Guest Post 2: John Patrick Hunt on Specific Performance in Delaware

John Patrick Hunt on Elon Musk and Twitter
Part II: Specific Performance of Merger Agreements

In yesterday’s post, I provided background on the availability of specific performance as a remedy in the context of acquisitions under Delaware law.  In this post, we look at Delaware law in more detail. 

Commenters have focused on In re IBP Shareholders Litigation, 789 A.2d 14, 82-84 (Del. Ch. 2001) (edted version available here) in which the court considered various equitable factors, including the adequacy of monetary remedies, before deciding to grant specific performance of a merger agreement to the seller.  But, importantly, the opinion in IBP does not suggest that the parties agreed to specific performance.  It would surprising if the parties had agreed to specific performance and the court simply decided not to mention it; the court did refer to the agreement’s choice-of-law provision in deciding the analogous question of what law to apply.  Id. at 52-54.  Thus, although IBP certainly stands for the proposition that the Court of Chancery is willing to order a buyer to go through with an M&A transaction, it may suggest more reluctance to do so than the court actually exhibits when the parties have agreed to specific performance.

            When the parties do agree to specific performance, the Court of Chancery seems to give great weight to their choice.  Indeed – again recognizing that the research for these posts has not been totally comprehensive – this author has found no merger or acquisition case in which the court denied on extrinsic grounds specific performance when it found that the parties’ agreement authorized the relief.

The Court of Chancery recognized the importance of respecting the parties’ choice to opt into specific performance in the related context of exercise of shareholder preemptive rights.  Ordering specific performance per the parties’ agreement in Gildor v. Optical Solutions, Inc., 2006 WL 4782348 (Del. Ch. June 5, 2006), the court wrote, “If the Stockholder Agreement was silent as to the availability of specific performance, Gildor would bear the burden of showing that a legal remedy would be inadequate.  … But, given Delaware’s policy of favoring freedom of contract, there is no need to make that inquiry. … Delaware courts do not lightly trump the freedom to contract and, in the absence of some countervailing public policy interest, courts should respect the parties’ bargain.”  Id. at *11. 

            Moving to M&A cases, in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008), the court seems to have treated the parties’ agreement on specific performance as dispositive. It did not analyze the adequacy of damages or equitable factors that would favor or disfavor specific performance.  Instead, it simply read the contract’s specific-performance provision and granted specific performance according to the contract’s express terms.  Id. at 759-63.  Although the court did not order the buyer to close the transaction, that was because it interpreted the contract’s specific-performance provision as not authorizing an order to perform that particular term.  Id. at 759-61.

            In last year’s Snow Phipps Group v. KCAKE Acquisition Corp., 2021 WL 1714202 (Del. Ch. April 30, 2021), now-Chancellor McCormick did order the transaction to close, basing the decision simply on the fact that the parties had agreed to that remedy:  “The court has not hesitated to order specific performance in cases of this nature, particularly where sophisticated parties represented by sophisticated counsel stipulate that the specific performance would be an appropriate remedy in the event of breach.”  Id. at *51.  Again, the court did not address the adequacy of damages or other equitable factors. 

Inversely, the Court of Chancery has also treated the parties’ decision to exclude specific performance as dispositive.  When an agreement has been interpreted to bar specific performance, the court has denied the remedy.  See Realogy Holdings Corp. v. SIRVA Worldwide, 2020 WL 4559519, at *1 (Del. Ch. Aug. 7, 2020) (claim for specific performance dismissed because “under the [purchase agreement], the unambiguous contractual conditions on that remedy failed”); United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 845 (Del. Ch. 2007) (claim for specific performance denied where plaintiff “failed to meet its burden of demonstrating that the common understanding of the parties permitted specific performance of the Merger Agreement”).

To be sure, in two recent cases in which the merger parties agreed to specific performance, the court has discussed equitable factors, suggesting that the parties’ decision is not dispositive.  However, the court ordered the buyer to perform in both cases, and the opinions suggest that the agreement was the driving force.  In Level 4 Yoga, LLC v. CorePower Yoga, LLC, 2022 WL 601862 (Del. Ch. March 1, 2022), the court twice mentioned Snow Phipps’s holding that Delaware typically “does not hesitate” to enforce merger parties’ specific-performance agreements, and it discussed equity only cursorily.  It did not address adequacy of damages at all.  See id. at *30-31.

In Channel Medsystems, Inc. v. Boston Scientific Corp., 2019 WL 6896462 (Dec. 18, 2019), the court’s lead reason for finding that the balance of equities favored the target was that “the parties expressly agreed that a failure to perform under the Agreement would cause irreparable harm for which the remedy of specific performance would be available.”  Id. at *39.  The court observed that the provision “does not tie the court’s hands in fashioning appropriate equitable relief,” but noted that the parties’ contract “reflect[ed] the parties’ understanding that specific performance would be available in this circumstance, which would be entirely consistent with past Delaware cases granting specific performance for failure to perform under a merger agreement,” id. at *39. 

So, while there are strong reasons to believe that the Court of Chancery could order specific performance of Elon Musk’s agreement to acquire Twitter, that conclusion is not foreordained.  Tomorrow’s post explores what damages would be available if specific performance is denied.

The author gratefully acknowledges receiving excellent research assistance from Michaela Gines and Benjamin Ylo of the King Hall Class of 2024.  Their work contributed significantly to these posts