In WaveDivision, the Court of Chancery held that defendant Millennium Digital Media Systems, L.L.C. (“Millennium”) breached “no solicitation” and “reasonable best efforts” provisions in certain purchase agreements that it entered into with plaintiff WaveDivision Holdings, LLC (“Wave”), as Millennium actively continued to seek refinancing deals for months after the execution of the purchase agreements. Millennium and Wave were both broadband cable operators. Millennium engaged in a series of refinancing transactions to stay afloat, but by 2005, its secured senior lenders (the “Senior Lenders”) required that it sell its assets to repay its debts. Wave offered to purchase Millennium’s cable systems (the “Systems”) and the parties signed a letter of intent containing an “Exclusivity of Negotiation” clause. Despite the execution of the letter of intent, Kevin Westbrook (“Westbrook”), Millennium’s CEO, and Darren Fredette (“Fredette”), an employee of Trimaran Fund Management, LLC, a fund holding certain of Millennium’s increasing rate notes (“IRNs”), and who the Vice Chancellor held was a de facto manager of Millennium, continued to seek refinancing alternatives to a deal with Wave. Millennium executed two purchase agreements (the “Agreements”) for the sale of the Systems to Wave, both of which contained no solicitation and reasonable best efforts clauses that obligated Millennium not to shop for any other transactions and required it to use its reasonable best efforts to obtain the consent of its lenders to the Agreements. Wave was given the right to terminate if Millennium failed to obtain the consent of its lenders by a certain date, but Millennium was not entitled to terminate simply because its lenders’ consents were withheld.
Even after execution of the Agreements, Westbrook and Fredette continued to seek and negotiate refinancing alternatives, especially with holders of the IRNs (the “IRN Holders”) who would receive no debt repayment under a sale to Wave. The negotiations for the IRN Holders were led by Trimaran that also had two members on Millennium’s management committee. Millennium even retained a consultant (at its own expense) to assist in developing an alternative refinancing plan. Millennium eventually executed refinancing and restructuring agreements, transferring control to the IRN Holders, and on the same day, it terminated the Agreements.
Wave brought an action for breach of contract against Millennium alleging breach of the no solicitation and reasonable best efforts provisions in the Agreements and of the implied covenant of good faith and fair dealing. The Court rejected Millennium’s argument that its performance under the Agreement was excused because a Senior Lender would not consent to the sale under any circumstances. The Court held that Millennium could not rely on a failure of the condition to excuse its performance when its own conduct materially caused the condition’s failure.
With respect to Wave’s breach of contract claims, the Court held that Millennium repeatedly breached the no solicitation clauses in the Agreements, including by acting as an “in house banker” for the IRN Holders and by retaining its own financial advisor to explore financing alternatives to the sale to Wave. The Court rejected Millennium’s argument that enforcing the no solicitation clause against it would cause its management committee to breach its duties to its creditors, reasoning that Millenium decided to sell the Systems at the behest of the Senior Lenders and the whole point of the Agreements was to pay off its creditors. The Court also held that Millennium breached the reasonable best efforts clauses in the Agreements and rejected Millennium’s argument that its post-signing conduct was an attempt to obtain consent of its lenders. The Court cited evidence showing Millennium did not use its reasonable best efforts to obtain the consent of its lenders, including its “lax attitude” toward the consent process and the fact that it spent most of its energy and resources in helping to develop alternatives to the sale to Wave. With respect to Wave’s claim for breach of the covenant of good faith and fair dealing, the Court held that the covenant was not applicable under these circumstances, as the Agreements established the terms of the parties’ relationship and the covenant could not be invoked to override these terms.
The Court also concluded that Wave was entitled to damages based on the reasonable expectations of the parties at the time of breach and must be put in as good a position as it would have been had Millennium not breached. It noted that damages must be measured from Wave’s perspective based upon the value of the Agreements to Wave at the time of the breach. The damages should include the profits Wave expected to make on the Systems.
The full opinion is available here.