On October 31, 2023, in Crispo v. Musk, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued a decision addressing an important question that arises in mergers and acquisitions: if one of the parties (usually the buyer) refuses to close the transaction, can the jilted company (usually the target company) obtain “benefit-of-the-bargain” damages (including the lost premium that would have gone to stockholders)? At least based on the circumstances before it, the court answered that question in the negative, indicating that only stockholders who are third-party beneficiaries of the agreement, not the corporation, would be entitled to such damages. We expect the decision to engender significant discussion and impact merger agreement drafting.

The case arose in an odd procedural posture, stemming from Elon Musk’s acquisition of Twitter. When Musk initially refused to close the deal, a stockholder sued in the Court of Chancery, seeking specific performance and damages. Twitter itself vigorously contested Musk’s attempted termination in the same court, and the deal ultimately closed. Leading up to the new decision, the stockholder sought $3 million in attorneys’ fees for his alleged role in prompting Musk to close the deal.

The court rejected the stockholder’s claim for attorneys’ fees, holding that the plaintiff’s original claims were not meritorious when filed. The core of the court’s conclusion was that in order to bring a suit for breach of the merger agreement, the plaintiff needed to be a third-party beneficiary. The agreement, however, expressly provided that stockholders were third-party beneficiaries only in limited, and not relevant, circumstances. As such, in a claim for specific performance to compel the deal to close, Twitter, as the party to the agreement, had the right to bring such a claim, not its stockholders. The court noted that this outcome was consistent with the Delaware law approach that a board generally controls litigation on behalf of the corporation.

The court additionally noted, however, that the agreement could be read to grant stockholders third-party beneficiary rights in one other circumstance: to seek benefit-of-the-bargain damages had the deal failed to close. On that issue, the court noted that the agreement provided that if the deal failed to close in some circumstances, the buyer would be responsible for “lost premium” damages. The court reasoned that in a merger like the one involving Twitter, where the stock is converted into the right to be paid cash, such damages are not available to the target corporation, on the theory that stockholders, not the corporation, are paid the deal consideration, and under Delaware contract law, a party cannot recover damages beyond the benefits to which the party is entitled under the contract. Based on that premise, the court concluded that the “lost premium” provision in the Twitter merger agreement might have conferred limited third-party beneficiary standing on stockholders had the deal terminated, but not when the plaintiff filed the claims. Because the deal closed and was not terminated, the court concluded that this potential stockholder third-party beneficiary right would be unavailable in any event, and so the court did not need to resolve the question of whether the agreement’s language provided for such a right in a terminated deal scenario. For all of these reasons, the plaintiff’s claims lacked merit when filed and, therefore, there was no basis to award a mootness fee.

The remedies available to a jilted party should the other party fail to close are generally an important area of negotiation in mergers and acquisitions. Indeed, the court, in rendering this decision, surveyed market responses that developed after a court outside of Delaware reached the conclusion in Consolidated Edison, Inc. v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005) that stockholders in that case could not pursue benefit-of-the-bargain damages after a deal failed to close. We expect that this newest decision will similarly prompt significant discussion in the market and impact provisions pertaining to remedies and third-party beneficiaries.

For more information on the Delaware Court of Chancery’s decision or any related matter, please contact Amy Simmerman, Todd Cleary, Mark Holloway, Brad Sorrels, Adrian Broderick, James Griffin-Stanco, Ryan Greecher, Joe Slights, Bill Chandler, Jason Schoenberg, or any member of Wilson Sonsini’s M&A or corporate governance practices.