November 16, 2023

More on Del. Chancery Addresses Enforceability of ConEd Clause

Early this month, John blogged about Chancellor McCormick’s decision regarding a mootness fee petition in Crispo v. Musk (Del. Ch.; 10/23). As John shared, the opinion found that approaches to so-called ConEd language” — each of which attempts to give a target the right to seek expectancy damages on behalf of their stockholders — may not be enforceable. John noted that the opinion suggested one potential fix — that is, expressly conveying third-party beneficiary rights to stockholders that only vest in exceptionally narrow circumstances and for the limited purpose of seeking lost premium damages — which might be preferable to the court finding an implied right to third-party beneficiary status.

This Milbank blog discusses another option hinted at in the opinion. This option relates to the “agency” approach to the expectancy damages problem, which the opinion said “rested on shaky ground” since “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.” Chancellor McCormick suggests a charter amendment may address this, but as the blog discusses, this option too has some hair on it:

The Chancellor in a footnote offers a ray of hope by noting that a charter amendment could permit the target to act as the stockholders’ agent in collecting lost stockholder premia. While at first blush one might think that this solution could be implemented seamlessly at the time of a merger vote, there are three issues with that approach.

First, both parties would be at risk of a breach (or alleged breach) prior to the vote, potentially unleashing during that period the parade of horribles that arise when stockholders are given directly exercisable third-party beneficiary rights.

Second, in a tender offer, there typically would be no stockholders meeting scheduled at which a charter amendment could be approved. Accordingly, the charter amendment would preferably be in place before any merger agreement is entered into – meaning that ISS and Glass Lewis may have to get on board pretty quickly with what should prove a very popular proposed charter amendment. (In a macro sense, it might be easier to move the Delaware legislature to action than to have hundreds of new stockholder proposals to evaluate and vote on.)

Finally, there is a technical problem that the charter amendment would need to address – the fact that damages typically are thought to accrue at the time of the breach, while damages would not be paid until a much later time, when the target would have a different stockholder base. So the charter amendment would need to establish whether any damages collected would need to be distributed to stockholders, and either provide a mechanism for damages to be distributed to the stockholders who were stockholders at the time of the breach, or, more likely, establish that third party beneficiary claims accruing to the stockholders at the time of the breach would be deemed transferred along with any stock transfer.

The blog concludes that necessity is the mother of invention: “In any event, there will no doubt be many solutions proposed, and perhaps many charters amended, over the next several months as practitioners come to grips with the fact that they have not in fact solved the ConEd riddle.” When we get wind of these inventions, we’ll share them here.

Meredith Ervine