In XTI Aerospace, Inc. v. Chardan Capital Markets LLC, 1:24-cv-6590-GHW, 2025 WL 240973 (S.D.N.Y. Jan. 17, 2025), the Southern District of New York held that a parent company is not bound by an arbitration agreement between a merger target and the target’s merger advisor, even post-merger.
In March 2025, Travis J. Mock discussed commercial arbitration clauses with Chambers USA in its Expert Focus program. His discussion and analysis are available here.
In June 2023, XTI Aircraft Company (“XTI Aircraft”) executed an agreement (the “Engagement Agreement”) with Chardan Capital Markets LLC (“Chardan”) for Chardan to act as XTI Aircraft’s merger advisor for a business combination. The Engagement Agreement entitled Chardan to a fee upon XTI Aircraft’s consummation of a business combination, though Chardan’s fee was to be discounted if XTI Aircraft merged with any entity related to Inpixon, Inc. Disputes concerning the Engagement Agreement were to be arbitrated before FINRA.
On March 12, 2024, XTI Aircraft merged with a subsidiary of Inpixon Inc., leaving XTI Aircraft as the surviving entity and a wholly-owned subsidiary of Inpixon, Inc. After the merger, Inpixon Inc. changed its name to XTI Aerospace, Inc. (“XTI Inpixon”).
Simultaneously with the consummation of the merger, XTI Aircraft and Chardan amended their Engagement Agreement (the “Amendment,” and together with the Engagement Agreement, the “Agreements”). That Amendment purported to make the majority of Chardan’s advisory fee payable in stock of XTI Inpixon.
After the merger, a disagreement arose concerning Chardan’s fee, and Chardan initiated a FINRA arbitration against XTI Aircraft and XTI Inpixon. XTI Inpixon, however, filed an action against Chardan seeking a declaratory judgment that it was not bound by the arbitration provision. The Southern District of New York granted that relief. First, the court held that XTI Inpixon was not bound by the Agreements because it had not signed them or received a direct benefit from them. Second, the court held that because XTI Inpixon was not bound by the Agreements, it could not be forced to arbitrate based upon the arbitration provision in those Agreements.
Chardan argued that even if XTI Inpixon was not bound by the Agreements in the first instance, it was equitably estopped from circumventing the Engagement Agreement’s arbitration requirement because XTI Inpixon had benefited from that agreement by securing a merger for its subsidiary. But the court disagreed. Observing that equitable estoppel arises only where a third party receives benefits “flow[ing] directly from the agreement, rather than indirectly” (emphasis in original), the Court held that the Engagement Agreement provided direct benefits to XTI Aircraft, who received the benefit of Chardan’s consulting services, but only an indirect benefit to XTI Inpixon, whose subsidiary ultimately became a target of XTI Aircraft’s merger.
In so holding, the court acknowledged that even though XTI Inpixon had not signed the Amendment, a genuine question existed as to whether XTI Inpixon was obliged to tender its stock as part of the fee owed under that Amendment. But even if XTI Inpixon did have such an obligation, the court reasoned that the assumption of an obligation could not establish the receipt of a benefit for purposes of equitable estoppel. Thus, having received no direct benefit from the Agreements, XTI Inpixon was not equitable estopped from challenging the arbitration provision they contained. As a result, the court issued an order declaring that XTI Inpixon was not bound by the arbitration provision and could not be forced to arbitrate with Chardan.
This decision highlights the importance of drafting contracts to secure the performance of all entities that are—or will become—necessary to the completion of the underlying agreement.. If you have questions about the interpretation of contracts or the application of arbitration agreements, please contact Michael C. Rakower, Travis J. Mock, or Daniel F. Gilpin.
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