January 5, 2010
NACCO Industries: Delaware Addresses Bidding War and No-Shop Provision
– by Steven Haas, Hunton & Williams
On December 22nd, the Delaware Court of Chancery issued an important decision in NACCO Industries v. Applica, where it refused to dismiss claims brought by a jilted buyer against a target corporation for breaching the no-shop provisions of a merger agreement. The potential buyer alleged that the target failed to comply with notice requirements set forth in the merger agreement when the target responded to, and eventually accepted, a topping bid from hedge fund Harbinger Capital Partners. Here is our client alert – and the opinion.
Equally important, the Court refused to dismiss the potential buyer’s common-law fraud claims against Harbinger based on allegedly false statements made in Harbinger’s Schedule 13D filings. The potential buyer claimed that Harbinger had fraudulently concealed its intent to acquire control of the target, and the Court concluded that federal courts do not have exclusive jurisdiction over false statements in SEC filings. The Court also refused to dismiss the potential buyer’s claim that Harbinger tortiously interfered with its merger agreement with the target by, among other things, publicly misrepresenting its acquisition intent and colluding with the target’s officers who were breaching the merger agreement.
The decision demonstrates that Delaware courts will enforce reasonable deal protections to give parties the benefit of their agreement. Going forward, it should also cause activist hedge funds and some private equity funds to evaluate their disclosures carefully. The decision raises many other interesting issues, however, such as the proper calculation of the potential buyer’s damages against the target and whether the potential buyer’s reliance was reasonable. It is also important to note that, because the opinion ruled on a motion to dismiss, the Court was required to assume the truth of the allegations in the complaint, which purported to quote several of Harbinger’s internal emails that appeared inconsistent with its SEC disclosures (for Harbinger’s response to the opinion, see DealBook’s article.