Genuine Parts Company v. Essendant Inc.

Citation: Not availableDocket: CA 2018-0730-JRS

Court: Court of Chancery of Delaware; September 9, 2019; Delaware; State Appellate Court

Original Court Document: View Document

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Genuine Parts Company (GPC) and Essendant Inc. signed a Merger Agreement on April 12, 2018, intending to combine their businesses in the office supply wholesale industry. The merger discussions began in fall 2017, amid competitive pressures from e-commerce. Prior to signing the Agreement, Sycamore Partners expressed interest in acquiring Essendant, which was not disclosed to GPC. Shortly after the Agreement was executed, Sycamore made a formal offer that allegedly exceeded GPC's offer. Although initially rejected by Essendant, Sycamore's subsequent enhanced proposal prompted Essendant to terminate the Agreement with GPC, pay the stipulated termination fee, and proceed with Sycamore.

GPC contended that the termination fee was insufficient to address its losses, arguing that Essendant's actions constituted material breaches of the Agreement, specifically a non-solicitation clause. Essendant asserted that the termination fee was GPC's exclusive remedy. In response, GPC filed a lawsuit for breach of contract. The court found that the Agreement did not unambiguously limit GPC's remedies to the termination fee, particularly given GPC's valid claims of breach. Consequently, the court denied Essendant's motion to dismiss GPC's claims, emphasizing that GPC's well-pleaded allegations warranted further examination. The factual background was derived from the Complaint and relevant documents, with all allegations accepted as true for the purpose of resolving the motion.

GPC, a Georgia corporation, distributes wholesale supplies through S.P. Richards Co. (SPR), while Essendant, a Delaware corporation, is another wholesale distributor in the same market. Non-party Sycamore is a private equity firm that includes Staples, Inc. in its portfolio. In late 2017, GPC and Essendant began negotiations for a merger due to increasing competition in the office supply sector, ultimately agreeing that GPC would spin off SPR to merge with Essendant. GPC shareholders would hold 51% of Essendant post-merger, with the agreement formalized in an April 12, 2018, document.

The Agreement included a Non-Solicitation Provision in Section 7.03(a), preventing Essendant from soliciting or engaging in any competing transactions. This provision prohibited Essendant from initiating or encouraging competing proposals, engaging in negotiations related to them, or entering into any related agreements. Additionally, Essendant was required to terminate any pre-existing discussions about competing transactions.

However, Section 7.03(c) permitted Essendant to engage with parties that made bona fide proposals for competing transactions, provided that the Essendant board determined, in good faith and after consulting financial and legal advisors, that such proposals could lead to a "Superior Proposal." A Superior Proposal must be financially more beneficial to Essendant shareholders than the merger and likely to be completed.

Under Section 9.01(g), Essendant could terminate the Agreement to pursue a Superior Proposal, contingent on paying GPC a Termination Fee and adhering to the conditions outlined in Section 7.03(d)(ii), which allows for termination if the competing proposal did not result from a breach of the Non-Solicitation Provision.

In Section 9.02 of the Agreement, the parties agreed that there would be no liability for either party following a valid termination, except for fraud or willful breaches occurring prior to termination. Section 9.03(e) stipulates that GPC's sole remedy upon termination is the payment of a Termination Fee by Essendant, which must be paid according to Section 9.03. If the fee is paid as specified, GPC cannot pursue any additional damages or remedies.

Prior to the Agreement’s execution, Essendant assured GPC that it had no intentions of merging with another entity. However, GPC claims that on April 9, 2018, Sycamore expressed interest in acquiring Essendant, just days before the Agreement was signed. Essendant's board discussed this overture the day before signing but did not inform GPC until May 31, 2018. Following Sycamore's initial offer of $11.50 per share on April 17, Essendant’s board concluded on April 24 that it was unlikely to lead to a superior proposal. Following the filing of its quarterly earnings release on April 25, which omitted mention of Sycamore's interest, Essendant notified GPC about the proposal on April 27.

