A centuries-old court in Delaware will decide if Elon Musk has to buy Twitter

David Gura

July 13, 2022 / 8:35 am

The battle over Twitter's future is moving into a courtroom — not in California, where it is headquartered, but in Delaware, where the social media company was incorporated in 2007.

On Tuesday, Twitter sued billionaire Elon Musk in the Delaware Court of Chancery, a hub of high-profile corporate litigation that is more than two centuries old, descended from the the High Court of Chancery in Great Britain.

In a 62-page lawsuit, the company asked the court to order the world's richest man to complete a $44 billion takeover deal he has been trying to back out of.

Musk is no stranger to the Delaware Court of Chancery. Last year, the Tesla CEO prevailed in a suit brought by the company's shareholders. The court also has decided cases involving the likes of Facebook, Goldman Sachs, and McDonald's.

What is the Delaware Court of Chancery?

Many public companies, including roughly two-thirds of the Fortune 500, are incorporated in Delaware, and while the state's corporate-friendly tax system is a big reason why, so is its Court of Chancery, which has jurisdiction over corporate law.

Established in 1792, the court says it deals with "corporate matters, trusts, estates, and other fiduciary matters, disputes involving the purchase and sale of land, questions of title to real estate, and commercial and contractual matters in general."

How is it different from other courts?

The Delaware Court of Chancery is more specialized than most courts in the U.S. While other courts consider cases in which one party is seeking monetary damages from another, the Court of Chancery does not.

Instead, it is a "court of equity." What does that mean, exactly? David Margules, a Wilmington-based partner with the law firm Ballard Spahr, explains:

"You are asking the court to enter an order that requires someone to do something, or prohibits someone from doing something."

Which is what Twitter is doing in this case.

In its lawsuit, it is asking the Delaware Court of Chancery to order the defendants — Musk and two corporations he established to facilitate his takeover deal — to close the deal.

Experts say companies may prefer courts of equity because they know the judges understand the ins and outs of corporate law. They become intimately familiar with case law, and they can handle cases in a sophisticated, efficient manner. In other courts, judges tend to be pulled in many different directions.

Who sits on the court?

There are seven judges: one chancellor and six vice chancellors. Picked by the governor, they tend to be longtime members of the Delaware State Bar Association who have spent their careers doing corporate litigation.

"The judges are generally experienced practitioners who cut their bones in private practice doing complex cases, and they work extraordinarily hard," Margules says.

Notably, in the Delaware Court of Chancery, there are no jury trials. The judges hold enormous power.

How is this likely to play out?

Under Delaware law, Musk has 20 days to respond to the lawsuit, but to Twitter, time is of the essence. In a separate filing, it asked for an expedited timetable, saying any delay would harm the company and its shareholders.

Twitter wants Musk's lawyers to respond to the lawsuit by July 18, and the company proposed a four-day trial with a Sept. 19 start date.

"There is going to be a very tight timeframe, and the judge will be inclined to set a hearing on the merits very, very quickly," says Margules.

In their initial agreement, Musk and Twitter agreed to the sale by Oct. 24.

The Delaware Court of Chancery has a reputation for being efficient. Judges often dispense with opening statements, preferring instead to go straight to the evidence.

At issue is Twitter's request that the court compel Musk to complete the agreed-upon deal. If a judge decides not to do that, it's likely he or she would weigh in on whether Musk should pay a $1 billion breakup fee agreed upon in the deal.

Margules says the chancellor or vice chancellor overseeing the case will want to make sure there is ample time for an appeal to the Delaware Supreme Court, if necessary.

What if Elon Musk refuses to comply with a court order?

The Delaware Court of Chancery can hold someone in contempt of court, and it has the power to send someone to jail, experts say.

But Michael Hanrahan, a partner with the law firm Prickett, Jones & Elliott, who has been a member of the Delaware Bar for more than 40 years, suggests there is another way the court could hold Musk to account if he fails to comply with a decision that doesn't go his way.

"Elon Musk owns a lot of stock in Delaware corporations, which may be subject to seizure in Delaware," he says, noting Tesla and SpaceX are both incorporated in the state. "So, there may be means of compelling him."