CURRENT MONTH (January 2024)
Delaware Court of Chancery Addresses Whether Stockholders Have Third-Party Beneficiary Status to Sue for Lost-Premium Damages under a Merger Agreement
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.
Delaware Court of Chancery Finds Companies in Contempt for Failing to Comply with Advancement Obligations, and Denies Delayed Motion to Dismiss in Favor of Arbitration
By Gurtej Grewal, Penn State Law
In Gandhi-Kapoor v. Hone Capital, the Delaware Court of Chancery found Respondents in contempt for failing to comply with an order requiring them to advance expenses to Petitioner. In December 2023, the Court denied Respondents’ subsequent motion to dismiss in favor of arbitration pursuant to Federal Rule of Civil Procedure Rule 12(b)(1) on the grounds that it was waived as a result of Respondents’ delay.
This summary advancement proceeding was first filed by Petitioner in September 2022. Eight months later, in April 2023, the Court granted summary judgment establishing her right to receive advancements from the Companies. When the Companies failed to pay, Petitioner moved for sanctions. In July 2023, the Court granted that motion and held the Companies in civil contempt for failing to comply with a court order of which (1) they had notice and (2) by which they were bound. Importantly, the Court noted that this case was a situation in which traditional collection methods would not be sufficient, in large part due to the irreparable harm the party seeking advancement might suffer as a result of the opposing party’s failure to pay.
Following the July order, Respondents failed to pay Petitioner advancement, and Petitioner renewed her sanctions motion. In response, one of the Companies, CSC Upshot Ventures I, L.P. (“Upshot”), moved to dismiss in favor of arbitration pursuant to Rule 12(b)(1), invoking an arbitration provision in its limited partnership agreement. On December 4, 2023, the Court denied that motion. In so finding, the Court held that an arbitration provision cannot deprive the Court of subject matter jurisdiction “over an action to enforce an advancement provision in a limited partnership agreement.” Also, the Court found that a party can waive its right to rely on an arbitration provision through its litigation conduct. Under the Federal Arbitration Act (“FAA), whether a conduct waiver has occurred is “an issue of substantive arbitrability for the court to decide.” Ultimately, the Court found that Upshot “waived its right to arbitrate” due to “engaging sufficiently in litigation to warrant a judicial conduct waiver.”
Supreme Court to Determine Whether a District Court May Dismiss or Stay a Case Where the Underlying Dispute Is Referred to Arbitration
By Leslie A. Berkoff, Partner and Chair of Dispute Resolution Department, Moritt Hock & Hamroff LLP
Continuing the trend of reviewing arbitration-related cases, on January 12, 2024, the Supreme Court granted certiorari in the case of Wendy Smith, et al. v. Keith Spizzirri, et al. to resolve a split in the circuit courts as to whether a district court can only stay a case, as opposed to dismissing the case, when the parties have entered into an agreement to arbitrate the underlying dispute.
In the case in question, a group of drivers had commenced suit in state court against their employer Intelliserve LLC, a Phoenix-based delivery service, asserting a multitude of violations of federal and state employment laws. The suit was removed to federal court, and the employer sought to compel arbitration under the governing agreement and dismiss the lawsuit. There was no dispute between the parties as to whether the underlying claims were subject to arbitration, but the parties disagreed as to whether the pending suit should be dismissed versus simply stayed. Plaintiffs asserted that Section 3 of the Federal Arbitration Act (“FAA”) required the district court to stay the lawsuit pending arbitration of the underlying claims rather than dismiss it. Section 3 of the FAA states, in part, that “If any suit or proceeding be brought . . . the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration . . . shall . . . stay the trial of the action until such arbitration has been had . . .” (emphasis added).
While on its face the FAA appears to mandate a stay, the Court sided with the employer and granted the motion to dismiss the suit, and the Ninth Circuit affirmed.
Acknowledging the current circuit split, the Ninth Circuit followed the minority of courts in dismissing the suit. The Ninth Circuit has a longstanding exception that allows cases to be dismissed where all claims are subject to arbitration, as do the First, Fifth, and Eighth Circuit Courts of Appeal; in contrast, the majority of the circuits (the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuit Courts of Appeal) appear to follow the plain language of the FAA and limit a district court to only stay a case. Whether a case is stayed or dismissed matters because if a case is dismissed, then there is an immediate right to appeal that decision, which arguably could lead to a stay of the proposed arbitration process while the appeal is decided. This in turn leads to delay and rising costs and is antithetical to the policies underlying the FAA, which are to foster and support the enforcement of arbitration agreements.