It should come as no surprise that when celebrity billionaire Elon Musk reached a deal to buy the social media platform Twitter in April, the two sides agreed to decide any disputes in Delaware Chancery Court.
After all, the state with more corporations than people has a long history at the center of courtroom dramas and has issued thousands of rulings whose impacts extend far beyond state borders.
About two-thirds of Fortune 500 companies, like Twitter, are incorporated in Delaware, though few have a robust physical presence in the state. There are many reasons why businesses incorporate here. The unique business court is perhaps chief among them.
Over two centuries, the Delaware Chancery Court has decided thousands of corporate cases making the result of disputes held there more predictable. In lieu of juries, it relies on five appointed judges who provide detailed reasoning for their decisions. As one of only three states with a separate chancery court, the chancery court in Delaware also offers relatively quick resolutions.
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“If you want to have your business dispute resolved by experts, you will generally prefer Delaware,” Joseph Grundfest, a professor of corporate governance at Stanford Law School, told the New York Times. “You might be able to fool some judges somewhere, but you’re less likely to be able to fool these judges because they see this stuff all the time.”
Twitter filed a lawsuit Tuesday in Delaware Chancery Court against Musk less than a week after he backed out of a $44 billion agreement to buy the company. In the lawsuit, Twitter argues that Musk signed a binding agreement that he can’t abandon.
“Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away,” the lawsuit reads.
Musk’s defense will likely revolve around his assertions that Twitter refused to hand over information about the number of spam bots on the platform in the course of finalizing the deal. He has said he doesn’t believe Twitter’s public statements that about 5% of its active users are bots.
Bloomberg Law reported that lawyers for Twitter hope to start the case on Sept. 19. The lawyers say they only need four days to prove Musk should be forced to honor their agreement.
If Musk testifies in the trial it will be his second time taking the stand in Delaware. A year ago Tuesday, Musk testified in a shareholder lawsuit over whether Musk and directors of his electric car company Tesla breached their fiduciary duties when they agreed to a $2 billion deal to buy SolarCity, a struggling solar-panel installing company founded by his two of his cousins with his help. The court sided with Musk earlier this year.
Chancery Court’s history with merger and acquisition disputes
Delaware Chancery Court has ruled on several disputes involving mergers and acquisitions with wide-ranging implications. In 2001, Tyson tried to get out of a deal to acquire a meat distributor called IBP arguing the distributor hid financial problems. The court said Tyson had “buyer’s regret” and ruled it had to buy IBP given a performance clause in the contract.
In a merger dispute between two chemical companies Hexion and Huntsman in 2008, the court found Hexion knowingly and intentionally breached the agreement. The case ended in a $1 billion settlement.
Bloomberg Law identified Akorn Inc. v. Fresenius as the only case that succeeded in chancery court where a buyer backed out of a deal because of a material change in the company being acquired. Healthcare group Fresenius dropped out of its $4.75 billion purchase of pharmaceutical company Akorn in 2017 when Akorn’s business plummeted following the agreement.
Recently, the court has heard cases regarding whether the COVID-19 pandemic created conditions that could void a previous agreed upon deal. In one case, the court ruled that a South Korean financial services company could get out of a $5.8 billion deal for 15 hotels because hotel shutdowns and capacity restrictions at the start of the pandemic breached the “ordinary course” of business clause.
Court brings celebrities and other big names to Delaware
When Musk took the stand in Wilmington he joined a line of celebrities and well-known business people who’ve testified in Delaware Chancery Court.
Papa John’s founder John Schnatter appeared in Wilmington in 2018 after he filed a lawsuit against the company. Schnatter was trying to get documents from Papa John’s related to his departure from the company in the wake of his use of a racial slur.
Former Disney CEO Michael Eisner and Academy Award-winning actor Sidney Poitier testified in Georgetown in 2004 as part of a shareholder lawsuit over $140 million in severance benefits paid to a former company president. Poitier, who died earlier this year at 94 of heart failure, was a former member of the Disney board of directors.
Others who have appeared in Delaware court include Craigslist CEO James Buckmaster, media mogul Conrad Black and Oracle founder Larry Ellison, the eighth-richest man in the world by Forbes’ calculations.
Former New York Yankees star Derek Jeter and celebrity chef Gordon Ramsay were also involved in recent chancery court disputes.
Facebook founder Mark Zuckerberg was scheduled to testify in Delaware in 2017 as the company sought to reclassify its stock. Facebook withdrew the application days before the scheduled testimony.
What sets Chancery Court apart from other courts
Delaware Chancery Court is a court of equity rather than a court of law, which means it handles cases seeking relief other than monetary damages where the law is not explicit. Equity courts stem from England, but most were abandoned or merged with courts of law near the foundation of the country. In 1792, Delaware contradicted the trend and created its chancery court setting the stage for the state’s influential role in corporate governance.
But that future didn’t start to take hold for another 100 years. In the 19th century, Delaware corporations had to be granted by special act of the state legislature and in the 1890s it stood as one of only four states with no general corporation law. New Jersey was the early clubhouse leader in corporate charters granted.
In 1899, Delaware passed a corporations act. Shortly after, Delaware surpassed New Jersey when the Garden State passed reforms under then-Governor Woodrow Wilson that outlawed most holding companies.
In 1967, Delaware’s corporate law was overhauled which led to a boom in large industrial companies incorporating in the First State.
Among the firmest critics at the time was a Columbia Law School professor named William Cary. In a now landmark article in 1974, he derided Delaware’s corporate laws and courts claiming they were part of a “race to the bottom” for business tax dollars and created a climate of lax rules that favored corporate managers.
The modified rules took on more importance in the 1980s when a frenzy of corporate mergers and acquisitions unfolded and Delaware’s Chancery Court gained its modern reputation.
Scholars and officials throughout the years have questioned whether other states or federal corporate governance could detract from Delaware’s business, but the First State has persisted. Delaware’s corporate franchise contributed 12.9% of the state’s general fund revenue last year, according to the Delaware Division of Corporations. There were more than 1.8 million business entities in Delaware at the end of the year.
“Delaware’s Court of Chancery has never become so bound by procedural technicalities and restrictive legal doctrines that it has failed the fundamental purpose of an equity court — to provide relief suited to the circumstances when no adequate remedy is available at law,” William Quillen and Michael Hanrahan wrote in a history of the court for Widener Law School.
Contact Brandon Holveck at bholveck@delawareonline.com. Follow him on Twitter @holveck_brandon.