When Essendant rejected Sycamore's initial proposal, it indicated openness to a revised offer. Sycamore submitted a renewed proposal on April 29 for the same price, which Essendant's board then determined could lead to a superior proposal, citing potential for a higher bid based on non-public information. Essendant informed GPC of this determination on May 4. GPC, on May 7, disputed the likelihood of Sycamore's proposal being superior and warned Essendant that negotiating with Sycamore would breach the Agreement's Non-Solicitation Provision, supported by a financial analysis suggesting the Sycamore proposal's share prices were lower than those expected from the SPR merger, along with concerns about regulatory approval.

GPC, despite opposing Sycamore's proposal, offered Essendant's shareholders an additional $4 per share through a contingent value right. While GPC's proposal was under consideration, Sycamore revealed on May 16, 2018, that it owned 9.9% of Essendant's shares, which increased to 11.16% by May 21. GPC asserted that Essendant and Sycamore's actions to conceal Sycamore's offers allowed it to acquire shares from unaware shareholders, giving Sycamore an unfair advantage and heightening the risk of undermining Essendant's merger with SPR. On May 31, 2018, Essendant modified a draft SEC Form S-4 to include its April 9 contact with Sycamore, and the following day, rejected GPC's contingent value right proposal. After several months of negotiations, Essendant accepted Sycamore's bid of $12.80 per share on September 10, 2018, despite its stock price falling from $14.25 to $12.84. The agreement with GPC was terminated on September 14, 2018, and GPC received a $12 million Termination Fee. Essendant justified its decision by citing documents indicating GPC was seen as a competitor, which raised antitrust concerns regarding the SPR merger. GPC filed a Complaint on October 10, 2018, alleging breach of contract due to Essendant's engagement with Sycamore, the termination of their agreement based on an inferior proposal, and failure to enforce confidentiality terms. The defendant filed a motion to dismiss on November 5, 2019, claiming the Termination Fee was the exclusive remedy and that GPC's breach of contract claims were inadequately pleaded. The Court of Chancery, when analyzing a motion to dismiss under Rule 12(b)(6), applies a standard that accepts all well-pleaded allegations as true and allows for reasonable inferences in favor of the non-moving party, emphasizing that contract interpretation issues can be addressed at this stage if the contract language is clear and unambiguous.

GPC contends that the Termination Fee is not the exclusive remedy for termination, as established in the Agreement's interconnected provisions. Central to this argument is Section 9.03(e), which states that the Termination Fee, when properly paid, is GPC's sole remedy. Essendant terminated the Agreement under Section 9.01(g) and attempted to pay the Termination Fee as outlined in Section 9.03(a)(ii). GPC argues that for Section 9.03(e) to apply, Essendant must adhere to the sequence of provisions, terminating in accordance with Section 9.01(g) and fulfilling the conditions of Section 7.03(d)(ii), which requires a good faith determination of a Superior Proposal from a competing transaction.

Essendant counters that GPC's interpretation imposes unnecessary conditions on the clear terms of Section 9.03(e). Essendant asserts that GPC's acceptance of the Termination Fee confirms that it was paid in accordance with the relevant sections, thereby precluding any further claims. Essendant supports its position by referencing a prior case, Cirrus Holding Co. v. Cirrus Industries, where it was determined that a losing bidder could not recover remedies beyond the termination fee due to similar exclusive remedy language. This precedent underlines Essendant's stance that once the Termination Fee is accepted, no additional claims can be made against it.

Cirrus's case diverges due to the specific language in its agreement regarding the termination fee. To terminate "pursuant to Section 11.3," the termination notice must be effective under Section 11.1.7, which is fulfilled if Cirrus completes an "Alternative Transaction." This unconditional aspect of Section 11.1.7 was pivotal in Vice Chancellor Lamb's ruling. The court dismissed the plaintiff's argument for additional language in Section 11.1.7 to preclude terminations based on breaches of the SPA's lock-up provisions.

