SIGA wanted to develop a smallpox drug but needed money to do it. It decided to collaborate with PharmAthene (PA), a company it had previously considered merging with. The parties developed a non-binding termsheet for a licence agreement, but never signed it. PA suggested a merger, on the understanding that if that fell through the parties would revert to the licensing plan. SIGA agreed, on the condition that PA would advance bridge financing. PA agreed, and they signed a merger termsheet, a merger agreement and a loan agreement, each of which provided that if the merger did not occur the parties would negotiate in good faith to execute the licence agreement as set out in the earlier termsheet.

Time passed and the drug looked both increasingly more promising and more valuable. The merger talks failed, but when the parties returned to the licensing idea, SIGA proposed ‘vastly different’ economic terms than those set out in the original termsheet (asking for 200-600% increases in payments under the licence).

PA’s action found favour with the Delaware Court of Chancery: PharmAthene Inc. v SIGA Technologies Inc. (Del Ch, 22 September 2011). While the licence termsheet was not a binding agreement, either on its own or as part of the other agreements because it did not contain all essential terms, SIGA had acted in bad faith in performing its obligations under the agreement to negotiate a licence agreement after the failure of the merger discussions. The original licence termsheet was intended to have significance in renewed licence negotiations; because SIGA’s new terms bore no resemblance to the original terms, it had acted in bad faith.

Vice-Chancellor Parsons struggled a bit with the remedy. Traditional expectation damages were too speculative; specific performance wasn’t appropriate. In the end, the judge awarded PA a share of future profits from the drug, on specific terms – a remedy described as being akin to a constructive trust or equitable lien.