Most M&A agreements include specific performance provisions that allow either party, under certain circumstances, to seek to have a court force the other party to comply with its contractual obligations. In M&A deals, a specific performance dispute often goes to the very heart of the deal – a buyer no longer wants to close the deal, and the other target/seller seeks to use the specific performance remedy to force the buyer to close the deal (or vice versa). Forcing a party to complete a transaction may be the preferred outcome for sellers, particularly if the target’s business experiences turbulence while the deal is pending and it is unclear if the sellers will be able to recover sufficient damages to cover losses resulting from a failed deal. While the recent amendments to the Delaware General Corporation Law clarify that a target can pursue lost premium damages if the M&A agreement expressly permits such recoveries, these damages may be challenging to ascertain and obtain through a judgment and may not fully compensate for the overall loss.
Delaware courts have established a framework for parties seeking specific performance through a trial in the Delaware Court of Chancery. First, the party seeking specific performance must establish that a valid enforceable agreement exists between the parties. Second, the party seeking specific performance must show that it was ready, willing and able to perform under the terms of the agreement. Third, and finally, the party seeking specific performance must prove that a balancing of the equities favors an order of specific performance. While the first two factors are relatively straightforward (although fact-dependent), the third factor – balancing of the equities – is less clear-cut.
Recent Delaware cases demonstrate the factors that Delaware courts consider when determining whether a party to an M&A transaction is entitled to specific performance. In this piece, we dive into these cases and discuss both the primary factors at play and how courts may consider them when evaluating a claim for specific performance.
Pathway to closing must be limited with concrete steps
Delaware courts have granted specific performance to enforce a closing of an M&A deal where the closing was predicated on the completion of a limited number of steps, and the court was able to oversee and enforce compliance in a practical manner. Delaware courts are more likely to grant a specific performance remedy to enforce an obligation to close a transaction if the pathway to closing involves limited and concrete steps. Alternatively, if the pathway to closing involves a number of steps, multiple actors and a variety of potential outcomes, Delaware courts are less likely to enforce a specific performance remedy.
Recent Delaware cases illustrate that Delaware courts are likely to enforce a specific performance remedy when the steps to closing are limited and concrete – particularly if the defendant controls the remaining actions. For example, in Snow Phipps Group LLC v. KCake Acquisition Inc., the Chancery Court ordered specific performance and enforced a reasonable best efforts provision to require a buyer to secure debt financing and close the transaction, where all of the buyer’s closing conditions (other than the condition to complete buyer’s financing) had been satisfied. As discussed in this May 2021 Cooley M&A post, as part of that acquisition, the buyers entered into a debt commitment letter and agreed to use their reasonable best efforts to obtain the debt financing pursuant to the debt commitment letter, and to seek alternative financing if the committed debt financing was unavailable. The parties agreed in the purchase agreement that specific performance was available only if the full proceeds of the debt financing had been funded to the buyer at closing. The buyers argued that the remedy of specific performance should not be available because the debt financing was not obtained. The court, however, invoked the prevention doctrine and ruled that the buyers failed to use reasonable efforts to obtain the debt financing, and that their failure to obtain the financing was due materially to their failure to finalize a credit agreement pursuant to the terms of the debt commitment letter. As such, the buyers could not benefit from the failure of their own conduct, and the court granted a decree of specific performance, ordering the buyers to use reasonable best efforts to obtain debt financing and close the transaction.
Similarly, in Bardy Diagnostics Inc. v. Hill-Rom Inc., the defendant-buyer had entered into a merger agreement to acquire the plaintiff-target, but the defendant decided not to close the transaction after Medicare rates decreased significantly before the closing. It was undisputed that all closing conditions were satisfied and the only missing step was for the parties to actually close the merger. The Chancery Court, therefore, ordered the buyer to close the merger. A similar fact pattern and result occurred in the Chancery Court’s Level 4 Yoga LLC v. CorePower Yoga LLC decision.
On the other hand, although it is not clear why the court could not oversee the preparation of financial statements in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., the Chancery Court refused to order specific performance of a deSPAC transaction – in part because the court found it impractical to supervise the target’s preparation of its financial statements needed for the registration statement for the transaction. It is possible the court would not have found this to be an insurmountable hurdle if the parties had not had unclean hands, as discussed below.
