Twitter, Inc. v. Elon R. Musk

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE KATHALEEN ST. JUDE MCCORMICK LEONARD L. WILLIAMS JUSTICE CENTER CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734

September 7, 2022

Peter J. Walsh, Jr., Esquire Edward B. Micheletti, Esquire Kevin R. Shannon, Esquire Lauren N. Rosenello, Esquire Christopher N. Kelly, Esquire Skadden, Arps, Slate, Meagher & Flom LLP Mathew A. Golden, Esquire 920 N. King Street, 7th Floor Callan R. Jackson, Esquire P.O. Box 636 Potter Anderson & Corroon LLP Wilmington, DE 19899-0636 1313 N. Market Street Hercules Plaza, 6th Floor Wilmington, DE 19801

Brad D. Sorrels, Esquire Wilson Sonsini Goodrich & Rosati, P.C. 222 Delaware Avenue, Suite 800 Wilmington, DE 19801

Re: Twitter, Inc. v. Elon R. Musk et al., C.A. No. 2022-0613-KSJM

Dear Counsel:

This letter decision resolves the Motion for Leave to Amend Defendants’ Verified

Counterclaims, Answer, and Affirmative Defenses and Motion to Extend Case Schedule

filed by Defendants Elon R. Musk, X Holdings I, Inc., and X Holdings II, Inc.

(“Defendants”) on August 29, 2022. 1 Plaintiff Twitter, Inc. filed its opposition on

September 3, 2022, 2 Defendants filed their reply on September 5, 2022, 3 and I heard oral

1 C.A. No. 2022-0613-KSJM, Docket (“Dkt.”) 282 (“Mot. to Amend”). 2 Dkt. 390 (“Opposition”). 3 Dkt. 405. C.A. No. 2022-0613-KSJM September 7, 2022 Page 2 of 5

argument on September 6, 2022. I assume that the reader is familiar with the background

of this dispute and will skip to the facts germane to the motion at issue.

On July 6, 2022, former Twitter employee Peiter “Mudge” Zatko filed a

whistleblower complaint with various federal authorities (the “Whistleblower

Complaint”). 4 The Washington Post published the Whistleblower Complaint on August

23, 2022. Defendants have represented to the court that “Defendants had no awareness of

and never reviewed the Whistleblower Complaint until it was reported by the Washington

Post on August 23, 2022.” 5 On August 29, 2022, Defendants sent Twitter a letter

purporting to terminate the merger agreement on new grounds, claiming that the allegations

in the Whistleblower Complaint, “if true, demonstrate that Twitter has breached the . . .

provisions of the Merger Agreement.” 6 Defendants moved to amend their counterclaims

later that night to assert additional claims based on the Whistleblower Complaint. They

simultaneously requested that the court bump trial, which is presently scheduled to begin

on October 17, to mid-November.

Defendants’ motion to amend is granted. Court of Chancery Rule 15(a) provides

that leave to amend should be “freely given when justice so requires.” 7 This court

interprets Rule 15(a) to “allow for liberal amendment in the interest of resolving cases on

4 Dkt. 244, Ex. A. 5 Mot. to Amend ¶ 24. 6 Opposition, Ex. 16 at 2–5. 7 Ct. Ch. R. 15(a). C.A. No. 2022-0613-KSJM September 7, 2022 Page 3 of 5

the merits.” 8 Leave to amend is typically granted unless the non-moving party can

establish “undue prejudice, undue delay, bad faith, dilatory motive or futility.” 9 This court

rarely declines amendments under Rule 15(a) based on futility. 10 Such arguments require

the court to assess the merits of a claim on a highly truncated posture and before such claim

has been pled; such arguments are therefore antithetical to the policy of resolving cases on

the merits. 11

The newly published Whistleblower Complaint would be grounds in most instances

to permit an amendment under the low bar of Rule 15(a). Twitter argues that the

amendment would be futile, but their arguments falter against the exceedingly movant-

friendly standard of Rule 15(a). I am reticent to say more concerning the merits of the

counterclaims at this posture before they have been fully litigated. The world will have to

wait for the post-trial decision.

