September 16, 2019

No-Shops: Del. Chancery Says Termination Fee Not Sole Remedy for Breach

It’s not often that you find a court rolling up its sleeves and digging into the mechanics of no-shop & termination fee clauses, but that’s what Vice Chancellor Slights did in his recent decision in Genuine Parts Co. v. Essendant, (Del. Ch.; 9/19). The Vice Chancellor refused to dismiss a buyer’s allegations that the seller had breached the terms of a merger agreement’s “no-shop” clause – and that the buyer could sue for damages, despite accepting a termination fee under contract terms that generally provided it would be the “exclusive remedy” for such a breach.

As this excerpt from Ropes & Gray’s recent memo on the decision highlights, Vice Chancellor Slights’ decision was premised on a close reading of the language of the termination fee provision:

In denying Essendant’s motion to dismiss, Vice Chancellor Slights focused on the exclusive remedy language in the termination fee provision. The Court emphasized that the provision providing that the termination fee was the exclusive remedy required a termination by Essendant “in accordance with” and “pursuant to” its right to terminate the merger agreement for a superior proposal. That right, in turn, depended on compliance with the conditions that (i) the superior proposal “did not arise from any material breach of” the no shop by Essendant and (ii) the Essendant board properly determined, in conformity with the no shop clause, that the Sycamore proposal constituted a superior proposal.

Accordingly, the Court found that the merger agreement left “room” for Genuine Parts to argue that the exclusive remedy provision did not apply. In doing so, the Court rejected Essendant’s argument that Genuine Parts’ acceptance of the termination fee precluded any argument that Essendant somehow failed to act “in accordance with” those provisions. According to the Court, absent express and unconditional contractual language making receipt of the termination fee exclusive of other legal or equitable remedies, acceptance of the termination fee did not by itself foreclose Genuine Parts’ right to sue Essendant for breach of contract. The Court then held that Genuine Parts’ complaint pled facts which plausibly alleged a material breach of conditions (i) and (ii) above.

At only 29 pages, this decision is much briefer than most important Chancery Court rulings, but there’s still a lot to unpack. In particular, VC Slights’ analysis of the issue of whether the no-shop clause was breached is worth a careful read.  As Prof. Ann Lipton recently tweeted, there doesn’t appear to be any direct evidence of any violations of the no-shop, “just mysteriously timed offers and acceptances.”

John Jenkins