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Amirsaleh v. Board of Trade of the City of New York, Inc., et al., C.A. No. 2822-CC (Del. Ch. Nov. 9, 2009)

November 9, 2009

In this memorandum opinion, the Court of Chancery denied plaintiff’s motion for summary judgment on a claim for breach of the implied covenant of good faith and fair dealing in connection with a merger agreement. The Court held that plaintiff failed to demonstrate that defendants exercised their discretion in bad faith when they determined to accept late merger consideration election forms but did not accept plaintiff’s form, which was submitted after defendants stopped accepting late elections.

In December 2006, the predecessor to defendant Board of Trade of the City of New York, Inc. (“NYBOT”) entered into an agreement and plan of merger (the “Merger Agreement”) with defendant IntercontinentalExchange, Inc. (“ICE”), whereby NYBOT’s predecessor was merged with and into a wholly-owned subsidiary of ICE to create the current NYBOT, a Delaware corporation.

Plaintiff owned two membership interests in NYBOT’s predecessor, both of which included the right to trade on the NYBOT exchange. The Merger Agreement provided that each NYBOT membership interest would be converted into either newly issued shares of ICE common stock or cash, or some combination thereof. The Merger Agreement permitted each NYBOT member to elect the form of consideration received in the merger, but the elections were subject to proration if either stock or cash was oversubscribed because the aggregate amounts of stock and cash to be issued in the merger were fixed amounts. The Merger Agreement also provided that members who failed to make timely elections would receive the form of consideration that was undersubscribed.

NYBOT members wishing to remain with the new NYBOT were required to timely complete and return a merger agreement election form (“Election Form”) and a NYBOT membership and pledge agreement and pledge addendum (the “Pledge Agreement”). Although Election Forms and Pledge Agreements were mailed to all NYBOT members in December 2006, plaintiff claimed he received neither and thus failed to make a merger consideration election by the January 5, 2007 deadline stated on the form. Defendants accepted late stock elections of 25 NYBOT members who made elections between January 6 and January 18, but did not accept any elections submitted after January 18. Plaintiff returned a completed Election Form on January 19, 2007, but defendants did not accept the form because it was untimely. Because the stock consideration was oversubscribed, members who did not make a timely election were automatically cashed out. Because of a rise in the ICE stock price between the time the Merger Agreement was signed and the time the merger was consummated and consideration distributed, the amount of all-cash consideration received by plaintiff was substantially lower in value than the stock and cash combination received by those members who made timely stock elections. Plaintiff also lost his trading rights on the NYBOT exchange because he did not pledge the required number of ICE shares to maintain his trading rights after the merger.

The Court of Chancery found that defendants’ purpose in deciding to accept late elections was a material factual dispute. Plaintiff contended that the decision to accept late election forms was motivated by a desire to accommodate “connected” members of NYBOT, and once the last of the “connected” members submitted his form on January 18, the late election window was closed. Defendants contended that the decision to accept late submissions was made to accommodate members (who were also the exchange’s customers) by accepting as many late elections as possible, that they held open the window for accepting late elections as long as feasible, and that they determined to cut off the acceptance of late elections only after it was apparent that holding the window open any longer would significantly jeopardize the prospect of distributing the merger consideration to NYBOT members by the deadline mandated by the terms of the Merger Agreement.

The Court of Chancery noted that the implied covenant of good faith and fair dealing, which is implied in every contract under Delaware law, is triggered when the defendant’s conduct does not violate the express terms of the agreement but nonetheless deprives the plaintiff of the fruits of the bargain. To successfully prove a breach of the implied covenant, the Court found that the plaintiff must demonstrate that defendants acted in “bad faith,” which requires the plaintiff to prove that the defendants’ conduct was motivated by an improper purpose. In reaching this decision, the Court rejected plaintiff’s argument that, in lieu of a showing of “bad faith,” all that is necessary to establish a breach of the implied covenant is the “absence of good faith.” The Court found no meaningful difference, in this context, between “a lack of good faith” and “bad faith,” concluding that plaintiff must demonstrate defendants’ conduct was motivated by a culpable mental state to establish breach. The Court reasoned that defendants were subject to an implied covenant not to give preferential treatment to “connected” members that submitted late elections, and that plaintiff would have a claim for breach of the implied covenant if he could demonstrate that defendants decided to accept late elections to give favorable treatment to so-called “connected” members and purposefully accepted late Election Forms just long enough to allow those “connected” members to submit their elections. On the other hand, if defendants’ determined to accept late Election Forms and later cut off the acceptance of late forms for the reasons they had articulated in response to the motion for summary judgment, such conduct would be good faith, even if defendants process was less than perfect. Because plaintiff failed to demonstrate the absence of a genuine issue of material fact (i.e., that the defendants’ exercise of discretion was done in bad faith), the Court denied plaintiff’s motion for summary judgment.

The full opinion is available here