Business Litigation
Delaware Court of Chancery Addresses Whether Stockholders Have Third-Party Beneficiary Status to Sue for Lost-Premium Damages under a Merger Agreement
By Leona Yazdidoust
In Crispo v. Musk, C.A. No. 2022-0666-KSJM (Del. Ch. Oct. 31, 2023), the Delaware Court of Chancery rejected the plaintiff stockholder’s petition for a $3 million mootness fee. The court held that Plaintiff’s claim lacked merit at the time of filing because (i) Plaintiff did not have third-party beneficiary status; and (ii) if such status existed, it had not yet vested.
The case stemmed from Elon Musk’s accumulation of Twitter stock starting in March 2022, followed by his offer to acquire the remaining shares in April 2022. After Musk attempted to terminate the merger agreement (the “Agreement”) in July 2022, Twitter sued Musk for specific performance to complete the deal, which eventually closed in October 2022.
Plaintiff is a Twitter stockholder. Prior to the deal’s closure, Plaintiff alleged that Musk breached the Agreement and breached his fiduciary duties as a controlling stockholder. The court found that Plaintiff failed to establish a claim for breach of fiduciary duty against Musk and lacked standing to seek specific performance of the Agreement. Plaintiff then petitioned the court for $3 million in mootness fees, claiming partial credit for the deal’s successful closure.
To receive mootness fees, a plaintiff must demonstrate: “(i) ‘the suit was meritorious when filed;’ (ii) the action that produced the benefit to the corporation ‘was taken by the defendants before a judicial resolution was achieved;’ and (iii) ‘the resulting corporate benefit was causally related to the lawsuit.’” Crispo v. Musk, slip op. at 3–4, citing United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997) (citing Allied Artists Pictures Corp. v. Baron, 413 A.2d 876, 878 (Del. 1980)). Since Plaintiff was not a party to the Agreement, he had no standing to sue for breach of the Agreement as a third-party beneficiary. He therefore failed to prove a meritorious claim, thus failing to meet the first element.
The court identified two reasonable interpretations of the Agreement that supported Plaintiff’s lack of standing. First, under the “no-third-party-beneficiary” provision within the Agreement, Delaware courts typically refrain from granting stockholders third-party beneficiary status under corporate contracts. This stance is emphasized in merger agreements, where such status could potentially disrupt Delaware’s board-centric model—where the board of directors of a corporation manages its business and affairs. Citing this provision, the court found Plaintiff lacked standing.
Second, the court considered the “lost-premium” provision in the Agreement, which stipulated that Musk’s termination would not absolve him from liability and damages for any intentional breach of the Agreement, including damages suffered by the company’s stockholders. Under this interpretation, no stockholder could seek lost-premium damages because the drafters did not intend to grant such rights while the company pursued specific performance.
Because Plaintiff lacked standing, and therefore his case was not meritorious when filed, he was not entitled to a mootness fee award.