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Amirsaleh v. Bd. of Trade of the City of N.Y., Inc., C.A. No. 2822-CC (Del. Ch. Jan. 19, 2010) (Chancellor Chandler)

January 19, 2010

In this post-trial memorandum opinion, the Court of Chancery held that defendants Board of Trade of the City of New York, Inc. (“NYBOT”) and IntercontinentalExchange, Inc. (“ICE”) did not breach the implied covenant of good faith and fair dealing inherent in the merger agreement pursuant to which ICE acquired NYBOT, now ICE Futures U.S., Inc., in January 2007. The Court entered judgment in favor of defendants and dismissed the case with prejudice.

Prior to the January 2007 merger, plaintiff owned two membership interests in NYBOT, then a non-stock New York corporation operating as a commodities exchange. Each NYBOT membership interest included the right to trade on the exchange. Pursuant to the merger agreement, each membership interest was converted, at the election of the member, into either newly issued shares of ICE common stock or cash, or a combination of both. Because both the cash and stock components of consideration were, in aggregate, fixed amounts, each member’s election was subject to proration if either component was oversubscribed. The merger agreement provided that members who failed to  submit a completed merger consideration election form before the election deadline, thereby failing to make a timely election, would receive the form of consideration that was undersubscribed. The merger agreement also provided that all consideration would be distributed to members no later than ten business days following the merger’s closing.

The election deadline was January 5, 2007. On January 12, the merger closed. In an effort to accommodate late members, defendants decided on January 17 to accept all late elections submitted up to that time and to continue to accept them as long as practicable, recognizing that they would need to cut off the acceptance of late elections very soon so as not to jeopardize the distribution of merger consideration by the contractual deadline. Defendants immediately reached out to members who still had not submitted their election forms in efforts to assist them but, by the morning of January 19, determined they could no longer continue to accept late elections without undue risk of failing to meet the consideration distribution deadline. Defendants thus determined that no elections received after January 18 would be accepted. Accordingly, members who failed to elect on or before January 18 received all cash, the undersubscribed component of merger consideration. Because the market price of ICE stock had increased significantly between the time the merger agreement was executed and the time the merger was consummated and the consideration distributed, the amount of all-cash consideration was substantially lower in value than the stock and cash combination received by members who made timely stock elections. Plaintiff, who desired to elect stock consideration, did not submit his form until the afternoon of January 19 and, therefore, received all cash. Plaintiff also lost his NYBOT trading rights because members wishing to retain trading rights after the merger were required to pledge a certain number of ICE shares.

Plaintiff claimed that, in choosing to accept late elections but cutting off such acceptance before plaintiff had submitted his form, defendants breached the implied covenant of good faith and fair dealing under the merger agreement. In an earlier decision denying plaintiff’s motion for summary judgment, the Court determined that, to prove such a breach, plaintiff must show that defendants’ decisions or actions in connection with the acceptance of late elections were made in bad faith. To do so, plaintiff had to show that defendants were motivated by an improper purpose, by demonstrating (i) that defendants decided to accept late elections solely to accommodate certain allegedly “connected” members (i.e., members that plaintiff claimed were favored because they had special connections with the defendants), (ii) that “connected” members received special treatment to ensure their election forms were submitted on or before January 18, or (iii) that defendants held open the window for the acceptance of late elections only long enough to ensure that “connected” members had an opportunity to submit their forms (closing the window once those forms had been submitted). The Court also concluded in its earlier summary judgment decision that plaintiff could not show the requisite bad faith merely by showing that defendants’ efforts to accommodate the acceptance of late elections were less than optimal.

After review of the evidence presented at trial, the Court found, first, that there were no “connected” members. Second, the Court found that the several members whom plaintiff tried to show were “connected” did not receive any special treatment. Plaintiff had relied in particular on the fact that one of the allegedly connected members was the last member to submit a late election form on January 18. Thus, plaintiff asserted, only because that member’s form was finally submitted did defendants decide to close the acceptance window. The Court found this timing a mere coincidence and found the inference plaintiff wished to draw otherwise unsupported and contradicted by the credible testimony of defendants’ witnesses. The Court further found that defendants’ efforts to accommodate members who had failed to submit an election prior to the deadline were targeted to all members who missed the deadline, not a specific few, and that their decision to cut off the acceptance of late elections was motivated by increasing pressure from the exchange agent to close the acceptance window to allow it sufficient time to calculate, prepare, and distribute the cash and stock consideration by the contractually mandated deadline, as well as defendants’ own fears that they would otherwise fail to meet the distribution deadline. Because plaintiff had failed to show defendants’ actions were motivated by any improper purpose, and the Court’s finding to the contrary that those actions were a good faith attempt to accommodate all NYBOT members who had missed the January 5 deadline, the Court held defendants had not breached the implied covenant of good faith and fair dealing and dismissed plaintiff’s claim.

The full opinion is available here