M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, January 5, 2010

Prompt Notice and Topping Bids

Generally, directors have a fiduciary duty to consider topping bids.  Try as they might, directors cannot contract around their fiduciary obligations in the merger context.  A recent ruling out of the Delaware Chancery Court (NACCO v Applica) before Christmas reminds us that while you can't contract out of your fiduciary obligations, breaching your contractual obligations can come at a price as well. 

The Merger Agreement Applica signed with NACCO included a relatively standard no-shop as well as a common "information rights" provision that required Applica to bid.  These information rights are extremely common.  Some time ago I  tried counting them up as part of a paper on matching rights in merger agreements.  Turns out that these information rights appeared in more than 98% of transactions in my sample of 331 deals.  If that's not boilerplate, I don't know what is.  Of course, I think Vice Chancellor Strine likes to say, "The reason boilerplate provisions appear in every merger agreement is because they're important!"

Vice Chancellor Laster reminds us that these information rights (or "prompt notice" provisions) still have meaning.  In the NACCO case, there's reason to suspect that Applica was, let's say, somewhat less than prompt in notifying NACCO that Harbinger was interested in putting together a bid.  For its part, Harbinger was apparently a little lazy in updating its 13D to reflect the fact that it had a developed something other than a passive interest in Applica.  While the latter is not a good thing, it's not disabling.  Harbinger after all didn't sign an NDA and/or standstill, so it could do what it wanted.  Applica, on the other hand, was not so free. 

And that's where NACCO provides some lessons for sellers.  NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions.  If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching.  And, if you breach, your damages will be contract damages and not limited by the termination fee provision.  Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement.  Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.  Suddenly fiduciary duty feels expensive!

These provisions - even if the notice provisions that seem like boilerplate - have meaning and must be respected, or you may have to pay a price.


Update: K&E has a memo summarizing the NACCO case here.


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