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Genuine Parts Co. v. Essendant Inc.

Court of Chancery of Delaware

September 9, 2019

GENUINE PARTS COMPANY, Plaintiff,
v.
ESSENDANT INC., Defendant.

          Submitted Date: June 7, 2019

          Kenneth J. Nachbar, Esquire, William M. Lafferty, Esquire and Thomas P. Will, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Richard T. Marooney, Esquire, Israel Dahan, Esquire and Peter Isajiw, Esquire of King & Spalding LLP, New York, New York; and Jeremy M. Bylund, Esquire of King & Spalding LLP, Washington, D.C., Attorneys for Plaintiff Genuine Parts Company.

          Gregory P. Williams, Esquire, Lisa A. Schmidt, Esquire, Matthew D. Perri, Esquire and Angela Lam, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and Matthew Solum, Esquire, Ian Spain, Esquire of Kirkland & Ellis LLP, New York, New York, Attorneys for Defendant Essendant Inc.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR.

         Plaintiff, Genuine Parts Company ("GPC"), and Defendant, Essendant Inc., signed a Merger Agreement on April 12, 2018 (the "Agreement"). The transaction, if consummated, would have combined two competitors in the office supply wholesale business. Recognizing they could withstand the headwinds of increased competition from e-commerce and other direct-to-consumer sellers better together than apart, GPC and Essendant began discussing a business combination in the fall of 2017.

         GPC was not Essendant's only suitor, however. Shortly before GPC and Essendant signed the Agreement, non-party, Sycamore Partners, expressed an interest in acquiring Essendant. The Essendant board of directors considered Sycamore's overture but said nothing about it to GPC. Five days after GPC and Essendant signed their Agreement, Sycamore formally offered to acquire Essendant allegedly at a premium to GPC's offer. The Essendant board of directors rejected Sycamore's initial offer. Undeterred, Sycamore sweetened the bid by giving assurances that more would be offered if diligence justified an increased bid. This time, the Essendant board determined Sycamore's renewed offer likely would lead to a better deal than the deal it had agreed to with GPC. After Sycamore completed confirmatory diligence, Essendant terminated the Agreement, paid GPC the termination fee as required by the Agreement and closed the deal with Sycamore.

         The payment of the termination fee and closing of the Sycamore transaction did not end the matter from GPC's perspective. GPC maintained the termination fee was neither an exclusive remedy nor an adequate remedy to compensate for its losses following Essendant's termination of the Agreement. Specifically, GPC alleged Sycamore's winning proposal was the result of Essendant's material breaches of several provisions of the Agreement intended to protect GPC's interests-most importantly, a non-solicitation provision. When Essendant disagreed and countered that the termination fee was GPC's exclusive remedy (whether adequate or not), GPC brought this action for breach of the Agreement.

         Essendant now moves to dismiss GPC's claims, arguing GPC's claim of breach fails because the Agreement is clear that the payment of the termination fee is GPC's exclusive remedy for Essendant's termination of the Agreement. As explained below, Essendant's contract-based defense is not dispositive at the pleading stage. Specifically, the Agreement does not clearly and unambiguously provide that GPC's remedy is limited to recovery of the termination fee in circumstances where, as here, GPC has well-pled that Essendant breached the Agreement's non-solicitation provision. Accordingly, Essendant's motion to dismiss must be denied.

         I. FACTUAL BACKGROUND

         I have drawn the facts from the allegations in the Complaint, documents incorporated by reference or integral to the Complaint and judicially noticeable facts available in public Securities and Exchange Commission filings.[1] In resolving the motion to dismiss, I accept as true the Complaint's well-pled factual allegations and draw all reasonable inferences in Plaintiff's favor.[2]

         A. The Parties and Relevant Non-Parties

         Plaintiff, GPC, is a Georgia corporation that distributes wholesale supplies and equipment for workspaces through S.P. Richards Co. ("SPR"), a "component" of GPC.[3] Defendant, Essendant, is a Delaware corporation and, like GPC, is a wholesale distributor of workplace supplies and equipment.[4] Non-party, Sycamore, is a private-equity firm whose portfolio of companies includes the well-known office supplies chain, Staples, Inc. ("Staples").[5]

         B. GPC and Essendant Negotiate a Merger

         Facing increasing competition in the office supply market, Essendant and GPC began discussing a combination of Essendant and SPR in the fall of 2017.[6]They eventually agreed to a transaction whereby GPC would spin off SPR to merge with Essendant.[7] Following the merger, GPC shareholders would own 51% of Essendant's common stock and Essendant's shareholders would own the remainder.[8] The parties memorialized the terms of their transaction in the Agreement dated April 12, 2018.[9]

         The Agreement contained several protections for GPC, including a typical "Non-Solicitation Provision" that prevented Essendant from pursuing a competing transaction. Specifically, in Section 7.03(a), Essendant agreed not to:

(i) solicit, initiate, or knowingly encourage (including by way of furnishing non-public information), or take any other action to knowingly facilitate, any inquiries or the making of any proposal or offer (including any proposal or offer to [Essendant's] stockholders), with respect to any Competing [Essendant] Transaction; (ii) enter into, maintain, continue or otherwise engage or participate in any discussions or negotiations with any Person in furtherance of such inquiries or to obtain a proposal or offer with respect to a Competing [Essendant] Transaction; (iii) agree to, approve, endorse, recommend or consummate any Competing [Essendant] Transaction; (iv) enter into any Competing [Essendant] Transaction Agreement; or (v) resolve, propose or agree, or authorize or permit any Representative, to do any of the foregoing.[10]

         In the same section, Essendant also agreed to terminate any discussions concerning competing transactions that had started prior to the execution of the Agreement. [11]

