Decision: On October 31, 2023 the Delaware Court of Chancery, in an opinion by Chancellor McCormick, rejected a mootness fee petition brought by a former Twitter (n/k/a X) stockholder. The former stockholder sought the fee award based on the assertion that the former stockholder’s claims contributed to Mr. Musk’s decision to close the deal. The Court rejected the mootness fee petition on two alternative grounds: (i) that the stockholder lacked third-party beneficiary status for its asserted claims; and (ii) the stockholder’s third-party beneficiary rights were limited to claims that, in this instance never vested. More specifically, in the claim at issue here (specific performance to compel a deal to close), a company alone has the right to bring such a claim, not its stockholders. Additionally, while the agreement could be read to grant stockholders a limited third-party beneficiary right to seek benefit-of-the-bargain damages had the deal failed to close, because the deal in fact closed and was not terminated, the stockholder’s third-party beneficiary right was unavailable.

Takeaways: The decision could create ambiguity surrounding the enforceability and acceptable scope of so-called “Con Ed” provisions designed to insure stockholders receive the benefit of the bargain in any improperly terminated deal. Coming out of this decision, target company advisors should consider more clearly and expressly grant third party beneficiary status to Companystockholders (with the potential issue of proliferating shareholder litigation claims and/or disproportionately enriching plaintiff’s counsel) or in the alternative, reconsider the sizing of reverse termination fee or liquidated damage clauses, to more accurately reflect share premium or other benefits of the transaction to target shareholders. However, care must be paid such that fees are not of a size or magnitude that would cause courts to determine that they constitute an impermissible penalty fee. On a more long-term basis, the Court suggested that a target company could amend its charter to include a provision explicitly delegating its stockholders as the company’s sole agent for the purpose of recovering lost-premium damages.