Twitter’s decision to file a lawsuit against Elon Musk in Delaware last week highlights the significant role of the tiny state in regulating transactions involving public companies. Delaware’s dominance of corporate law is both well-established but fragile. The way that its courts handle the Musk case could once again confirm its importance but also risks highlighting the weak position of the state.
Twitter is headquartered in San Francisco but is incorporated in Delaware, as are a majority of the largest U.S. corporations. Companies are attracted to the state because it has developed a reputation for crafting reasonable rules relating to corporate governance and mergers. The Delaware Chancery Court consists of experts in corporate law who quickly and competently decide cases and provide extensive guidance on best practices that are essential reading for corporate lawyers.
In its heyday, the Delaware Chancery often decided disputes that decided the fate of significant public companies. For example, its decision resolving the fight over the cosmetics company Revlon conveyed that it was improper for a board to be guided by personal dislike in refusing to accept a bid for the company that would benefit shareholders. Twitter’s board was guided by this principle in deciding to accept Musk’s bid, despite concerns about how he might run the company.
Most experts agree that Musk’s case for exiting the Twitter deal is weak. His arguments evidence a Trumpian approach to pushing the boundaries of the law. It is likely that his legal claims are simply an excuse for him to exit a bad deal.
On the other hand, a victory for Twitter is not a sure thing. The merger contract provisions at issue are broadly worded. Is there a clear answer to whether his request for more information about alleged spam accounts is “reasonable” and whether Twitter made “material misrepresentations” in its SEC filings? It is possible that Musk is partly motivated by the belief that he has a plausible argument that he be provided more information under the merger agreement.
This may be a case that requires more than determining whether Musk is a sinner or saint. On the one hand, the predictability of merger transactions is important for Delaware. If a bidder can pull out of a deal based on a pretext simply because the market has turned, the stability of the market for public companies will become less certain. On the other hand, the Delaware court may view this situation as unlikely to repeat itself. Musk is an aberration in his efforts to exit an impulsive decision. Is it Delaware’s job to punish Musk for making life difficult for a multi-billion dollar company?
As other commentators have noted, the practical ability of Delaware to force Musk to purchase Twitter is uncertain. If a Delaware court grants Twitter a specific performance remedy and Musk flouts it, Delaware’s limited authority as just one state among 50 will be highlighted. This risk could influence the Delaware Chancery to find some middle ground that avoids a conflict. Perhaps it would give Musk some limited disclosure with the hope that doing so would prompt the parties to reach a settlement.
This could be a Marbury v. Madison moment for the Delaware Chancery. In that case, which is read by every first-year constitutional law student, the U.S. Supreme Court finessed its concern about its ability to enforce an order by deciding the case on a technicality that would not require it to force compliance but confirmed its authority to interpret the law. That power of judicial review is now the foundation of the court’s power. In order to maintain its storied place in regulating public companies, Delaware must find a way to deal with Elon Musk.
James Park is professor of law at UCLA School of Law. He is the author of a history of securities fraud regulation, “The Valuation Treadmill: How Securities Fraud Threatens the Integrity of Public Companies.”
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