Guest Post 3: John Patrick Hunt on Alternatives to Specific Performance in Twitter v. Musk

John Patrick Hunt on Elon Musk and Twitter
Part III: Alternatives to the Specific Performance of Merger Agreements

As explored in the previous posts (1 & 2) in this series, Delaware law seems to provide for specific performance of merger agreements when the parties agree to it, which they often do.  But, moving to the second major point of these posts, what if the court nevertheless decides not to order specific performance here?  For example, commenters have suggested Musk might simply defy such an order, and that fear of that outcome might induce the court not to order specific performance in the first place.  Setting aside any doubts about the plausibility of this scenario, we consider what would happen if the court actually did decline to order specific performance on the stated ground that damages are adequate or for other equitable reasons.

The conventional reading of the Musk-Twitter contract seems to be that any monetary damages would be capped at $1 billion, the amount of what the agreement calls the “Parent Termination Fee.”  And the does say that in plain terms.  For a “knowing and intentional” breach of the agreement, Twitter is “entitled to seek monetary damages, recovery, or award” from Musk or the acquiring companies “in an amount not to exceed the amount of the Parent Termination Fee, in the aggregate.”  Agrmt. 8.3(c)(ii).  In cases other than knowing and intentional breach, Twitter’s “right to receive payment from Parent of the Parent Termination Fee … shall constitute the sole and exclusive monetary remedy” of Twitter.  Id.  The same provision goes on to state that “in no event shall [Musk or the acquisition companies] be subject to an aggregate amount for monetary damages … in excess of an aggregate amount equal to the Parent Termination Fee.”  Id.  The specific-performance provision itself states, “in no event shall [Twitter] be permitted or entitled to receive aggregate monetary damages in excess of the Parent Termination Fee.”  Agrmt. 9.9(b).

But these assertions have to be read against the general background assumption of the agreement that specific performance would be available.  This assumption also appears repeatedly in the agreement, and it is stated emphatically: “[T]he parties hereto acknowledge and agree that the parties hereto shall be entitled to an injunction, specific performance, and other equitable relief … to enforce specifically the terms and provisions hereof, in addition to any other remedy to which they are entitled at law or in equity.”  Agrmt. 9.9(a).  Moreover, “Notwithstanding anything herein to the contrary, including the availability of the Parent Termination Fee or other monetary damages, remedy, or award, it is hereby acknowledged and agreed that [Twitter] shall be entitled to specific performance or other equitable remedy to enforce” the agreement against Musk and the acquisition companies, provided the conditions discussed above are met.  Agrmt. 9.9(b).  The word “acknowledge” seems significant here, as it communicates that each party not only agrees to be subject to specific performance, but also recognizes that each party contemplates that the remedy will in fact be granted — that is, granted despite equitable considerations.

The contract documents do not address the case where a court denies specific performance for equitable reasons.  A provision that Twitter can pursue specific performance and monetary relief simultaneously but cannot receive both, Agrmt.  9.9(b)(iii)(A), just appears to address the timing of election of remedies. 

Assuming that the agreement does not cover the case where specific performance is unavailable, the “in no event” should also be interpreted not to cover that case, leaving a gap or omitted case in the contract.  One possibility is that the gap is large enough to constitute a failure of assent, as in that 1L chestnut, the Peerless case, Raffles v. Wichelhaus, 159 Eng. Rep. 375 (1864) (or in the chicken case, Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960), which has been interpreted as a modern analogue).  Or perhaps the denial of specific performance on extrinsic grounds would be the failure of a basic assumption that the court would award the remedy, so that mistake doctrines would come into play.  See Fortis Advisors LLC v. Johnson & Johnson, 2021 WL 5893997, at *17 (Del. Ch. Dec. 13, 2021).  These outcomes threaten the enforceability of the merger agreement and thus would be bad news for Twitter.

More likely, however, the court would try to fill the gap by interpretation.  Delaware courts would receive extrinsic evidence, such as evidence of the parties’ negotiations, given the contract’s ambiguity, see, e.g., United Rentals, 937 A.2d at 834-35.  We of course don’t know what that extrinsic evidence might show, but unless it leads to a clear outcome, it seems likely that the default contract remedy of expectation damages would come back into play.  See AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, 2020 WL 7024929, at *100 (Del. Ch. Nov. 30, 2020) (“The common law has established a series of default rules governing the ability of a party to recover damages for a breach of contract.  They form a backdrop to the negotiated provisions.”); Concord Real Estate CDO 2006-1, Ltd. v. Bank of America N.A., 996 A.2d 324, 332 (Del. Ch. 2010) (common law “provides a backdrop of standard default rules that supplement negotiated agreements and fill gaps when a contract is incomplete, whether by inadvertence of design.  Parties can contract around virtually all common law rules.  In a lengthy and sophisticated agreement … the terms of the agreement and not the common law will control many issues.  But unless contradicted or altered by the parties’ agreement, the common law rules form an implied part of every contract.”).

Twitter’s expectation damages would be the amount needed to put the company in the financial position it would have been in if Musk had closed the transaction as agreed.  They could vastly exceed the $1 billion termination fee, which, as Dean Afra Afsharipour (right) has noted, is a relatively small proportion of the deal price by M&A standards.  This amount would certainly be litigated, but a reasonable candidate for an approximation would be the difference between the agreed acquisition price of its stock and the market price.  The deal price is $54.20 per share, and at this writing, Twitter is trading at $34.28 per share and reportedly has 764 million shares outstanding.  That works out to over $15 billion in expectation damages.

A counterargument could be that despite the contract language quoted above, the parties did not in fact assume that specific performance would be available.  Instead, perhaps Twitter recognized that denial was a possibility, signed up for an undercompensatory $1 billion remedy in that circumstance, and lost its gamble.  The strong Delaware precedents in favor of specific performance cut against this interpretation, but extrinsic evidence that the Twitter team recognized the possibility that specific performance would be denied despite the law could cut the other way.  And Musk’s side would be able to take discovery and try to prove that, given Delaware’s rules on extrinsic evidence.

For example, if Twitter’s representatives discussed the possibility that a court would deny specific performance to avoid a confrontation with Musk out of fear that he would refuse to comply, that could weigh in favor enforcing the damages limitation should apply.  But it raises a question:  Should a powerful party be allowed to benefit from willingness to defy the law in this way?

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The author gratefully acknowledges receiving excellent research assistance from Michaela Gines and Benjamin Ylo of the King Hall Class of 2024.  Their work contributed significantly to these posts.