Opinion | Twitter’s Lawsuit In opposition to Elon Musk Seems to be Like a Loser

The merger settlement on this case might be learn in a manner that allows a court docket to order Mr. Musk to purchase Twitter—he and two entities he controls agreed they might “not oppose” such an order—by means of a treatment referred to as “particular efficiency.” Though litigation is at all times unsure, it’s onerous to think about a court docket would power the acquisition of a $44 billion company.

Particular efficiency is used fleetingly, and for good cause. It’s the final act of coercion, and it is sensible solely when there isn’t a different. If one agrees to promote Hearst Fort, however tries to again out when the next bid emerges, a court docket could particularly implement the contract. There is just one Hearst Fort, and no different treatment could make the jilted purchaser complete.

However the place alternate options exist, different cures often make extra sense. Think about the contract was to color Hearst Fort, and the painter walked away. A court docket could be reluctant to power the painter to do the job. Nobody needs to have his home painted by somebody below court docket order. A coerced painter may skimp on high quality, which may require the court docket to get entangled once more.

Because of this, Delaware courts have not often ordered particular efficiency in merger agreements. If Mr. Musk doesn’t need to purchase Twitter, it doesn’t make a lot sense for a court docket to make him accomplish that. Twitter could be worse off below his possession at this level, a destiny Twitter’s board is legally obligated to attempt to keep away from. There are additionally different potential patrons for Twitter.

What occurs if the court docket orders particular efficiency and Mr. Musk refuses? The one means the court docket has to compel him to line up financing and affix his signature to a deal is by holding him in contempt if he refuses. However it isn’t Mr. Musk that promised to purchase Twitter, however two entities below his management. The court docket may maintain them in legal contempt, however as Lord Thurlow noticed, “companies have neither our bodies to be punished, nor souls to be condemned.” Mr. Musk promised to “trigger” these entities to consummate the deal, however a court docket is unlikely to jail him if he shirks or refuses. Mr. Musk may play a high-stakes sport of hen that finally reveals that courts are extraordinarily restricted in circumstances like this if the events don’t need to play alongside.

Damages are simpler to implement. The court docket may order the painter who walked away to pay the distinction between the worth agreed and the worth of hiring a alternative. Within the case of Twitter, nonetheless, this treatment appears unavailing. It isn’t clear how Twitter is made worse off by Mr. Musk’s strolling away. Twitter shareholders are certainly worse off as a result of the merger settlement would have cashed them out at $54.20 a share. However the shareholders aren’t get together to the settlement. Solely Twitter Inc. is a celebration, and it’s a separate and distinct authorized entity. Twitter must show hurt, akin to misplaced income, and that’s an uphill battle.

Twitter may have raised the stakes for Mr. Musk by together with a requirement that he pay damages to its shareholders if he walked away. In that case, the shareholders may have sued for the distinction between the quantity Mr. Musk agreed to pay and the worth every other suitor would pay—just like the home-owner discovering one other painter. However the merger settlement doesn’t give shareholders this treatment.

The problem of the $1 billion breakup price stays. Courts will likely be more likely to make Musk pay to stroll away than power him to stroll down the aisle. However it isn’t clear he should pay that a lot. Breakup charges are alleged to mirror damages brought on by a breach of contract. They aren’t alleged to act as a penalty. On condition that Twitter isn’t clearly worse off by $1 billion—if in any respect—a court docket may balk at imposing such a excessive price.

This case highlights an vital threat to shareholders in mergers and acquisitions: The company that negotiates the deal could not have a lot of a case towards a breaching counterparty as a result of the company, not like its shareholders, often isn’t harmed when the counterparty walks away. The simple repair is to present shareholders the correct to sue for his or her losses. However both Mr. Musk’s legal professionals have been too good for that or Twitter’s weren’t good sufficient.

Mr. Heaton is managing member of an funding analysis agency. Mr. Henderson is a legislation professor on the College of Chicago. They’re co-founders of Heaton Henderson LLC, a company governance consultancy.