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Delaware Court of Chancery Questions Enforceability of Con Ed Provisions
November 13, 2023 Download PDF
In Crispo v. Musk, the Delaware Court of Chancery, in an opinion by Chancellor McCormick, addressed the enforceability of merger agreement provisions related to the recovery of lost-premium damages by the target. Such “Con Ed provisions”—named after the Second Circuit’s opinion in Consolidated Edison, Inc. v. Northeast Utilities—attempt to clarify that damages for lost merger premiums are recoverable from a wrongfully terminating buyer by the target or stockholders in certain circumstances. Crispo suggests that while Delaware courts will likely not permit the target to recover lost-premium damages for itself or on behalf of stockholders, target stockholders themselves would have that right in certain circumstances.
In Con Ed, the Second Circuit applied a no-third-party-beneficiaries provision to hold that under New York law, stockholders could not enforce a merger agreement against a buyer who wrongfully terminated and seek damages for the lost merger premium. The holding threatened to shift the balance of negotiating leverage in mergers, allowing buyers to walk away with little consequence other than the payment of certain fees and expenses.
In response, parties began adopting provisions addressing the recovery of lost premiums. One variation of these so-called “Con Ed provisions” expressly provides stockholders with third-party-beneficiary status, but, as recognized by the Crispo court, this could lead to a proliferation of lawsuits and undermine the target’s ability to control the litigation asset and achieve a favorable outcome for all stockholders. Another variation makes the target an agent for recovering damages on behalf of its stockholders, but again, as noted by the Crispo court, there is “no legal basis” for a contracting party unilaterally to appoint itself as an agent to control a non-party’s rights. A third variation, which was at issue in Crispo, defines damages resulting from the wrongful breach to include lost premiums in an attempt to allow the target itself to recover the premiums.
Crispo involved Elon Musk and his affiliated entities’ acquisition of Twitter, Inc. After Musk purported to terminate the transaction, plaintiff brought claims alleging that buyers had breached the merger agreement. The buyers eventually had a change of heart and closed the transaction, and the plaintiff sought mootness fees for his claim’s role in the merger’s consummation.
In determining whether the plaintiff’s breach claim was meritorious when filed—a key element of a mootness fee petition—the court discussed the enforceability of Con Ed provisions. According to the court, Con Ed provisions are unenforceable under Delaware law if they define lost-premium damages to be exclusive to the target. Recovery by the target would be an unlawful contractual penalty because merger consideration, including premiums, are paid directly to the stockholders, so the target itself has no expectation or right to lost-premium damages.
The court then interpreted the merger agreement’s lost-premium damages definition and a seemingly contradictory no-third-party-beneficiaries provision to confer to the stockholders third-party-beneficiary status to seek lost-premium damages, but not while the company pursues a claim for specific performance. Another interpretation was that the stockholders did not have third-party-beneficiary status in any case, but that would render the lost-premium damages provision unenforceable and violate a cardinal rule of contract construction that all contract provisions should be given effect. Under either interpretation, however, the plaintiff lacked standing to sue for lost-premium damages when he filed suit, and therefore, his mootness fee was denied.
Though the Crispo opinion is not a direct holding on the Con Ed and third-party-beneficiary provisions, it reflects the court’s views on the merits of such provisions and that it will engage in detailed scrutiny of the parties’ intent behind such provisions. It does alleviate practitioners’ concerns that Con Ed, if followed in Delaware, would foreclose upon any party’s ability to recover lost-premium damages, and confirms that with proper drafting, Delaware courts will permit stockholders themselves to recover such damages against a wrongfully terminating buyer under the merger agreement, at least where specific performance is not an available remedy.
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