2023 M&A Annual Review 15 19 20 Crispo v. Musk (Del. Ch. Oct. 31, 2023). Provisions like this second bullet are commonly referred to as “Con Ed” provisions. They became more common after the Second Circuit in Consolidated Edison, Inc. v. Northeast Utilities (2005) found that a merger agreement did not give company shareholders standing to sue—since they were not parties and were not included in the agreement’s exceptions to a general disclaimer of third-party beneficiaries—and did not allow the company to seek damages for losses suffered by the shareholders, since the agreement provided for the company to seek damages only to the extent suffered by it. 9 At the end of October, the Delaware Chancery Court gave dealmakers reason to rethink provisions for damages payable by a buyer for breaching a merger agreement where target shareholders are not parties. The court’s opinion19 addressed the merger agreement between Elon Musk’s entities and Twitter, which provided, among other things, that: ▪ Other than specified parties (which did not include shareholders), there were no third-party beneficiaries, and ▪ If terminated under certain circumstances, the buyer would be liable for damages, including the shareholder premium and other benefits of the transaction lost by the shareholders.20 A Twitter shareholder sued Musk for allegedly breaching the agreement before Musk closed the transaction. After the closing, the shareholder sought a mootness fee for his purported role in causing Musk to close, but the court found the shareholder had no standing, because when he sued either he did not have thirdparty beneficiary status or his status had not vested. Of more general applicability, the court stated that: ▪ Defining damages payable by a buyer to a target company to include lost shareholder premiums was an unenforceable penalty, since the target company itself would not have received that premium. ▪ A target company could consider making itself the shareholders’ agent for purposes of pursuing damages suffered by them, but that was on “shaky ground” since there was no basis for the company to unilaterally appoint itself agent. ▪ The parties could make shareholders third-party beneficiaries by the express terms of the agreement. However, here they had not done so, and in most deals both buyers and target companies generally tried not to give all shareholders standing to sue the buyer, which might lead to loss of control by the buyer and the target and might not be consistent with the “need to recognize the contractual primacy of the board … in the sale context”. The court questioned, though, whether the parties, implicitly if not expressly, intended to make shareholders third-party beneficiaries after the target company had sought specific performance, since otherwise the apparently carefully drafted damages definition would not mean much. The opinion does not diminish the availability to targets of specific performance remedies, which if obtained could result in, among other things, a closing of the acquisition and receipt by shareholders of the intended premium. Nor does it address a target company’s right to sue a breaching buyer for damages suffered by the company, such as costs and expenses, or the use of “reverse” termination fees payable by the buyer to the target in many transactions. However, target companies, in the absence of, and sometimes in addition to, other comparable remedies, want to be able to sue breaching buyers for the benefit of the lost premium, which can be a substantially larger amount. Target companies may take actions, in merger agreements or elsewhere, to address the court’s concerns, thereby further disincentivizing breaches by buyers, but the market has not yet settled on a response to the opinion. Musk’s Agreement to Acquire Twitter Makes People Think About … Contract Damages
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