When Elon Musk chose to back out of his $44 billion offer to buy Twitter, the social media giant filed a lawsuit in the Delaware Court of Chancery.
Twitter has filed a lawsuit seeking "particular performance," an unusual remedy that would oblige Musk to finish the deal.
Unfortunately for Twitter, the guy who offered to acquire the firm is not Elon Musk Inc. but Elon Musk as a natural person. The legal justification stems from the country's ban on slavery in the nineteenth century. This alone can prevent compulsion.
Twitter's claim aims to prevent Musk from additional violations of their contractual relationship, compel Musk to meet his legal commitments, and require the merger to be completed. While particular performance has precedent in Delaware, the Musk-Twitter transaction is unusual. To date, Delaware has only forced one firm to buy another. The Court of Chancery has never forced a natural person to complete a transaction. Although companies are legal people with equal rights for many purposes, other rights are reserved for natural persons alone. One of such rights is the 13th Amendment ban on involuntary servitude, which is a foundation of the rarity of the remedy of a particular performance.
Courts grant particular performance when no alternative remedy, including monetary damages, is available.
Because all land is unique, this solution is most commonly used in real estate transactions. Courts also give a particular performance for one-of-a-kind items such as antiquities and other in-demand items. However, courts seldom accept specific performance for personal services contracts, in part because the state can no longer compel persons to participate under the 13th Amendment.
Beyond the Constitution, there are practical reasons for the rarity of particular performance as a remedy and the courts' disdain for requiring individuals to perform by force. Human nature would cause a person who is forced to perform a service to do a poor job. It is just more feasible and judicially efficient to award monetary damages in order for the party to locate a substitute. In other words, while the court may order Elon Musk to buy Twitter, it would be difficult to order him to run the firm in the best interests of shareholders and other stakeholders. In other words, while the court may order Elon Musk to buy Twitter, it would be difficult to order him to run the firm in the best interests of shareholders and other stakeholders.
Tyson Foods' 2001 acquisition of meatpacker IBP establishes a precedent in Delaware for specific performance as a remedy for a merger. Tyson won a bidding war for IBP but then tried to back out of its $3.2 billion offer. The Delaware Court of Chancery determined that specific performance was the best remedy due to the combination of contract provisions and the difficulties in assessing monetary damages. Tyson broke the contract, according to Leo Strine, a deputy chancellor on the court, and there were no major unfavorable changes to IBP—Tyson just experienced buyer's remorse. "Material adverse effect," Strine stated, is meant to safeguard the acquirer from unexpected circumstances that significantly threaten the target's entire profits potential over time; short-term earnings reductions are insufficient.
Tyson accused IBP of misrepresenting earnings and accounting issues and neglecting to disclose facts to the Securities and Exchange Commission.
Similarly, Musk has accused Twitter of withholding critical information concerning the existence of bots from him by omitting including it in required monthly SEC reports. Strine came to the conclusion that Tyson had not been misled. Developments in valuation reflected market changes and increasing supply-chain expenses. Musk's allegations may meet a similar outcome.
Although Strine believed that specific performance was the best solution, he refrained from compelling it, questioning whether the management teams could collaborate and whether forcing a merger would be best for shareholders and other stakeholders."The impact of a forced merger on constituencies other than IBP and Tyson stockholders and top management weighs heavily on my mind," Strine wrote in his opinion.
Tyson's takeover of IBP was authorized by IBP shareholders on September 28, 2001.
Even in a merger like IBP-Tyson, the judge was concerned about the impact of forcing parties into commitments they no longer wanted. This was true even in the absence of the personal aspect of the Musk-Twitter deal. Musk participates in the discussions as an individual with full constitutional protections and no motive to defend the shareholders and stakeholders involved if he were a business.
There are more questions.
Is Musk's offer to buy Twitter so one-of-a-kind that a substitute transaction isn't possible?
Is the absence of a formal auction and bidding procedure sufficient to differentiate Twitter from IBP? Tyson faced competition, weighed its choices, and placed the highest bid because it felt the firm would add value to its operations. Musk purchased stock privately, conducted the deal in public, and mostly bypassed due diligence. Finally, there is the issue of whether monetary damages are sufficient.
As a result, while Twitter attempts to compel Musk to buy the firm, a court is unlikely to award such a remedy.
The commentary's author bio: Carliss Chatman is an associate professor of law at Washington & Lee University.
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