A common provision in merger agreements is denial of the right of non-parties to the agreement to assert third-party beneficiary claims.  The use of this provision left open the question whether stockholders of a disappearing target company could enforce contractual undertakings of the acquirer following the closing of the merger.  The U.S. Court of Appeals for the Second Circuit answered that question in Consolidated Edison v. Northeast Utilities[1] by denying under New York law the right of stockholders to enforce claims under the merger agreement because they were not parties to the agreement and any third-party beneficiary claims were barred by the “no-third party beneficiaries” clause in the agreement.  As a result, properly drafted merger agreements have provided for carve outs from the no-third party beneficiaries clause for claims that stockholders were entitled to assert following the closing.

The Delaware Court of Chancery has addressed this issue in two recent decisions that confirm the right of stockholders to enforce rights as third-party beneficiaries in certain circumstances.

  • In Arkansas Teacher Retirement System v. Alon USA Energy, Inc.,[2] the Court of Chancery held that a stockholder had standing to enforce a stockholders agreement entered into by the corporation with the purchaser of a 48% controlling interest in the corporation. The provision being enforced was a one-year standstill on interested party transactions that was substantially consistent with and a substitute for the three-year standstill that otherwise would have applied under § 203 of the Delaware General Corporation Law.  The plaintiff sued to set aside a merger consummated by the controlling stockholder allegedly in violation of the standstill.  The Court found that the plaintiff, as a stockholder, was an intended beneficiary of the standstill agreement with third-party beneficiary rights and therefore denied a motion to dismiss.  The stockholder agreement did not have a no-third party beneficiaries clause but the Court did cite a 2008 decision upholding the right of former stockholders to sue to enforce the merger consideration election provision of the merger agreement that had such a clause.[3]
  • In Dolan v. Altice USA, Inc.,[4] the Court of Chancery held that the former stockholders of Cablevision Systems Corporation had the right to enforce a covenant in the merger agreement under which Cablevision was acquired by Altice that required Altice to operate Cablevision’s News 12 Networks subsidiary substantially as it had been operated for a specified period post-closing, something that was important to the family that controlled Cablevision. Although the merger agreement did not provide for that provision to survive the closing of the merger and did have a no-third party beneficiaries clause without a carve-out, the Court found the merger agreement sufficiently ambiguous to survive a motion to dismiss.

These decisions are a reminder that, although the Delaware courts may in the right circumstances recognize the third-party beneficiary rights of stockholders, it continues to be important to draft agreements with care to specify which undertakings survive the closing and who has the right to enforce those undertakings.  This is especially true for merger agreements when the target disappears or becomes controlled by the acquirer and it is only the former target stockholders who are in a position to assert those rights.  Correspondingly, from the perspective of an acquirer, if undertakings are not meant to be enforced post-closing or target stockholders are not intended to have enforcement rights, the agreement should express that understanding clearly and not rely on general language alone.

As with many arrangements, the Delaware courts will give the parties broad leeway to define their understanding contractually.  However, it is up to the parties and their advisers to do so clearly so that their understanding will be enforced as intended.

[1] 426 F.3d 524 (2d Cir. 2005).

[2] 2019 WL 2714331 (Del. Ch. June 28, 2019).

[3] 2019 WL 2711280 (Del. Ch. June 27, 2019).

[4] Amirsaleh v. Bd. of Trade of City of New York, Inc., 2008 WL 4182998 (Del. Ch. Sept. 11, 2008).