Will Delaware Order Elon Musk to Perform?

Tech giant Elon Musk (“Musk”) has been making headlines recently for announcing the termination of his agreement to purchase the popular social media platform, Twitter, Inc. (“Twitter”). In a court filing on July 12, 2022, Twitter accused Musk of breaching an agreement to buy Twitter for $44 billion.[1] Musk and his lawyers have asserted that he is not in violation of the agreement, which requires Musk to use “reasonable best efforts” to complete the purchase.[2] In support of this position, Musk claims that Twitter has not provided the necessary disclosures regarding the number of spam accounts on the platform and halted ordinary operation of the company while the acquisition was closing. Further, Musk alleges that Twitter’s public disclosures that five percent of its users are bots are materially misleading, which equates to a “material adverse effect” under the terms of the deal.[3]

Twitter was quick to file a lawsuit against Musk following his vocalized desire to back out of the agreement. Twitter stated that it was Musk who was violating the agreement, calling his quick escape from the merger a measure of “bad faith” and a “model of hypocrisy”.[4]

Twitter, which is headquartered in San Francisco, California, is suing Musk in Delaware, where its business is incorporated.[5] Delaware’s Court of Chancery is Twitter’s choice of venue for this litigation predominately for its excellent reputation in dealing with corporate law and for its specialization in being a “Court of Equity”[6]. Twitter has asked newly appointed Chancellor Kathaleen McCormick, to force Musk to abide by his offer to purchase the company at the $44 billion price the two sides agreed upon in just a five-day trial.[7]

Chancellor McCormick did just that, granting Twitter a five-day trial in October, the first win for either side – stating that “the reality is that delay threatens irreparable harm to the seller, Twitter, for the reasons I described earlier: The longer the delay, the greater the risk.”[8]

With Chancellor McCormick’s initial ruling, as well as the difficulty it takes to get out of a legally binding agreement, it appears that Musk has an up-hill battle to face against Twitter.

This is largely a result of the fact that the merger agreement includes a “specific performance clause”. This purpose of this type of provision is to prevent a party from backing out of a deal without good reason. The clause gives Twitter the right to sue Musk to force him to go through with the deal, as long as he still has the debt financing in place. [9]

Courts have enforced specific performance clauses in the past, notably in IBP v. Tyson Foods. This 2001 case saw Tyson agreeing to acquire IBP, a meat distributor for just over $3 billion. However, when the agreement went sour over poor business, Tyson tried to get out of the merger arguing over financial issues at IBP. The court ruled that Tyson had to buy IBP given the contract’s specific performance clause, “as it is the only method by which to adequately redress the harm threatened to IBP and its stockholders”.[10]

In addition to Tyson, a case from 2007 titled Genesco v. Finish Line saw the Delaware Court of Chancery rule in favor of Genesco after Finish Line attempted to terminate the deal. However, rather than going through with the deal, the sides agreed to terminate the transaction, with Finish Line paying Genesco damages.

The Musk litigation team has accused Twitter of a “material breach” of the deal agreement.  Musk’s lawyers argue that Twitter fraudulently reported the numbers of spam accounts, to which the company has estimated about 5% of users. In this case, Musk would have to prove that the number of bots is much higher and to show a material adverse effect on Twitter’s business for grounds to end the deal. A material adverse change is a change in circumstances that significantly reduces the value of a company. Twitter has responded, saying that the issue with bots did not have material adverse effect because its regulatory filings had warned that those figures were estimates. Equally, some commentators have noted that the term “bots” is not found anywhere in the deal documents, thus making it less likely to form a basis for termination.

As stated in the original agreement, a breakup fee of $1 billion is in effect if either side wants out. However, with Twitter’s stock price crashing as a result of Musk’s termination attempt. It seems as if settlement may not be on the table, which means that unless Musk is able to prove that there are many more than admitted bots on Twitter, he may be in for a difficult trial. The expectation is that the lack of substantial legal footing that Musk is leaning on will end in him becoming the new face of Twitter or having to pay the company financial damages (Tenesco v. Finish Line). The strategy to stall these eventualities out seems to be failing at least initially as the Delaware Court of Chancery has set a trial date for mid-October.


[1] Why Elon Musk Can’t Back Out of Buying Twitter, According to Twitter (July 2022) https://www.nytimes.com/2022/07/12/technology/twitter-musk-lawsuit-reasons.html

[2] Id.

[3] Id.

[4] https://www.documentcloud.org/documents/22084456-final-verified-complaint

[5] https://www.npr.org/2022/07/13/1111239959/twitter-elon-musk-delaware-court-of-chancery

[6]  https://www.npr.org/2022/07/13/1111239959/twitter-elon-musk-delaware-court-of-chancery

[7] https://www.reuters.com/technology/groundbreaking-judge-will-oversee-twitters-lawsuit-against-musk-2022-07-13/

[8] https://finance.yahoo.com/news/twitter-elon-musk-hearing-152545679.html?guccounter=1

[9] https://www.cnbc.com/2022/07/08/elon-musk-faces-long-legal-war-with-twitter-as-he-abandons-deal.html

[10] https://courts.delaware.gov/OPINIONS/download.ASPx?ID=2530

Is Cryptocurrency Regulation here yet?

Is Regulation here yet? The Evolving State of Case Law and the Appropriate Characterization of Crypto as a Security or Not.

