A recent Delaware Court of Chancery opinion allowed a claim to proceed based on the theory that a termination fee for a merger agreement was not the sole remedy for breach of contract. In Genuine Parts Co. v. Essendant, Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019), the court discussed a very fact-specific, contract-based reason why the termination fee was not the sole remedy for a potentially willful breach of the merger agreement.
The non-solicitation provision in the merger agreement had a “fiduciary-out” which was subject to various parameters and notice requirements. There was also a “willful breach” exception to the termination fee as a sole remedy.
In addition, the target-company met with another suitor before signing the merger agreement despite: (i) a representation that there were no other suitors; and (ii) no notice or disclosure of that pre-agreement meeting being made.
The claims included breach of contract because the competing bid that was accepted was allegedly not a superior bid.
Highlights of Court’s Analysis:
The court explained that non-solicitation provisions are routine, and that there is no per se prohibition about a non-solicitation provision as long as there is a “safety valve” that allows for a board to consider a superior offer. See Slip op. at 23-24, and footnotes 76-78.
The court distinguished a prior Chancery decision, which had materially different terms in the applicable agreement, where the court determined that a losing bidder was unlikely to get specific performance beyond the termination fee. See Cirrus Holding Co. v. Cirrus Industries, Inc., 794 A.2d 1191 (Del. Ch. 2001).
By contrast, the court did follow the reasoning of another Chancery decision that found, based on the terms of the contract in that case, that a termination fee was not an exclusive remedy. See NACCO Industries, Inc. v. Applica, Inc., 997 A.2d 1 (Del. Ch. 2009).