- Share this article on Facebook
- Share this article on Twitter
- Share this article on Email
- Show additional share options
- Share this article on Print
- Share this article on Comment
- Share this article on Whatsapp
- Share this article on Linkedin
- Share this article on Reddit
- Share this article on Pinit
- Share this article on Tumblr
A Delaware judge last week gave Elon Musk until Oct. 28 to follow through on his promise to buy Twitter. In granting the stay, Chancellor Kathaleen McCormick relied on representations from the Tesla CEO that the contract governing the purchase is valid and binding.
There are two paths the case can now take, with one being that the debt is funded and the merger closes. The other possibility is that Musk can’t secure the financing, and the case goes to trial in November. In that scenario, he might be blocked from taking any position inconsistent with his motion seeking the stay under the so-called legal doctrine of judicial estoppel, legal observers say. They point to his newfound position, stated in a proposed order to delay the trial, that the merger agreement is “enforceable,” that both sides “remain bound by their terms and conditions,” and that the conditions to completing the purchase have been satisfied.
“Judicial estoppel is the idea that if I stand up in court and make a statement, and then court then relies on it in making a ruling, I’m stuck with that statement,” explains Greg Varallo, a partner at law firm Bernstein Litowitz Berger & Grossmann. “I can’t say ‘I’m just kidding.’ Once a judicial officer relies on me to rule, that’s that.”
The confirmation from Musk that the deal is on might box him in, cutting off any wiggle room he may have had to walk away from the purchase. (At the same time, the mogul is under federal investigation for conduct related to his acquisition of Twitter, per a court filing unsealed on Thursday.)
“He made quite a few representations in his letter seeking a stay about the status of what he intends to do with the merger agreement, and the judge relied on them when she granted his request to stay the upcoming trial,” says Joel Fleming, a securities and M&A lawyer at Block & Leviton. “If there is more litigation, judicial estoppel eliminates a number of arguments he otherwise might’ve made because he’s locked into the statements in his letter.”
The crux of Musk’s lawsuit against Twitter is that the company made false and misleading statements about its bot and spam accounts. In convincing McCormick to grant the trial stay, he might have blocked himself from further advancing the claim, Fleming says.
Considering Musk has gone back on his word before, Twitter opposed his motion to stay the trial. It stressed that Musk refused to commit to a closing date and that financing for the deal remained suspect. A corporate representative for one of the lending banks testified on the same day that Musk agreed to move forward with the purchase that he hasn’t communicated his intent to close the transaction, let alone on any particular timeline, according to court filings. Twitter’s lawyers called Musk’s proposal an “invitation to further mischief and delay.”
Still, staying the trial was the right move by the judge, observes Larry Hamermesh, professor at Delaware Law School. “It would’ve been crazy to go forward with trial in a case that was moot,” he says. “He conceded that all the conditions to closing had been satisfied and that he was withdrawing any claim to terminate the agreement. That’s what the trial was going to be about.”
Notably, McCormick didn’t sign Musk’s proposed order, which gave the Tesla CEO free rein to avoid the contract “without any admission of liability and without waiver of or prejudice to claims and defenses.” The caveat might have allowed him to waive judicial estoppel, permitting him to move forward with arguments that Twitter is in violation of the merger agreement.
Judicial estoppel is applied under a judge’s discretion, meaning there are no bright line rules for when it does and doesn’t come into play. It she does enforce the doctrine and her ruling is appealed, the Delaware Supreme Court will give substantial deference to her decision.
McCormick additionally imposed a hard deadline of 5 p.m. on Oct. 28 to close the transaction, instructing Twitter to tell her that night if Musk doesn’t meet it to obtain a November trial date. Musk likely needs that time to get the financing in order since he’s bound by a blackout period preventing him from selling Tesla shares until the company reports earnings on Oct. 19. Unless he takes a loan against his shares, he’ll have to wait to come up with his end of the $44 billion.
If Musk’s end game is still to walk away from the deal, he doesn’t have many cards left to play, according to legal observers. He may try to argue that Twitter isn’t entitled to specific performance, a remedy forcing a party to comply as closely as possible with the terms of a contract, because financing for the purchase fell through. But Twitter has a strong case that Musk created the mess in the first place, and McCormick hasn’t been shy about enforcing the terms of a transaction in similar cases. As recently as April 2021, she refused to allow private equity firm Kohlberg to back out of an agreement to purchase cake decorating company DecoPac. She found that Kohlberg’s breach of the merger agreement “contributed materially” to its failure to obtain debt financing.
“In general, unless a party has a financing out in their contract, the fact that they don’t get the financing doesn’t help them if somebody is trying to enforce the contract,” Varallo says.
Sign up for THR news straight to your inbox every day