ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Friday, July 15, 2022

Guest Post 3: John Patrick Hunt on Alternatives to Specific Performance in Twitter v. Musk

John Patrick Hunt on Elon Musk and Twitter
Part III: Alternatives to the
Specific Performance of Merger Agreements

As explored in the previous posts (1 & 2) in this series, Delaware law seems to provide for specific performance of merger agreements when the parties agree to it, which they often do.  But, moving to the second major point of these posts, what if the court nevertheless decides not to order specific performance here?  For example, commenters have suggested Musk might simply defy such an order, and that fear of that outcome might induce the court not to order specific performance in the first place.  Setting aside any doubts about the plausibility of this scenario, we consider what would happen if the court actually did decline to order specific performance on the stated ground that damages are adequate or for other equitable reasons.

John Patrick HuntThe conventional reading of the Musk-Twitter contract seems to be that any monetary damages would be capped at $1 billion, the amount of what the agreement calls the “Parent Termination Fee.”  And the does say that in plain terms.  For a “knowing and intentional” breach of the agreement, Twitter is “entitled to seek monetary damages, recovery, or award” from Musk or the acquiring companies “in an amount not to exceed the amount of the Parent Termination Fee, in the aggregate.”  Agrmt. 8.3(c)(ii).  In cases other than knowing and intentional breach, Twitter’s “right to receive payment from Parent of the Parent Termination Fee … shall constitute the sole and exclusive monetary remedy” of Twitter.  Id.  The same provision goes on to state that “in no event shall [Musk or the acquisition companies] be subject to an aggregate amount for monetary damages … in excess of an aggregate amount equal to the Parent Termination Fee.”  Id.  The specific-performance provision itself states, “in no event shall [Twitter] be permitted or entitled to receive aggregate monetary damages in excess of the Parent Termination Fee.”  Agrmt. 9.9(b).

Twitter-logo.svgBut these assertions have to be read against the general background assumption of the agreement that specific performance would be available.  This assumption also appears repeatedly in the agreement, and it is stated emphatically: “[T]he parties hereto acknowledge and agree that the parties hereto shall be entitled to an injunction, specific performance, and other equitable relief … to enforce specifically the terms and provisions hereof, in addition to any other remedy to which they are entitled at law or in equity.”  Agrmt. 9.9(a).  Moreover, “Notwithstanding anything herein to the contrary, including the availability of the Parent Termination Fee or other monetary damages, remedy, or award, it is hereby acknowledged and agreed that [Twitter] shall be entitled to specific performance or other equitable remedy to enforce” the agreement against Musk and the acquisition companies, provided the conditions discussed above are met.  Agrmt. 9.9(b).  The word “acknowledge” seems significant here, as it communicates that each party not only agrees to be subject to specific performance, but also recognizes that each party contemplates that the remedy will in fact be granted -- that is, granted despite equitable considerations.

The contract documents do not address the case where a court denies specific performance for equitable reasons.  A provision that Twitter can pursue specific performance and monetary relief simultaneously but cannot receive both, Agrmt.  9.9(b)(iii)(A), just appears to address the timing of election of remedies. 

Assuming that the agreement does not cover the case where specific performance is unavailable, the “in no event” should also be interpreted not to cover that case, leaving a gap or omitted case in the contract.  One possibility is that the gap is large enough to constitute a failure of assent, as in that 1L chestnut, the Peerless case, Raffles v. Wichelhaus, 159 Eng. Rep. 375 (1864) (or in the chicken case, Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960), which has been interpreted as a modern analogue).  Or perhaps the denial of specific performance on extrinsic grounds would be the failure of a basic assumption that the court would award the remedy, so that mistake doctrines would come into play.  See Fortis Advisors LLC v. Johnson & Johnson, 2021 WL 5893997, at *17 (Del. Ch. Dec. 13, 2021).  These outcomes threaten the enforceability of the merger agreement and thus would be bad news for Twitter.

More likely, however, the court would try to fill the gap by interpretation.  Delaware courts would receive extrinsic evidence, such as evidence of the parties’ negotiations, given the contract’s ambiguity, see, e.g., United Rentals, 937 A.2d at 834-35.  We of course don’t know what that extrinsic evidence might show, but unless it leads to a clear outcome, it seems likely that the default contract remedy of expectation damages would come back into play.  See AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, 2020 WL 7024929, at *100 (Del. Ch. Nov. 30, 2020) (“The common law has established a series of default rules governing the ability of a party to recover damages for a breach of contract.  They form a backdrop to the negotiated provisions.”); Concord Real Estate CDO 2006-1, Ltd. v. Bank of America N.A., 996 A.2d 324, 332 (Del. Ch. 2010) (common law “provides a backdrop of standard default rules that supplement negotiated agreements and fill gaps when a contract is incomplete, whether by inadvertence of design.  Parties can contract around virtually all common law rules.  In a lengthy and sophisticated agreement … the terms of the agreement and not the common law will control many issues.  But unless contradicted or altered by the parties’ agreement, the common law rules form an implied part of every contract.”).

