Taboo Trades

Specific Performance, Twitter, and Elon Musk with Nate Oman

September 18, 2022 Kim Krawiec Season 3 Episode 1
Taboo Trades
Specific Performance, Twitter, and Elon Musk with Nate Oman
Show Notes Transcript

In this episode, UVA Law 3Ls Bridget Boyd and Jenn Scoler join me to interview Nathan B. Oman, the W. Taylor Reveley III Research Professor and Co-Director of the Center for the Study of Law and Markets at William & Mary School of Law. Nate specializes in Contract Law, the Economic Analysis of Law, Jurisprudence, Law and Religion, and Legal History. Today, we’re discussing his 2009 article, Specific Performance and the Thirteenth Amendment, published in the Minnesota Law Review. 

The article first came to my attention this summer, when the internet erupted with suggestions that the specific performance clause in the Elon Musk (more precisely, X Holdings) merger agreement with Twitter wasn’t enforceable because of the 13thAmendment. As you’ll hear in this episode, Nate is having none of that.  

I’ve split my discussion with Nate into two parts. In this Part, largely driven by questions from Bridget and Jenn, we discuss the Musk-Twitter litigation and the various provisions of the merger agreement, including the specific performance provision and the termination fee. If you’re covering that litigation in class this year, in my completely and wholly unbiased view , the episode makes a really nice introduction for students to some of the issues.  


Nathan B. Oman faculty bio

Nathan B. Oman, Specific Performance and the Thirteenth Amendment, 93 MINN. L. REV. 2020 (2009).

Amendment and Plan of Merger by and among X Holdings I, Inc., X Holdings II, Inc. and Twitter, Inc. dated as of April 25, 2022

[00:00] Nate Oman: There can't possibly be a 13 Amendment problem with, like, coercing a corporation into doing something right. Corporations, they're not natural people. They have owners, right? We enslave corporations all the time, and we shouldn't feel bad about that.

[00:15] Kim Krawiec: Hey, everybody, welcome to the Taboo Trades Podcast, a show about stuff we aren't supposed to sell, but do anyway. I'm your host, Kim Kravick.

[00:27] Kim Krawiec: My guest today is Nate Omen, the W. Taylor Reveli, the third research professor and co director of the center for the Study of Law and Markets at William and Mary School of Law. He specializes in contract law, the economic analysis of law, jurisprudence, law and religion, and legal history. Today we're discussing his 2009 article, Specific Performance and the 13th Amendment, published in the Minnesota Law Review. The article first came to my attention this summer when the Internet erupted with suggestions that the specific performance clause in the Elon Musk, or more precisely, the Ex Holdings merger agreement with Twitter wasn't enforceable because of the 13th Amendment. As you'll hear in this episode, Nate is having none of that. I'll split my discussion with Nate into two parts, and this part largely driven by questions from UVA Law three L Bridget Boyd and Jen Scholar, who are.

[01:25] Kim Krawiec: My cohosts for today.

[01:26] Kim Krawiec: We discussed the Musk Twitter litigation and the various provisions of the merger agreement, including the specific performance provision and the termination fee. If you're covering that litigation in class this year, in my completely and wholly unbiased view, the episode makes a really nice introduction for students to some of these issues.

[01:50] Kim Krawiec: I'm here chatting with my co host for today, bridget Boyd and Jen scholar in advance of our interview with William and Mary law professor Nate Omen. So, guys, first of all, introduce yourself and just say hi to our listeners.

[02:02] Jenn Scoler: Hi, everyone. My name is Jen Scholar. I am a real here at UBA Law, and I'm really excited to talk to me about how specific performance applies in the modern context and specifically in terms of the corporate realm. I'm hoping to practice corporate law after I graduate, and I think it will be interesting to see what he has to say about this.

[02:21] Bridget Boyd: Hi, everyone. I'm Bridget Boyd. I'm also at three L at the University of Virginia. Similar to Jen, I am interested in the corporate practice, and after graduation, I'll be going to work in New York City doing mostly M and A work. So I'm really excited to talk to Nate today about the Twitter Elon Musk case and specifically how he thinks his article might relate to Twitter seeking specific performance.

[02:50] Kim Krawiec: As you guys know, this is a 2008 paper that we're talking to him about specific performance and the 13th Amendment. And just to give our listeners some sense of why we're talking about Elon Musk in connection with the 13th Amendment in this paper. Paper only came to my attention actually over the summer because of the Twitter Elon Musk or more specifically, X Holdings litigation. And as we talked about in class, that contract calls for specific performance as a standard. This is an issue that contracts law scholars think about, but that a lot of the Twitter verse doesn't think about, but began talking about after the suit was filed. And it's caused some folks to argue that specific performance can't be granted in the case even if it was a good idea to do it. And not everybody agrees it's a good idea to do it. But even if it was a good idea, some people have argued that the 13th Amendment spar against indentured servitude would prevent that from happening. And as you guys just mentioned, I know that in part you're interested in this paper and this topic because of that litigation. So what are you hoping to get Nate to talk about, specifically the connection between his paper and the litigation? So, Bridget, let's start with you. What are you hoping to talk to him about?

