Twitter Inc.’s

lawsuit seeking to enforce its $44 billion deal with

Elon Musk

has set the stage for an unusual courtroom battle in Delaware. Clues about the potential outcome can be found in past decisions from the state’s courts.

The social media giant on Tuesday filed its case in Delaware’s Chancery Court—which is viewed as one of the most important forums for U.S. business litigation—alleging Mr. Musk has no legal basis to walk away from the transaction.

Mr. Musk’s lawyers last week said that Twitter’s estimate of the number of fake and spam accounts on the platform—estimated to be less than 5%—is potentially misleading and that the company hasn’t provided enough information to assess that figure. Mr. Musk also alleged that Twitter has failed to operate its ordinary course of business, instead firing two high-ranking employees and laying off a third of the company’s talent-acquisition team.

The claims “lack any merit” and Twitter has complied with the terms of the deal, the company said in its lawsuit. Possible outcomes of the case range from Mr. Musk being let off the hook to having to close the deal or paying a breakup fee of $1 billion.

Lawyers said past decisions from Delaware courts offer hints of where the Chancery Court may land.

The case will test certain aspects of merger and acquisition agreements, such as performance provisions that compel the parties to meet obligations under a deal, said

Michael Holmes,

an attorney at law firm Vinson & Elkins LLP who litigates in Delaware. It will in part center on the definition of a material adverse effect—an agreement term specifying circumstances that would permit walking away from the deal. Twitter declined to comment, while Mr. Musk didn’t respond.

Below are three Delaware cases that lawyers flagged as being potentially influential in Twitter’s lawsuit.


Wants Out

In January 2001, poultry producer

Tyson Foods Inc.

reached an agreement to acquire meatpacker IBP Inc. for $3.2 billion. By the end of March, both companies reported lower earnings and Tyson said it would cancel the deal due to IBP’s alleged fraud. IBP had not informed Tyson of accounting irregularities and lost earnings by IBP’s appetizer unit DFG Foods LLC, court filings alleged. IBP disputed the fraud claims and sued, asking for the merger to take place.

The dispute landed in Delaware’s Chancery Court, which in June 2001 rejected Tyson’s efforts to get out of the agreement. It found that Tyson hadn’t been fraudulently induced to complete the transaction. The court also said IBP hadn’t suffered a material adverse effect.

Tyson was aware of IBP’s internal issues before signing the agreement, the court said, pointing out that Tyson knew that IBP’s business was cyclical and that accounting problems had been discovered at DFG. Tyson’s main reason for revisiting the deal came down to “buyer’s regret,” then-Chancery Court Vice Chancellor

Leo Strine Jr.

wrote. “Tyson wished it had paid less, especially in view of its own compromised 2001 performance and IBP’s slow 2001 results,” wrote Mr. Strine, who is now at Wachtell, Lipton, Rosen & Katz, one of the firms representing Twitter.

The deal closed in September 2001. Tyson, which didn’t respond to a request for comment, still owns IBP.

Chemical Company’s ‘Heavy Burden’

Roughly seven years later, in 2008, Mr. Holmes was involved in a dispute related to a deal between chemical company Hexion Inc. and chemical manufacturer

Huntsman Corp.

Hexion previously convinced Huntsman to walk away from another offer with a better price and seller-friendly terms, such as a narrow material adverse effect definition. The $10.6 billion deal was announced in July 2007.

The Delaware Chancery Court.


andrew kelly/Reuters

Huntsman’s results declined in the following quarters, court records indicate, and Hexion looked for a way out. This included consulting counsel to see if a material adverse effect had occurred and seeking an opinion from an outside appraiser on the outlook of the deal. In June 2008, Hexion filed a lawsuit in Delaware Chancery Court asking the court to determine that it wasn’t obliged to complete the deal.

The court, however, found Huntsman had not experienced a material adverse effect that warranted a deal termination. A buyer faces a “heavy burden” in trying to invoke a material adverse effect to back out of a deal, the court wrote.

The court ordered Hexion to meet all of its obligations short of actually closing the deal, such as securing financing and seeking antitrust clearance from regulators. Huntsman announced in December 2008 that the deal had been terminated and that it would receive roughly $1 billion. Huntsman subsequently sued the banks that had agreed to finance the Hexion deal, saying they conspired to interfere with a separate merger. That lawsuit settled for roughly $1.8 billion. This brought the cumulative settlement amount tied to the deal to around $2.7 billion, Huntsman said. Huntsman’s financial results at the time of the deal were not out of line with chemical industry and broader economic trends, the company added.

Hexion did not respond to a request for comment.

A Rare Material Adverse Effect

Ten years after the Huntsman case, Delaware courts found the first-ever material adverse effect.

It arose from a purchase agreement between German pharmaceutical firm Fresenius Kabi AG and pharmaceuticals manufacturer Akorn Inc. in April 2017. Soon after the $4.3 billion deal was announced, Akorn began to struggle due to stiff competition. At the same time, Fresenius received letters from whistleblowers calling into question Akorn’s compliance with regulatory requirements for product development. Fresenius in an internal investigation found serious and pervasive compliance issues at Akorn, according to court records.

Fresenius notified Akorn that it was terminating the deal, resulting in a lawsuit in Delaware’s Chancery Court. The court said walking away from the deal was permitted for a number of reasons, including that Akorn statements about its regulatory compliance were incorrect. Those inaccuracies would reasonably be expected to amount to a material adverse effect, the court found. The court also found that a 55% drop in Akorn’s annual earnings before interest, taxes, depreciation and amortization in 2017, after consistent growth between 2012 and 2016, amounted to a material adverse effect.

The court determined that Fresenius was right in terminating the agreement, which Delaware’s Supreme Court confirmed in December 2018. Akorn did not respond to request for comment. Fresenius declined to comment.

All three cases centered on what is significant enough to constitute a material adverse effect, lawyers said. In Twitter’s case, it will be central to assess what the number of spam and fake accounts is, said

Lawrence Hamermesh,

executive director of the Institute for Law & Economics at the University of Pennsylvania.

“Nobody is going to blink if it’s 8%. But if the quote-unquote real number was 25%, then Musk has a case,” Mr. Hamermesh said.

Write to Jennifer Williams-Alvarez at [email protected]

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