In the Twitter-Elon Musk lawsuit, the crucial role of the Delaware Court of Chancery

In the Twitter-Elon Musk lawsuit, the crucial role of the Delaware Court of Chancery

In the long-awaited lawsuit between Elon Musk and Twitter, there is a player that is rarely discussed: the Court of Chancery of Delaware which will decide the dispute. This court, 230 years old, is however a main character of this saga which operates according to very specific rules.

One of Twitter’s main assets in its legal battle against Tesla boss Elon Musk is Leo Strine. The experience of this lawyer from the American firm Wachtell, Lipton, Rosen & Katz (WLRK) recruited by Twitter could prove decisive in the outcome of the complaint filed on July 12 to force Elon Musk to finalize the acquisition of the social network. .

A line from the CV of this lawyer must, in fact, give cold sweats to the boss of Tesla who no longer wants to buy Twitter: Leo Strine spent 16 years as a judge at the Court of Chancery of Delaware.

A major asset for Delaware

Few lawyers have such an intimate knowledge of the functioning of this very particular court, called upon to settle the dispute between the two heavyweights of Silicon Valley.

This almost unique court – there are only three in the United States (Mississippi, Delaware, Tennessee) – has forged a prominent place in the arena over its 230 years of existence. of the trade war between big beasts of the American economy.

“Almost all merger and acquisition agreements in the United States contain a clause which stipulates that any litigation relating to this contract must be settled in the Court of Chancery of Delaware”, points out the Delaware News Journal.

This popularity comes above all from the fact that this court is located in the State of Delaware, a State which has fewer inhabitants – just over 950,000 – than companies which have elected their tax domicile there (1.5 million). Two-thirds of the groups on the Fortune 500 list, which establishes a ranking of the 500 main companies listed in the United States each year, have their address there and naturally turn to it in the event of a dispute.

And if all these companies have chosen Delaware, it is not only because of the sweetness of its taxation of this small state for companies, which has earned it the status of a tax haven. “The existence of the Court of Chancery ‘in itself’ is one of this state’s main draws for large groups,” reads the Santa Clara University (California) website, who wrote a history of this extraordinary jurisdiction.

Equity in inheritance

Outstanding first of all because she is one of the last direct descendants of the High Court of the British chancellery, which played an important role in the United Kingdom between 14e et 19e century. Its purpose was to make it possible to seize the Chancellor of the King of England in order to ask him to settle particularly thorny disputes according to the “conscience” of the monarch, supposed to have the last word when common law was not enough.

The royal word was often considered more “equitable” in cases that related to questions of inheritance, personal guardianship or even certain commercial disputes.

It is this tradition that the Court of Chancery has perpetuated since its creation in 1792. Its judges – who call themselves chancellors – are supposed to be able to base themselves on the “principles of equity” rather than on the rule of law.

However, the Court of Chancery is not above the law. It applies them, but its judges reserve the right to decide under the “principles of equity” when the texts of the law are not sufficiently clear.

This is why this jurisdiction is so popular in the event of disputes around merger and acquisition agreements, because the clauses of these contracts are often drafted in very general terms, requiring interpretation on a case-by-case basis by experts in the field. A know-how of which this court has made its specialty in more than two centuries of existence.

No jury

Another advantage is that equity allows “to decide other than by awarding damages, which is the norm in civil cases”, explains Charles Elson, specialist in corporate governance at the University of Delaware. , interviewed by the New York Times.

Judges can thus decide that it is “fair” to oblige a party to honor its takeover offer or to absolve it… A question at the heart of the battle between Twitter and Elon Musk and which has been brought to the attention of the Court of Chancery many times since the beginning of the 21e century, noted the business channel Bloomberg.

Large groups also appreciate another particularity of this court: it does not call on a jury and lets the judges decide everything. There is therefore much less publicity around these hearings, which are often very specific, technical and much more expeditious than before traditional civil courts. A certain intimacy which suits perfectly to companies which generally do not want the details of their business to be spread out in the media.

Which does not mean that this court has never had to consider cases that have had significant media repercussions. The Court ruled in 2021 that the economic impact of the Covid-19 pandemic was not sufficient reason to allow a company to reverse a buyout promise made to another group. It is also this jurisdiction which decided, in 2020, the luxury giant LVMH which no longer wanted to buy the American luxury jewelry brand Tiffany.

Elon Musk himself has already dealt with the Court of Chancery. In April 2022, he won his case before this court against Tesla shareholders who wanted to prevent him from buying SolarCity, a company specializing in solar energy.

A victory that does not bode well for the outcome of his trial against Twitter. The Court of Chancery appears, in fact, very reluctant to allow a buyer to reconsider an accepted offer.

Bloomberg has thus found only one case where the judges considered that there had been a “significant adverse event” justifying a reversal of the terms of the contract. In 2018, the court ruled that German pharmaceutical group Fresenius had the right to renege on its commitment to acquire US drugmaker Akorn, whose revenues had fallen nearly 30% just two months after signing the deal. redemption.

Not sure the judges find Elon Musk’s argument – ​​who blames Twitter for hiding the real number of fake accounts from him – as convincing as a one-third drop in revenue.

Melissa Galbraith
Melissa Galbraith is the World News reporter for Globe Live Media. She covers all the major events happening around the World. From Europe to Americas, from Asia to Antarctica, Melissa covers it all. Never miss another Major World Event by bookmarking her author page right here.