Saturday, November 19, 2022
Look there are two massive business stories right now - FTX and Twitter - and I have worked very, very hard to avoid learning anything about crypto, so Twitter it is.
Eventually there will be writing - so much writing - about all of this (me and everyone else), but as I type, it's being reported that there has been a massive exodus of Twitter employees who largely do not want to work for Elon Musk; Musk, in a paranoid fear of sabotage, locked all employees out of the offices until Monday before demanding they all fly to San Francisco for a meeting on Friday, and engineers responsible for critical Twitter systems left. Most of us who are actually on Twitter are waiting for one big bug to take the system down (I've set up an account, by the way, at Mastodon). And maybe that won't happen - maybe Musk will eventually turn things around - but he's certainly made things a lot more difficult for himself in the interim.
I'll save my bigger lesson musings for other formats, but for now, I'll make a minor point: the Delaware Court of Chancery did not, of course, order Musk to complete the deal, but he settled in the shadow of other broken deal cases and clearly saw the writing on the wall. Though there are only a few cases on point, Chancery has not hesitated to order reluctant buyers to complete mergers - in fact, I'm unaware of any case where an acquirer was found to be in breach and specific performance was not awarded - but in the first of these, IBP v. Tyson, Chancellor Strine agonized over the social dislocation that might be caused by forcing an unwilling buyer to complete a sale. Part of the reason he ultimately ordered specific performance was because the business case for the deal remained unchanged; as he put it:
A compulsory order will require a merger of two public companies with thousands of employees working at facilities that are important to the communities in which they operate. The impact of a forced merger on constituencies beyond the stockholders and top managers of IBP and Tyson weighs heavily on my mind. The prosperity of IBP and Tyson means a great deal to these constituencies. I therefore approach this remedial issue quite cautiously and mindful of the interests of those who will be affected by my decision….
[T]here is no doubt that a remedy of specific performance is practicable. Tyson itself admits that the combination still makes strategic sense. At trial, John Tyson was asked by his own counsel to testify about whether it was fair that Tyson should enter any later auction for IBP hampered by its payment of the Rawhide Termination Fee. This testimony indicates that Tyson Foods is still interested in purchasing IBP, but wants to get its original purchase price back and then buy IBP off the day-old goods table. I consider John Tyson's testimony an admission of the feasibility of specific performance…
Probably the concern that weighs heaviest on my mind is whether specific performance is the right remedy in view of the harsh words that have been said in the course of this litigation. Can these management teams work together? The answer is that I do not know. Peterson and Bond say they can. I am not convinced, although Tyson's top executives continue to respect the managerial acumen of Peterson and Bond, if not that of their financial subordinates.
What persuades me that specific performance is a workable remedy is that Tyson will have the power to decide all the key management questions itself. It can therefore hand-pick its own management team. While this may be unpleasant for the top level IBP managers who might be replaced, it was a possible risk of the Merger from the get-go and a reality of today's M A market.
The impact on other constituencies of this ruling also seems tolerable. Tyson's own investment banker thinks the transaction makes sense for Tyson, and is still fairly priced at $30 per share. One would think the Tyson constituencies would be better served on the whole by a specific performance remedy, rather than a large damages award that did nothing but cost Tyson a large amount of money.
Well, Elon Musk is an ... unusual ... buyer of companies, and I doubt we'll see his like again soon, but he's definitely illustrating a worst case scenario for forcing a merger over a buyer's objections. He famously performed no diligence on the company before signing the deal, and tried to back out immediately thereafter, so there was no point where he engaged in any serious analysis of Twitter's systems or planning for what he'd do with ownership. His whiplash changes to policies, his mistaken firings, and his basic misunderstanding of Twitter's business all demonstrate the dangers of selling a company to a buyer who is not prepared to run it.
Which begs the question whether Chancery will be more hesitant in future cases to order specific performance.
In Twitter's case, the parties had agreed to an unusually strong specific performance provision - which barred Musk from even contesting the propriety of specific performance were he found to be in breach - but whatever parties' contractual agreements, specific performance ultimately lies in the court's discretion, and the court has to decide whether it is an appropriate remedy. Though Delaware places great weight on parties' agreements that specific performance is appropriate and breach would cause irreparable harm, the court must also determine that the order "not cause even greater harm than it would prevent." What made the Twitter deal so uniquely high stakes was that the parties had also agreed that, in the absence of specific performance, the most Musk could be ordered to pay in damages was $1 billion, which was far less than the damage he had inflicted on Twitter in the interim and certainly less than what shareholders were owed. Had the court been unwilling to award specific performance, his bad behavior would, essentially, have been rewarded with a slap on the wrist.
Deal planners, I assume, know all of this, which makes me wonder if, going forward, there will be more uncertainty about enforcement, and whether merger agreements will be more likely to provide that knowing and intentional breaches can result in uncapped damages. At least that way, parties will be protected if they are concerned that Delaware courts - looking at the Twitter wreckage - might be less willing to order specific performance in the future.