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Musk-Twitter Fight Set to Join Line of Delaware Chancery Wars

July 12, 2022, 10:00 AM

Elon Musk’s decision to walk away from his acquisition of Twitter Inc. has sparked a fight that is heading for the Delaware Chancery Court. The agreement over the Musk offer requires that any legal disputes be heard in Delaware, where many lawsuits over merger and acquisition agreements typically play out.

Musk has argued that Twitter has been misrepresenting user data and taking other actions that make the deal untenable. Both sides have enlisted high-powered legal talent ahead of litigation in the Delaware court.

Both Twitter and Musk are likely to look to earlier fights in the Delaware venue to build their cases. Those earlier decisions resulted in a range of outcomes, including one in which LVHM and Tiffany & Company renegotiated their deal, Fresenius was able to drop its purchase of Akorn, and neither side won in a battle between Anthem and Cigna.

Musk says the social media giant materially breached the agreement by failing to turn over specific information on the number of bots on the platform. He also argues an underrepresentation of the number of spam accounts may constitute a “material adverse effect” that would allow him to walk away from the deal.

  • IBP v. Tyson Foods: Tyson Foods Inc. wanted to terminate an agreement to acquire IBP Inc., a beef and pork producer. Tyson said a decline in IBP’s recent performance, along with accounting problems at an IBP unit, constituted a material adverse effect. The Delaware Court of Chancery wasn’t convinced. The court in a 2001 ruling said a “short-term hiccup in earnings should not suffice” to constitute a MAE. Rather, “the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.”
  • Anthem-Cigna Merger Litigation: In a merger between Anthem and Cigna, a Delaware Chancery judge said in 2020 that the executive teams at both companies “played themselves” in a “corporate soap opera”. The judge found that Cigna sought to derail the merger and failed to prove that it was entitled to a termination fee. And while Anthem proved that Cigna breached its obligations to make its best efforts to complete the agreement, Cigna proved that the merger would have failed anyway as it was shut down by the Justice Department.
  • Akorn Inc. v. Fresenius: There has been just one case that succeeded in the Delaware Chancery court where a buyer was able to terminate a deal because of a material change in the target company. Healthcare group Fresenius was able to drop its $4.75 billion purchase of pharmaceutical company Akorn Inc in 2017. The judge said Fresenius could cut off the merger after Akorn’s business plummeted following the agreement.
  • Hexion Specialty Chemicals, Inc. v. Huntsman Corp.: Private equity company Apollo Global Management’s move to merge chemical companies Huntsman and Hexion Specialty Chemical ended in a nixed deal in 2008 after a bitter battle. Hexion tried to back out of the agreement, and Huntsman sued Apollo and banks on the deal, arguing that they had conspired to undermine the merger. While there had been a deterioration in Huntman’s business, the court found it wasn’t a MAE. The court said that for a decline in earnings by the target company to constitute a MAE, “poor earnings results must be expected to persist significantly into the future.” The case ended in a $1 billion settlement.
  • Tiffany & Co v. LVHM: Luxury goods company LVHM tried to nix its acquisition of Tiffany & Company, but eventually renegotiated the deal for about $420 million less than the parties had originally agreed. LVHM tried to end the agreement because of the hit luxury goods sales took during the Covid-19 pandemic. The companies ultimately renegotiated the deal, lowering it to $15.8 billion.
  • Bardy Diagnostics v. Hill-Rom: Medical technology company Hill-Rom wanted out of a deal to acquire Bardy, a startup that makes a heart-monitoring device, after a regional Medicare administrative contractor cut reimbursement rates for the devices. The Chancery Court found the rate cut wasn’t a MAE, reiterating that such a MAE must “substantially threaten[s] the overall earnings potential of the target in a durationally-significant manner,” which the court has indicated is generally measured in years, not months.

—With assistance from Matthew Bultman

To contact the reporter on this story: Clara Hudson in Washington at chudson@bloombergindustry.com

To contact the editors responsible for this story: Keith Perine at kperine@bloombergindustry.com; Michael Ferullo at mferullo@bloomberglaw.com