Private Equity

It keeps on happening.  Contracting parties allow “standard” boilerplate to potentially trump bespoke provisions of their acquisition agreements.  This phenomenon is particularly prone to occur with “no third party beneficiary” clauses, classic and overused boilerplate that can often do more harm than good.  Indeed, in a prior post to Weil’s Global Private Equity blog, no third party beneficiary clauses were likened to ramming bows that were once standard features of warships across the world based on a single battle where ramming supposedly figured heavily in the resulting victory for the winning side.^[1]  It turns out, however, that ramming never figured much in future naval battles and the installed ramming bows frequently just caused damage to friendly ships.

While contracting parties understandably do not want unintended third parties intruding into their contractual relationship, the idea that an unintended third party can actually become a beneficiary of the contracting parties agreement, even in the absence of a no third party beneficiary clause, “is overstated and largely a myth.”^[2]  Indeed, as noted by a recent Texas Supreme Court decision, “[a]lthough a contract may expressly provide that the parties do not intend to create a third-party beneficiary, the absence of such language is not determinative. ‘Instead, the controlling factor is the absence of any sufficiently clear and unequivocal language demonstrating’ the necessary intent [to benefit a specific third party].”^[3]

That is not to say that there are not benefits to no third party beneficiary clauses in limiting or eliminating potential third parties from claiming to have rights to enforce the terms of the contracting parties agreement.  But in most cases, the no third party beneficiary clause needs to be fully “bespoke” boilerplate not “standard” boilerplate or, like the ramming bows of old, the supposed benefits of the clause can backfire.  It can backfire because many times there are specific provisions of an acquisition agreement that are intended to benefit and be enforceable by a third party (usually affiliates of the contracting parties); and case law has suggested that, even when that intent to benefit a third party is clear, a no third party beneficiary clause can override that otherwise expressed intent.^[4]  A notable example of intended third party beneficiaries in the private equity context are the private equity fund and its partners with respect to the non-recourse clause of an acquisition agreement where the only contracting party is the affiliated acquisition vehicle (on the buy side) or the portfolio holding company seller (on the sell side). There are other examples as well, of course, including obligations to continue indemnification and D&O protection for the former officers and directors of the acquired portfolio company.  And in a merger context, where the only contracting party on the sell side is often the company being sold, failing to provide third party beneficiary status to these affiliated non-parties can be particularly problematic.

A recent Delaware Court of Chancery decision, Dolan v. Altice USA, Inc., C.A. No. 2018-0651-JRS (Del. Ch. June 27, 2019), provides the latest example of how a standard no third party beneficiary clause can potentially wreak havoc with bespoke provisions that otherwise may have been intended to benefit persons related to the contracting parties but who were not the actual contracting parties.  In Altice USA,  Cablevision Systems Corp agreed to be acquired in a $17.7 billion merger with Altice N.V.  Among the assets owned by Cablevision were certain cable news channels known as the News12 Networks.  The Dolan family were the founders and significant shareholders of Cablevision. 

When merger discussions began, the Dolan family initially sought to exclude the News12 Networks by spinning them out to an entity they controlled.  The Dolan family was apparently concerned that the News12 Networks maintain “its employee base, quality reporting and programming.”  The Dolan family was ultimately convinced, however, to include the News12 Networks in the merger, allegedly in exchange for a commitment from Altice, set forth in Section 6.4(f) of the Merger Agreement, “that Altice would operate News12 ‘substantially in accordance with the existing News12 business plan . . . through at least the end of plan year 2020[.]’”  Soon after the merger closed, Altice took a number of actions that were alleged to have violated Section 6.4(f) of the Merger Agreement and the Dolan family (and two employees of News12) sued to specifically enforce Altice’s obligations. 

But Altice, pointing to the no third party beneficiary clause in the Merger Agreement,^[5] moved to dismiss the plaintiffs’ claim by stating that the Dolan family had no standing to seek enforcement of Section 6.4(f), suggesting that Section 6.4(f) was in effect “an aspirational, albeit unenforceable, expression of then-present intent …[and] [t]o the extent the Dolan family thought they had obtained more, they negotiated a ‘bad deal.’”  The no third party beneficiary clause specifically carved out from its reach provisions related to D&O indemnification, financing sources, and the rights of the shareholders to receive the merger consideration (i.e., it was bespoke boilerplate, but incomplete if it was intended to preserve enforcement rights in favor of the Dolan family because it did not mention Section 6.4(f) at all).  Another provision of the merger agreement (Section 6.8(e)) specifically disclaimed any intent to create third party beneficiary rights in any employee with respect to the employee benefit provisions set forth in the Merger Agreement (one of which specifically stated that compensation and certain benefits for employees would not be reduced during the first year following closing). 

Vice Chancellor Slights referred to the various provision of the Merger Agreement under consideration as “some boilerplate, some bespoke provisions and some bespoke boilerplate.” The question to be decided according to the Vice Chancellor was “whether the boilerplate and bespoke boilerplate should be construed, as a matter of law, to render a bespoke provision superfluous.” The Vice Chancellor had little trouble concluding that the two employee plaintiffs were not third party beneficiaries of the Merger Agreement (both as a matter of third party beneficiary law and the specific language of Section 6.8(e), independent of the general no third party beneficiary clause),^[6] but as to the Dolan family the court found the interplay between Section 6.4(f) and the no third party beneficiary clause (Section 9.8) created an ambiguity that required the consideration of parol evidence to resolve.  According to the court:

Section 6.4(f) is specific in providing detailed rights that expressly benefit non-parties to the contract; Section 9.8 is specific in identifying who is and who is not intended to be a third-party beneficiary of the contract. Canons of contract construction, alone, cannot render unambiguous two specific and yet conflicting contractual provisions.

The goal of contract construction in instances like this is to “harmonize” related contractual provisions. That simply cannot be done here by looking only within the four corners of the Merger Agreement. Extrinsic evidence will be needed to determine what Section 6.4(f) was intended to mean and how, if at all, it is to be enforced.

By declaring the provisions ambiguous, the court did not treat the no third party beneficiary clause as determinative, as some courts have.  So the Dolan family may yet obtain the benefit of the bespoke provision allegedly negotiated for their benefit in Section 6.4(f) of the Merger Agreement to which they were not an actual party.  But by specifically referring to Section 6.4(f) in Section 9.8 (i.e., by including a fully bespoke no third party beneficiary clause in the Merger Agreement) this whole episode of the dispute could have been avoided, if it truly was the intention of the parties to grant to the Dolan family a specifically enforceable provision of the Merger Agreement.