The Trial Between Twitter and Elon Musk Will Take Place in Delaware – The Founder of Tesla Risks Big.
The Delaware Court of Chancery could force Elon Musk to buy Twitter for $44 billion.
After Elon Musk announced that he did not want to buy Twitter anymore under the pretext that the social network cheated him with its number of fake accounts, the company hired one of the most prestigious American business law firms (Wachtell, Lipton, Rosen & Katz), and reacted sharply.
The billionaire did not hesitate to respond with derision from his own Twitter account.
But Elon Musk has indeed signed a 73-page contract in which he commits to buying the company located in San Francisco. The microblogging site said it was ready to take him to court to enforce the agreement. And a priori, a court in the state of Delaware will have to decide.
1. Why Delaware?
Like many other American companies, Twitter has chosen to register in the state, in the city of Dover. More than 1.8 million companies have chosen to locate in Delaware. That's more than the state's population.
Most of these companies are not headquartered here. In the case of Twitter, its headquarters are in downtown San Francisco and most of its employees are still based there. But Delaware offers several advantages. Its taxes are lighter than those of other states, including California, and its courts are known for their ability to handle complicated cases quickly. The unprecedented lawsuit between Elon Musk and Twitter should nevertheless give them a hard time.
2. What is the court where the dispute will be tried?
The court that will most likely be called upon to arbitrate is called the Delaware Court of Chancery. Founded in 1792, when Delaware adopted a constitution, the court's main characteristic is that it relies on case law rather than statute law. It has experience in mergers and acquisitions cases, which reassures companies because its decisions are more predictable.
For example, it arbitrated between HP and Compaq in 2002, when a dissident shareholder sought to prevent the merger between the two companies. It was also in Delaware that LVMH and Tiffany clashed in 2020. The French group eventually bought the jeweler at a lower price.
Its judges can force parties to comply with its injunctions, not just pay fines. In theory, they could therefore force Elon Musk to buy Twitter, as demanded by the social network's board of directors. But such a measure would be complicated to implement.
They could also call the parties to testify. The billionaire of South African origin could therefore speak. He had been summoned by the same court in July 2021 to justify the purchase of SolarCity by Tesla. Elon Musk, who was the first shareholder of both companies, was accused by other shareholders of having paid too much for this acquisition. The judges finally agreed with him, after a nine-month trial.
3. How will the trial between Twitter and Elon Musk play out?
On July 18, 2022, Twitter sent a letter to the American market regulator, the SEC. The social network accuses Elon Musk of not respecting his commitments. His about-face is “invalid and unlawful”, write his lawyers. The social network led by Parag Agrawal could file a complaint against the billionaire as early as this week, according to Axios. The lawsuit could drag on during 2023.
Judges will look at the 73 pages of the acquisition agreement to determine whether the billionaire has the right to waive. The main issue will likely be the number of bots, or fake accounts, on the platform.
4. What could be the outcome of this trial between Elon Musk and Twitter?
Elon Musk maintains that the proportion of bots is higher than 5%, the figure put forward by Twitter. He will have to prove that this gap if it exists, has a “significant negative effect” on the business of the social network. This will be far from easy, according to experts.
In an opinion published in 2020, a Delaware judge defined this effect as “a negative change in the target's business that significantly impacts its ability to earn money for a reasonable period, which should be measurable in years rather than months.”
Elon Musk will have to prove that Twitter's omission of the exact number of bots constitutes an “unexpected, fundamental and permanent” item affecting the company, according to Larry Hamermesh, a University of Pennsylvania law professor.
The Delaware Court of Chancery has only ruled in favor of an acquirer that refused to honor its contract in one case, according to the New York Times: the 2017 acquisition of the pharmaceutical company Akorn by Fresenius Kabi.
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