Imagine: Elon Musk, known for his delight in defying authority, is ordered to move ahead with his $44 billion purchase of Twitter — and refuses.
It’s an unusual scenario, but one in which the court would have the power to enforce its orders. It could slap an epic fine on Mr Musk; appoint receivers to get the deal done; or even enable the seizure of his assets. Twitter sued Mr Musk on Tuesday to force him to consummate the acquisition after he pulled out.
Mr Musk is not one to shrink from a fight. He has tangled with everyone from the US Securities and Exchange Commission over his provocative tweets, to a British cave expert in a defamation case, and Donald Trump.
In Delaware Chancery Court last summer in the SolarCity trial, the Tesla chief executive openly mocked the lawyer examining him, saying he had “great respect for the court” but not for the attorney, a “bad human being”.
Mr Musk’s respect for that very court may now be tested should it impose a remedy to the Twitter mess that the world’s richest person doesn’t like.
“We’ve never had a situation like that in Delaware that I can recall,” said Larry Hamermesh, a University of Pennsylvania law professor who specialises in Delaware corporate law disputes. “It would be pretty extreme.”
Mr Musk’s lawyers did not respond to emails seeking comment on the case.
Lawyers for Twitter in their lawsuit said that they will need only four days in court to show that Mr Musk should be forced to honour his agreement and pay $54.20 a share for the social media company.
If they prevail and the court returns a judgment holding Mr Musk liable, it could invoke Delaware’s civil contempt laws if he did not pay up, said Brian Quinn, a Boston College law professor who teaches about mergers and acquisitions law.
“A judge could hold him in contempt and set a daily fine until he complies,” Mr Quinn said. “For Musk, that would have to be a rather large number.”
Mr Musk’s net worth is $217.1 billion, according to the Bloomberg Billionaires Index.
That is what former Chancery judge Andre Bouchard did in a case involving the court-ordered sale of transcription software maker Transperfect Global. When Transperfect officials ignored an order, Mr Bouchard imposed a $30,000 daily fine, and the company quickly complied. The Delaware Supreme Court later upheld the judge’s contempt powers against Transperfect but threw out sanctions against its owner.
The court could allow Twitter to go after Mr Musk’s assets, said Robert Miller, who holds a chair in corporate finance and law at the Iowa College of Law.
Chancery Court “is a court of equity, with broad powers to fashion remedies. Tesla is a Delaware corporation”, Mr Miller said. The court, he said, “would have no problem reaching Musk’s Tesla stock”.
“Nothing like this has ever happened before”, a scenario in which “someone is ordered by Chancery to close a deal and just ignores that order”, Mr Miller said.
However, legal deadbeats are not uncommon, he said, “and all states and all courts have procedures whereby the winning litigant can ‘execute’ a judgment by moving against the loser’s assets”.
A court judgment if Mr Musk refused to pay would become like any other debt, said Charles Elson, a retired University of Delaware finance professor and the former head of the school’s Weinberg Centre for Corporate Governance. But seizing Tesla shares to collect that debt could be a long, tortuous legal road, he said.
“You’d need to undertake the effort to pierce the corporate veil” over the deal, because Mr Musk established holding companies for the purpose of the acquisition, Mr Elson said.
If the shell companies ignored Chancery’s judgment, the court could appoint a receiver to take them over and “do the deal”, Mr Quinn said. The companies would then contact the lenders for the financing and grapple with Mr Musk — suing him for the sum, if necessary.
Under Delaware’s civil contempt procedure, a judge can send a scofflaw to jail to think it over. In 2014 the court issued an arrest warrant for a defendant flouting an order to surrender his passports. But it is rare for a Chancery judge to send for the sheriff.
“In a contract dispute, they can’t hold a gun to your head,” Mr Elson said. “There’s no such thing as a contract prison.”
Still, the court could impose a large fine on Mr Musk, or even order his arrest, Mr Miller said.
“There’s no way in the world Delaware is going to lose its franchise as the premier corporate law jurisdiction where contracts are enforced because Elon doesn’t feel like doing it,” he said.
Mr Quinn agrees the court would have to respond forcefully. Delaware’s corporate statutes and its Chancery Court help bring companies to the state whose incorporation fees make up as much as a fourth of its annual $5 billion budget, by some estimates.
“That state lives and dies on its corporate laws,” Mr Quinn said, and does not want a reputation as one “where you can thumb your nose at a judge”.
