The Delaware Court of Chancery has held the seller in an asset purchase transaction liable for breach of an exclusivity provision in the subject asset purchase agreement, dismissing the seller's argument that the fiduciary duties owed by management to creditors negate the contractual exclusivity provision.

Millennium Digital Media Systems, L.L.C., a cable company, was in financial distress. After a series of unsuccessful refinancings, its creditors demanded that the company sell assets to repay its debt. Millennium entered into an asset purchase agreement with WaveDivision Holdings, LLC, a competing cable operator. The agreement contained a "no solicitation" provision, which required Millennium to deal exclusively with Wave and to refrain from engaging in any solicitation for, or encouraging, any alternative transactions involving the assets being sold. However, Millennium continued to actively pursue other alternatives, retaining a financial advisor to review potential investments and commencing negotiations for a refinancing with one of its senior creditors, Highland Capital Management. After almost six months of pursuing parallel tracks without informing Wave, Millennium terminated the Wave purchase agreement and that same day closed a refinancing deal with Highland. Wave sued for breach of contract.

Millennium argued that the no solicitation provision can't be enforced as a matter of law since complying with the provision would have forced Millennium's management to breach its fiduciary duties to its creditors. The court dismissed this argument outright as making no "economic or legal sense." Though merger or asset purchase agreements that involve sale of control of a target company may contain a "fiduciary out" provision, the court stated that companies are "free to enter into binding contracts without such a fiduciary out so long as there was no breach of fiduciary duty involved when entering into the contract in the first place." Under Delaware law, if a contract with a third party is premised upon breach of fiduciary duty, a court may find it to be unenforceable on equitable grounds.

WaveDivision v. Millennium, C.A. No. 2993-VCS (Del. Ch. September 17, 2010)