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In Sunstone Partners Management, LLC v. Synopsys, Inc. (Del. Ch.; 8/24), Judge Paul Wallace, sitting in the Chancery Court by designation, addressed a jilted suitor’s claims that a seller breached its obligations under a letter of intent between the parties. The plaintiff argued that statements made in an earnings call to the effect that the seller had decided to “explore strategic alternatives” for its software integrity group (SIG), a business segment of which the security testing services (STS) business that was the subject of the LOI was a part, and its subsequent retention of a financial advisor to facilitate that process breached the exclusivity provision contained in the LOI.

In his letter ruling, Judge Wallace rejected those allegations. He began his analysis by quoting from the relevant language of the LOI, which imposed the following exclusivity obligation on the seller:

[d]uring the Exclusivity Period (as defined below), Synopsys and its agents and representatives will not solicit, negotiate or accept any proposal for any merger with or acquisition of the Business, or the sale or exclusive license of all or substantially all of the Business’s assets, from any person other than Sunstone Partners and its representatives and advisors.

The plaintiffs claimed that the CEO’s statements during the earnings call about exploring strategic alternatives for the SIG segment and its subsequent retention of JP Morgan to serve as its financial advisor for that project involved “soliciting” a “proposal” the sale of the STS business.

Judge Wallace didn’t agree. The term “solicit” was undefined in the exclusivity provision, so the Judge interpreted it in accordance with its plain and ordinary meaning. Citing Webster’s Dictionary, he said that solicit means “to approach with a request or plea,” or “request or seek to obtain something.”  He also observed that the object of the solicitation must be a “proposal” for the sale of the assets of the business, “not expressions of general interest or preliminary discussions.”  Accordingly, he concluded that the actions pointed to by the plaintiff didn’t constitute the solicitation of a proposal for the sale of the STS business:

The statements in the Earnings Call are not a solicitation seeking a proposal for the sale of the STS assets. Stating that “we have decided to explore strategic alternatives for the Software Integrity business” is not a request for a proposal of a sale of the STS assets, even if the STS is a subdivision within the Software Integrity business. Interpreting these comments in the most plaintiff-friendly light, the Court construes them as initiating a process that may or may not result in sale proposals. That, under the narrow terms of the Exclusivity Provision, is not a solicitation. There must exist a specific request for proposals of a sale of the STS assets. Merely considering a sale is not soliciting, negotiating, or accepting a proposal.

He also concluded that the plaintiff failed to raise any facts supporting an inference that its retention of J.P. Morgan involved a solicitation. In reaching that conclusion, he observed, among other things, that it would have made little sense for the seller to solicit interest from other buyers after the earnings call, since the exclusivity period would have expired just three days later.

This case involved only a letter opinion, but you don’t see too many LOIs addressed by the Chancery Court, so this decision is one that’s worth reading.

– John Jenkins