## Facts

- Consolidated Edison, Inc. (CEI) agreed in a 1999 merger agreement to acquire Northeast Utilities (NU) for about $3.6 billion, reflecting an approximately $1.2 billion premium over NU’s market price.
- Shortly before the planned closing, CEI asserted that NU had suffered a material adverse change and demanded a reduced purchase price.
- NU rejected the price reduction, treated CEI’s position as an anticipatory repudiation and breach, and declared the merger effectively terminated.
- CEI sued NU for claims including breach of contract and misrepresentation; NU counterclaimed for breach of contract, characterizing CEI’s position as buyer’s remorse.
- NU sought to recover the $1.2 billion “merger premium” as damages for NU shareholders, arguing shareholders were third-party beneficiaries.
- The merger agreement included (1) a broad no-third-party-beneficiaries clause and (2) a limited exception granting NU shareholders third-party rights as to a provision defining the merger consideration they would receive upon consummation.
- The agreement also contained a negotiated termination and remedies scheme, including expense reimbursement and a provision permitting the non-breaching party to sue for damages upon a willful and material breach.

## Issues

1. Whether NU shareholders were intended third-party beneficiaries with an enforceable right to sue CEI for damages equal to the lost merger premium after the merger failed to close.
2. If such a right existed, whether it belonged to shareholders who held NU stock at the time of the alleged breach or those who held stock at the time of judgment.

## Decision

- The Second Circuit held that NU shareholders were not intended third-party beneficiaries with litigation rights to recover the lost merger premium as damages.
- The court interpreted the contract’s shareholder carve-out as limited to receipt of merger consideration only if the merger was consummated.
- Because the shareholders had no enforceable right to sue for the premium, the court did not reach which shareholders would own the claim.
- The court reversed the district court’s ruling recognizing a shareholder premium-recovery claim and remanded for further proceedings consistent with its holding.

## Legal Principles

- Under New York law, a third party may enforce a contract only when the contract clearly manifests an intent to confer enforcement rights on that party.
- A no-third-party-beneficiaries clause strongly negates intent to grant nonparties enforcement rights; any exception is construed narrowly according to its text.
- A contractual right to receive merger consideration upon consummation does not, without clear language, imply a substitute third-party right to recover that consideration as damages when closing does not occur.
- The prevention doctrine cannot be used to create third-party rights or liabilities beyond those the contract clearly grants.
- The implied covenant of good faith and fair dealing cannot override express contractual limits or reallocate negotiated remedies to impose substantial liability not supported by the agreement’s remedial scheme.

## Conclusion

The Second Circuit held that NU shareholders had only a limited third-party entitlement to receive consideration if the merger closed, not a right to sue for a lost premium after a failed closing; the court therefore rejected shareholder premium damages and remanded.


Consolidated Edison, Inc. v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005)