Amirsaleh v. Board of Trade of the City of New York, Inc., C.A. No. 2822-CC (Del. Ch. Nov. 9, 2009), read opinion here. See summaries of prior decisions of the Chancery Court in this case here and here. A video clip of the recent trial in this case is available here.

Kevin Brady, a highly respected Delaware litigator, provides the synopsis for this case.

In this Chancery Court decision, the defendant, the Board of Trade of the City of New York, Inc. (“NYBOT”), is the resulting entity of a December 2006 merger between NYBOT’s predecessor and IntercontinentalExchange, Inc. (“ICE”). Plaintiff, who owned two membership interests (which included a right to trade on the NYBOT exchange) in NYBOT’s predecessor, moved for summary judgment.

Pursuant to a merger agreement, each NYBOT interest would be converted into either newly issued shares of ICE common stock, cash, or some combination of cash and stock. Members were permitted to elect the form of consideration by January 5, 2007. However because the amount of merger consideration was fixed, the ability to elect was limited to the extent the stock or cash option was over- or undersubscribed.

Plaintiff never received the election form that was mailed to him until after the January 5 deadline, so he failed to make a timely election. By January 19, 2007, plaintiff had submitted his election form and pledge agreement, but defendants rejected the election as untimely. At the same time however, defendants accepted the elections of 25 other NYBOT members whose elections were submitted as late as January 18, 2007.

The Court noted that there existed a factual dispute as to why defendants accepted some forms after the January 5 deadline, but failed to accept plaintiff’s form. Plaintiff contended that defendants’ decision was driven by a desire to appease “connected” NYBOT members. In fact, plaintiff alleged that defendants closed the elections immediately after the last “connected” member submitted his form on January 18, 2007. On the other hand, “Defendants contended that the decision to accept late submissions was made in good faith and driven solely by valid business considerations,” and the election window remained open as long as possible so as to appease as many late filers as possible, but had to close when it did so that it had sufficient time to prepare the merger consideration payout that was due January 29, 2007. Because the stock consideration was oversubscribed, the result of defendants’ decision was that members (like plaintiff) who did not make a timely election were automatically cashed out at an amount “substantially lower than the value of the stock and cash combination received by those with timely elections.” Moreover, such late filers risked losing their NYBOT trading rights.

Plaintiff filed suit alleging that defendants had breached the merger agreement and the implied covenant of good faith and fair dealing by deeming plaintiff’s election untimely. Plaintiff sought a remedy of “shares of ICE in the same amount, and on the same terms and conditions, as issued to other members of NYBOT who had made an election to receive Stock Consideration” and also seeking reinstatement of his two trading memberships. Defendants previously moved for summary judgment on all claims, and prevailed on the breach of contract claim. See Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2008 WL 4182998 (Del. Ch. Sept. 11, 2008). Remaining for the Court was whether “defendants’ initial decision to accept late elections and the subsequent decision to stop accepting elections was a good faith effort to further the goals of the Merger Agreement.”

Court Finds No Difference Between Absence of Good Faith and Bad Faith

As the Court noted initially, “the implied covenant of good faith and fair dealing inheres in every contract.” It is a judicial tool to imply terms into a contract to protect the reasonable expectations of the parties. “It is triggered when the defendant’s conduct does not violate the express terms of the agreement but nevertheless deprives the plaintiff of the fruits of the bargain. . . . To prove a breach of the implied covenant, then, the plaintiff must allege an implied contractual obligation not to engage in certain conduct, a breach of that obligation by the defendant, and resulting damage to the plaintiff.”

The Court then engaged in an interesting analysis of whether all that is required is an absence of good faith or, on the contrary, if a showing of bad faith is necessary. After discussing the Supreme Court’s decisions in Dunlap v. State Farm Fire and Casualty Insurance Co., 878 A.2d 434 (Del. 2005) and 25 Massachusetts Avenue Property L.L.C. v. Liberty Property Ltd. Partnership, C.A. No. 3027-VCS, 2008 Del. LEXIS 611 (Del. Nov. 25, 2008), Chancellor Chandler concluded that “there is no meaningful difference between ‘a lack of good faith’ and ‘bad faith.’” To prove bad faith, “a plaintiff must demonstrate that the defendant’s conduct was motivated by a culpable mental state . . . [or] an improper purpose.”

Summary Judgment Denied Due to Disputed Material Fact

Having previously held that defendants’ decision regarding the late elections was not a breach of the merger agreement, the Court was left to decide whether the manner in which Defendants exercised that discretion “conflicted with the reasonable expectations of the pre-merger NYBOT and the pre-merger ICE (the ‘Merger Agreement Parties’). To determine those expectations, the Court must inquire what conduct the Merger Agreement Parties would have clearly agreed to proscribe had they foreseen it.”

The Court held that a material fact existed and thus denied plaintiff’s motion for summary judgment. “Plaintiff has a claim for breach of the implied covenant if he can demonstrate that defendants breached [the] implied obligation [not to give connected members special treatment in submitting late elections, including holding open the election window just long enough to ensure that all connected members had submitted their late elections].” However, the question remained whether defendants lacked the requisite intent in the event “defendants’ decision to accept late submissions was driven by considerations of customer satisfaction balanced against leaving enough time to calculate and distribute merger consideration – and reasonable efforts were made to give all late filers the same or substantially similar assistance turning in their late forms . . . .”