Merger Agreements, the Duty of Good Faith and Fair Dealing, and the Duty to Provide Notice to Shareholders

The Race to the Bottom focuses on Delaware decisions, particularly those that affect shareholders. In Amirsaleh v. Board of Trade of the City of New York, Inc., Del. Ch., C.A. No. 2822-CC, Chandler, C. (Sept. 11, 2008)(Mem. Op.), an owner sued alleging that the company failed to distribute an election form required by a merger agreement.  Although the court dismissed much of the suit, it did find that the merger agreement contained a covenant of good faith and fair dealing and found a genuine issue of material fact as to whether the provision had been violated.

The not-for-profit Board of Trade of the City of New York, Inc. ("NYBOT") and CFC Acquisition Co., a wholly owned subsidiary of Intercontinental Exchange, Inc. ("ICE"), agreed to merge. Under the merger agreement, those owners wishing to retain trading privileges were required to complete and return both an Election Form and a Pledge Agreement.

The NYBOT distributed proxy materials and held a special meeting on December 11.  The Election Form, however, had not been distributed.  Instead, the Proxy Statement disclosed that the Form would follow in a subsequent mailing and the deadline for returning the Form would be disclosed in the supplemental mailing.  In early December, Plaintiff inquired about the Form and was told that it "would be mailed shortly."  The Forms were distributed later that month, with the NYBOT relying on a third party for execution.

• On December 19, 2006, the Election Forms and Pledge Agreements were sent by first class mail, postage prepaid, to all NYBOT members using the addresses the NYBOT had on file.  To accomplish the printing and distribution of the forms, NYBOT and ICE contracted with a third party, RR Donnelly & Sons Company.  NYBOT provided RR Donnelly with its list of members and addresses -- a list that included Amirsaleh and his proper mailing address.  RR Donnelly contracted with Apple Direct Mail Services, Ltd., and Apple Mailed the Election Forms, which specified that the deadline for making an election was January 5, 2007.

Plaintiff never received the Election Form and apparently remained unaware of the January 5 deadline.  On January 12, an official at NYBOT contacted Plaintiff to inquire about the Pledge Agreement but said nothing about the Election Form.  The Pledge was faxed the same day but not returned until January 18.  The same day, Plaintiff learned of the need to return the Election Form, obtained a faxed copy and returned it the same day.  The NYBOT, however, treated the election as late.  Plaintiff received cash rather than stock, effectively eliminating his trading privileges on the new entity.

Plaintiff alleged that he had not received the Election Form and that this violated the merger agreement.  The court conceded that the Plaintiff has not received the material.  The merger agreement, however, only required that the material be mailed, not received.

• The record is clear enough that Amirsaleh did not receive an Election Booklet prior to the January 5, 2007 deadline. This fact alone, however, certainly does not amount to a breach of the contract because the contract does not require delivery of the Election Forms. The terms of the Merger Agreement provide only that the Election Form “shall be mailed” to NYBOT members “on the same date as the Proxy Statement/Prospectus is mailed to the Members or on such other date as ICE and NYBOT shall mutually agree.” The evidence in the record supports that such a mailing took place on December 19, 2006. Plaintiff is unable to point to any evidence that shows the existence of a genuine issue of material fact with respect to whether or not the forms were mailed.
  

In other words, the court countenanced a meger that threatened to eliminate trading privileges for its members without requiring that the members actually receive notice that the privileges would be extinguished. 

Nonetheless, the court found that the merger agreement contained an implied duty of good faith and fair dealing and that the failure of the NYBOT to accept the Election Form late may have violated that clause.   

• As it currently stands, the record is entirely unclear on precisely how, why, or when the defendants determined to stop accepting late election forms. Although defendants have pointed to specific exhibits in support of their contention that a firm decision was made to extend the deadline to January 18, the proffered exhibits offer no such support. Moreover, although defendants argue that it is unfair to permit plaintiff to contend ICE and NYBOT acted in bad faith when plaintiff failed to take the depositions of NYBOT Member Services employees, those employees did not have any control over defendants’ decision to stop accepting late forms. . . . [As a result, there was] a genuine issue of material fact as to whether ICE and NYBOT’s clandestine and unexplained decision to stop accepting late forms frustrated the purpose of the Merger Agreement’s election provision."
  

The primary materials for this post are available on the DU Corporate Governance website.