Wednesday, July 13, 2022
John Patrick Hunt
Elon Musk and Twitter: Overview
Is Elon Musk is likely to be ordered to go through with his agreement to acquire Twitter if he unjustifiably fails to close the acquisition? This series of three posts analyzes the question and considers what damages might be awarded Twitter if specific performance is denied. The first post lays out the problem, the second addresses the issue of specific performance, and the third discusses damages in the absence of specific performance.
Although the Twitter merger agreement provides that Musk and his acquisition companies may be compelled to close the transaction, it’s been pointed out that the decision to grant such an order, one of “specific performance,” generally is a matter of judicial discretion rather than pure party choice. As Contracts teachers know, American courts generally will not order specific performance as a remedy for breach of contract if an award of damages provides “adequate” relief. See Rest. (2d) of Contracts § 359(1). Even if damages are inadequate, courts may weigh a variety of factors, such as the public interest and fairness between the parties, in deciding whether to grant the equitable remedy of specific performance. See Rest. (2d) of Contracts §§ 362-369. We will call the adequacy of damages and the application of these factors “equitable grounds” for denying specific performance or “equitable issues.”
The Restatement commentary specifically instructs that parties cannot simply opt into specific performance: “Because the availability of equitable relief was historically viewed as a matter of jurisdiction, the parties cannot vary by agreement the requirement of inadequacy of damages, although a court may take appropriate notice of facts recited in their contract.” Rest. (2d) of Contracts, § 359 cmt. a (1981).
These posts make two points. First, as M&A scholars know, the Delaware Court of Chancery has ordered specific performance of corporate merger agreements as a matter of course and has not extensively analyzed equitable factors as the Restatement suggests. Indeed, when merger parties address specific performance in their agreement, the court has treated the decision to grant specific performance or not primarily as a question of contract interpretation and has given little or no weight to equitable issues, including the adequacy of damages. Although the research for these blog posts has not been totally comprehensive, the author has located no case in which the court interpreted the parties’ contract to authorize specific performance but declined to order the remedy for equitable reasons.
Second, even in the apparently unlikely event that the Court of Chancery were to decide to exercise its equitable discretion not to grant Twitter specific performance, this particular merger agreement is drafted so that Twitter would have a reasonable argument for full expectation damages, which could far exceed the contract’s much-discussed $1 billion cap on monetary relief.
A note on assumptions. The agreement provides that specific performance is available only under particular conditions, as follows. Twitter’s shareholders must have approved the deal and regulatory conditions must be satisfied. Agrmt. 7.1. Debt financing (either the negotiated financing or an alternative) must be available. Agrmt. 9.9(b). Twitter must have materially performed its pre-closing obligations and confirmed that it will close if Musk is ordered to do so. Agrmt. 7.2(a), 9.9(b). Twitter must not have suffered a material adverse effect, Agrmt. 7.2(c). And its representations and warranties must be true (with some allowances for immaterial inaccuracies). Agrmt. 7.2(b).
Of course, Musk claims that Twitter has materially breached its obligations, made false and misleading representations, and is likely to suffer a material adverse effect. See Letter from Mike Ringler to Vijay Gadde, July 8, 2022. Twitter (and other commenters) have cast doubt on Musk’s claims, see, e.g., Matt Levine, Elon’s Out, Bloomberg, July 9, 2022, but these posts do not evaluate them. Instead, it assumes that the conditions for specific performance set forth in the agreement are met and addresses whether the court is likely to deny specific performance for equitable reasons.
The author gratefully acknowledges receiving excellent research assistance from Michaela Gines and Benjamin Ylo of the King Hall Class of 2024. Their work contributed significantly to these posts.