, akin to misplaced earnings, and that’s an uphill battle.

Twitter might have raised the stakes for Mr. Musk by together with a requirement that he pay damages to its shareholders if he walked away. In that case, the shareholders might have sued for the distinction between the quantity Mr. Musk agreed to pay and the value another suitor would pay—just like the house owner discovering one other painter. However the merger settlement doesn’t give shareholders this treatment.

The problem of the $1 billion breakup charge stays. Courts can be more likely to make Musk pay to stroll away than pressure him to stroll down the aisle. But it surely isn’t clear he must pay that a lot. Breakup charges are speculated to replicate damages brought on by a breach of contract. They aren’t speculated to act as a penalty. On condition that Twitter isn’t clearly worse off by $1 billion—if in any respect—a court docket may balk at imposing such a excessive charge.

This case highlights an necessary threat to shareholders in mergers and acquisitions: The company that negotiates the deal might not have a lot of a case in opposition to a breaching counterparty as a result of the company, in contrast to its shareholders, normally isn’t harmed when the counterparty walks away. The straightforward repair is to provide shareholders the suitable to sue for his or her losses. However both Mr. Musk’s attorneys had been too good for that or Twitter’s weren’t good sufficient.

Mr. Heaton is managing member of an funding analysis agency. Mr. Henderson is a legislation professor on the College of Chicago. They’re co-founders of Heaton Henderson LLC, a company governance consultancy.