Delaware Opens the Door to Third-Party Beneficiaries

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Overview


Based on a recent Delaware Chancery Court decision, parties outside of a transaction—not just the buyer or seller—may be able to enforce continuing employment provisions in a purchase agreement. This decision shows that a third party can successfully assert standing to enforce employment provisions of a purchase or merger agreement to which it is not a party.

In Depth


The Delaware Chancery Court’s recent decision in Dolan v. Altice indicates that parties outside of a transaction—not just the buyer or seller—may be able to enforce purchase agreement covenants for continued post-closing employment. Even if a purchase agreement contains boilerplate “no third party beneficiaries” language, continuing employment covenants now may have broader implications.

In 2015, Cablevision, Altice N.V. and Neptune Merger Sub Corp. entered into a merger agreement by which Altice purchased all of Cablevision’s stock. Immediately prior to the merger, four members of the Dolan family held approximately one-third of Cablevision’s stock. In addition to the other Cablevision assets, the buyers also acquired a group of regional cable news television channels, known as the News 12 Networks LLC (News12).

Shortly after the transaction closed, the Dolans learned that Altice laid off several News12 employees and planned to lay off more. When Altice refused to rescind the layoffs, the Dolans filed suit seeking specific performance of the covenant in the merger agreement requiring News12 to be operated in accordance with its existing business plan (the Covenant). Altice sought to dismiss the action on two grounds:

  1. that the Covenant did not survive the closing of the transaction, and
  2. that the Dolans did not have standing as third-party beneficiaries of the merger agreement rather than parties to the agreement (the buyer and seller).

The Delaware Chancery court found that the Dolans had standing to bring a claim as third-party beneficiaries, despite not being parties to the merger agreement. It further found that it could not harmonize the Dolans’ third-party beneficiary status with the provision in the merger agreement, ruling that extrinsic evidence was needed to resolve the conflict. The court then held that it was ambiguous whether the Covenant was intended to survive closing as it was highly negotiated, lasted five years and used obligatory language directing Altice’s actions. The Chancery Court’s decision shows that a third party can successfully assert standing to enforce employment provisions of a purchase or merger agreement to which it is not a party, particularly where heavily negotiated, bespoke language is inconsistent with boilerplate “no third party beneficiaries language.”