In contrast, Section 9.01(g) of the Agreement allows Essendant to terminate to enter a definitive agreement for a "Superior Proposal" under specified conditions in Section 7.03(d)(ii), which Cirrus lacked. Consequently, despite initial similarities with Section 9.03(e), GPC has grounds to contend that the exclusive remedy provision may not apply, arguing either that no Superior Proposal existed or that any such proposal resulted from a material breach of the Agreement.

Essendant claims GPC waived its breach of contract claim through public statements and SEC filings, while GPC insists that accepting the Termination Fee does not constitute a waiver. GPC cites NACCO Industries, Inc. v. Applica Inc., where the court held that accepting a termination fee did not bar breach of contract claims, although it might limit future recovery. The determination of whether GPC's acceptance of the fee restricts its claims depends on compliance with obligations, including the No-Shop and Prompt Notice Clauses outlined in the Agreement. The exclusive remedy provision in Section 9.03(e) necessitates adherence to additional sections, including conditions for accepting a Superior Proposal. Therefore, GPC's acceptance of the Termination Fee does not legally preclude it from pursuing breach of contract claims.

Essendant does not identify any clause in the Agreement that prohibits GPC from accepting the Termination Fee while also pursuing breach of contract claims. Essendant acknowledges that Section 9.03(e) is inapplicable if the Termination Fee was not paid in accordance with Section 9.03. GPC has sufficiently articulated a chain of provisions, starting with Section 9.03(a)(ii), to support its claim that Essendant's material breach of the Non-Solicitation Provision and its non-compliance with the Superior Proposal Provision constitute failures to pay the fee as required. Although accepting the Termination Fee may complicate GPC's damages claim, it has presented adequate facts to suggest that this acceptance does not bar its pursuit of damages stemming from Essendant's termination following an alleged breach.

Regarding GPC's claim for breach of contract, it has successfully alleged a material breach of Section 7.03(a). A material breach is defined as a failure to fulfill an obligation fundamental to the contract, undermining its essential purpose. Essendant contends that GPC has not shown such a failure that compromises the Agreement's purpose, but GPC argues that securing an exclusive merger opportunity with Essendant was a fundamental goal, influenced by Essendant's representations regarding interest in merger partners. The broadly worded Non-Solicitation Provision is deemed material to this goal. While Essendant's board must seek the best value for shareholders, it cannot be automatically accused of breaching fiduciary duty due to no-shop provisions, which are standard in merger agreements. Furthermore, Section 7.03(c) allows board discussions about competing transactions as long as they do not result from a material breach of Section 7.03(a), indicating that the Non-Solicitation Provision is enforceable under Delaware fiduciary law.

GPC has alleged sufficient facts to support a potential claim of breach of the Non-Solicitation Provision of the Merger Agreement by Essendant. GPC claims that Essendant engaged in a pattern of covert communications with Sycamore that undermined the agreement, citing specific events such as discussions about a potential revised offer and the timing of various proposals. Essendant contends that GPC's allegations do not substantiate claims of a breach, arguing that a rejection of an offer does not imply that a better offer will be considered, and that GPC has not shown Essendant favored Sycamore over GPC.

However, GPC has presented enough allegations to suggest that Essendant may have indirectly encouraged Sycamore's interest in a competing transaction, especially since Sycamore had expressed interest prior to Essendant's commitment to GPC. The Non-Solicitation Provision mandates that Essendant cease discussions about competing transactions post-agreement. GPC claims that Essendant indicated it would be open to Sycamore’s revised offer after signing with GPC.

The court acknowledges that while individual allegations may seem weak in isolation, they collectively allow for a reasonable inference of breach at the pleading stage. Particularly compelling is the fact that Essendant rejected Sycamore's initial proposal only to later consider a similar offer as a "Superior Proposal," suggesting that Essendant may have shared its preferences with Sycamore. Consequently, the court has denied Essendant's motion to dismiss GPC's claims.