The on-then-off-then-on-again acquisition of Twitter, Inc. by Elon Musk has generated an unusual amount of attention for corporate litigation. Much of that has focused on the “main show” – the litigation commenced by Twitter seeking to compel Musk to close the transaction. Recently, however, the Delaware Court of Chancery issued a decision in a companion case, brought against Musk directly on behalf of a class of Twitter stockholders. In Luigi Crispo v. Elon R. Musk et al., Chancellor Kathaleen S.J. McCormick held that the stockholder lacked standing to enforce the merger agreement through an order of specific performance and, further, rejected his claim that Musk was a controller of Twitter with fiduciary duties toward the company. The court did, however, leave the door ajar, if only slightly, for the stockholder to continue to pursue a claim for damages—a “thorny legal issue” that the parties will further brief. The Court’s consideration and musings about the merger agreement’s provisions concerning potential damages based on lost premium, and the Court’s ultimate decision after it receives supplemental briefing, bear watching by merger parties seeking certainty regarding the viability of claims asserted directly by target company stockholders.
Interestingly, the court noted that the Twitter merger agreement included a “blanket prohibition” that evidenced the parties’ intention to preclude standing for Twitter’s stockholders. Indeed, that language could scarcely be clearer: “this Agreement is not intended to and shall not confer upon any Person other than the parties hereto any rights or remedies hereunder….” The Court further concluded that none of the Agreement’s carveouts to this prohibition was applicable, nor were the limited precedents proffered by the plaintiff helpful to his argument. Nonetheless, Chancellor McCormick held that another provision, ostensibly addressing the effect of termination of the agreement on “liability or damages” raised a question about stockholders’ ability to seek damages. Specifically, the Court pointed out that the agreement provided that termination would not relieve any party of liability or damages, including “the benefits of the transactions contemplated by this Agreement lost by the Company’s stockholders (taking into consideration all relevant matters, including lost stockholder premium….).”
The Court then focused on whether the “lost stockholder premium” language could provide a basis for stockholder standing to sue for damages, notwithstanding the separate prohibition on third-party beneficiary claims. Referencing a 2005 opinion by the Second Circuit Court of Appeals in Consolidated Edison, Inc. v. Northeast Utilities, in which a merger agreement’s no-third-party-beneficiaries clause was held to deny stockholders standing to sue for lost premium, the Court explained that transactional lawyers had since frequently employed contractual language that preserved a target company’s ability to sue for lost stockholder premium, presumably without conferring standing on stockholders. Because the Court was raising the issue sua sponte, however, and the parties had not yet had the opportunity to address the “lost stockholder premium” language, the parties were granted leave to submit supplemental briefing.
The Court did not address whether Twitter’s active pursuit of claims against Musk, which includes claims for damages as well as specific performance, would factor into its consideration of stockholder standing to pursue those same claims. Relatedly, however, given the elephant in the room of Twitter’s parallel suit against Musk, the Court was less sympathetic to the stockholder’s claim that Musk controlled Twitter and owed its stockholders fiduciary duties, holding that Musk’s 9-10% ownership over Twitter—even if assumed to be 26.8% ownership, imputing co-investor agreements—did not give rise to an inference of control.