Before Elon Musk completed his takeover of Twitter, the lawsuit filed by the social media company to force the completion of the merger could have potentially gone to trial. According to Twitter, Musk had a legal obligation to close on the deal based on the terms of the contract. The company was asking the court to compel the performance of the deal. In corporate transactions, there is a possibility that a court could force specific performance and order the deal to close.
Merger agreements are governed by a detailed contract. These agreements often obligate the buyer to complete the deal. In many cases, the buyer must pay a breakup fee if the deal does not go through. In other cases, the contract may specify that specific performance of the merger transaction is a possibility. If there is no provision on specific performance in the contract, the court may be forced to issue a ruling. Here, Musk reconsidered his decision to walk away from the deal and closed the transaction before the deadline specified in the agreement.
There is often a period when a potential merger’s success is up in the air. Even after the parties agree to terms, the buyer conducts extensive due diligence on the target company. In some cases, the buyer may get cold feet and try to use what it discovers in due diligence to walk away from the deal. The justification may seem flimsy because the buyer has other reasons for not wanting to complete the transaction. In some instances, the buyer may be using due diligence and the threat of walking away to muscle down the deal price.
Specific Performance Is an Equitable Remedy in Contracts and Business Transactions
In general, specific performance is an equitable remedy that a court can enter on the motion of one of the parties. Specific performance is a legal remedy under which a court orders a party to complete the transaction it agreed to enter into despite its refusal. In order for a court to order an equitable remedy, the party seeking the remedy must show that there are equitable factors that require the court to so. In most cases, the jilted seller argues they would suffer irreparable harm if the deal does not close. In Twitter’s case, it would likely have sustained significant losses based on both lost business and diminished credibility from a deal that fell through.
However, it can be challenging for a seller to persuade a court to order specific performance. Most merger agreements include a breakup fee that would compensate the seller for some of the losses they would suffer if the deal does not close. A court could always order monetary damages when the prospective buyer has breached the merger contract. This remedy may make the seller whole. There are usually other remedies besides specific performance that a court could order. But all told, the seller would have to show the court why it may suffer additional irreparable damages if the deal does not happen.
Courts Have Sometimes Forced Buyers to Complete the Deal
Nonetheless, some courts have been amenable to arguments seeking specific performance of a merger agreement made by the seller. A court would likely look at the specific factors of the transaction, including whether money could adequately compensate the seller for a failed transaction.
Another factor is the consideration of whether the seller’s business would be irreparably harmed. This was largely the argument that Twitter was making. Musk had publicly questioned the company’s viability and introduced far greater uncertainty to its future prospects if it was forced to continue business on its own.
The burden would be on the seller to persuade a court why this particular transaction is unique and why monetary damages alone could not compensate them. For example, when there have been numerous public statements made about the benefit and necessity of a deal, and the seller would be left with a diminished business with no transaction, a court may order the completion of the deal. The seller should at least consider a lawsuit to force specific performance, even if it is not the favored remedy.
More often, a court would likely order specific performance in favor of the buyer when the seller does not want to complete the deal, when there is no remedy in the contract to compensate the buyer, and the seller refuses to uphold the initial terms. With no alternative, the court is more likely to order the seller to continue with the transaction.
Like the Twitter lawsuit, courts will usually hear these cases on an expedited timetable. In a merger transaction, time is of the essence, and the parties would not need to wait years for a trial date. Courts are far more likely to order equitable remedies sooner than other remedies because of the pressing need for them.
Consider Addressing Specific Performance in the Merger Agreement
In the meantime, sellers may help their own cause when they negotiate a merger agreement to make specific performance more likely. For example, they may consider insisting on a clause that would allow for specific performance when irreparable harm may be posed. Conversely, buyers should be aware of the fact that this clause could force them to go through with the deal, and they may consider resisting when the seller insists on the addition of this clause. In most cases, specific performance should be something that is addressed by the agreement. A court will usually not disturb a merger agreement two or more willing parties have reached. If specific performance is not addressed in the agreement, the seller would need to show that monetary damages or other legal remedies would be inadequate to compensate them.
In the case of Twitter, none of these considerations ended up being necessary. Many legal experts have speculated that, had Musk not voluntarily completed his takeover of the company, it would have been able to persuade the court to order the completion of the deal, in part based on the alleged harm that Musk himself caused the company during the transaction.