C.A. No. 2541-VCL (Del. Ch. Dec. 22, 2009)
The Court of Chancery declined to dismiss claims by NACCO Industries, Inc. (“NACCO”), a disappointed bidder for Applica, Inc. (“Applica”), that Applica and jumping bidder Harbinger Management Corporation (“Harbinger”) (1) breached a merger agreement, (2) tortiously interfered with a merger agreement, (3) committed fraud, and (4) committed civil conspiracy. NACCO had entered into a binding merger agreement with Applica, which Applica eventually terminated in favor of a jumping bid by Defendant Harbinger. Importantly, the Court permitted NACCO to pursue damages over and above the termination fee and expense reimbursement authorized by the merger agreement, and held that NACCO could pursue Delaware common law fraud claims arising from alleged misstatements in Harbinger’s Schedule 13d and 13g filings. As the Court noted, it necessarily applied a “plaintiff-friendly” standard at this motion to dismiss stage, and assumed that the “extreme and unusual” facts in the complaint, as stated below, could be proved at trial.
NACCO, a publicly-traded corporation which operates Hamilton Beach, a designer and distributor of small appliances, entered a merger agreement with Defendant Applica, also a distributor of small appliances (the “Hamilton Beach Merger Agreement”), following the entry of a non-disclosure and standstill agreement which prohibited NACCO from acting unilaterally to acquire Applica, and provided for a period of due diligence.
The Hamilton Beach Merger Agreement contained a No-Shop provision and a Prompt Notice provision. The No Shop provision only permitted Applica to provide information to and enter into discussions with an offeror, if it received an unsolicited bona fide written offer that the Applica board determined was reasonably likely to constitute a “Superior Proposal”, meaning that, after consultation with financial and legal advisors, the board believed that, if consummated, the offer would result in a more favorable transaction. The Prompt Notice provision obligated Applica to give NACCO prompt notice of “any inquiry or proposal relating to an [Applica] Competing Transaction.” The term “[Applica] Competing Transaction” included “any merger, consolidation, share exchange, business combination or other transaction or series of transactions involving [Applica] that is conditioned on the termination of this Agreement or could reasonably be expected to preclude or materially delay the completion of the Merger.”
Unbeknownst to NACCO, however, Harbinger allegedly had been “in covert contact with members of Applica’s management”, first in violation of the non-disclosure agreement and, later, the merger agreement. The complaint further alleged that the covert discussions enabled Harbinger to increase its stake in Applica to almost 40% before it started a bidding contest, while NACCO was barred from the same opportunity because of its standstill agreement. This covert tipping of information to Harbinger continued throughout the entire deal process, giving Harbinger an unfair advantage over NACCO.
At the same time, Harbinger filed several Schedules 13g and 13d each time it acquired Applica common stock, each time certifying that its acquisitions were for investment purposes only, and not to gain control of Applica. Internally, however, NACCO alleged Harbinger was planning to acquire Applica and one of its competitors, Salton, Inc. (“Salton”), to create and sell the two combined companies “for a massive gain”.
After acquiring control of Salton, Harbinger notified Applica that it would be making a competing acquisition proposal, and Applica alerted Harbinger that an all cash offer would likely be successful. Applica did not disclose to NACCO any of its communications with Harbinger or Salton, and NACCO alleged Applica even gave NACCO false information that Harbinger would support the Hamilton Beach Merger Agreement after learning of Harbinger’s dissatisfaction with that agreement. In reliance on Applica’s assurances that Harbinger would support the Hamilton Beach Merger Agreement, Harbinger’s Schedule 13g and 13d filings, and Harbinger’s lack of any prior deal jump attempts, NACCO believed that Harbinger would not make a competing bid.
When Harbinger announced its competing bid to acquire Applica, it amended its prior Schedule 13 forms to disclose that it had been acquiring Applica shares in order to acquire control. Upon receipt of Harbinger’s competing bid, Applica informed NACCO that it was reasonably likely to constitute a Superior Proposal. Applica then terminated the Hamilton Beach Merger Agreement and accepted Harbinger’s bid, paying NACCO the $4 million termination fee and $2 million in expense reimbursement. According to the Complaint, when Applica and Harbinger entered into a merger agreement (the “Harbinger Merger Agreement”), Applica’s preliminary proxy statement soliciting votes for the Harbinger Merger Agreement, revealed in the “Background of the Merger” section, a markedly different set of facts compared to Harbinger’s 13d filings. A bidding contest ensued which Harbinger won. Applica’s stockholders approved the Harbinger Merger Agreement, and Harbinger subsequently closed a Salton-Applica transaction.
NACCO brought this action, initially seeking to enforce the Hamilton Beach Merger Agreement, but was not able to get an expedited trial date. NACCO also sought and was denied injunctive relief in the United States District Court for the Northern District of Ohio. In this opinion, the Court of Chancery denied motions to dismiss NACCO’s claims that (1) Applica breached the No Shop and Prompt Notice provisions of the merger agreement, (2) Harbinger committed fraud in connection with its Schedule 13 disclosures, (3) Harbinger tortiously interfered with the Hamilton Beach Merger Agreement, and (4) Defendants were engaged in a civil conspiracy.
