Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

The Delaware Court of Chancery, in a key ruling on the third-party beneficiary rights of merger target shareholders, has dismissed an ex-Twitter Inc. investor’s “lost premium” suit that sought a $3 million “mootness fee” after Elon Musk reversed his decision to abandon the social media giant’s purchase in Crispo v. Musk, et al., No. 2022-0666-KSJM (Del. Ch. Oct. 31, 2023).

Chancellor Kathaleen St. Jude McCormick’s October 31 opinion found plaintiff shareholder Luigi Crispo’s suit was not meritorious when filed since he never had a valid claim that he should profit by Musk’s buy decision. She said either he lacked third-party status or those rights had not yet vested during Musk’s on-again-off-again acquisition.  But she took the occasion to comprehensively clarify the parameters of third-party shareholder beneficiary rights—which might benefit M&A practitioners.

The Chancellor noted that although the facts of this case made the decision seem deceptively simple, the complexity of the underlying rights issue has the potential to form a legal “Gordian KnoI” which requires some explanation as to how it might be cut.

Background

The litigation arose out of Elon Musk’s July 2022 decision to acquire Twitter—and his change of mind less than three months later to scrub it, resulting in a suit by Twitter for specific performance, but Musk changed his mind again in October and consummated the deal on the original terms that month.  Meanwhile Crispo, who held 5,000 shares of Twitter, sued Musk and his X Holdings Inc. I and II  acquisition companies in July for breach of the merger pact and breach of duty as the controller of Twitter,

After Chancellor McCormick dismissed most of those claims and the sale closed, Crispo’s suit was considered dead, but it “sprang back to life zombie-like” she said, when Crispo claimed partial credit for Musk’s. change-of-heart and sought a $3 million award on grounds that Musk mooted plaintiff’s breach of merger charge by keeping his deal promise after all.

Meritorious mootness suit?

Chancellor McCormick said the Delaware Supreme Court has held that mootness fees are only awarded when:

i)The suit was meritorious when filed

ii) the action that produced the benefit to the corporation “was taken by the defendant before a judicial resolution was achieved;” and

iii) “the resulting corporate benefit was causally related to the lawsuit.”

“In order for a suit to be considered meritorious when filed, the complaint must have been able to have survived a motion to dismiss, whether or not such a motion was filed,” so he must prove the remaining lost premium claim was meritorious for the suit to survive, the Chancellor pointed out; but she added that plaintiff  was not a party to the Merger Agreement, so the merits of his claim hinge on the argument that he had standing to sue for breach of the agreement as a third-party beneficiary

To allege standing as a third-party beneficiary, a plaintiff must plead that:

i) “the contracting parties . . . intended that the third party beneficiary benefit from the contract,”

ii) the benefit [was] intended as a gift or in satisfaction of a pre-existing obligation to that person, and

iii) “the intent to benefit the third party [was] a material part of the parties’ purpose in entering into the contract.”

Was the investor vested?

But the Chancellor ruled that, “[T]hird party beneficiaries, however, cannot object to the alteration or termination  of the contract before their rights against the promisor have vested.’’  and Crispo’s rights had not vested.

Moreover, she said, Delaware courts are reticent to confer third party beneficiary status to stockholders under corporate contracts for a mix of doctrinal, practical and policy reasons not the least of which is that “under Delaware law, the board of directors manages the business and affairs of the corporation, which extends to litigation assets.”  That includes Delaware’s exacting presuit demand test for shareholders who seek to sue on behalf of the corporation.

Lost Premium Provision no help

The court said Section 9.7 of the Merger Agreement is a no-third-party-beneficiaries provision which comprises a blanket prohibition disclaiming third-party beneficiaries followed by three. carve-outs but none of those provide any help for the plaintive here.  In addition, the chancellor noted, the blanket prohibition states that the Merger Agreement “shall not confer upon any Person other than the parties hereto any rights or remedies hereunder[.]”

Conclusion

Finally, she said, the parties stipulated to specific performance as to “prevent” breaches of the Merger Agreement, suggesting that a breach claim seeking lost-premium damages would not accrue unless specific performance was unavailable.  The limitation necessarily implied by the Merger Agreement 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, she concluded.