Not all specific performance fights result in a final decision by courts. In fact, parties to M&A deals may try to change key terms of a deal prior to closing, particularly if circumstances have changed, and a claim for specific performance always overhangs these negotiations. The most famous recent specific performance battle – Twitter v. Elon Musk – illustrates how parties position themselves in fights over the merits of a transaction in light of the factors Delaware courts consider in evaluating specific performance claims. After Elon Musk allegedly tried to renegotiate or terminate his deal to acquire Twitter, Twitter was quick to file suit for specific performance. In its complaint, Twitter noted that the only conditions to closing that were not met related to financing the transactions and were fully in Musk’s control, not complicated and required limited court oversight. While Musk – as discussed below – did not go down without a public fight, it appears he was persuaded that the Delaware courts were unlikely to be on his side with so little to do to close the deal, and he ultimately completed the acquisition without a trial.
Party seeking specific performance must have clean hands
From the perspective of Delaware courts, the plaintiff seeking specific performance must come with “clean hands,” having performed its obligations under the transaction agreement. In a typical M&A agreement, this approach is usually already reflected in a reciprocal closing condition that each party shall have complied with its pre-closing covenants in all material respects. While the failure of this closing condition alone would be sufficient to preclude the grant of a specific performance remedy from a purely contractual standpoint, it is important to note that satisfying these closing conditions does not by itself guarantee the grant of a specific performance remedy if the plaintiff does not otherwise come to the court with clean hands.
For example, in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., the Chancery Court denied a request for specific performance – in part because it concluded that the plaintiff obtained the merger agreement by “sharp and unscrupulous practices, by overreaching, by concealment of important facts, even though not actually fraudulent, by trickery, by taking undue advantage of [its] position, or by any other means which are unconscientious.” The court found that the special purpose acquisition company (SPAC) plaintiff (26 Capital) took advantage of the target company by having a hedge fund that owned 60% of the SPAC sponsor act as the exclusive financial adviser to the target company. Among other things, the hedge fund financial adviser guided the negotiation of transaction documents in favor of the SPAC (and the sponsor with a carried interest in the SPAC) to the detriment of its client, the target, and secretly revealed to the SPAC the positions that the target would take in negotiations.
The double-dealing illustrated in the 26 Capital case showcases an extreme example of “unclean” hands. On the other end of the spectrum, Delaware courts also have found the failure to complete obligations in a timely manner as enough to prohibit a specific performance remedy. In Twin Willows LLC v. Pritzkur, the plaintiff-buyer and the defendant-seller were parties to a real estate sale and purchase agreement that included a “time is of the essence” clause. The plaintiff-buyer asked the court to extend the drop-dead date of the agreement and to grant a specific performance remedy for the closing of the transaction. The court refused, finding that the plaintiff defaulted on a material obligation under the agreement when it previously failed to close on the date specified in the agreement.
Against this backdrop, it is not surprising that part of Musk’s public defense and initial allegations against Twitter highlighted Twitter’s alleged “unclean hands” in the deal process. In other words, in highlighting Twitter’s actions, Musk was likely trying to set the ground for a specific performance defense. Musk’s letter to Twitter purporting to terminate the transaction not only detailed the inaccuracy of certain representations core to Twitter’s business as justification for terminating the transaction, but also emphasized Twitter’s failure to comply with a covenant to cooperate with financing as one of Musk’s reasons for backing out. We will never know how Delaware courts would have viewed Musk’s exact claims, but it appears Musk understood from prior decisions that he had an uphill climb and needed to paint Twitter as an uncooperative counterparty.
Evaluating irreparable harm in the M&A context
Another factor Delaware courts have considered is whether the party seeking specific performance has suffered irreparable harm. The Delaware Chancery Court determined in a seminal specific performance case – In Re: IBP Inc. v. Tysons Foods Inc. – that the target in a business combination would suffer irreparable harm if the merger agreement was not enforced. The court considered that the target company (IBP) was unique, and that the business combination with Tyson for a mixture of cash and stock would yield value of an unquantifiable nature for the target stockholders, rendering it difficult to determine the quantum of damages.