[04:09] Bridget Boyd: So I'm really curious mostly about the fact that in the deal, elon Musk himself instead of exfoliating his party to the specific performance provision. So I'd like to know if Nate thinks that impacts sort of the court's decision on whether or not to grant it and if he thinks that the indentured servitude analysis that he discusses in his paper would be at all relevant.

[04:38] Kim Krawiec: Yeah, so I'm interested in that as well. Right. You and I talked about that a little bit in class. Even though the agreement is technically between Twitter and exholdings, musk is a party to particular provisions, including the specific performance provision. And I'm assuming that that's because of the funding mechanism between him and his holdings. But nonetheless, it still adds a wrinkle to it that I think is interesting that perhaps we can get Nate to talk about and that I haven't heard many other people talk about. But I have not been following the case as obsessively as many of my colleagues, and so it's possible that I just missed that. Jen, what about you? What are you hoping to talk to him about?

[05:20] Jenn Scoler: Yeah, so I think my question is very similar to Bridgett in some ways, but also just from a more general perspective. I think that in the context of merchant acquisition agreements, there are often termination fees negotiated by the parties for cases in which one party decides they don't want to go through with the deal. I think what I'm interested in is very similarly to the Twitter litigation, at what point a specific performance can be granted versus just going through with these termination fees. And how common is specific performance used in the context of these deals?

[05:58] Kim Krawiec: Yes, and this is a great question and one that I kind of have as well, or at least some aspects of it. As is common in this agreement, there is both a termination fee and a specific performance provision, and the termination fee is a billion dollars, which sounds like a lot, but of course, in the context of what a $44 billion deal is small, and so I'm not certain how the two provisions operate together. It's possible that a lot of people don't know how they operate together, but we'll see what Nate says. And I should clarify that for our listeners who haven't perhaps yet read the paper, that these are things that are beyond the scope of Nate's article as we're going to talk about. Nate's article is really about the constitutional question and not some of these broader questions that we're bringing to his attention. But he is an expert in this field, and so I think that he very well may have thoughts on it that hopefully he'll share with us. Leaving aside for a minute the sort of application to Elon Musk, what else are you guys hoping to learn? What are you interested in learning during the course of this discussion? Bridget, I'll go back to you. Anything else that you're hoping to get out of this?

[07:10] Bridget Boyd: Yeah, I'm definitely curious to get Nate's opinion on whether he thinks it would be more efficient for today's courts to adopt the historical analysis of indentured servitude and specific performance that the article discusses. He mentioned several times throughout the article that its purpose was not to take a stance on whether specific performance should be allowed in some service contracts. But I am hoping we can get him to share his personal opinion on the matter. And if he does support it. I'd be interested in hearing what. If anything. He thinks should be tweaked in the analysis to sort of align it with more modern legal views. Of course, the historical discussion dates back to a very different time.

[07:53] Kim Krawiec: Good. And what about you, Jen?

[07:55] Jenn Scoler: I think as evident as the fact that Bridget and I have very similar questions, the Cost expressed strong interest in the details of what happens when a specific program is ordered and how that interacts with efficiency. And he touched on the efficiency considerations in this article, but I think we would like to press him more on specific performance in the context of settlements and when you find it more advantageous to not proceed with an agreement. So should we be enforcing specific performance in these contexts, or should we let parties negotiate around that? So I think that's something that we're all really interested in is getting into the nittygritty of efficiency in terms of specific performance versus damages.

[08:37] Kim Krawiec: Okay, great. And hopefully he will let us take him there, whether it's part of the article or not. Thanks for joining me for this little discussion, you guys. It's been fun.

[08:46] Bridget Boyd: Thank you.

[08:47] Jenn Scoler: Great. Yeah, we're very excited.

[08:50] Nate Oman: Hello.

[08:51] Kim Krawiec: Hey, Nate, how's it going?

[08:53] Jenn Scoler: Fine.

[08:53] Nate Oman: How are you doing, Kim?

[08:54] Kim Krawiec: Good. Okay, so I'm going to first introduce my co host for today. That's Jen and Bridgett. They're going to ask the first set of questions and I've already recorded a little conversation with them. Nate, this paper is from 2008, but as I mentioned to you when I invited you on the podcast, I actually didn't know about it until Twitter exploded this summer with discussion of your paper. And so my first reaction was, I can't believe that I didn't see this paper before. And also, wait a minute, how did we get involved in the discussion of the 13th Amendment in connection with Elon Musk? So if you're willing, can you tell us a little bit about the conversation around the 13th Amendment and specific performance in connection with Musk and how your paper is implicated in all of that discussion?

