Alex Reed contribution by Jürgen R. Ostertag
22.07.2022
Is there a common future for Twitter and Elon Musk? This question is to be clarified in October at the Court of Chancery in Delaware. Bild: picture alliance / ZUMAPRESS.com | Andre M. Chang
Elon Musk has lost interest in Twitter. The company insists on the completion of the takeover. What is being argued regarding and what arguments might be decisive in court Jurgen R. Ostertag written down.
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One of the richest men in the world announces that he will buy one of the world’s most influential social media services and changes his mind a few weeks later. The subsequent and partly public dispute between Elon Musk and Twitter provides the best entertainment. While the verbal exchange is in full swing, the legal battle with Twitter’s filing in the Delaware Court of Chancery is only just beginning. There is a lot of money at stake for both sides.
What culminated in a lawsuit began in April when Musk offered Twitter a price of $54.20 per share, or $44 billion in total, for its acquisition. Three months later, Musk terminated the acquisition agreement, alleging breach of contract by providing false information and deviating from previous business operations. Twitter countered with a lawsuit for compliance, accusing Musk of hypocritical behavior and defamatory statements regarding Twitter and its management. It seems that both parties want to win over public opinion in order to gain advantages in negotiating a comparative solution.
Is Musk still bound by the acquisition agreement?
Legally, Musk can terminate the contract if Twitter has failed to meet its obligations under the agreements made. Accordingly, Musk’s reason for termination is that Twitter has failed in its Article 6.4 obligation to provide reasonable access to business information and its Article 6.11 obligation to cooperate and notify on financial matters.
Alternately, he argues that the termination of two key executives and adjustments in recruitment constituted an unauthorized change in the conduct of business and that the high number of bogus customers (spam and fake accounts) had a material adverse effect (MAE clause) on Twitter’s market value.
Twitter denies the allegations and alleges in the lawsuit that it granted Musk access to information under the contract and coordinated with Musk on managerial and personnel measures. Musk himself was in breach of contract and therefore cannot terminate the contract. Twitter accuses Musk of violating confidentiality obligations and obligations to cooperate with publications with his tweets. He also violated his obligation to secure the financing of the purchase by dismissing his advisor Bob Swan “without replacement”.
Twitter filed the complaint on July 12, 2022 in the Delaware Court of Chancery, which has jurisdiction under the jurisdiction clause of the contract. Before this, both sides are now called upon to prove their own presentation. The court will ultimately decide whether Twitter provided reasonable access to information under the contract. This obligation is determined by the wording of the contract. However, an exact statement cannot be made at this point in time, as the entire situation has not yet been explored.
Due diligence does not play a significant role
Circumstances outside of the contract – for example the aspect of whether a purchase object check (due diligence) was carried out before signing – play no role in the interpretation. Rather, it is not unusual when taking over a listed company to only carry out a more detailed examination of the object of purchase following the purchase contract has been signed and before the purchase is completed.
The financial reports and other significant events or circumstances affecting the company are communicated to the public at least quarterly so that an initial check can already be made on the basis of them. A “satisfactory” conclusion of the object of purchase inspection is then often agreed as a condition of completion. However, such a closing condition has not been agreed here, so that Musk cannot refrain from closing the contract solely because of his dissatisfaction with the number of bogus customers.
The question of whether Twitter provided accurate information regarding bogus customers will be decided at the court hearing. Assuming the number of bogus customers is actually significantly higher than the company claims, the contractual MAE clause requires Musk to prove that this had a material adverse effect on Twitter. A material adverse effect, as contractually defined, is when one or more effects of an action or event has resulted or will result in a material adverse effect on Twitter’s business, financial condition, or results of operations.
The Delaware Court of Chancery is very restrictive in the interpretation of MAE clauses and has regularly denied the existence of such an adverse effect, so that the contract had to be performed. The only case in which a material adverse effect was assumed was decided by the court in October 2018 in the case of Akorn Inc. vs. Fresenius Kabi AG. Fresenius Kabi was able to demonstrate that the target company, Akron, had undergone a company-specific, material change for a sustained significant period of time. The hurdle to prove a significant adverse effect is therefore very high, the proof of the existence of such an effect is therefore classified as unlikely.
When is the agreed termination fee due?
Elon Musk is required under Article 8.3 to pay Twitter a termination fee of $1 billion if he terminates without justification. This contractual termination fee must be paid if either all of the conditions for the completion of the contract are met and Musk does not perform the contract, or the necessary completion conditions cannot be met due to a breach of contract by Musk. This is the case, for example, if financing cannot be guaranteed. Twitter can also be required to pay the termination fee if the company violates contractual obligations – for example, the shareholders do not agree to the transfer of the company.
Twitter’s action for performance of the contract is only permissible on the basis of the provision contained in the contract that the parties can demand performance from the other party (specific performance clause). In contrast to German law, according to US law, one party “only” has a claim for damages in the event of a breach of contract by the other party. This is not the case if the parties include a performance clause in the agreement because compensation for damages does not adequately compensate for the damage that has actually occurred. The court then orders performance if there is such a clause and the contract is fair and equitable.
Can the court order the completion of the takeover?
Unless Musk demonstrates a material adverse effect as a result of the increased number of bogus customers he alleges, his termination under the MAE clause is void and the contract will be enforced by Twitter’s action for performance. In this case, it can be assumed that Musk will follow the court’s order.
The court has set the hearing for October. Judge Kathleen McCormick found Twitter’s arguments convincing that those involved are able to pursue an expedited trial. Therefore, the parties should now work out a schedule for a five-day process. Musk is the loser from the first round.
If the parties strive for an out-of-court settlement before the oral hearing, renegotiation of the purchase price is likely in such cases of a company takeover.
Jürgen R. Ostertag heads the German-speaking practice group at Tarter Krinsky & Drogin LLP in New York. He has been advising German companies and private individuals on US legal issues for over 22 years. He is a German and American fully qualified lawyer and admitted to the bar both in Germany and in the USA.
