Proposed Delaware Law Originates from Crispo v. Musk

In a recent article, SheppardMullin attorneys John Hempill and Karl Buhler examine the potential effects of the Delaware State Bar Association’s (DSBA) proposed amendment to Delaware law, which would take effect on August 1, 2024, if approved. This proposal originates from the Crispo v. Musk case.

A Twitter stockholder alleged that Elon Musk breached his fiduciaries duties and violated the Twitter/Musk merger agreement (Musk ultimately closed the deal). The Delaware Court of Chancery addressed the enforceability of “lost-premium damages” provisions, which provide that stockholders can recover lost premium damages when the buyer is in breach.

In 2005, the Second Circuit issued a ruling the authors call “seminal” in Consolidated Edison, Inc. v. Northeast Utilities in respect to lost-premium damages. It held that a provision in a merger agreement prohibiting third-party rights means stockholders of the target company lack standing to recover lost premium damages arising from a pre-closing breach by the buyer. This led to provisions in merger agreements to bar the effects of the Con Ed ruling.

In Crispo, the issue was the enforceability of a provision that the target company’s damages definition included its stockholders’ lost-premium damages. The Court of Chancery held that a target company has no right to receive merger consideration, including the premium. That being the case, it has no entitlement to lost-premium damages in the event of a busted deal. Therefore, a provision defining a target’s damages to include lost-premium damages cannot be enforced.

Based upon Crispo, the DSBA proposed a new Section for  Delaware General Corporate Law that would allow the target in a merger agreement to seek damages (including lost premium damages) if the buyer fails to consummate the merger per the terms of the agreement. Therefore, it would not be necessary under Delaware law to contractually appoint the stockholders of the target as third-party beneficiaries nor appoint the target company as an agent on behalf of such stockholders.

The authors suggest that if the amendment is enacted, companies should consider appointing a stockholders’ representative in their merger agreements. That will provide security to their stockholders and likely prevent litigation on this specific issue.