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Elon Musk is trying to walk away from his $44 billion agreement to buy Twitter, but the Court of Chancery in Delaware, where the company is incorporated and is now suing Mr. Musk, should order him to buy the social media company.
Forcing a party to keep a contractual promise — what lawyers call “specific performance” — is a rarely invoked remedy in merger cases, and rightly so. A forced corporate marriage can be bad for both parties and end up damaging a company’s value. If Mr. Musk and Twitter are a poor fit, joining them could undermine Twitter while also eroding the worth of Mr. Musk’s other companies. Under this view, awarding money damages to Twitter instead of affirming Mr. Musk’s obligation to purchase the company would leave both better off and allow them to go their separate ways.
But holding both parties to their bargain — especially one of this economic magnitude — can also generate value for Twitter, as opposed to monetary damages. By ordering Mr. Musk to fulfill the terms of the contract, the court can create stability and certainty for future entrants into merger contracts — while giving the parties to this agreement room to negotiate their way out if both no longer want to go through with the deal.
Mr. Musk seemed enthusiastic about Twitter in April after striking an agreement to buy the company, saying, “Twitter has tremendous potential — I look forward to working with the company and the community of users to unlock it.” But then the S&P 500 dropped 6 percent over the next two and a half weeks, and technology stocks were hit particularly hard. At that point, Mr. Musk, in his distinctive style, threatened to terminate the deal if Twitter refused to give him data related to “bot” accounts. These exchanges culminated in his decision this week to terminate the acquisition.
While his lawyers gave some pretext for his decision, many market observers think it’s clear that Mr. Musk breached his contract. The merger agreement was specific: So long as Twitter fulfills its obligations and the banks fund their commitments, Twitter “shall be entitled to specific performance” of Mr. Musk’s promise to buy the company for the price agreed upon. Twitter responded to Mr. Musk’s attempt to walk away by hiring corporate-law titan Wachtell, Lipton, Rosen & Katz and suing Mr. Musk in Delaware to force him to complete the deal.
Some observers have responded with skepticism that the court will agree, noting that specific performance is a rare remedy for breach of a merger contract. It should be invoked nonetheless in this case, for three reasons.
First, though the issue has been little-studied, one of us has shown in empirical work that the market has responded positively on the few occasions when Delaware courts have forced sophisticated parties to close agreed-upon mergers. The reasons are obvious: When investors, companies and employees order their affairs around a set of promises, it’s costly to break them.
Second, damages won’t come close to compensating Twitter for the harm Mr. Musk has caused. The reason is that the contract caps damages at $1 billion. Knowing this, the parties and their lawyers — and Mr. Musk’s are sophisticated as they come — explicitly agreed that Twitter could be entitled to specific performance. Delaware’s courts have said before that this language weighs in favor of forcing merger parties to close, and this case is no different.
Third, the remedy the court chooses will influence not only Twitter but also the market for mergers as a whole. Allowing Mr. Musk to abandon this acquisition on flimsy grounds while paying for a fraction of the harm he’s caused will lead future sellers to hesitate before pursuing mergers that could create value for investors. That’s why Delaware courts have taken the extraordinary step of requiring mergers to close in the past. A failure to hold Mr. Musk to his bargain could reverberate throughout corporate boardrooms, deterring otherwise beneficial mergers, for years to come.
To be sure, forcing Mr. Musk to buy Twitter could entangle the court in the morass that Mr. Musk has created. For one thing, his banks might back out, too, both to strengthen his litigation position and to give their client what he wants. Mr. Musk also might ignore the court’s order, raising even more fundamental questions about whether courts can be counted upon to enforce the law. And those who would prefer, for political reasons, that Mr. Musk not own Twitter will wonder why a corporate-law court forced that outcome.
These considerations should not be decisive. If Mr. Musk’s banks renege on their commitments, they should and likely will be held responsible for that. If Mr. Musk, who is the C.E.O. of Tesla and Space X, also Delaware companies, ignores the will of the state’s courts, there will be consequences for that, too. And corporations have long chosen Delaware’s courts for their disputes precisely because political considerations — such as whom one might prefer to be in control of Twitter and its outsize influence — are not seen as influencing their corporate-law judgments.
The fact that Mr. Musk and Twitter may be a bad fit should give the court no pause. The parties are still free to mutually bargain for a breakup after the court has ruled. The question is what the starting point for those negotiations should be. The answer should be given by the agreement Mr. Musk signed, not his after-the-fact maneuvering.
The remedy in this case will set expectations that will shape the merger market for decades. Litigators have long said that bad facts make bad law. Allowing Mr. Musk to walk away from the deal he struck would do just that. Instead, in light of evidence that the market has applauded such steps in the past, the court should order Mr. Musk to perform the contract he signed.
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