Elon Musk isn't the first to walk away from a deal. Here's how similar cases have ended.
Bailey Schulz, USA TODAY
6 min read
Corrections & Clarifications: An earlier version of this story misstated the year Judge Leo Strine required the completion of Tyson's stalled deal. The year was 2001.
Elon Musk isn’t the first executive to have buyer’s remorse.
Though the personalities and money attached make the deal one of a kind, there have been other takeover agreements in which one party tries to walk away. Many of the lawsuits that stem from these disputes wind up in the Delaware Court of Chancery, a nonjury court that has become a premier battleground for business disputes because of the state's business-friendly incorporation laws.
Many of these cases don't reach judgment because it’s more likely for the parties to settle out of court. For those that do, experts say, the rulings rely heavily on the initial contracts, many of which are seller-friendly.
“The Delaware courts very rarely grant breakups,” said Thomas Lys, an accounting professor and professor of law by courtesy at Northwestern University. "You sign a deal, you live by the deal. You can get out of it under extraordinary circumstances, but typically it's difficult."
Twitter accepted a $44 billion bid from Tesla billionaire Elon Musk, who says he wants to abolish permanent bans on the social media platform.
Previous cases show there are a number of outcomes possible with Twitter's lawsuit.
Those include the judge ordering Musk to close the deal, or Musk walking away by paying a $1 billion breakup fee. Twitter and Musk also could renegotiate the purchase price or breakup fee and settle out of court.
Here’s how other M&A cases have been settled in the Delaware court:
Tyson Foods agreed to purchase meat distributor IBP for $3.2 billion in January 2001. But a harsh winter led to poor performancefrom IBP, and Tyson soon began to have second thoughts.
Tyson announced that it planned to terminate the deal. The company claimed IBP failed to disclose crucial information and argued that declining performance was evidence of a “material adverse effect” – a circumstance laid out in a contract that would allow the buyer to walk away from the deal without penalty.
But a judge at the Delaware Court of Chancery did not consider a “short-term hiccup in earnings” to be a material adverse effect. In June 2001, Judge Leo Strine – who now works for the firm representing Twitter – ordered Tyson to close the deal.
In 2001, Tyson Foods in Springdale, Ark., sought to terminate its agreement to purchase meat distributor IBP for $3.2 billion.
The case “really sets this very high threshold that’s necessary to prove an MAE,” or material adverse effect, said Steven Haas, co-head of law firm Hunton Andrews Kurth LLP’s M&A practice.
“For most public company deals, the merger agreements are very seller-friendly, and the buyers have to complete the transaction unless they can prove the target suffered a material adverse effect,” Haas said.
Haas said a material adverse effect will be hard for Musk's lawyers to prove because he was “clearly aware” of the bot problem at Twitter before the deal. The billionaire said eliminating spam bots would be a “top priority” at an April 14 event and declared he would “defeat the spam bots or die trying” in a tweet on April 21.
“That's certainly going to hurt his case,” Haas said.
After agreeing to buy cake decoration company DecoPac Holdings Inc. for $550 million in March 2020, private equity firm Kohlberg & Co. got cold feet when the COVID-19 pandemic began to upend business operations across the U.S. DecoPac’s weekly sales began to dip as states issued stay-at-home orders.
In April 2020, Kohlberg told DecoPac it would not close because debt financing was unavailable. Judge Kathaleen St. J. McCormick later ruled that Kohlberg “too easily and conveniently accepted defeat” after spending "just four days" trying to secure alternative funding and ordered the buyer to close the deal.
McCormick will also preside over Twitter’s case.
Though some critics doubt whether a judge would order Musk to close the deal given the likelihood that he could ignore the order, Louisiana State University law professor Christina Sautter didn’t discount this possibility.
“There doesn't seem to be anything, that I know of, where Musk has a good argument for a walk away from the agreement,” she said.
In November 2019, LVMH agreed to purchase Tiffany for $16.2 billion. But the Paris-based conglomerate tried to back out after it said the French government pushed for a delay to assess the threat of U.S. tariffs. Tiffany sued.
“The litigation is tough, and so you have seen situations where the parties renegotiated before they went to trial,” said Afra Afsharipour, professor of law at the University of California, Davis.
She added that she believes Musk has a weaker case than LVMH did.
“One of the things that was hard in (Tiffany’s) cases was COVID happened. They shut down all their stores,” Afsharipour said. “I don't know what new chaos is going on with Twitter's business.”
In this 2008 case, chemical companies Huntsman and Hexion were on track to merge until the financial crisis hit, resulting in “several disappointing quarterly results” forHuntsman.
Hexion tried to back out of the deal, saying financing would not be available and claiming Huntsman had suffered a material adverse effect. The Delaware Court of Chancery disagreed.
Though the court didn’t order Hexion to close the merger, it did say the company would be required to make a best-effort attempt to secure financing and close the transaction. The two companies ended up settling out of court.
“It’s an example of the judge not going all the way for the completion of the deal,” Morgan Ricks, a professor at Vanderbilt law school, told USA TODAY. “These cases don't usually reach judgment.”
He added that this is an outcome Twitter is likely trying to avoid because Musk's $54.20-a-share offer will be hard to beat.
Ricks expects the case to wrap up sometime this year, although Musk's lawyers are pushing for a February trial date.
Lys, the Northwestern University professor, noted that cases like this typically either go to court where “the person like Elon Musk loses,” or the two parties compromise with a revised price.
Musk "is on the hook one way or the other,” he said. “He’s not going to walk away from this scot-free.”
Tesla CEO Elon Musk, Twitter's largest shareholder, now wants to buy the social media company.
You can follow USA TODAY reporter Bailey Schulz on Twitter @bailey_schulz and subscribe to our free Daily Money newsletter here for personal finance tips and business news every Monday through Friday.
