Heresniak v. Musk

Background

William Heresniak, who was a Twitter shareholder when he filed the case, sought damages, declaratory relief, and injunctive relief based on Elon R. Musk’s agreement to acquire Twitter. Heresniak alleged that Musk delayed closing the transaction, causing shareholders to receive merger proceeds later than they should have, and that Musk benefited from purchasing Twitter shares before timely disclosing his stake. He also alleged that Twitter directors Jack Dorsey and Egon Durban failed to negotiate properly, investigate Musk’s financing, or seek other buyers, and that Dorsey received an equity rollover arrangement that was not available to most other shareholders.

The acquisition closed in October 2022. Twitter shareholders received merger consideration on October 31, 2022. The defendants—Elon R. Musk, X Holdings I, Inc., X Holdings II, Inc., and Twitter, Inc.—filed two motions to dismiss.

Standing and derivative claims

The court first addressed whether Heresniak’s claims were direct claims, alleging an injury to him as a shareholder, or derivative claims, alleging an injury to Twitter that could be pursued on the company’s behalf. Under Delaware’s two-part test, the court asked who suffered the alleged harm and who would receive the benefit of any recovery.

The court concluded that both of Heresniak’s main claims were derivative. His aiding-and-abetting claim depended on alleged harm to Twitter from the directors’ conduct during the sale process. His unjust-enrichment claim likewise alleged that Musk harmed Twitter by acquiring shares at below-market prices and delaying the closing. The fact that shareholders allegedly received merger proceeds late did not make the claim direct.

A former shareholder may still bring a direct claim by attacking the fairness or validity of the merger itself. Heresniak conceded at the hearing that he was not alleging that Musk acquired Twitter at an unfair price. The court also found that his allegations about Dorsey’s rollover arrangement, the board’s process, and the failure to seek other offers did not plausibly show that the merger’s validity was tainted. The rollover arrangement affected Dorsey’s payment method and reduced Musk’s total cash payment, but the court found that it did not affect the total value of Twitter or the value of Heresniak’s shares.

Because Twitter was now private and Heresniak no longer retained shares, the court held that he could not maintain a derivative action on Twitter’s behalf. It therefore dismissed all claims for lack of standing.

Alternative failure to state claims

The court separately ruled that the claims would fail even if Heresniak had pleaded direct claims. For aiding and abetting a breach of fiduciary duty, a plaintiff must plausibly allege a fiduciary duty, a breach, knowing participation by the alleged aider and abettor, and damages caused by the breach. The court assumed, without deciding, that Dorsey and Durban may have breached fiduciary duties, but found that Heresniak did not plausibly allege that Musk knowingly participated in any breach. Friendship, professional relationships, communications, and the alleged rollover arrangement were not enough to support that inference.

The court dismissed the declaratory and injunctive-relief claims because the merger had closed, Heresniak and his proposed class were no longer shareholders, and the requested relief would address an alleged past wrong rather than resolve an ongoing dispute with practical consequences.

The court also held that Heresniak failed to state an unjust-enrichment claim. He did not adequately allege a connection between Musk’s alleged enrichment from buying shares at depressed prices and Heresniak’s alleged loss. As to the delayed merger payment, the court found that the merger agreement governed the payment and that unjust enrichment could not be used to circumvent an inadequate breach-of-contract claim.

Disposition

The court granted the defendants’ motions to dismiss. It stated that Heresniak’s claims failed for lack of standing and on the merits, and dismissed the case without leave to amend because further amendment would be futile.