The Delaware Supreme Court upheld a Delaware Court of Chancery ruling that SIGA Technologies, Inc. breached its obligation to negotiate a term sheet in good faith, notwithstanding the non-binding nature of the term sheet and the fact that it was never executed. The Delaware Court of Chancery ruling was reported on in our November 2011 Corporate Alert.
In the case, Pharmathene, Inc. and SIGA negotiated, but failed to execute, a non-binding termsheet outlining specific terms for a pharmaceutical licensing transaction between the parties. They subsequently negotiated and executed a merger agreement in lieu of the licensing transaction, but expressly agreed in the merger transaction documents to resume negotiating the licensing transaction in good faith pursuant to the termsheet (which was attached as an exhibit to the merger agreement) if the merger fell through. SIGA subsequently terminated the merger agreement and, although the parties resumed negotiating the licensing transaction, by that time, SIGA's overall financial picture and business outlook had dramatically improved. SIGA proposed licensing terms materially different than those in the original termsheet (for example, upfront payments were increased from $6 million to $100 million, milestone payments were raised from $10 million to $235 million and royalty rates were doubled). Pharmathene subsequently sued SIGA asserting, among other things, a breach of SIGA's duty to negotiate in good faith.
The Delaware Supreme Court held that SIGA had breached the covenant to negotiate in good faith by demanding terms that were not "substantially similar" to those contained in the term sheet. The Delaware Court of Chancery awarded Pharmathene certain expectation damages, as well as attorneys' fees and expenses. The Delaware Supreme Court, finding Pharmathene's evidence of expectation damages to be too speculative and uncertain, remanded the case back to the Delaware Court of Chancery for reconsideration of such damages. In remanding the case, the Delaware Supreme Court ruled that expectation damages may be awarded only for losses that can be proven with reasonable certainty.
SIGA Technologies, Inc. v. Pharmathene, Inc., No. 314, 2012, Delaware Sup. Ct. (May 24, 2013).