Canada: Twitter v. Elon Musk - Part 3: What Happens Next?

Gillian Dingle (00:05): Twitter has already commenced its claim in Delaware and it is seeking specific performance. It has pleaded, as Andrew noted, that Musk is in breach of various provisions of the merger agreement. And while Twitter denies that it has breached any provision of the agreement that would entitle Musk to terminate, the agreement does provide that a party who is himself in breach can't exercise any termination rights.

Gillian Dingle (00:41): Twitter pleads that it has satisfied all of its obligations, and subject to one remaining regulatory approval, it is ready to proceed to its stockholder vote and close the transaction. So what it's asking the court to do is to order that Musk specifically perform his obligations, that he be required by the court to close the deal and buy Twitter as he agreed to do. And the merger agreement, as many do, provides expressly for specific performance. The parties have agreed here that damages would be an insufficient remedy. This is standard language in these sorts of agreements, and it's inserted because specific performance can be seen as an extreme remedy. It forces an unwilling party to meet his contractual obligations, and courts in both Canada and the United States will only grant specific performance where damages are insufficient. Musk hasn't yet responded with his defense to the complaint but we expect that, as Josh noted, his response is likely to be that because of what he describes as the several breaches by Twitter of the merger agreement, that he doesn't have to close. One of the standard closing conditions that we see in this agreement is that Twitter must have complied in all material respects with obligations under the agreement. And Musk's position, and his answer to the complaint is likely to be that by failing to give him the information he has sought about the number of bot accounts on the platform, which Musk views as fundamental to Twitter's business, Twitter has failed to meet its obligation to grant access, and this failure is material. So what can the court do with this set of facts? One potential outcome, the outcome that Musk hopes for, is that the court agrees with Mr. Musk that Twitter breached its obligations. He would then be entitled to walk away from the deal, and both sides' obligations would be at an end. The court may also agree with Twitter that either it has not breached any of its obligations and so Musk can't terminate the agreement, or even if it has, that Musk has also breached obligations and so is unable to use any of his termination rights. And as I noted, Twitter is asking the court to order specific performance. In either case, assuming all other conditions are met. Musk will be required to close the deal and buy Twitter at a price that is now substantially in excess of Twitter's current stock price. This may be challenging, and the parties have agreed that it's a condition of the availability of specific performance that Musk's debt financing has been or will be funded. The third option is one that isn't yet on the table and may never be on the table, depending on how the case unfolds. If Musk succeeds, at least based on the facts at present, there is no damages. There is no break fee, he walks away. Twitter may change its position in the litigation and seek damages instead of specific performance. This is something that it hasn't currently asked the court to grant. If it makes that decision, the stakes may be high. The merger agreement contains the standard "no third-party beneficiary" language that we see in many agreements like this. And that means that outside of certain limited circumstances described in the agreement, the agreement itself does not confer any rights on third parties. This language is intended to prevent non-parties, such as stockholders, from suing on the agreement to be paid their $54 a share, and leading to a damages award for breach of contract that represents the difference between the Twitter share price and what Musk would have paid, in this case in the tens of billions. Courts in New York, and most recently in the Cineplex decision here in Ontario, have held that this type of third-party beneficiary language limits the available damages to those that have been suffered by the target only, not the target's shareholders. However, courts in Delaware, where the case will be tried, have been critical of this interpretation, with one of the former vice chancellors remarking at a conference that an award of the shareholder premium reflects a logical and practical understanding by parties to merger agreements, and that the standard third-party beneficiary language should not be read to restrict damages. But there are also a lot of practical challenges with pursuing damages on behalf of third-party shareholder should Twitter decide to do that here. Which specific shareholders are to benefit? Is it the shareholders as they existed before the merger agreement was signed? Is it the shareholders as they exist at the time the case is decided? But even if Twitter chooses to seek damages instead of specific performance, the Delaware Court may not have to address whether the third-party beneficiary clause actually limits Twitter's ability to receive the shareholder premium. And this is so because the merger agreement in this case expressly contemplates that Twitter can seek damages for termination, and then in the case of liabilities or damages payable by Musk for a knowing and intentional breach, that these damages would include the benefits of the transaction contemplated by this agreement lost by the company's stockholders, so the shareholder premium. Lawyers will be working frantically to get the case ready for court so that the court can determine all of the issues that each side has raised.