Addressing The Enforceability Of Con Ed Provisions In Merger Agreements, Delaware Court Of Chancery Rejects Petition For Post-Closing Mootness Fee, Finding Stockholders Lacked Third-Party Beneficiary Standing To Seek Lost-Premium Damages
On October 31, 2023, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued final judgment denying a petition for a mootness fee award to a stockholder—who had previously asserted claims for breach of a merger agreement—after the merger closed. Crispo v. Musk, No. 2022-0666-KSJM (Del. Ch. Oct. 31, 2023). The Court explained that, to obtain a mootness fee, a “plaintiff-stockholder must demonstrate that his mooted claim was meritorious when filed.” The claim at issue was for breach of a so-called “Con Ed provision” in the merger agreement purporting to provide for lost-premium damages. The Court found that plaintiff did not have third-party beneficiary status, at least at the time he filed suit, and therefore his claim was not meritorious.
Plaintiff was a stockholder of a social media company (the “Company”), which had entered a merger agreement to be acquired at a premium to its stock price. The merger agreement contained a lost-premium damages provision stating that, in the event of breach, the acquiror would be liable for “the benefits of the transactions contemplated by [the merger agreement] lost by the Company’s stockholders … taking into consideration all relevant matters, including lost stockholder premium[.]”
After the acquiror declared its intent to terminate the merger, the Company filed suit for breach of the merger agreement and sought specific performance to compel the acquiror to close the deal. Plaintiff thereafter separately filed suit, asserting claims for breach of fiduciary duty and breach of the merger agreement against the acquiror and related entities. The Court broadly dismissed plaintiff’s claims but left a claim for breach of the lost-premium damages provision unresolved, pending supplemental briefing.
While the suits were pending, the acquiror determined to proceed with the deal and the transaction subsequently closed. However, plaintiff subsequently petitioned for a mootness fee, claiming “partial credit for the deal’s consummation.” The question before the Court was whether plaintiff had standing to assert the lost-premium damages claim at the time he filed suit. In doing so, however, the Court addressed the enforceability of Con Ed provisions.
As the Court explained, Con Ed provisions were “intended to rebalance the negotiation leverage” in mergers in the wake of a decision in Consolidated Edison, Inc. v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005) (“Con Ed”). In that decision, the U.S. Court of Appeals for the Second Circuit held that Northeast Utilities stockholders did not have third-party beneficiary rights under a “common form of merger agreement” to sue for the premium that Con Ed would have paid had the deal closed. In the years thereafter, M&A practitioners developed several provisions to “deter buyers from backing out of a deal.” These Con Ed provisions “aimed to make clear that the parties to the contract intended for the buyers to be liable for lost stockholder premium in the event of a busted deal.”
For instance, one approach was to expressly confer in the merger agreement third-party beneficiary rights to stockholders. But the Court noted that buyers were concerned about the “proliferation of potential lawsuits” and sellers were apprehensive about the loss of control of such litigation and the ability to secure a favorable outcome.
The merger agreement for the acquisition of the Company utilized another approach—i.e., the express lost-premium damages provision. But the Court concluded that, “[t]o the extent that a damages-definition provision purports to define lost-premium damages as exclusive to the target, … it is unenforceable.” The Court explained that, under basic contract principles, a contracting party cannot receive more than expectation damages and “[a] target company has no right or expectation to receive merger consideration, including the premium, under agreements that operate like the [m]erger [a]greement.”
Instead, the merger consideration was to be paid to the stockholders. Yet, the merger agreement contained a provision “expressly disclaiming third-party beneficiaries,” subject to three explicit carveouts not applicable to the lost-premium damages provision. The Court thus concluded that one reasonable interpretation of the merger agreement was that the parties intended to preclude claims by stockholders as third-party beneficiaries and “took the risk that the [lost-premium damages] provision would be unenforceable.”
Relying, however, on “the cardinal rule of contract construction that, where possible, a court should give effect to all contract provisions,” the Court determined that there is “another possible construction” that stockholders were “granted third-party beneficiary [rights] that vest in exceptionally narrow circumstances and for the limited purpose of seeking lost-premium damages.” But the Court found that a “limitation necessarily implied … is that the drafters did not intend to vest stockholders with a right to enforce lost-premium damages while the company pursues a claim for specific performance.”
Therefore, regardless of which interpretation is “most faithful to the parties’ expectations,” plaintiff did not have a meritorious claim when it was filed. Accordingly, the Court denied plaintiff’s petition for a mootness fee.