Delaware Court Of Chancery Denies Motion To Dismiss Merger Agreement Breach Claims Even Though Defendant Paid The Contractual Termination Fee
On September 9, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied Essendant Inc.’s motion to dismiss an action for breach of a merger agreement brought by Genuine Parts Company (“GPC”). Genuine Parts Co. v. Essendant, Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019). The claims arose after defendant terminated the two office supply companies’ merger agreement in favor of an acquisition of defendant by a private equity firm. The Court held that the complaint adequately pled that defendant had materially breached the merger agreement’s non-solicitation provision and the agreement did not unambiguously limit plaintiff’s possible recovery to the termination fee.
In April 2018, the parties executed a merger agreement, which contained a non-solicitation provision—restricting defendant’s ability to seek or facilitate an alternative transaction—but permitted defendant to consider a “Superior Proposal.” The agreement also provided that a specified termination fee would be the “exclusive remedy” for a termination of the merger if the fee is paid “in accordance” with the termination fee section of the agreement. The Court noted that the termination fee section of the agreement contemplated termination “pursuant to” other sections, which through various cross-references permitted entry into an agreement with respect to a “Superior Proposal to the extent permitted by and subject to” applicable provisions where the competing offer did not arise from any “material breach” and defendant’s board determined in good faith that it constituted a “Superior Proposal.”
Denying defendant’s motion to dismiss, the Court found that the complaint sufficiently alleged a material breach. First, the Court determined that a breach of the non-solicitation provision could constitute a material breach of the agreement because “it is reasonable to infer that a fundamental purpose of the [a]greement . . . was lawfully to secure [plaintiff’s] exclusive ability to merge with [defendant].” Second, the Court found that the allegations in the complaint “in total” supported an inference that the provision was breached. In this regard, the Court noted that defendant had engaged with the private equity suitor before executing the agreement and received an initial proposal shortly after execution, even though the agreement required defendant to “immediately cease” all existing discussions about any alternative transaction. The Court highlighted that an “even stronger circumstantial inference of breach” arose with respect to the allegation that the first offer from the private equity firm was rejected while a second offer that was “essentially the same”—except that it was conveyed with a suggestion that it could be increased subject to review of non-public information—was deemed by defendant to be a Superior Proposal.
The Court also rejected defendant’s contention that plaintiff’s acceptance of the termination fee waived its breach of contract claim for further damages. The Court explained that it found “no basis to conclude” that defendant’s acceptance of the termination fee “precludes it from pursuing breach of contract claims as a matter of law,” though it may factor into damages considerations at a later stage of the litigation.