Some are wondering why the case was brought to the Court of Chancery in Delaware, which is the second-smallest state.
In 1899, the home state of President Joe Biden changed its business laws to attract more corporations. According to historians, New Jersey was the most popular corporate home in the 19th century. More than half of Fortune 500 companies are incorporated in Delaware due to its director friendly laws, tax breaks and courts that handle business disputes. There are many merger agreements that require legal disputes to be heard in Delaware.
The Delaware Chancery Court is a court of equity, meaning it has historically handled cases that did not involve monetary damages. The first equity courts were in England. Over the past two centuries, most such courts in the US and UK have been merged with law courts. The Chancery Court has developed expertise in business law cases. Chancellors, who decide cases without juries, often issue injunctions affecting deals and can also order specific performance, which is what Musk was ordered to do. The Chancery Court can order a party to pay money if it chooses. The court can hear cases much quicker than other courts.
In July of 2021, Musk testified in a Chancery Court in his defense against a shareholder lawsuit that claimed he engineered a sweetheart deal by forcingTesla to buy SolarCity. Musk, who was the largest shareholder of both companies at the time of the acquisition, spent more than a day on the witness stand and sparred with the shareholders. The billionaire was happy when the chancellor ruled in his favor.
The chancellor will look into the legal thicket presented by the 73-page purchase agreement and decide if the social-media platform mishandled the transaction that led to Musk walking. Musk is likely to be called to testify again. The reason for Musk's departure is related to automated user accounts and how they are used on social media. He contends that the social-media platform is teeming with fake accounts that make up less than 5% of users. The Material Adverse Effect, or MAE, is when a person walks away because of a violation of the buyout agreement.
Musk issued a late-night meme in response to the lawsuit that was about to be filed against him.
pic.twitter.com/JcLMee61wj
— Elon Musk (@elonmusk) July 11, 2022
Legal experts say the Chancery Court has rarely sided with parties trying to bail out of acquisition commitments. It is hard to prove an MAE has happened. According to Larry Hamermesh, a University of Pennsylvania law professor, Musk would have to prove that the omission of bots is a negative development that makes the transaction impossible. An adverse change in the target's business that is consequential to the company's long-term earnings power over a reasonable period is what a Delaware judge defined as an MAE. The court could force Musk to complete the purchase if he can't prove his MAE.
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