The Delaware Court of Chancery is the premier forum for complex corporate law disputes. The Chancellors recently clarified some issues regarding the exclusivity (or lack thereof) of purportedly exclusive termination fees for M&A deals, including an exercise in precise reading of contractual language. Corporate lawyers and other deal professionals should all be paying attention.
In April of 2018, two office supply wholesalers, Genuine Parts Company (GPC) and Essendant, Inc. (Essendant), signed a merger agreement – the companies would merge so as to better compete with others such as online and e-commerce office supply providers. Among the agreement’s provisions was a nonsolicitation covenant providing that after signing Essendant would not solicit competing offers
The Deal… Gone Wrong
But, there were also other parties interested in acquiring Essendant. One of these other parties, Sycamore Partners (Sycamore), eventually persuaded Essendant that it could offer a better deal. Essendant terminated its deal with GPC, paid the termination fee set forth in the agreement, and closed the deal with Sycamore.
GPC was, unsurprisingly, not pleased with this turn of events. GPC sued, claiming, inter alia, that the contractual break fee was inadequate and not its exclusive remedy for termination of the deal (for reasons including Essendant’s alleged breach of other provisions of the agreement, such as a nonsolicitation covenant). Essendant disagreed.
The Delaware Court of Chancery Decision
This disagreement made it to the Delaware Court of Chancery, which rendered a decision on September 9, 2019. Vice Chancellor Slights wrote that:
“Essendant now moves to dismiss… [arguing that] the payment of the termination fee is GPC’s exclusive remedy…. Specifically, the Agreement does not clearly and unambiguously provide that GPC’s remedy is limited to recovery of the termination fee in circumstances where, as here, GPC has well-pled that Essendant breached the Agreement’s non-solicitation provision. Accordingly, Essendant’s motion to dismiss must be denied.”
In short, the Chancery Court, after a close reading of the merger agreement, determined the termination fee would have served as the exclusive remedy if the competing transaction had not resulted from a material breach of the nonsolicitation covenant.
However, the Chancery Court found that GPC had adequately alleged enough in total to infer that Essendant, at least indirectly, breached the nonsolicitation covenant, which breach, if proven, would render the break fee not the exclusive remedy. As a result, the Chancery Court declined to dismiss GPC’s claims for damages above and beyond the break fee.
If you would like to read the full decision in Genuine Parts Company v. Essendant, Inc. for yourself, click here.
This decision reminds us that where deal parties intend for pre-agreed termination fees to act as exclusive remedies and bar claims for additional damages, particular attention must be paid to the the exact language describing the circumstances under which such termination fee is the exclusive remedy. In other words, is the termination fee the exclusive remedy for all flavors of deal termination or is it only the exclusive remedy for some flavors of deal termination, and any terminations outside of that scope will fall to standard judicial remedies?
When trying to set up an exclusive remedy or termination fee more generally, pay attention to the exact mechanics. Details matter. If you are a company considering an M&A deal or other corporate transaction, careful thought and planning are important.
 Specifically, the language of the nonsolicitation covenant in Section 7.03(a) provided that Essendant was not to:
(i) solicit, initiate, or knowingly encourage (including by way of furnishing non-public information), or take any other action to knowingly facilitate, any inquiries or the making of any proposal or offer (including any proposal or offer to [Essendant’s] stockholders), with respect to any Competing [Essendant] Transaction; (ii) enter into, maintain, continue or otherwise engage or participate in any discussions or negotiations with any Person in furtherance of such inquiries or to obtain a proposal or offer with respect to a Competing [Essendant] Transaction; (iii) agree to, approve, endorse, recommend or consummate any Competing [Essendant] Transaction; (iv) enter into any Competing [Essendant] Transaction Agreement; or (v) resolve, propose or agree, or authorize or permit any Representative, to do any of the foregoing.
 The Court wrote:
As is typical in disputes arising from complex integrated contracts, the parties’ competing constructions of the Agreement beckon a whistle-stop tour through several of its interconnected provisions. Most important to Defendant’s motion is Section 9.03(e), which provides, in part, “notwithstanding anything in this Agreement to the contrary (including Section 9.02), in the event the Termination Fee is paid in accordance with this Section 9.03, the payment of the Termination Fee shall be the sole and exclusive remedy of GPC[.]” Essendant terminated the Agreement under Section 9.01(g); therefore, it purported to pay the Termination Fee “in accordance with” Section 9.03(a)(ii).
As noted, Section 9.03(a)(ii) contemplates termination of the Agreement “pursuant to” Section 9.01(g), meaning “in conformity with” that provision. Section 9.01(g) permits Essendant to terminate the Agreement “to enter into a definitive agreement with respect to a Superior Proposal to the extent permitted by, and subject to the applicable terms and conditions of, Section 7.03(d)(ii)[.]”
Section 7.03(d)(ii), in turn, allows for termination under Section 9.01(g) if, “in response to the receipt of an offer or proposal with respect to a Competing [Essendant] Transaction that did not arise from any material breach of Section 7.03(a), the [Essendant] Board determines in its good faith judgment . . . that such offer or proposal constitutes a Superior Proposal[.]” Finally, Section 7.03(a) contains the Non-Solicitation Provision.”
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