Opinion

Elon Musk always had the odds stacked against him in Delaware

Matthew CranstonUnited States correspondent

Updated Oct 5, 2022 – 10.21am, first published at 9.47am

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Washington | The embarrassment of having his personal texts exposed in court, or the recent rebound in US share prices may go some way to explaining Elon Musk’s latest change of heart, but the fierce reputation of a small court in Delaware probably has more to do with it.

A trial in the Delaware Court of Chancery on October 17 was scheduled to determine whether Musk would be forced to go through with his $US44 billion ($68 billion) bid for Twitter, after he tried backing out in July.

Delaware is the country’s second-smallest state, with more registered companies than people. But the Court of Chancery punches well above the state’s weight, having built a reputation for quick decision-making and intolerance of companies trying to back out of M&A deals because of some perceived material change in the target’s value.

Musk’s main gripe was that he believed the number of real Twitter accounts was far lower than the company counted by its own methodology.

Indeed, many experts agreed with the premise, but in the end Musk had to admit a Delaware court judge was not going to accept the numbers dispute as a “materially adverse effect”.

And the court has form: one of its biggest cases at the height of the global financial crisis resulted in a buyer being forced to stick to its merger agreement.

The Delaware Chancery Court has a fierce reputation for protecting shareholders’ interests. AP

The Delaware court found that there had been no material change at chemical company Huntsman Corporation despite the GFC fallout and a few bad quarters, and that the buyer Hexion had no choice but to proceed with the deal even if it wasn’t concluded.

A review of the court by a Connecticut legislature seeking to replicate its structure and reputation noted that “the Court of Chancery has a national reputation in the business community and is responsible for developing the case law in Delaware on corporate matters.

“Under its business judgment rule, the court tends not to second guess business decisions that company leaders determine to be in the best interest of the stockholders. The court often ends up dismissing plaintiffs’ complaints.”

Vice chancellor on the Court of Chancery in Delaware, Sam Glasscock III, once told the Markkula Centre for Applied Ethics at Santa Clara University that the court tended to act in shareholder interests, even where there “appear[ed] in hindsight to be downright boneheaded decisions, so long as they were taken by disinterested and informed directors”.

More than half the companies traded on the New York Stock Exchange and NASDAQ, as well as 60 per cent of Fortune 500 companies agree, and are incorporated in Delaware.

It seems the Delaware Chancery Court is one place still more powerful than the world’s richest man – and his latest change of mind shows it.

More on Elon Musk’s Twitter deal

Musk to buy Twitter for original $US44b price Elon Musk revived his bid for Twitter at the original offer price of $54.20 a share, potentially avoiding a courtroom fight over one of the most contentious acquisitions in recent history.
The deal is on: How Elon Musk’s $US44b Twitter takeover unfolded The billionaire will press ahead with the acquisition at the original price, bringing an end to months of twists and turns in the battle for the social media giant.
OPINION: Twitter bid at agreed price would boost trust in fair dealing A deal at the original price would not only benefit jaded Twitter investors, it would also show that US capitalism is robust enough to ensure tycoons keep their side of a bargain.

Matthew Cranston is the United States correspondent, based in Washington. He was previously the Economics correspondent and Property editor. Connect with Matthew on Twitter. Email Matthew at mcranston@afr.com