[09:44] Nate Oman: Yeah, so the merger agreement, or the acquisition agreement rather, between Must and Twitter contains this provision in the agreement in which the parties agree that essentially you get an election, you get a breakup fee, or you can get specific performance, and Twitter is asking for specific performance. So then the question that arises as well, are there legal impediments to the specific performance in this case? And a number of people have raised this sort of old chestnut of an argument which goes something like this, which is, there's a well established common law rule. It's actually an equitable rule, I guess, to be technical, so you can get specific performance of a personal service contract. And in the United States, that rule has oftentimes kind of been justified in passing by the claim that you to were get specific performance. That is, if you were to get an injunction ordering someone to perform a personal service contract that would violate the 13th Amendment. So I got interested in that claim way back in the distant past and wrote this article about whether or not it really was the case that specific performance or personal service contract would violate the 13th Amendment. And so this has come up in the case of Mosque. I actually have to say, I actually don't think for a variety of reasons that this objection to the enforcement of the contract has any legs at all. I don't think there's any 13th Amendment colorable, 13th Amendment issue in specific performance of Musk's contract. We can go into that if you want, but that would be my conclusion.

[11:28] Kim Krawiec: Yeah, I think that if you're willing, we would like you to go into it because both Jen and Bridget are M and a practice bound and are very interested in the terms of the contract. And so to the extent we realize it's beyond the scope of your paper, but to the extent you're willing to discuss it, I think they'd be interested too. So I'm going to turn it over to Jen first to probe a little bit more into some of the questions about the contract.

[11:49] Jenn Scoler: Hi, Nate. Thank you for being here with us. I think we're all excited to ask our questions and learn more. So I think you kind of touched on this a bit and your answer to the last question, but just generally in the context of M and A deals, there are termination fees for parties that don't want to necessarily go through with the contract, but there are also or the agreement, but there are also specific performance options. So is it common for acquirers or target companies to extend up your knowledge to alternatively seek specific performance of the completion of the deal or our termination fees or similar damages preferable to specific performances in these contexts and like how generally available with specific performance be to buyers and sellers? And how do you think that the issues you raised in your article are implicated in these circumstances?

[12:41] Nate Oman: So, I don't know. In terms of frequency, I will say this, it's not unprecedented or uncommon for people to see specific performance of an M and A contract. And the Delaware Chancery of Court has ordered specific performance of M and A agreement in many cases in the past. It's also not uncommon for there to be just breakup fees and people get money. So in getting specific performance in an M and A contract, there are a couple of issues that get a little bit tricky. So the classic equitable doctrine around specific performance, right, is that specific performance is an extraordinary remedy. You have to show that your money damages would be inadequate in order to get a specific performance to the remedy. So if I am a seller, one sort of doctrinal hoop you've got to run through, you got to figure out why is it that money damages are going to be inadequate. Because oftentimes as a seller, if the contracts perform, you're going to get his money. So why is it that just giving you a judgment isn't going to be inadequate. And oftentimes what you have in MMA agreements, as I'm sure you're aware, is the purchase is actually pretty complicated, right? It could be cash, it could be a mixture of cash and stock. And the Delaware Chancellor at least has held that if a purchaser is, sorry, if a seller is seeking specific performance, just the bare fact that you've got a mixture of say cash and options and cash and stocks means that money damages won't be an adequate remedy, perhaps because the valuation of the options of the stock might be imperfect or something like that. There's also a sort of issue, and this has come up in the discussion on the mosque case, is suppose you the jolted seller and you just get money damages, you just get the purchase price. So in the Twitter case it's whatever per share was they were going to get out of mouse, you might say, well there's a negative reputational effect from being the jilted stellar and of course that is not going to be recoverable as damaged unless you can prove it with specificity. And so therefore your remedy is going to be inadequate. I will say the Delaware Chance record in particular, my sense is that they're actually really pretty liberal about granting specific performance in merger agreements, and in some cases they don't really do much more than a really pro forma if that analysis of the sort of Equitable doctrine they treat as a matter of contract interpretation. They'll just say, look, you guys agreed that there was going to be specific performance, and so we're just going to give you what it is that you'd agree to. And that actually is something that sort of, I wouldn't want to say, unique to the Delaware Chancery Court, but is a place where the Delaware Chance practice and rules diverges from, say, the secondary statement, because the secondary statement is pretty clear about saying you can't just contract into specific performance.

