In the recent decision of Frontier Oil Corporation v. Holly Corporation, pdf, Vice Chancellor Noble issued a 117-page opinion finding that Holly did not repudiate a merger agreement nor did it breach its implied covenant of good faith and fair dealing under the merger agreement. He also ruled that Frontier breached the merger agreement by declaring a repudiation by Holly, but that Holly suffered no damages as a result of Frontier’s breach of the merger agreement and was only entitled to an award of nominal damages. The case was based on a 2003 agreement between Frontier and Holly to merge. During March of 2003, in advance of a definitive merger agreement, the parties proceeded with due diligence. Although the board of Frontier approved the merger agreement on March 28, the board meeting of Holly did not go as smoothly. The board of Holly decided that it needed additional information before deciding to proceed with the merger, though that desire was tempered by Frontier’s concern that the plans for the merger might be leaked to the public and that the stock might be traded on non-public information regarding the transaction. In light of potential Frontier liabilities, Holly and Frontier renegotiated the terms of the merger agreement. The Holly board subsequently approved the merger agreement which provided that either party could terminate the agreement based on a number of situations.
During the 14 weeks following the execution of the merger agreement, litigation was commenced which involved obligations that Frontier had guaranteed and therefore, Frontier could not rely on a previously hoped for “corporate separateness defense” of a subsidiary. In addition, an investment banker had determined that Holly significantly undervalued certain assets and that Frontier had struck a good, “perhaps too good of a” deal. The guarantee by Frontier of certain liabilities involved in the recently filed lawsuit apparently was a shock to Holly.

Although Holly did not issue a “Material Adverse Effect Notice,” based on the new liabilities, according to the court, the record is also clear that, after the July 9 board meeting, Holly likely would not proceed to closing on the merger agreement in accordance with its expressed terms, but this is not to suggest that Holly had repudiated the merger agreement; instead, it still had multiple options available to it, if Frontier did not adequately address its concerns, including declaring a MAE, exercising its fiduciary out, or seeking a mutual consensual termination. Nonetheless, Frontier was on notice, that Holly would not be proceeding under the merger agreement unless its concerns were met, which did not necessarily mean that Holly would be in breach. There are many more details in the 117-page decision, but this very short summary is sufficient to highlight the key aspects.