Termination Fee is not Exclusive Remedy for Breach of No-Shop
On September 9, 2019, the Delaware Court of Chancery held that Genuine Parts Company (“GPC”) adequately pled facts that supported a pleading stage inference that Essendant Inc. breached its merger agreement with GPC by terminating the agreement to pursue a transaction with non-party Sycamore Partners (“Sycamore”) pursuant to a superior proposal termination right. The Court further found that GPC adequately pled that its acceptance of a termination fee from Essendant did not preclude GPC from pursuing breach of contract claims against Essendant for its alleged breaches of the parties’ merger agreement.
This action arose from a proposed business combination between Essendant and GPC, which if consummated, would have combined two competitors in the office supply wholesale business. Shortly before GPC and Essendant signed a merger agreement in April 2018, Sycamore expressed an interest in acquiring Essendant. Essendant rejected Sycamore’s initial overture, but Sycamore persisted, eventually making an offer after Essendant signed a merger agreement with GPC, which Essendant’s board of directors determined was superior. Essendant could not terminate its merger agreement with GPC if Sycamore’s superior proposal arose from a material breach of the agreement. Further, Essendant’s right to enter into an agreement with respect to a superior proposal was conditioned on its compliance with the terms of its merger agreement with GPC. GPC alleged that Essendant breached the merger agreement by (1) terminating the agreement to pursue an inferior proposal, (2) failing to require Sycamore to enter a confidentiality agreement with terms at least as restrictive as those in GPC’s confidentiality agreement, and (3) failing to exercise reasonable best efforts to close the transaction. In September 2018, Essendant terminated its merger agreement with GPC and paid GPC a $12 million termination fee, which GPC accepted.
GPC subsequently brought this action seeking damages for Essendant’s alleged breaches of the parties’ merger agreement. Essendant moved to dismiss on grounds that the termination fee it paid GPC was its sole remedy under the parties’ merger agreement. The Court of Chancery disagreed, finding that GPC adequately pled that the termination fee was not GPC’s exclusive remedy where GPC had well-pled that Essendant breached the merger agreement’s non-solicitation provision.