[15:54] Kim Krawiec: Do you have any insight for us? Going back to Jen's initial question about this, what is the interaction of the termination fee and the specific performance provision? How do they operate together? If it seems to me to undermine the notion that damages are not able to be calculated if you have both the fee and you have the call for specific performance, or am I reading too much into that notion?

[16:23] Nate Oman: I suspect conceptually I take your point, which would be something like if you got a termination fee in there that's basically liquidated damages.

[16:33] Kim Krawiec: Exactly.

[16:33] Nate Oman: Damages. We can calculate everything with certainty, so why bother with the Equitable stuff?

[16:39] Kim Krawiec: The mere fact that it's not called I've had this discussion with a couple of M and A folks, and they're like, no, it's a termination fee. I'm like, well, just because you don't call it liquidated damages doesn't mean it isn't. Although that change works with lots of courts, as you and I both know. But conceptually, I'm not sure how they operate together.

[16:59] Nate Oman: So I think in the Delaware Chancery Court they tend to be treated properly. I think they treat the parties Tam and A agreements as like highly sophisticated parties who can look at it to their own interests. So they're generally speaking, just going to say, well, again, they treat it almost like a matter of contract interpretation rather than as an application of these Equitable rules. And so they'll just say, well, if you write a contract that gives you the ability to elect the termination fee versus specific performance, we'll just enforce that contract as written, unless we've got some really sort of strong reason to suppose that we think that's fraud or something like that. Right?

[17:55] Kim Krawiec: Which of course is part of, I guess, Elon Musk's argument, right.

[17:59] Nate Oman: About these are all the stories he's saying, like, you lied to me, or the very least the warranties with slightly different issue, but the warranties in the contract have not been met. I suspect that outside of the M and A context and outside of the Delaware Chancery Court, your argument would have more legs. But my sense is that it just doesn't have much, at least in the chancery Court, right. It's a really specialized body of law. One of the sort of interesting things about the specific performance issue there is that the specific performance of an M and a agreement may well be that it's a shotgun marriage. Right. Where you're forcing. At least formally. You're forcing two management teams that by this point in time probably have a pretty poisonous relationship because of litigation. And you're just forcing them into this shotgun marriage. And they're going to have to work together. One of them is going to get fired. And the Delaware transfer basic response is like, this is what you bargain to. You've made your bed, now you get a lie in it.

[19:10] Kim Krawiec: And I think we'll probably come back to some of those questions later in the podcast because there are a number of questions along that flavor in connection with personal service contracts. I wanted to move to Bridget Now who also had some questions about the Twitter Elon Musk litigation that I think will give you a chance to talk about why you think this is a nonissue in this particular case. So go ahead, Bridget. Hi, Nate.

[19:33] Bridget Boyd: Thank you for being here with us today. You mentioned that you don't think that 13th Amendment will be an issue at all in this case with Twitter and Elon Musk. But I had come across an article online that argued that because Elon Musk himself, instead of X Holdings was party to the specific performance provision, the 13th Amendment might be at play, but then again, it's still an M and a deal. It's not really a service contract. So is that why you don't think the 13th Amendment will be an issue at all, or is there any other insight you can provide us with?

[20:10] Nate Oman: Yeah, there's sort of three reasons I don't think the 13th Amendment would be in play. So the first, as you mentioned, is the main party to the contract with Twitter is actually not Elon Musk. It's an acquisition vehicle. And there's clearly, like, there's no 13th Amendment problem with there can't possibly be a 13th Amendment problem with, like, coercing a corporation into doing something, right. Corporations, they're not natural people. They have owners, right? We enslave corporations all the time, and we shouldn't feel bad about that. So as to specific performance against this acquisition vehicle, there's nothing there. So then Musk is also a party to the contract. But Musk is a party to the contract in a very limited sense, right. He has certain obligations under the contract to provide essentially the purchase price through financing. So that's not a personal service obligation, right. It's an obligation to ultimately to provide money. My understanding is it's a bit more than just the debt. So it's not just like, I promise to pay you money. It's the promise to do various things with his Tesla stock. But none of that would be a personal service contract. A personal service contract, right, is where I'm agreeing to work under you as an employee, and you're going to direct me as my employer. Musk didn't contract to become the employee of either the acquisition vehicle or Twitter, and so it's just not a personal service contract. And so I don't think it's implicated in that sense. I don't think there's any plausible 13 Amendment argument to be made that sort of specific performance in general of contracts is suspect in the non personal service contract context. And then the final reason I don't think it's a good argument is I just don't think that the 13th Amendment prohibits specific performance of all personal service contracts that's more controversial than the other. So the other stuff I don't think necessarily I think the Delaware transfer court would agree with me on that. On the last point, they should agree with me, but I don't know if.

[22:19] Kim Krawiec: It was we're here for the controversy, Nate. That's what this class is all about, as you know.