For some investors, part of the appeal of tokenized assets is that the sector has been able to dodge regulations from institutions like the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of Treasury, and the Commodity Futures Trading Commission. Tokenized assets can be fungible or non-fungible. Fungible tokenized assets are both interchangeable and indistinguishable such as Bitcoin and other cryptocurrencies (“Crypto”). Non-fungible tokens (“NFTs”) are unique tokens that are non-divisible and cannot be replaced because each token has its own unique value.[1]

Investors and regulators alike have faced the recurring question of how to make sense of this decentralized digital space. However, more clarity on the guidelines surrounding Crypto and NFTS are forming. On March 9, 2022, President Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets, calling for a closer look into the possible threats and benefits of Crypto.[2] The SEC has shouldered the weight of overseeing the majority of Crypto products and platforms. Regulatory efforts have been a challenge due in part to a major dilemma being weighed by regulators: whether cryptocurrencies should be processed as securities or commodities.

In 2021, a Connecticut federal case involving a securities class action suit against Stuart Fraser, GAW Miners, and ZenMiner began to provide a more definitive answer on how to classify cryptocurrencies; as the federal jury concluded that Paycoin and several other crypto-currency mining related assets were not securities.[3] However, as recently as June 3, 2022, U.S. District Judge Michael P. Shea has granted a motion for a new trial regarding Paycoin.[4]

Judge Shea justified the new trial by citing precedent in SEC v. Kik Interactive Inc., in which Kik Interactive Inc. (“Kik”) failed to register its digital tokens as a security.[5] The SEC was able to demonstrate that under the Howey Test, Kik met the criteria to be considered an “investment contract”. For an asset to be considered an investment contract, it must meet the three criteria of the Howey Test, which was developed and named after the Supreme Court case SEC v. W.J. Howey Co., 328 U.S. 293 (1946).[6]  The Howey Test requires that there be (i) an investment of money (ii) in a common enterprise (iii) that is subject to a reasonable expectation of profits to be derived from the efforts of others.[7] With Kik’s money being invested in a single integrated offering, the court granted the SEC summary judgement and Kik a $5 million dollar penalty.[8]

In addition to Kik, the SEC also brought a lawsuit against Ripple Labs Inc., claiming that over $1.3 billion had been raised as an unregistered digital asset security.[9] The lawsuit has made national news because XRP, the cryptocurrency developed by Ripple, is one of the most valuable in the world. Ripple has been arguing that XRP should not qualify as an investment contract because the company had never promised profits to any of its holders.[10] The case was formally served in December of 2020 and is still ongoing. However, on March 22, 2021, Judge Netburn declared that XRP has monetary value, separating it from bitcoin and Ether.[11]

A regulatory stance that aligns with the initial Paycoin decision would result in more lenient oversight over the Crypto space and likely promote further development in blockchain technology.[12] Conversely, a regulatory stance promoting SEC oversight over tokenized assets could force digital currencies, such XRP, to register as securities. Upcoming legal decisions, particularly the new trial regarding Paycoin, will be crucial in providing investors and legislators with a more concrete understanding of the legal space surrounding tokenized assets and blockchain technology.


[1] Tokenization: Opening Illiquid Assets to Investors, BNY Mellon (June 2019), https://www.bnymellon.com/emea/en/insights/all-insights/tokenization-opening-illiquid-assets-to-investors.html.

[2] Executive Order on Ensuring Responsible Development of Digital Assets, The White House (March 2022),


[3] Federal jury Concludes Cryptocurrency Products NOT Securities, The National Law Review (November 2021), https://www.natlawreview.com/article/federal-jury-concludes-cryptocurrency-products-not-securities.

[4] Federal Judge Orders new Securities Trial for Crypto-Product ‘Paycoins’, ConnecticutLawTribune (June 2022), https://www.law.com/ctlawtribune/2022/06/13/federal-judge-orders-new-securities-trial-for-crypto-product-paycoins/?kw=Federal%20Judge%20Orders%20New%20Securities%20Trial%20for%20Crypto-Product%20%27Paycoins%27&utm_source=email&utm_medium=enl&utm_campaign=dailybriefing&utm_content=20220614&utm_term=clt&slreturn=20220529104704.

[5] Id.

[6] Framework for ‘Investment Contract” Analysis of Digital Assets, The U.S. Securities and Exchange Commission, https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets (last visited June 29, 2022).

[7] SEC v. Kik Interactive Inc., 492 F.Supp.3d 169, 177 (S.D.N.Y. 2020).

[8] SEC Obtains Final Judgment Against Kik Interactive for Unregistered Offering, The U.S. Securities and Exchange Commission (October 2020), https://www.sec.gov/news/press-release/2020-262.

[9] XRP vs. SEC lawsuit update, Cryptopolitan (June 2022), https://www.cryptopolitan.com/xrp-vs-sec-lawsuit-update/.

[10] The ‘Ripple’ effect: a striking development on defending digital asset securities litigation, Reuters (April 2022), https://www.reuters.com/legal/legalindustry/ripple-effect-striking-development-defending-digital-asset-securities-litigation-2022-04-21/

[11] XRP vs. SEC lawsuit update, Cryptopolitan (June 2022), https://www.cryptopolitan.com/xrp-vs-sec-lawsuit-update/.

[12] SEC vs. Ripple: Case Explained, CNBC (April 2022), https://www.cnbctv18.com/cryptocurrency/sec-vs-ripple-case-explained-13054042.htm.