It is common in M&A deals for the seller to have the right to terminate an agreement by paying a significant termination fee; especially as part of a fiduciary out structure.
This case involves players in the business wholesaler market. The seller and a suitor, a competitor, began talks about merging. Ultimately, the suitor and a seller entered into a merger agreement which would result in a suitor/seller 51%/49% company.
The agreement contained several protections for the suitor, including a typical non-solicitation provision that prevented the seller from pursuing a competing transaction. The seller also agreed to terminate any discussions concerning competing transactions that had started prior to the execution of the merger agreement.
The seller, however, did have a fiduciary out provision. The seller could talk to others offering a superior proposal if it was not a material breach of the non-solicitation provision. To achieve this fiduciary out protection the seller board was first required to determine “in its good faith judgment” that there was a superior proposal on the table; after consulting with a financial advisor of internationally recognized reputation and external legal counsel.
With that finding the seller was permitted to terminate the merger agreement by paying a $12 million termination fee to the merger suitor and then the seller was permitted to pursue the superior proposal as long as it “did not arise or result from any material breach” of the non-solicitation provision. In such a case the seller would have no liability to the merger suitor except for liability for fraud or willful breach.
Prior to executing the merger agreement, the seller assured the suitor it had no interest in merging with anyone else and that no other entity was interested in a transaction with the seller. But according to suitor, the Staples group had expressed interest in acquiring the seller three days before the execution of the merger agreement. The seller’s board addressed the Staple’s buyer’s pre-signing overture in a meeting held the day before executing the merger agreement but said nothing of it to the suitor until seven weeks after signing the merger agreement.
Ultimately, the seller terminated the merger agreement and paid the merger suitor the $12 million termination fee. The seller then did a deal with the Staples buyer.
The merger suitor sued the seller for damages in Court of Chancery of Delaware. The seller moved to dismiss the lawsuit claiming that the merger suitor’s exclusive remedy for breach of the merger agreement was payment of the $12 million termination fee.
The court denied the seller’s motion to dismiss finding that the merger suitor’s allegations if true could satisfy the fraud/willful breach carveout in the exclusive remedy provision of the merger agreement.
This case is referred to as Genuine Parts Company v. Essendant Inc., C.A. No. 2018-0730-JRS, Court of Chancery of Delaware (Decided: September 9, 2019)
In 20/20 hindsight, the seller should have kept its merger suitor in the loop about its discussions with Staples; including disclosing Staples’s interest to the merger suitor before signing the merger agreement.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
Telephone: 714 273-6291
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