Twitter also argues that the amendment would be prejudicial to the extent it would

expand discovery and extend the case schedule, and Twitter’s arguments to this effect are

8 Gould v. Gould, 2011 WL 141168, at *7 (Del. Ch. Jan. 7, 2011). 9 In re TGM Enters., L.L.C., 2008 WL 4261035, at *2 (Del. Ch. Sept. 12, 2008) (quoting Cantor Fitzgerald, L.P. v. Cantor, 1999 WL 413394, at *2 (Del. Ch. June 15, 1999)). 10 See, e.g., In re Trust for Gore, 2010 WL 5561813, at *2 (Del. Ch. Dec. 23, 2010) (granting leave to amend to add a claim because the claim was supported by “at least an arguable interpretation of the facts”). 11 See NACCO Indus., Inc. v. Applica Inc., 2008 WL 2082145, at *1 (Del. Ch. May 7, 2008) (“Rule 15(a) reflects the modern philosophy that cases ‘are to be tried on their merits, not on the pleadings.’ Therefore, courts generally will not test the sufficiency of the pleadings in ruling on a motion to amend.” (quoting In the Matter of Transamerica, Inc., 2006 WL 587846, at *2 (Del. Ch. Feb. 28, 2006))). C.A. No. 2022-0613-KSJM September 7, 2022 Page 4 of 5

far more forceful than Twitter’s futility arguments. But that prejudice can be mitigated by

cabining additional discovery to the new allegations and maintaining the existing case

schedule. So that is what I will do.

Defendants are permitted only incremental discovery relevant to the new

allegations. That discovery can be made through targeted document discovery and minimal

additional experts and fact witnesses. The parties are ordered to confer immediately to

attempt to negotiate reasonable parameters for the additional discovery.

Defendants’ motion to extend the case schedule is denied. “A trial judge has broad

discretion to control scheduling and the court’s docket.” 12 In arguing that trial should be

delayed by at least four weeks, Defendants contend that no external deadline creates any

urgency. They observe that the merger agreement’s “termination date of October 24, 2022

is automatically stayed if litigation is commenced, and debt financing has an outside date

of April 25, 2023.” 13 They adduce, therefore, that “any prejudice to Twitter can be easily

mitigated by . . . continu[ing] the trial date.” 14 But the opposite is true. I previously rejected

Defendants’ arguments in response to Twitter’s motion to expedite, making clear that the

longer the delay until trial, the greater the risk of irreparable harm to Twitter. 15 Indeed,

Twitter has represented that the anticipated risk of harm has materialized over the course

12 Goode v. Bayhealth Med. Ctr., Inc., 931 A.2d 437, 2007 WL 2050761, at *3 (Del. July 18, 2007) (TABLE). 13 Mot. to Amend. ¶ 8. 14 Id. ¶ 37. 15 Dkt. 103 at 63. C.A. No. 2022-0613-KSJM September 7, 2022 Page 5 of 5

of this litigation. Twitter “has suffered increased employee attrition,” which “undermin[es]

the company’s ability to pursue its operations goals. The company has been forced for

months to manage under the constrains of a repudiated merger agreement, including

Defendants’ continued refusal to provide any consents for matters under the operating

covenants.” 16 I am convinced that even four weeks’ delay would risk further harm to

Twitter too great to justify.

In maintaining the case schedule, I am further comforted by the fact that Twitter has

represented that it can handle reasonable requests for additional discovery while

maintaining the October 17 trial date. 17

IT IS SO ORDERED.

Sincerely,

/s/ Kathaleen St. Jude McCormick

Kathaleen St. Jude McCormick Chancellor

cc: All counsel of record (by File & ServeXpress)

16 Opposition ¶ 26. 17 Id. ¶ 40.