A brewing legal battle over Elon Musk’s effort to terminate a $44 billion deal to buy Twitter will likely end up in court in Delaware. That’s where a 230-year-old court that is a prime location for corporate battles can hear a case, should Twitter sue Musk to force the deal to end, as it is expected to do this week.
The court is known as the Delaware Court of Chancery. Here’s what you should know about it.
What is the Delaware Court of Chancery?
Created in 1792, the Delaware Court of Chancery is one of three courts established by the State Constitution, along with the Supreme and Superior Courts. It is known as a court of equity, instead of a court of justice, because it allows more flexible resolutions than those formally established by law.
The court’s purview is to make decisions in cases where the law is not explicit about outcomes and where a party seeks specific action beyond monetary damages, said Charles Elson, founding director of the John L. Weinberg for Corporate Governance at the University of Delaware. If Twitter sues Musk, for example, it could push for the acquisition to be completed and the court could require it through an injunction, he said.
“It’s situational,” Elson said. “It has a broad corporate charter, which Delaware has, and leaves the rest up to the judges.”
Chancery courts often hear cases involving wills, adoptions, divorces, and guardianships. Delaware, Mississippi, and Tennessee are the only states with separate chancery courts, descending from the English judicial tradition.
In Delaware, the Chancery Court has a chancellor, who is the chief judge, and six vice chancellors. The governor appoints the chancellor and vice chancellors, who must be confirmed by the state Senate to serve a 12-year term. Delaware Chancery Courthouses are in Wilmington, Dover, and Georgetown.
Why would the Court of Chancery hear a Twitter case?
Like many American businesses, Twitter is registered as a business in Dover, Del. More than 1.8 million businesses are incorporated in the state, including more than two-thirds of Fortune 500 companies, according to the State Division of Corporations.
As a result, the Delaware Court of Chancery has heard many types of corporate cases over the years, accumulating experience in this area. Many companies want cases heard in court because of that knowledge, which also makes the arc of legal disputes there more predictable.
“If you want your business disputes expertly resolved, you will generally prefer Delaware,” said Joseph Grundfest, a professor of corporate governance at Stanford Law School. “You may be able to fool some judges somewhere, but it’s less likely that you can fool these judges because they see this stuff all the time.”
The Chancery Court is intimately familiar with disputes involving mergers and acquisitions. Over the past two decades, it has ruled in disputes such as when a dissenting shareholder fought over the merger of computer companies HP and Compaq in 2002; when the chemical company Hexion sued to end its merger with another chemical company, Huntsman, in 2008; and when luxury companies LVMH Moët Hennessy Louis Vuitton and Tiffany & Company sued each other over a takeover in 2020.
What happens once a case reaches Chancery Court?
Most cases in the Court of Chancery typically follow the same process, similar to most civil courts in other states. Both parties can file a motion for summary judgment, which means they ask the court to rule on all or part of the case without going to trial. If the case goes to trial, the judge determines the facts based on the evidence provided through records and testimony, then rules on the resolution.
Chancellor Kathaleen McCormick appoints herself or one of six deputy chancellors to preside over the case. If a chancellor has a conflict of interest, say having worked for Musk or Twitter in the past, she cannot preside. Cases are then decided by the presiding judge and not by a jury, although the judge may convene an advisory jury to help consult. The judge’s decision may be appealed to the State Supreme Court, whose decision is final.
Have Mr. Musk and Twitter seen cases in the Court of Chancery?
Yes, at least for Mr. Musk.
In 2016, Musk’s car company Tesla announced the acquisition of solar panel energy company SolarCity for $2.6 billion. Tesla shareholders filed a lawsuit to prevent the deal from going ahead, a case that reached the Delaware Court of Chancery. Tesla shareholders accused Musk of pressuring Tesla’s board of directors to effectively bail out struggling SolarCity, which the billionaire had founded. The court ruled in Musk’s favor in April.
Twitter did not immediately respond to a question about whether it has seen cases in the Delaware Court of Chancery.