Explore the court’s decision on a $12 million M&A termination fee in the case of Genuine Parts Company v. Essendant Inc. Learn valuable insights for M&A deals and fiduciary out clauses.
November 5, 2019
Introduction:
In M&A deals, sellers often have the option to exit the agreement by paying a substantial termination fee. This is especially common when there’s a fiduciary “out” clause. In this case, we’ll explore a situation where such a termination fee didn’t turn out to be the exclusive solution.
The Deal:
This case revolves around two players in the business wholesaler market—a seller and a suitor (a competitor) who decided to merge. They entered into a merger agreement, which would result in a combined company with the suitor owning 51% and the seller holding 49%.
The agreement had several safeguards for the suitor, including a non-solicitation provision that prevented the seller from pursuing other competing deals. The seller also agreed to halt any ongoing discussions about such transactions initiated before the merger agreement.
However, the seller had a “fiduciary out” provision. This meant that the seller could explore better offers from other parties if it didn’t breach the non-solicitation provision. To use this provision, the seller’s board had to genuinely believe, after consulting with reputable financial advisors and legal counsel, that there was a superior offer on the table.
If such a proposal existed, the seller could exit the merger agreement by paying a $12 million termination fee to the suitor. Then, the seller could pursue the better offer, as long as it didn’t arise from a significant breach of the non-solicitation provision. In that case, the seller would only be liable for fraud or willful breach.
Before signing the merger agreement, the seller assured the suitor that they had no intention of merging with anyone else and that no other entity was interested in them. However, according to the suitor, the Staples group had expressed interest in acquiring the seller just three days before the merger agreement was signed. The seller’s board discussed the Staples offer the day before signing but didn’t inform the suitor until seven weeks later.
The Lawsuit:
Eventually, the seller terminated the merger agreement and paid the suitor the $12 million termination fee. Subsequently, the seller struck a deal with the Staples group. The suitor then filed a lawsuit in the Court of Chancery of Delaware, seeking damages. The seller tried to dismiss the case, arguing that the exclusive remedy for any breach was the $12 million termination fee.
However, the court rejected the seller’s motion to dismiss, as it found that the suitor’s allegations, if true, could fall within the fraud/willful breach exception in the merger agreement’s exclusive remedy provision.
Comment:
In hindsight, it’s clear that the seller should have kept the suitor informed about its discussions with Staples, including disclosing Staples’ interest before finalizing the merger agreement.
Case Reference:
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)
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
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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