On NACCO’s breach of contract claim, the Court ruled that the Complaint adequately pled a breach of the “customary” No Shop and Prompt Notice provisions. Specifically, NACCO alleged that Applica leaked information to its favored bidder, failed to inform NACCO about its covert conversations with Harbinger and Salton, and failed to notify NACCO of its intent to negotiate a competing transaction with Harbinger. The Court based its ruling on the breadth of both provisions which covered all discussions that could “reasonably be expected to preclude or materially delay the completion” of the merger, not merely firm offers. The Court was also “influenced by the Complaint as a whole, which alleges that throughout the deal timeline, Harbinger representatives received timely and accurate tips and assistance from Applica” even before the NACCO merger agreement was executed, because Applica’s senior management feared they would lose their jobs following a strategic deal and thus favored Harbinger as a financial buyer. It was insufficient for Applica to merely provide NACCO with the same information that it provided publicly to its stockholders.
In addition to finding sufficient allegations that Applica breached the Hamilton Beach Merger Agreement, the Court found that damages could exceed the termination fee and expense reimbursement set forth in the merger agreement, despite NACCO’s losing the bidding contest, reasoning that to establish a rule that a losing bidder cannot plead damages “would have serious and adverse ramifications for merger and acquisitions practice and for our capital markets.” The Court ruled that NACCO is entitled to make its case that it should receive its “full expectancy damages”, or “an alternative damages measure, such as its reliance interest”, because “Applica’s right to terminate and pay the termination fee without further liability depended on Applica complying with its obligations under …the No-Shop and Prompt Notice Clauses.” The Hamilton Beach Merger Agreement specifically excluded from the limitation on liability, any termination resulting “from the willful and material breach by a party of any of its representations, warranties or covenants in this Agreement.”
Next, the Court found that it had jurisdiction over the well-pled common law fraud claim, based on Harbinger’s statements in its Section 13 federal securities filings. For jurisdiction, the Court relied on the Delaware Supreme Court opinion in Rossdeutscher v. Viacom, Inc., 768 A.2d 8 (Del. 2001), as well as federal removal cases, and the policy that its ability to enforce a common law fraud remedy for false statements in an Exchange Act filing where a Delaware entity has been accused of fraud serves important Delaware interests. The Court held that federal courts do not have exclusive jurisdiction to hear common law fraud claims based on statements in federal securities filings, and that it could exercise jurisdiction over NACCO’s claim that the information in Harbinger’s filings was false and misleading, but that Delaware’s jurisdiction does not extend to fraud claims that arise solely from the violation of the line item requirements for filling out a Schedule 13g or 13d.
NACCO adequately pled facts meeting the elements of fraud, by alleging that (1) Harbinger made false statements that it intended to hold Applica shares for investment purposes while pursuing actively its preferred strategic alternative of an Applica-Salton combination, (2) Harbinger intended to induce NACCO to act or refrain from acting, (3) NACCO acted in justifiable reliance on the false statements, and (4) the false statements were material.
The Court rejected Harbinger’s argument that hedge funds who frequently file Schedule 13d disclosures need not disclose any intent other than an investment intent until they actually make a bid. The intent and reliance elements were “a close call” because Delaware’s common law fraud does not recognize a general “fraud on the market” theory of reliance. The Court nonetheless found it reasonable, given NACCO’s allegations that Harbinger was provided inside tips, to infer at the pleading stage that Harbinger drafted its securities filings with the intent to gain control of Applica by misleading NACCO. The Court also found it plausible that Harbinger’s fraud enabled it to amass its nearly 40% ownership of Applica at a low cost basis, while NACCO was bound by a standstill, giving Harbinger an insurmountable advantage in the subsequent bidding contest. The Court granted NACCO the inference that it ceased bidding because it could not overcome Harbinger’s advantage.
The Court next declined to dismiss NACCO’s tortious interference claim against Harbinger, finding it adequately pled (1) a contract, (2) about which defendant knew and (3) an intentional act that is a significant factor in causing the breach of such contract (4) without justification (5) which causes injury. Harbinger’s contacts with Applica violated the No-Shop and Prompt Notice provisions, when Harbinger had knowledge of their existence. In addition, the allegations of Harbinger’s false Schedule 13 filings demonstrate that Harbinger did not limit itself to legitimate vehicles of competition when seeking to acquire Applica, but instead made false statements “to hide its intent and get the drop on NACCO”. As a result of Harbinger’s successful acquisition of a nearly 40% stock position, facilitated by its false disclosures and unfair advantage, NACCO was deprived of the full benefit of the contractual protections for which that it bargained.
Lastly, the Court declined to dismiss plaintiff’s civil conspiracy claim, finding that all three elements, (1) a combination of two or more persons, (2) unlawful act done in furtherance of a conspiracy, and (3) actual damage, were adequately pled. NACCO alleged that Applica and Harbinger conspired to commit fraud, when Applica management tipped Harbinger about non-public events to facilitate Harbinger’s ability to influence the outcome of the Hamilton Beach merger and subsequent bidding contest, delayed in providing information to NACCO at Harbinger’s request, and provided false information to NACCO to further Harbinger’s agenda.
The Court dismissed the remaining claims of breach of the implied covenant of good faith and fair dealing, equitable fraud and civil conspiracy claim with respect to claims that Applica and Harbinger conspired to breach the Hamilton Beach Merger Agreement, and that Applica conspired to commit tortious interference.
The full opinion is available here.