Target Shareholders Try to Establish Rights After Mergers Fail

The rights of target shareholders in the context of a failed merger is the focus of a recent New York Law Journal article authored by Corporate partner Abbe L. Dienstag, Litigation partner Alan R. Friedman and associate Susan D. Hawkins.

The March 3 article, entitled "Target Shareholders Try to Establish Rights After Mergers Fail," reviews recent cases where target shareholders have asserted independent, contractual claims for wrongful termination of merger agreements. Ordinarily, the target — not its shareholders — has a cause of action for breach in such cases.

The authors explain that courts have generally respected the no third-party beneficiary clause, a typical merger provision which bars rights of enforcement from the target shareholders and relegates them to incidental beneficiaries. They outline Judge Alvin Hellerstein's decision in favor of Enron's shareholders In re Enron Corp., one of a limited number of decisions allowing shareholders of a public company target to sue for breach of a terminated merger agreement.

In Enron, the authors explain, the court based its decision on language in the merger agreement that specifically excepted from the exclusion of third-party beneficiary rights, the right of the Enron shareholders to receive merger consideration. While the Enron decision may be read narrowly, the authors suggest that buyers draft their agreements defensively with an explicit clause stating that any shareholder right to enforce receipt of the merger consideration accrues only if the merger is actually consummated.

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