A Delaware judge looks increasingly likely to order Elon Musk to go through with his $44 billion deal to buy Twitter — and if she does and if Musk resists, experts say the court has more power to force a deal than many investors realize.
Legal experts say Delaware Court of Chancery judge Kathaleen McCormick appeared to signal this week she’s inclined to rule against Musk and enforce “specific performance” — legalese for requiring him to consummate his original agreement to buy the site for $54.20 per share instead of just paying a fine and walking away.
Analysts weighing how Musk would react to a specific performance order say one possibility is that he refuses to comply — a risky, irrational and likely disastrous move that could nonetheless be conceivable for the famously erratic mogul.
“He has no chance of winning that fight,” University of Iowa corporate finance and law chair Robert Miller told The Post. “But Elon has blown off the SEC. Why not the Court of Chancery?”
The answer, according to Miller and others, is that the Delaware court’s ruling could pose a far bigger threat to Musk’s empire. The SEC fined Musk and Tesla $40 million over a misleading tweet about taking Tesla private in 2018. A forced purchase of Twitter, however, would have a scope that’s 1,000 times that sum, threatening a major blow to the finances of the world’s richest person.
If Musk refuses to comply with a specific performance order, Delaware has the power to appoint an official called a “special master” that would have the authority to legally “be Elon Musk” and close the deal, according to Miller.
The easiest way for the special master to execute the deal would be to seize a massive chunk of Musk’s Tesla shares and sell them — a drastic action that Delaware “100% has the jurisdiction” to execute — partly because Tesla is currently incorporated in Delaware, according to investment researcher and former corporate attorney J.B. Heaton.
“Obviously since Tesla is a highly liquid, highly traded company, you can get that done probably in a week,” Heaton said in reference to Delaware selling Musk’s Tesla shares.
Musk owns a total of about 163 million Tesla shares, according to the most recently available Securities and Exchange Commission filings. Musk has already taken out loans against 88 million of those shares, leaving 75 million shares that could be sold off, according to analysts who have studied the world’s richest man’s financials.
The 75 million available shares are worth about $55 billion based on Tesla’s current stock price. That’s well in excess of the $23.5 billion in cash Musk needs to close the Twitter deal, as the remainder of the $44 billion would be covered by co-investors and financing from several banks led by Morgan Stanley.
However, the stock sales would significantly shrink Musk’s roughly 17% stake in the electric carmaker, giving the mogul less control over his flagship company and potentially sending its stock plummeting.
A more likely special performance scenario, according to Miller and Heaton, is that Musk realizes the potentially dire consequences of the special master arrangement and chooses to comply with the order. In that case, Musk could raise the $23.5 billion by borrowing even more against his stakes in Tesla or SpaceX, rather than by selling off shares.
However, Musk could struggle to find lenders because he has already borrowed against more than half of his Tesla stake and has publicly trashed the investment that the loans would be financing, according to one hedge fund manager who closely monitors Musk’s finances.
Surging interest rates and an economic slowdown also make loans more difficult to access across the board, the hedge fund manager said.
Twitter will see its day in court against Musk in October after McCormick on Tuesday granted the company’s request for an expedited trial.
“The longer the merger transaction remains in limbo, the larger the cloud of uncertainty cast over the company and greater the risk of irreparable harm to sellers and to the target itself,” McCormick said during Tuesday’s hearing — comments that some analysts took as a sign she’s leaning toward specific performance.
“She hasn’t even seen any evidence and she’s already using words like ‘irreparable harm’ — basically trigger words for specific performance,” Heaton said.
Still, the order would have to survive appeals to the Delaware Supreme Court and potentially the US Supreme Court — a process that would likely wrap up by year’s end. Musk could also still theoretically defeat Twitter’s suit, pay a paltry $1 billion breakup fee or negotiate a settlement.
Twitter shares were trading just below $40 on Thursday — an indication that Wall Street remains skeptical Musk will end up being forced to buy the site for $54.20 per share, even though there’s a broad consensus among analysts that Twitter has a strong case.