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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Chancery Finds Prospective Purchaser May Pursue Breach Claims Against Target Despite Termination Fee Payment
Termination fee provisions are commonplace buy-side protection in M&A transactions intended to recoup a failed prospective purchaser’s otherwise sunk costs. They can also provide substantial sell-side protection when drafted as an exclusive remedy. But, as this decision illustrates, the level of protection depends on each contract’s specific terms.
Plaintiff brought this action for breach of a merger agreement after defendant had terminated the parties’ merger agreement, paid the $12 million contractual termination fee, and closed a similar deal with a third party. Defendant moved to dismiss, arguing the termination fee was plaintiff’s exclusive remedy under the merger agreement.
The Court of Chancery denied defendant’s motion. After reviewing several interconnected provisions of the merger agreement, the Court reasoned that the agreement did not, as required to prevail at the dismissal stage, “clearly and unambiguously” provide that plaintiff’s remedy was limited to the termination fee. Plaintiff had alleged that defendant breached the agreement’s non-solicitation provision, which, under the contract’s terms, was a precondition to the termination fee serving as an exclusive remedy. The Court further held that plaintiff’s acceptance of the termination fee payment did not preclude it from pursuing its breach of contract claim and proving additional damages. Finally, the Court held that plaintiff had adequately pled a series of facts from which the Court could infer that defendant had violated the merger agreement’s non-solicitation provision by indirectly encouraging a competing transaction.