In True North Communications Inc. v. Publicis S.A., the Delaware Chancery Court similarly characterized a merger as an opportunity that cannot be quantified and held that monetary damages likely would not be a sufficient remedy for the loss of such opportunity. This line of cases suggests that Delaware courts would likely find that a party to an M&A transaction would suffer irreparable harm if the deal failed to close, given that each M&A transaction is unique and carries its exclusive benefits to any transaction party.
Jurisdiction of counterparty may impact feasibility of enforcement
Even if there is a clear path to closing with concrete steps, the feasibility of enforcement may impact a court’s decision to issue a specific performance decree. While business courts are accustomed to awarding monetary damages, an award of specific performance comes with its own complications – in particular, compelling the losing (and likely disgruntled) party to perform. Because so few specific performance cases have gone to trial and resulted in a specific performance decree, forcing an unwilling party to perform hasn’t been directly addressed, but it’s easy to imagine the complications that would arise. During the Twitter and Musk public battle, many mused on the lengths a court may need to go to compel Musk to complete his purchase of Twitter and whether that might impact the court’s decision.
When determining the practicality of enforcing a decree of specific performance against a party, at least one Delaware court has considered the location and jurisdiction of that party. For example, in 26 Capital, the plaintiff sought specific performance to require a Philippines-based target company to use its reasonable best efforts to close the deSPAC transaction. Following a review of a number of factors, the Delaware Chancery Court declined to enforce specific performance. The court held that, in addition to the complex factual circumstances and difficulties in providing judicial oversight, an order issued by a Delaware court likely would be insufficient to enforce the specific performance in the Philippines. As this case shows, a Delaware court’s jurisdiction over a dispute between multinational parties will not necessarily mean that the court will issue a decree of specific performance against a non-US party where the administration of the remedy will take place in a non-US jurisdiction. In a transaction involving a non-US party, the predictability, speed and fairness of Delaware courts should be weighed against the Delaware courts’ practical ability – or lack thereof – to enforce an order of specific performance. Automatically stipulating Delaware courts as the arbiter of disputes may not serve the best interests of a US party when it looks to petition a specific performance remedy against a non-US party.
Even with equitable remedies, contract language matters
If parties want to preserve the ability to obtain specific performance, it is essential that they include a specific performance provision in the merger agreement. The Delaware Chancery Court has cited such provisions as evidence of the intent to make this remedy available, and it is an appropriate remedy when included in agreements between sophisticated parties represented by sophisticated counsel (e.g., Snow Phipps and Level 4 Yoga).
Conversely, Delaware courts also give weight to language pointing to an intent of the parties not to seek a specific performance remedy. In Hexion Specialty Chemicals Inc. v. Huntsman Corp., the specific performance provision in the merger agreement included language precluding specific performance as a remedy for breach of the defendant-buyer’s obligation to close. After consideration of extrinsic evidence – including the plaintiff-target’s own disclosure in its merger proxy statement – the court held that the agreement did not allow the plaintiff-target to specifically enforce the defendant-buyer’s obligation to consummate the merger.
Key takeaways
While the decision to grant specific performance is ultimately a fact-specific inquiry at trial, these cases offer important takeaways for practitioners.
- Control what is in your hands. A party is more likely to get an award of specific performance when most of the conditions to closing the transaction have already been satisfied. If completion of a financing is required, the plaintiffs should specify what actions the court needs to order the buyer to take to complete the financing.
- Keep your side of the street clean. Any party seeking specific performance should make sure that it does not have “unclean hands” that could give the court a basis for denying relief.
- Protect your ability to pursue an array of damages. Make sure the merger agreement includes a very clear specific performance provision where the parties agree that monetary damages are not an adequate remedy, and breach would (not could) result in an irreparable harm. Parties also may want to consider specifying in the provision that the target may seek alternative remedies, including lost premium damages, and an order of specific performance.
- Dissuade delay tactics. Along the same lines, the merger agreement should make clear that the ability to terminate it is suspended while a party is seeking specific performance, thus prohibiting a delaying party from pushing proceedings past the outside date for an easy “out.”
- Consider the best dispute options. When dealing with non-US counterparties, consider which jurisdiction is best for obtaining an order of specific performance against the non-US counterparty, especially when there is no international treaty for mutual recognition of judgments.
