Recent Delaware Court of Chancery Rulings Impact M&A Transactions and Prompt Proposed Statutory Changes
The Delaware Court of Chancery has recently issued several decisions—Crispo v. Musk, West Palm Beach Firefighters v. Moelis & Company, Chordia v. Lee, and Sjunde AP-fonden v. Activision Blizzard, Inc.—that have significant implications for merger and acquisition (M&A) practitioners. This summary will highlight these opinions and discuss the proposed statutory changes by the Delaware Bar in response.
Crispo v. Musk
In Crispo v. Musk, the court addressed when a target company can assert a claim for premium damages if a buyer defaults on an acquisition agreement. Typically, the board of directors of a public company acts on behalf of shareholders, who are the ultimate recipients of the merger consideration, usually at a premium to the pre-merger market price. If the buyer breaches the agreement, the target company traditionally can only claim lost transaction costs, not the premium it negotiated.
A "Con Ed clause" (named after Consolidated Edison, Inc. v. Northeast Utilities) allows a target to claim lost premium if the buyer exits the deal wrongfully. However, its enforceability was unclear until Crispo v. Musk, where the Twitter acquisition agreement included such a clause. Crispo, a Twitter shareholder, sued Musk when he attempted to back out of the deal, seeking specific performance or damages. The Chancellor ruled that Crispo lacked standing to sue for specific performance but could potentially claim damages under certain conditions, clarifying that the target company itself could not claim premium damages.
To enforce such a clause, the provision must specifically confer third-party beneficiary rights on the target shareholders, allowing them to sue directly and hold the buyer liable for lost premium.
West Palm Beach Firefighters v. Moelis & Company
In this case, the Delaware Chancery Court invalidated provisions in a stockholders’ agreement that granted a company founder pre-approval rights on various governance decisions, including stock issuances, financings, dividend payments, and senior officer appointments. The founder was also given the right to designate a majority of the board members and required the company to recommend that shareholders vote for the founder's candidates.
The court found these provisions violated Section 141(a) of the Delaware General Corporation Law (DGCL), which mandates that a corporation's business and affairs must be managed by or under the direction of its board of directors. The pre-approval provisions essentially rendered the board powerless, contravening Section 141(a). While making recommendations would not have violated the section, the requirement to recommend candidates did. If these provisions had been included in the certificate of incorporation, they would have been enforceable, highlighting the potential challenge in obtaining shareholder approval for such provisions.
Chordia v. Lee
In Chordia v. Lee, a shareholder agreement with an “Efforts Clause” required the corporation to use reasonable efforts to effectuate the rights granted under the agreement. The court ruled that this clause took precedence over other contractual rights that would interfere with it. Specifically, the agreement allowed Key Holders to designate directors as long as they remained officers or employees. The court found that firing these Key Holders would deprive them of their board designation rights, thus interfering with the Efforts Clause.
Unlike West Palm Beach Firefighters v. Moelis & Company, the Efforts Clause bound the corporation but not its board of directors, avoiding issues with Section 141(a). This case underscores the need for careful drafting of shareholder agreements to prevent conflicts between majority stakeholders and the target’s founders or key stockholders.
Sjunde AP-fonden v. Activision Blizzard, Inc.
In this case, the court refused to dismiss a complaint against Activision Blizzard’s board for violating DGCL provisions during a merger transaction. The plaintiff alleged that the board approved a late-stage draft of the merger agreement instead of a final version, delegated authority to a committee to finalize a key term without full board approval, and failed to provide a merger summary in the stockholder meeting notice.
While approving late-stage agreements is standard practice, the court found that the missing key provisions made the agreement not ripe for approval. The court emphasized that Section 251(b) requires a board to approve an essentially complete merger agreement. Delegating authority to a committee to finalize key terms without board approval also violated the DGCL, which mandates board approval for merger agreements.
Proposed Statutory Changes by the Delaware Bar
In response to these decisions, the Delaware Bar has proposed several changes to the DGCL:
Amend Section 122 to allow corporations to enter into governance agreements with stockholders, restricting corporate actions and requiring specific approvals (responding to West Palm Beach Firefighters v. Moelis & Company).
Introduce Section 147 to permit board approval of agreements in final or substantially final form (responding to Sjunde AP-fonden v. Activision Blizzard, Inc.).
Add Section 261(a)(1) to allow target companies to seek damages, including lost premiums, against buyers failing to perform under merger agreements (responding to Crispo v. Musk).
Add Section 261(a)(2) to enable stockholders to appoint a representative to enforce rights in connection with a merger (responding to Crispo v. Musk).
These proposed amendments aim to clarify and enhance the enforceability of provisions and agreements in M&A transactions, addressing the challenges highlighted by recent court rulings.