AfraTwitter’s expectation damages would be the amount needed to put the company in the financial position it would have been in if Musk had closed the transaction as agreed.  They could vastly exceed the $1 billion termination fee, which, as Dean Afra Afsharipour (right) has noted, is a relatively small proportion of the deal price by M&A standards.  This amount would certainly be litigated, but a reasonable candidate for an approximation would be the difference between the agreed acquisition price of its stock and the market price.  The deal price is $54.20 per share, and at this writing, Twitter is trading at $34.28 per share and reportedly has 764 million shares outstanding.  That works out to over $15 billion in expectation damages.

A counterargument could be that despite the contract language quoted above, the parties did not in fact assume that specific performance would be available.  Instead, perhaps Twitter recognized that denial was a possibility, signed up for an undercompensatory $1 billion remedy in that circumstance, and lost its gamble.  The strong Delaware precedents in favor of specific performance cut against this interpretation, but extrinsic evidence that the Twitter team recognized the possibility that specific performance would be denied despite the law could cut the other way.  And Musk’s side would be able to take discovery and try to prove that, given Delaware’s rules on extrinsic evidence.

For example, if Twitter’s representatives discussed the possibility that a court would deny specific performance to avoid a confrontation with Musk out of fear that he would refuse to comply, that could weigh in favor enforcing the damages limitation should apply.  But it raises a question:  Should a powerful party be allowed to benefit from willingness to defy the law in this way?

**

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.

https://lawprofessors.typepad.com/contractsprof_blog/2022/07/guest-post-3-john-patrick-hunt-on-alternatives-to-specific-performance-in-twitter-v-musk.html

Commentary, Contract Profs, Current Affairs, E-commerce, In the News, Recent Cases, Web/Tech | Permalink

Comments

Good series. Twitter (the corporation) has no damages, since it’s suffered no monetary damage and is on record as saying Musk’s takeover will be bad for the company.

OTOH, the shareholders have lost, but they have no contractual claim against Musk. Musk didn’t agree with them on specific performance, and their monetary loss can be calculated easily and accurately.

Are the shareholders third party beneficiaries of the merger agreement?

Posted by: Frank Snyder | Jul 16, 2022 6:08:05 PM

These arguments sound similar to those voiced in the WSJ. Whence the confidence that Twitter has not been harmed? Seems to me that for a company like Twitter, which makes money through selling various forms of advertising on its platform, most of its value derives from the good will value associated with that service. When someone who is acquiring the company goes around saying that advertisers are mostly just reaching bots, that undermines the company's valuation. What am I missing?

Yes, the amount of harm Musk has done will be hard to quantify. Perhaps that is why Delaware courts, as Professor Hunt has shown, often grant specific performance as a remedy in this context.

As to shareholders, those suits will certainly come. I am too far removed from teaching corporations to remember whether those suits will be direct, derivative, or both. I also think this might be a great test case for the notion that shareholders with large stakes in public corporations can be found to have assumed fiduciary duties towards minority shareholders, but I'm out on a limb here.

Posted by: Jeremy Telman | Jul 17, 2022 5:53:11 AM

Twitter may have a business defamation claim against Musk—assuming they can prove he lied—but that’s separate from a breach of contract claim. You don’t get extra damages for breach because the defaulting party traduced you.

The initial reaction from Twitter’s board and nearly all its employees was that Musk’s “free speech” plan would wreck Twitter. The Board adopted a poison pill to thwart it. They tried to avoid the takeover by negotiation. Key employees announced they’d quit. The Board now has to claim that Twitter, the corporation, is better off if Musk owns it. I’d like to see Agrawal testify on the stand that the company will be irreparably harmed unless Musk takes over, fires him and the rest of the board, and reinstates The Donald’s account: (“Twitter will be destroyed if the evil Musk takes over! Even our Democracy will suffer terrible harm! So, Judge, please make him go through with the deal!” What’s the possible claim they can now make that the corporation will be better off—i.e., will make more money—if Musk owns it? I suspect a lot of employees are already exploring whether they’ll file amicus briefs opposing specific performance as a remedy. How many of them want to work for the man?

The shareholders will be better off if they get the offer price, but that’s got nothing to do with harm to Twitter itself. The shareholders are not parties to the contract. Even assuming they were, their damages are classic sort that are easily calculated: offer price minus current share price.

