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What if Musk loses the Twitter case but defies the court?

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Twitter wants a Delaware court to order Elon Musk to buy the social media service for $44 billion, as he promised back in April. But what if a judge makes that ruling and Musk balks?

The Tesla billionaire’s reputation for dismissing government pronouncements has some worried that he might flout an unfavorable ruling of the Delaware Court of Chancery, known for its handling of high-profile business disputes.

Musk hopes to win the case that’s headed for an October trial. He’s scheduled to be deposed by Twitter attorneys starting Thursday.

But the consequences of him losing badly — either by an order of “specific performance” that forces him to complete the deal, or by walking away from Twitter but still coughing up a billion dollars or more for breach of contract — has raised concerns about how the Delaware court would enforce its final ruling.

“The problem with specific performance, especially with Elon Musk, is that it’s unclear whether the order of the court would be obeyed,” retired Delaware Supreme Court Justice Carolyn Berger told CNBC in July. “And the courts in Delaware — courts all over — are very concerned about issuing a decision or issuing an order that then is ignored, flouted.”

Berger, who was also a vice chancellor of the Chancery Court in the 1980s and 1990s, stood by those concerns in an interview with The Associated Press but said she doubted the Delaware institution would go so far as to make him complete the deal.

“The court can impose sanctions and the court can kind of coerce Musk into taking over the company,” she said. “But why would the court do that when what really is at stake is money?”

Berger said she expects Twitter to prevail, but said a less tumultuous remedy for the company and its shareholders would make Musk pay monetary damages. “The court doesn’t want to be in a position to step in and essentially run this company,” she said.

Musk and his lawyers didn’t respond to requests for comment.

Other legal observers say such defiance is almost impossible to imagine, even from a famously combative personality such as Musk. He acknowledged he might lose in August in explaining why he suddenly sold nearly $7 billion worth of Tesla shares.

“I take him at his word,” said Ann Lipton, an associate law professor at Tulane University. “He wants to win. Maybe he’s got his own judgment as to what the odds are. But he’s also being sort of practical about this. He’s getting some cash ready so he doesn’t have to dump his Tesla shares if it turns out he is ordered to buy the company.”

A ruling of specific performance could force Musk to pay up his $33.5 billion personal stake in the deal; the price increases to $44 billion with promised financing from backers such as Morgan Stanley.

The Delaware court has powers to enforce its orders, and could appoint a receivership to seize some of Musk’s assets, namely Tesla stock, if he doesn’t comply, according to Tom Lin, a law professor at Temple University.

The court has made such moves before, such as in 2013 when it held Chinese company ZTS Digital Networks in contempt and appointed a receiver with power to seize its assets. But after coercive sanctions didn’t work, the receiver asked the court five years later to issue bench warrants calling for the arrest of two senior executives the next time they visited the U.S.

Speculation that Musk could be threatened with jail time for failing to comply with a ruling is unrealistic, said Berger. “At least, not for the Court of Chancery,” said the former judge. “That’s not the way the court operates.”

But more important, Lin said Musk’s legal advisers will strongly urge him to comply with the rulings of a court that routinely takes cases involving Tesla and other firms incorporated in the state of Delaware.

“If you are an executive at a major American corporation incorporated in Delaware, it’s very hard for you to do business and defy the chancery court’s orders,” Lin said.

Concerns about Musk’s compliance derive from his past behavior dealing with various arms of the government. In a long-running dispute with the U.S. Securities and Exchange Commission, he was accused of defying a securities fraud settlement that required that his tweets be approved by a Tesla attorney before being published. He publicly feuded with California officials over whether Tesla’s electric car factory should remain shut down during the early stages of the COVID-19 pandemic.

He’s also taken a combative approach in Delaware Chancery Court, calling an opposing attorney a “bad human being” while defending Tesla’s 2016 acquisition of SolarCity against a lawsuit that blamed Musk for a deal rife with conflicts of interest and broken promises. He and his lawyers have other Delaware cases still pending, including one involving his compensation package at Tesla.

“I think we’ve got a whole lot of players who, as loose a cannon as Elon Musk is, rely on the goodwill of the Delaware courts on an ongoing basis for their businesses,” Lipton said.

Musk’s argument for winning his latest Delaware case largely rests on his allegation that Twitter misrepresented how it measures the magnitude of “spam bot” accounts that are useless to advertisers. But most legal experts believe he faces an uphill battle in convincing Chancellor Kathaleen St. Jude McCormick, the court’s head judge who is presiding over the case, that something changed since the April merger agreement that justifies terminating the deal.

The trial begins Oct. 17 and whichever side loses can appeal to the Delaware Supreme Court, which is expected to act swiftly. Musk and Twitter could also settle the case before, during or after the trial, lawyers said.

Delaware’s courts are well-respected in the business world and any move to flout them would be “shocking and unexpected,” said Paul Regan, associate professor of Widener University’s Delaware Law School who has practiced in Delaware courts since the 1980s. “If there was some kind of crisis like that, I think the reputational harm would be all on Musk, not the court.”

