Micro-blogging platform Twitter sued Tesla CEO Elon Musk recently, for violating his $44 billion deal to buy the social media site.
Musk had announced his plans to terminate the deal, citing three reasons behind his decision. Firstly, Musk’s attorneys accuse Twitter of fraudulently under-reporting the number of spam/fake accounts. Twitter replied that it did not share additional information with Musk regarding spam accounts because it feared he would build a competing platform after abandoning the acquisition.
Secondly, Musk’s lawyers alleged that the platform failed to provide the required data and information he had requested. As the contract said that Twitter must provide reasonable access to its properties, books, and records.
Lastly, Musk’s attorneys stated that Twitter did not comply with a contract term that required the company to get his consent before deviating from its ordinary course of business.
Musk cites Twitter’s decision to fire two “high ranking” employees, lay off a third of its talent acquisition team, and institute a general hiring freeze as examples of decisions made without consulting him.
In its lawsuit filed with the Delaware Court of Chancery, Twitter called the reasons cited by Musk a ‘pretext’ that lacked merit and said his decision to walk away had more to do with the decline in the stock market, particularly for tech stocks.
Twitter also accused Musk of ‘secretly’ accumulating shares in the company between January and March without properly disclosing his substantial purchases to regulators, and said he “instead kept amassing Twitter stock with the market none the wiser.”
Shares of the social media platform closed at $34.06 on Tuesday, up 4.3%, but sharply below the levels of $50 where it traded when the deal was accepted by Twitter’s board in late April. The stock added another 1% after the bell.
The Delaware Court of Chancery, a non-jury court that primarily hears corporate cases based on shareholder lawsuits and other internal affairs, has ruled on a number of cases where a company cited the specific performance clause to force a sale.
None were nearly as large as Musk’s Twitter deal — $44 billion — and the details underpinning them differ as well.
Still, past cases can provide context for how this Musk-Twitter dispute might end.
IBP vs Tyson Foods
In this 2001 case, Tyson agreed to acquire IBP, a meat distributor, for $30 per share, or $3.2 billion, after winning a bidding war. But when both the businesses suffered, Tyson tried to get out of the deal and argued there were hidden financial problems at IBP.
Judge Leo Strine found no evidence that IBP materially breached the contract and said Tyson simply had “buyer’s regret.”
That didn’t justify calling off a deal, he said.
Strine ruled Tyson had to buy IBP given the contract’s specific performance clause.
Strine wrote, “Specific performance is the decisively preferable remedy for Tyson’s breach, as it is the only method by which to adequately redress the harm threatened to IBP and its stockholders.”
More than 20 years later, Tyson still owns IBP.
The Tyson deal differs in a few key ways, however. Tyson hoped a judge would allow it to walk away from the deal in part because of the significant deterioration of IBP’s business after the agreement was signed.
Musk is arguing false and vague information about spam accounts should allow him to walk.
Also, unlike Tyson’s deal for IBP, Musk’s acquisition of Twitter involves billions of dollars in external financing. It’s unclear how a decision in favour of Twitter would affect potential funding for a deal or whether that could impact closing.
Strine now works at Wachtell, Lipton, Rosen & Katz, the firm Twitter hired to argue its case.
AB Stable v. Maps Hotels and Resorts
In this 2020 case, a South Korean financial services company agreed to buy 15 US hotels from AB Stable, a subsidiary of Anbang Insurance Group, a Chinese company, for $5.8 billion. The deal was signed in September 2019 and scheduled to close in April 2020.
The buyer argued COVID-19 shutdowns caused a material adverse effect on the deal. The seller sued for specific performance.
Judge J. Travis Laster found that hotel shutdowns and dramatic capacity reductions breached the “ordinary course” of the business clause, and ruled that the buyer could get out of the deal.
The Delaware Supreme Court affirmed the decision in 2021.
Tiffany v. LVMH
In another COVID-related case, LVMH originally agreed to buy jewelry maker Tiffany for $16.2 billion in November 2019.
LVMH then attempted to scrap the deal in September 2020 during the pandemic, before it was set to close in November. Tiffany sued for specific performance.
In this case, a judge never issued a ruling, because the two sides agreed to a lowered price to account for the drop in demand during the COVID-induced global economic pullback.
LVMH agreed to pay $15.8 billion for Tiffany in October 2020. The deal closed in January 2021.
Genesco v. Finish Line
Footwear retailer Finish Line initially agreed to buy Genesco for $1.5 billion in June 2007 with a closing date of Dec. 31, 2007.
Finish Line attempted to terminate the deal in September of that year, claiming Genesco “committed securities fraud and fraudulently induced Finish Line to enter into the deal by not providing material information” concerning earnings projections.
As with the Tyson case, the Delaware Chancery Court ruled Genesco had met its obligations and that Finish Line simply had buyer’s remorse for paying too much.
Markets had begun to crash in mid-2007 during the start of the housing and financial crisis.
But rather than going through with the deal, both sides agreed to terminate the transaction, with Finish Line paying Genesco damages.
In March 2008, with the credit market cratering, Finish Line and its primary lender UBS agreed to pay Genesco $175 million, and Genesco received a 12% stake in Finish Line.
Genesco remains an independent publicly traded stock to date. JD Sports Fashion agreed to buy Finish Line for $558 million in 2018.