The shareholders can bring a derivative action for business defamation or securities violations if the Board doesn’t. Assuming Musk engaged in defamation deliberately to drive down the stock price and purchase at a lower price, they may have a claim. There will be an awful lot of discovery by excellent and expensive lawyers into the very information that Twitter has (apparently) not turned over. But the corporation has no cause of action against Musk for the decline in the share price. Except in rare cases, changes in ownership and fluctuations in stock prices do not affect any financial interests of the corporation itself.
I didn’t suggest that Professor Hunt was wrong to say that specific performance is available as a potential remedy. But (as I recall he notes) even where the parties agree, a Delaware judge must still consider both the public interest and the difficulty in administering the remedy. Here, the takeover is vigorously opposed by a large slice of the public, several government agencies (who may file as amici to argue that turning the platform over to Musk is not in the public interest), prominent politicians, and pretty much the whole workforce. And supervising the proxy materials and process isn’t an easy thing for a court to do.

I don’t use Twitter and really don’t care who wins. Musk either takes over Twitter at the agreed-upon price, or he pays a chunk of money to some people, or (if Twitter lied about the figures on which he relied) he does neither. Who cares? But the fireworks will be fascinating.

The bid was $54.20. The current stock price is $38.41, even lower than it was before Twitter sued. Investors don’t seem to have much faith that a court would order specific performance.

Posted by: Frank Snyder | Jul 18, 2022 4:37:23 PM

Always fun to spar with you, Frank! Here is a rendition of what I would say from my barstool on the matter:

My point is not that Twitter has a business defamation claim against Musk but that the company suffered harm arising from the breach. Disentangling the tortious conduct from the breach itself could be hard, but since the contract specifically provides for specific performance as a remedy for breach, that exercise seems unnecessary.

As I’m sure you know, it is very common for boards to respond with defensive measures when faced with a hostile acquisition. Adopting a poison pill is a fairly standard response. But Musk sweetened the pot, and the board suspended the poison pill. I don’t know why any court would care about mean things Twitter’s board said about Musk, as that rhetoric all became irrelevant once they entered into the agreement with Musk.

I don’t think a Delaware court will pay much mind to an amicus filed on behalf of employees who oppose an acquisition. Delaware has recognized some duties that boards owe to employees and other constituencies in the context of the business judgment rule, but once a company has been put up for sale (as Twitter was when the board entered into the agreement with Musk), the board’s one duty is to get the highest return for its shareholders.

My recollection is that the shareholders can bring direct suits for harms that Musk has done to their share price and derivative claims for harms he has done to the corporation. You do not believe there has been such harm, but your views do not accord with the way Delaware courts treat cases like this one.

I agree with you that specific performance might be messy here. Some have argued that a court still might order it in order to force Musk into post-judgment negotiations that will result in him paying a cancellation fee in excess of $1 billion.

If you are interested in the question of whether Twitter lied, Matt Levine has the answer here: https://www.bloomberg.com/opinion/articles/2022-07-18/elon-wants-to-fight-the-bots

As to what investors think, that can change very quickly. We’ll see what happens as the litigation proceeds. Of course, there are other factors at play here, but ceteris paribus if I thought there was a 70% chance of an order of specific performance resulting in me getting $54.20/share of Twitter, I would be willing to pay $37.94/share.

Posted by: Jeremy Telman | Jul 19, 2022 5:53:04 AM

Interesting discussion! I was wondering whether anyone would raise Frank’s point.

As Frank ably points out, it’s indeed true both that a corporation is distinct from its shareholders and Twitter’s shareholders are not parties to this contract. The issue thus is determining damages to Twitter itself for breach of contract. There, a leading M&A casebook provides, “In the case of a merger transaction, expectation damages can potentially be extremely large if a court decides that they include the premium to be paid by the buyer to the seller’s shareholders.” Claire A. Hill, Brian JM Quinn & Steven Davidoff Solomon, Mergers and Acquisitions: Law, Theory, and Practice 425 (2d ed. 2019).

Including the premium in Twitter’s damages is reasonable. If we assume, reasonably but debatably, that Twitter exists to create value for its shareholders within legal constraints, then it seems reasonable to suppose that impairment of Twitter’s value is damage to the company itself. And the loss of an opportunity to be sold at a high price would seem to affect the company’s value, because the deal price either conclusively measured the company’s subjective value or was probative of its objective value.

One might argue that the merger premium inexactly measures a loss in objective value, but here Delaware appears to follow the familiar approach: “[A]s a general rule, … a party who has broken his [sic] contract will not be permitted to escape liability because of the lack of a perfect measure of damages for breach. Therefore, a reasonable basis for computation and the best evidence which is obtainable under the circumstances of the case, and which will enable the trier to arrive at a fair approximate estimate of loss is sufficient proof.” Falcon Tankers, Inc. v. Litton Sys., Inc., 380 A.2d 569, 588 (Del. Super. New Castle Cty. 1977).

As stated in the post, expectation damages undoubtedly would be litigated, and the difference between the merger price and the company’s trading price at closing is one reasonable candidate for measuring them.

Posted by: John Patrick Hunt | Jul 21, 2022 12:01:43 PM