Matt O’brien, The Associated Press

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RBC reports $3.9B Q4 profit as it prepares for a more turbulent year ahead

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By Ian Bickis in Toronto

Royal Bank of Canada is taking measures to prepare for a more uncertain year ahead, but results from the past quarter still show gains in key areas like loans and new client additions.

The bank, which on Tuesday announced it had reached a deal to buy HSBC Bank Canada for $13.5 billion, said Wednesday it was raising its dividend for the last time until the deal is closed, while also announcing a two per cent discount on dividend reinvestments to help boost its balance sheet.

Given the potential slowdown ahead, the bank also set aside $381 million for potentially bad loans, compared with a reversal of $227 million last year, which offset gains elsewhere in the quarter to leave earnings of $3.88 billion just $10 million shy from a year earlier.

The actions on loan provisions and dividend discounts come as elevated housing and energy prices, geopolitical instability, and rising interest rates put pressure on growth, affect asset valuations and adds to market volatility, said RBC chief executive Dave McKay.

“We maintain our cautious stance on the outlook for economic growth,” he said on an analyst call.

“Although higher interest rates are needed to preserve long term economic stability, the lagging impact of monetary policy, combined with strong employment and significant liquidity in the system, has likely delayed what may end up being a brief and moderate recession.”

While rising rates put pressure on the economy, RBC is especially well positioned to benefit from them as the net interest margins on its sizable deposit base grows.

The bank said it saw net income in personal and commercial banking grow five per cent from a year ago to $2.14 billion, mostly due to those higher margins along with average volume growth of 10 per cent in loans, and wealth management also got a boost from higher net interest income and loan volume growth.

The boost from rising interest margins come as a benefit of RBC’s scale, which it continues to push to increase, both through the HSBC Canada acquisition, and more organic growth.

HSBC Canada gives the potential for RBC to add some 800,000 clients if it goes through as expected in late 2023, while this year the bank added 400,000 clients, and expects its client referral deal with the Canadian division of India’s ICICI Bank to direct some 50,000 more customers as immigration levels reach record highs.

The bank is well-positioned to add more clients, and deposits, next year to provide lower-cost funding for its loans, said McKay.

“We believe our largely deposit-funded balance sheet will be a key driver of profitability in a rising rate environment,” he said.

The bank’s capital markets business shows the clearest indications of volatility, with net income of $617 million down 33 per cent from a year earlier, but up 29 per cent from the third quarter.

Revenue totalled $12.57 billion, up from $12.38 billion a year earlier.

The quarter showed strong loan growth and no signs of a credit spike for RBC, said Scotiabank analyst Meny Grauman in a note, but he wondered about what the bank’s move on the discounted dividend reinvestment plan (DRIP) shows for the bank’s capital outlook, given the expected tougher economic conditions next year.

“In that context a defensive move on the DRIP raises questions about downside risks,” said Grauman.

He said the bank’s better-than-expected earnings, which came in at an adjusted $2.78 per diluted share for the quarter compared with a consensus of $2.68, according to Refinitiv, was from higher revenues and smaller loan provisions than expected.

Bank expenses however, which were up 9.5 per cent for the quarter compared with last year on higher staffing costs and some acquisition-related increase, came in higher than expected.

RBC said it will now pay a quarterly dividend of $1.32 per share, an increase of four cents.

For its full financial year, RBC said it earned $15.81 billion or $11.06 per diluted share on $48.99 billion in revenue compared with a record profit of $16.05 billion or $11.06 per diluted share on $49.69 billion in revenue in the same period last year.

This report by The Canadian Press was first published Nov. 30, 2022.

Companies in this story: (TSX:RY)

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Bank of Canada lost $522 million in third quarter, marking first loss in its history

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By Nojoud Al Mallees in Ottawa

The Bank of Canada lost $522 million in the third quarter of this year, marking the first loss in its 87-year history.

In the central bank’s latest quarterly financial report, it says revenue from interest on its assets did not keep pace with interest charges on deposits at the bank, which have grown amid rapidly rising interest rates.

The Bank of Canada’s aggressive interest rate hikes this year have raised the cost of interest charges it pays on settlement balances deposited in the accounts of big banks.

That’s while the income the central bank receives from government bonds it holds remains fixed.

The Bank of Canada dramatically expanded its assets during the pandemic as part of its government bond purchasing program. Also known as quantitative easing, the policy was part of the central bank’s efforts to stimulate the economy.

That expansion in assets is now costing the central bank, as it paid for the government bonds with the creation of settlement balances.

Speaking before the House of Commons finance committee last week, Bank of Canada governor Tiff Macklem addressed the expected losses.

He said losses don’t affect the central bank’s ability to conduct monetary policy.

He noted the size and duration of the losses will depend on the path of interest rates and the evolution of the economy.

“Following a period of losses, the Bank of Canada will return to positive net earnings,” he said.

The Bank of Canada is looking to the federal government for a solution to balance its books.

While there are a few options available, some economists say the problem before the central bank is largely an accounting one rather than a monetary policy concern.

This report by The Canadian Press was first published Nov. 29, 2022.

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