Musk Must Prove Fraud To Win Twitter Case Before Chancery Court

The lawsuit filed by Twitter Inc. to compel billionaire Elon Musk to fulfill his pledge to acquire the social media giant will be heard by a powerful Delaware court that specializes in high-stakes corporate disputes.

Photo Insert: The Court of Chancery in Delaware

On July 16, 2022, Randall Chase of the Associated Press (AP) reported that Twitter sued Musk in Delaware's Court of Chancery to compel him to complete a $44 billion purchase agreement reached in April.

Twitter contends that Elon Musk, CEO of electric car manufacturer and solar energy business Tesla Inc., has acted in bad faith and is intentionally seeking to derail the agreement because market circumstances have deteriorated and the purchase no longer suits his interests.

Since November, the value of Musk's Tesla shares, which he planned to use to finance the acquisition, has decreased by more than $100 billion, according to the lawsuit.

The 1792 establishment of the Court of Chancery can be traced back to the High Court of Chancery of Great Britain, which in turn originated from an earlier institution in medieval England known as the King's Chapel.

As "keeper of the king's conscience," the court served as an alternative to the more rigid and ineffective common law tribunals. These powers are currently exercised by seven judges on the Delaware Court of Chancery, making it a prominent venue for high-stakes corporate disputes.

Delaware has a well-established and carefully cultivated corpus of corporate case law dating back to 1899 and is home to over 1 million business organizations, including over 60 percent of Fortune 500 businesses. In fact, many merger agreements stipulate that any issues shall be resolved by a judge of the Delaware Chancery Court.

If the court were to order Musk to complete the transaction, it would not be unprecedented.

A judge ordered Tyson Foods Inc. to complete its $3.2 billion acquisition of meatpacker IBP Inc. in 2001 after granting IBP's claim for specific performance (the performance of a legal contract strictly or substantially according to its terms).

Another Chancery judge authorized Kohlberg & Co. to complete its $550 million acquisition of DecoPac Holdings Inc., which supplies cake decorations and baking technology, last year.

Vice Chancellor Kathleen St. Jude McCormick stated that Kohlberg failed to demonstrate that a drop in DecoPac sales as a result of the coronavirus pandemic constituted a material adverse effect (MAE), thereby allowing the buyers to withdraw.

McCormick, who was sworn in as Chancellor, or chief judge of the court, a week after her verdict, referred to it as "a victory for deal certainty." She will also be hearing the lawsuit involving Twitter.

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