Friday, December 22, 2023

Crispo, Third Party Beneficiaries, and the Twitter Fallout

After Twitter v. Musk concluded, there remained a bit of satellite litigation in the form of a claim brought by Twitter shareholder Luigi Crispo, who alleged that his lawsuit against Musk – filed in the midst of the dispute with Twitter – had in fact materially contributed to the Twitter v. Musk settlement, and therefore he should be entitled to attorneys’ fees. 

(Pause for laughter.)

Anyway, the legal merit of that claim turned on whether Crispo’s claims against Musk – as a stockholder, for breaching the merger agreement with Twitter – themselves ever had any merit to begin with.  In October of this year, Chancellor McCormick held that they did not, but the way she got there put merger planners in something of a bind.

One issue that came up during the whole … thing … was what kind of damages Twitter could get if it prevailed in its claim that Musk breached the merger agreement, but if specific performance was for some reason unavailable.  (And yes, sorry, I can’t help but mention, this is an issue I discuss in more detail in my paper, Every Billionaire is a Policy Failure).  The merger agreement had a damages cap of $1 billion, but leaving that aside, the obvious damages would be for the lost premium.  I.e., Twitter was trading around $40 or so when the whole thing started, Musk offered $54.20, he should at least be required to pay that difference.

Conceptually, though, that’s a problem because Twitter, the entity, and the party to the merger contract, never expected to receive that money – the money was going straight to its stockholders.  Contract damages are supposed to give you the benefit of your bargain, and Twitter’s benefit was not to receive the difference between $40 per share and $54.20 per share, but to transfer that value to its stockholders, while itself receiving the inestimable benefit of submitting to Elon Musk’s leadership.

One way around this would be to make stockholders third party beneficiaries of the contract, but to do that might give them enforcement rights – exactly as Crispo was claiming – which would interfere with the directors’ ability to control any subsequent litigation.

Anyway, merger planners have been aware of this problem for a little while and so they generally write in first, that there are no third party beneficiaries, and second, some kind of liquidated damages provision that counts lost premium as among the damages that acquirers are responsible for.  Twitter’s merger contract did the same (although, apparently, still qualified by the cap).

Which brings us to Crispo.  He argued that notwithstanding all of this, he still had the ability to bring his claims for lost premium damages, which meant his claims when filed were meritorious, which meant his lawsuit could be viewed as having contributed to the final settlement.

In October, McCormick rejected the argument, and along the way she held that if stockholders are not third party beneficiaries, target companies cannot seek lost premium damages, even through a liquidated damages clause, because liquidated damages clauses can only encompass benefits that a contracting party actually expected to receive if the deal went through:

Contractual provisions that define the type of damages for which a party might be liable are enforceable only to the extent they are consistent with principles of contract law.  A contracting party cannot receive more than expectation damages.  “[E]xpectation damages [are] measured by the amount of money that would put the promisee in the same position as if the promisor had performed the contract.”  A party cannot recover damages for consideration that it would not expect to receive had the contract been performed…. A target company has no right or expectation to receive merger consideration, including the premium… Where a target company has no entitlement to a premium in the event the deal is consummated, it has no entitlement to lost-premium damages in the event of a busted deal. Accordingly, a provision purporting to define a target company’s damages to include lost-premium damages cannot be enforced by the target company.

She also held that merger targets like Twitter cannot claim to be seeking lost premium damages on shareholders’ behalf, because “there is no legal basis for allowing one contracting party to unilaterally and irrevocably appoint itself as an agent for a non-party for the purpose of controlling that party’s rights.”

Now, I personally find that technically correct as a matter of contract doctrine, and wholly unsatisfying as a practical matter.  After all, as McCormick herself noted in the same opinion:

[M]erger agreements involve the payment of consideration directly to stockholders. In a Delaware corporation, that benefit to stockholders marks the satisfaction of the board’s fiduciary obligations to them and is a material part of the parties’ purpose in entering into the contract. Indeed, delivering this benefit to stockholders is typically the target corporation’s purpose for entering into a merger agreement.

It seems very … artificial … to ignore that obvious fact for the purpose of remaining faithful to, well, common law forms of action.  But she held what she held, and now merger planners who want to allow for lost premium damages, while not giving shareholders the ability to enforce deals directly, are stuck.

One possibility that’s being floated is to amend the DGCL.  After all, Crispo is simply a common law contract holding; no reason the law can’t be changed by statute.

In the meantime, though, a little birdie alerted me to this private ordering solution by PGT Innovations.  PGTI entered a merger agreement, and when shareholders vote on it, well:

At the PGTI Stockholders Meeting, PGTI expects to submit for the approval or adoption by PGTI’s stockholders an amendment to the Amended and Restated Certificate of Incorporation of PGTI (as amended from time to time) designating PGTI as the agent of stockholders of PGTI to pursue damages in the event that specific performance is not sought or granted as a remedy for Masonite’s fraud or material and willful breach of the Merger Agreement (the “PGTI Organizational Document Amendment”). The PGTI Organizational Document Amendment is intended to address recent caselaw from the Delaware Chancery Court that, could be construed to, in effect, limit the remedies available to PGTI under the Merger Agreement absent the PGTI Organizational Document Amendment.

See?  The merger agreement itself – to which shareholders are not a party – can’t unilaterally make PGTI into shareholders’ agents, but, the theory goes, the charter, which increasingly is treated as a contract between shareholders and managers under Delaware law, can. 

It’s a neat solution (though I don’t think the problem should, umm, exist), though I do wonder what happens when shareholders accuse PGTI of violating its duties as an agent by not seeking exactly the right damages (settling too easily, whatever); the same kind of deference we usually give to board members should not apply if PGTI is acting in a different capacity, though I suppose PGTI might address that with careful drafting (the exact language does not (?) seem to be available yet).

Ann Lipton | Permalink


Post a comment