The Court of Chancery awarded $15 million in damages against defendants Millennium Digital Media Systems, LLC, et al. (“Millennium”) for breaching agreements with WaveDivision Holdings LLC and Michigan Broadband LLC (“Wave”) that contained “no solicitation” and “reasonable best efforts” clauses in the matter of WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C., C.A. No. 2993-VCS (Del. Ch. Sept. 17, 2010), read opinion here.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.
Wave and Millennium are broadband cable operators. Wave was in the business of acquiring and upgrading cable systems, and since 2000 Millennium had been struggling financially due to increased competition in the cable market. Even though Millennium had been involved in a series of refinancings, by 2005, Millennium was highly leveraged and under strong pressure from its creditors to meet its repayment obligations under the credit agreement. It was at this time that Millennium’s senior management and its secured creditors (the “Senior Lenders”) decided that a sale of Millennium’s assets was Millennium’s best option. Both the Management Committee and the holders of its high-yield senior increasing rate notes (the “IRNs,” and the “IRN Holders”) approved the plan to pursue a sale of Millennium’s assets.
On December 15, 2005, Wave made an offer to purchase some of Millennium’s assets for $157 million (the “Letter of Intent”). The Letter of Intent had a 30-day “Exclusivity of Negotiation” provision in it, and despite being bound not to entertain or discuss any offer to sell any interest in its assets, Millennium continued to actively look for additional sources of cash infusions.
Millennium’s APA with Wave
On February 8, 2006, Wave and Millennium, with the approval of Millennium’s Senior Lenders and IRN Holders, executed an Asset Purchase Agreement (“APA”) for the sale of a cable system in Michigan and a largely identical Unit Purchase Agreement for the sale of cable systems in Oregon and Washington (collectively, the “Agreements”). The Agreements and the Letter of Intent contained no solicitation provisions. The Agreements also contained a provision requiring Millennium to use “reasonable best efforts” to obtain the consent of its lenders to the sale. After the execution of the Agreements, Millennium continued to actively look at refinancing alternatives. It continued to brainstorm with the IRN Holders and it retained a consultant to help develop a refinancing plan as an alternative to the sale to Wave.
Millennium Enters Into Refinancing Agreement and Terminates APA
On July 28, 2006, Millennium executed restructuring agreements that transferred control to IRN Holders and terminated its Agreements with Wave. On June 1, 2007, Wave filed an action alleging breach of the APA Section 5.05 (reasonable best efforts) and Section 5.09 (no solicitation) by consciously facilitating a refinancing transaction with the very lenders whose consent Millennium was supposed to be working to obtain. Millennium countered that: (i) its actions were not intended to facilitate a refinancing but rather to get its lenders’ consent to the sale; and (ii) its lenders “would not have consented to the sale under any circumstances and that the failure of that condition excuses Millennium’s performance thereby rendering any potential breach by Millennium moot.”
The Court rejected Millennium’s arguments because a party to a contract cannot rely on the failure of a condition to excuse its performance when its own conduct materially caused the condition’s failure. Moreover, the Court noted that “it is not necessary that the consent would have been given ‘but for’ Millennium’s conduct, but only that Millennium’s actions contributed materially to the non-consent of the lenders.” The Court found that Millennium acted “as an in-house banker for the IRN Holders, assisting them to analyze a possible refinancing by developing financial models comparing the results of a sale with refinancing and restructuring plans in which Millennium and the IRN Holders would retain ownership of the assets.” In addition, the Court noted that “Millennium’s retention of Barrier in contravention of the no solicitation provisions materially contributed to the lenders’ failure to consent to the sale. Millennium is therefore precluded from using this lack of consent to abrogate its responsibility to compensate Wave for Millennium’s breach.” The Court went on to state:
The clearest evidence that Millennium did not comply with its duty to use its reasonable best efforts to obtain consent was that Millennium spent a significant amount of time and energy helping to develop an alternative to the sale. That is, instead of working in good faith with Wave to obtain the necessary consents, Millennium kept Wave in the dark and on a string so it could prospect for a better deal. Despite Wave’s repeated offers to assist Millennium with gathering the necessary consents, Millennium never told Wave about its involvement in stimulating an alternative refinancing deal…Millennium’s behavior undercuts any claim that it was actively pursuing consents in good faith.
Millennium also argued that the “no solicitation” provision could not be enforced against it because that provision would have forced the Management Committee to breach its fiduciary duties to its creditors. The Court rejected this argument because:
The whole point of the Agreements was to sell the Systems and help pay off the creditors as the creditors had themselves demanded, thus Millennium cannot now use its duty to the creditors as a reason not to go through with the sale…. Delaware entities are free to enter into binding contracts without a fiduciary out so long as there was no breach of fiduciary duty involved when entering into the contract in the first place.
Court Awards Wave $15 Million in Damages
The Court found that Wave was entitled to an amount of damages that reflected the value Wave expected to realize from the Agreements minus any cost avoided by not having to perform (most obviously, the purchase price), and minus any mitigation that Wave was able to achieve by purchasing the two cable systems in the first quarter of 2007. The Court determined that the appropriate amount was approximately $15 million plus pre-judgment interest.