DealLawyers.com Blog

Elon Musk has made a career out of playing with fire and somehow avoiding getting badly burned. I guess it helps to be the richest guy in the world, but from “funding secured” to Solar City to his latest shenanigans with Twitter, Elon has blissfully trolled all comers without a lot of consequences. However, recent Delaware case law suggests that despite the limitations on liability in the Twitter merger agreement, he still might stumble into a world of hurt if he keeps trying to simply troll his way out of his deal to buy Twitter.

As I blogged previously, the Twitter merger agreement contains a fairly typical private equity style limited specific performance clause. While Section 9.9(a) of the agreement imposes full specific performance obligations on the entities Musk formed to acquire Twitter, you can’t get blood from a stone, and the ability of those entities to perform their obligations depends on the availability of the financing that’s been committed to the deal.  In order to ensure that’s available, Section 9.9(b) of the agreement imposes a limited specific performance obligation on Musk to fund his equity commitment in the event that, among other things, the debt financing is in place.

Of course, Musk is now publicly angling to renegotiate the purchase price of his deal by challenging the accuracy of Twitter’s public statements concerning its percentage of spam accounts.  Most people evaluating the situation seem to have concluded that Musk’s downside is limited to the $1 billion reverse breakup fee, and that may well be the case based on the language of the contract.  But he’s a loose cannon, and if he doesn’t exercise a little impulse control, it’s at least possible that he could find himself with a much deeper downside.

That’s because last year, in Snow Phipps Group v. KCake Acquisition, (Del. Ch.; 4/21), the Chancery Court rejected a private equity buyer’s claim that the seller had experienced a MAE and accepted the seller’s contention that the buyer’s conduct breached its obligations under the agreement’s financing covenant, which resulted in the deal’s failure to close. Invoking the “prevention doctrine,” a common law rule that says if a party caused the other side’s failure to perform, it can’t use that failure to excuse its own performance, then-Vice Chancellor McCormick ordered the private equity buyer to close the deal, despite the fact that the contract contained only a limited specific performance clause. In other words, she essentially rewrote the contract and ordered full specific performance based on the buyer’s misconduct.

If Twitter holds the line on Musk’s attempt to renegotiate the purchase price, his next step presumably would be to try to litigate his way out of the deal by alleging that Twitter’s issues with spam accounts represented a breach of its rep in Section 4.6 of the merger agreement concerning the accuracy of information in its SEC filings. In order to avoid closing & ultimately terminate the deal, Section 7.2(b) of the agreement would require Musk to show that the failure of that rep – and any other that he threw into the mix – to be accurate resulted in an MAE.

As everyone reading this knows, proving a MAE is always tough sledding, but it’s likely to be a lot tougher when the smart money already has concluded that his alleged concerns about spambots are just a pretext. It’s also likely not helpful that Musk has been blasting accusations and other negative commentary about the company & its management all over social media with apparent disregard for the non-disparagement obligations he signed up for in Section 6.8 of the merger agreement.

What’s more, Section 6.3 of the agreement imposes an obligation on the parties to use their reasonable best efforts to consummate the deal, and  Section 6.10 of the agreement is a financing covenant that imposes plenty of obligations on Musk and his entities, including an obligation to take or cause to be taken “all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange, obtain and consummate” the financing arrangements for the deal.

Navigating these contractual obligations is by no means impossible, and even if Musk isn’t able to wiggle his way out of the deal or persuade Twitter to renegotiate, the most likely outcome under the contract would appear to be his payment of a $1 billion reverse termination fee to exit the deal.  But Elon Musk is a guy who has demonstrated a propensity to play stupid games. If he plays stupid games with his obligations under the merger agreement, then despite what the contract says, there’s a chance that he could win some very stupid prizes in the Delaware Chancery Court.

– John Jenkins