Crispo v. Musk, et al., C.A. No. 2022-0666-KSJM (Del Ch. Oct. 11, 2022) (McCormick, C.)

In this memorandum opinion, the Court of Chancery granted defendants’ motion to dismiss after holding that (1) a plaintiff stockholder was not a third-party beneficiary to a merger agreement for the purpose of seeking specific performance of that agreement, and (2) the buyers, Elon Musk and certain of his affiliated entities (“Musk”), did not constitute a control group and therefore did not owe fiduciary duties to the target company’s stockholders.  The Court ordered supplemental briefing, however, on the question of whether the “anti-Con. Edison” provision of the merger agreement conferred upon stockholders third-party beneficiary status that would allow them to pursue a direct claim for damages.

In March 2022, Musk began accumulating Twitter stock and, on April 13, made an offer to acquire the rest of the company for $54.20 per share.  Twitter’s board responded initially by adopting a poison pill, before negotiating and agreeing to a deal at the offered price.  On July 8, 2022, Musk sent a letter to Twitter purporting to terminate the merger agreement.  Twitter sued for specific enforcement, seeking to close the deal.  During that litigation, a Twitter stockholder brought a putative class action against Musk, alleging that Musk breached the merger agreement.  The stockholder also alleged that Musk had breached his purported fiduciary duties owed as a controlling stockholder of Twitter.

First addressing plaintiff’s breach of contract claim, the Court explained its reticence to recognize stockholders as third-party beneficiaries to contracts executed by corporations, rooted in the law’s deference to a board’s authority to control the corporation and its litigation assets.  Moreover, the Court recognized that freely granting stockholders third-party beneficiary status under such agreements would result in a “proliferation” of stockholder suits, leading to “inefficiencies both for specific entities and the system as a whole.”

Turning to the merger agreement, the Court afforded great weight to the “no third-party beneficiary” provision contained therein, recognizing that it “carve[d]-out” three groups as third-party beneficiaries in certain narrow, inapplicable, circumstances.  Those explicit carveouts suggested that “the parties knew how to confer third-party beneficiary status and deliberately chose not to do so with respect to any unlisted groups.”  The Court distinguished decisions where (1) the contract granted specific stockholders unique rights, and no other party was in a position to enforce those rights, and (2) stockholders had independently bargained for the specific provision they sought to enforce.

The Court also rejected plaintiff’s other textual arguments for third-party beneficiary standing, in part because the “mechanics provisions” in the agreement were not sufficiently specific as to overcome the “no third-party beneficiaries” provision.  However, the Court suggested an “Effect of Termination” clause may give plaintiff standing to sue for damages if the merger did not close and invited the parties to submit supplemental briefing on that issue.

That provision states that no termination of the merger agreement

shall relieve any party hereto of any liability or damages (which the parties acknowledge and agree shall … include the benefits of the transactions contemplated by this Agreement lost by the Company’s stockholders … including lost stockholder premium), which shall be … damages of such party, resulting from any knowing and intentional breach of this Agreement prior to such termination in which case … the aggrieved party shall be entitled to all rights and remedies at law or in equity.

The Court rejected plaintiff’s argument that the provision’s references to “stockholders” and empowerment of an “aggrieved party” to pursue “all rights and remedies at law or in equity” gave the plaintiff beneficiary standing to sue for specific performance.

However, the Court noted this provision may give stockholders beneficiary status to pursue damages in the event of a failure to close.  The Court explained that such provisions developed in the wake of Consolidated Edison, Inc. v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005), wherein the Second Circuit concluded that a popular carve-out for stockholders from a “no third-party beneficiary” provision was inapplicable in a case where the transaction never closed.  Transactional attorneys responded with contract provisions, like the one at issue, to provide alternative protection to stockholders if the deal did not close.  The Court’s sua sponte survey of the literature suggested these provisions were intended only to clarify damages—not confer third-party beneficiary standing.  Nonetheless, it invited the parties to submit supplemental briefing on whether the provision gave plaintiff standing to pursue a claim for damages.

Lastly, the Court rejected plaintiff’s argument that Musk, or Musk and others who had signed co‑investor letters, controlled Twitter and thus owed fiduciary duties to the company’s stockholders.  Musk individually owned less than 10% of Twitter’s stock, did not exercise any contractual rights he had under the merger agreement to veto board action or otherwise assert control, and was only alleged to have a personal relationship with one of eleven members of the Twitter board.  Even adding others who had signed co-investor letters, the supposed “group” only had 26.8% of shares, which by itself was not enough to give rise to an inference of control.  Moreover, the Court recognized that Twitter’s board had demonstrated its independence by adopting a poison pill, and then suing specifically enforce the merger agreement.  The Court refused “to make multiple logical leaps, as well as ignore the reality [of the parallel litigation] playing out in real time,” and dismissed the breach of fiduciary duty claim.

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