         Notwithstanding Section 7.03(a), Section 7.03(c) allowed Essendant to provide information to and have discussions with any "Person (or any of such Person's representatives) who has made a written, bona fide proposal or offer with respect to a Competing [Essendant] Transaction that did not arise or result from any material breach of Section 7.03(a)."[12] To achieve the protection of Section 7.03(c), Essendant's board was first required to determine "in its good faith judgment . . . that [the competing] proposal . . . constitutes, or is reasonably likely to lead to, a Superior Proposal[.]"[13] A Superior Proposal is one the Essendant board:

determines, in its good faith judgment, after consulting with a financial advisor of internationally recognized reputation and external legal counsel . . . to be (a) more favorable from a financial point of view, to the stockholders of [Essendant] than the Merger and (b) reasonably expected to be consummated.[14]

         Under Section 9.01(g), Essendant was permitted to terminate the Agreement "to enter into a definitive agreement with respect to a Superior Proposal," but only "to the extent permitted by, and subject to the applicable terms and conditions of Section 7.03(d)(ii)" and only "provided that prior to or substantially concurrently with such termination, [Essendant] pays or causes to be paid to GPC the Termination Fee."[15] Section 7.03(d)(ii), in turn, allows for termination of the Agreement to pursue a Superior Proposal that "did not arise or result from any material breach" of the Non-Solicitation Provision.[16]

         In Section 9.02, the parties agreed "there shall be no liability . . . on the part of any Party" following a "valid termination" of the Agreement, except that the parties are not "relieve[d]" of liability for fraud or "Willful Breach[es]" committed prior to termination.[17] As for the Termination Fee, Section 9.03(e) provides that payment of the fee is GPC's exclusive remedy for termination if Essendant pays the fee "in accordance with" Section 9.03:

notwithstanding anything in this Agreement to the contrary (including Section 9.02), in the event that the Termination Fee is paid in accordance with this Section 9.03, the payment of the Termination Fee shall be the sole and exclusive remedy of GPC . . . and in no event will GPC or any other such Person seek to recover any other money damages or seek any other remedy based on a claim in law or equity . . . .[18]

         C. Sycamore Enters the Picture

         Prior to executing the Agreement, Essendant assured GPC it had no interest in merging with anyone else and that no other entity was interested in a transaction with Essendant.[19] But according to GPC, Sycamore, on behalf of Staples, had expressed interest in acquiring Essendant on April 9, 2018, just three days before the execution of the Agreement.[20] Essendant's board addressed Sycamore's pre-signing overture in a meeting held the day before executing the Agreement but said nothing of it to GPC until May 31, 2018.[21]

         On April 17, 2018, Sycamore formally offered to acquire Essendant's stock for $11.50 per share. After considering this initial proposal on April 24, 2018, Essendant's board determined the offer was unlikely to lead to a Superior Proposal as defined in the Agreement.[22] On April 25, Essendant filed its quarterly earnings release and 10-Q, neither of which mentioned Sycamore's proposal.[23] Two days later, on April 27, ten days after receiving it, Essendant informed GPC of Sycamore's proposal.[24]

         To any outsider and to GPC, there were no signs that Essendant might terminate the Agreement. Indeed, a slide deck for Essendant's quarterly earnings call included a discussion of how the GPC transaction would "further enhance[] Essendant's strategy."[25]

         D. Essendant Entertains Sycamore's Second Proposal

         According to GPC, when Essendant rejected Sycamore's April 17 proposal, the Essendant board conveyed to Sycamore that it would be open to receiving a revised offer.[26] On April 29, Sycamore obliged and submitted a "renewed" proposal to acquire Essendant's stock for $11.50 per share-the same price per share it offered on April 17.[27] This time, however, Essendant's board concluded Sycamore's renewed offer was reasonably likely to lead to a Superior Proposal because Sycamore indicated it might make a higher bid upon receiving non-public information.[28] Essendant's board notified GPC of its determination on May 4.[29]

         Three days later, on May 7, GPC advised Essendant that, in its view, Sycamore's second proposal did not constitute and would not lead to a Superior Proposal and warned Essendant that continued negotiations with Sycamore would violate the Agreement's Non-Solicitation Provision.[30] As support for its position, GPC pointed to a preliminary discounted cash flow analysis that suggested implied share prices for Essendant resulting from the Sycamore proposal were significantly lower than the share prices expected to result from the SPR merger.[31] GPC also observed that antitrust regulators were unlikely to approve a transaction with Sycamore because its proposal would be viewed as an attempt to protect Sycamore's investment in Staples against the impact of a merger between SPR and Essendant.[32] Despite its objection to the Sycamore proposal, GPC concluded its response with an offer to pay Essendant's shareholders an additional $4 per share in the form of a contingent value right.[33]

         While GPC's revised proposal was pending, Sycamore disclosed on a Schedule 13D, dated May 16, 2018, that it had acquired beneficial ownership of 9.9% of Essendant's outstanding shares. By May 21, its stake had increased to 11.16%.[34] According to GPC, Essendant and Sycamore's deliberate effort to conceal Sycamore's offers to the market allowed Sycamore to acquire a substantial position in Essendant from "unsuspecting shareholders who were not aware of the competing offer[s]."[35] This, coupled with the fact that Essendant did not require Sycamore to enter into an Acceptable Confidentiality Agreement per the Agreement (with a standstill provision), [36] allowed Sycamore to gain "an unfair advantage and materially increased the risk that Sycamore would be able to undermine Essendant's merger with SPR."[37]

         E. Essendant Terminates the Agreement

         On May 31, 2018, Essendant revised a draft SEC Form S-4 to reflect its April 9 contact with Sycamore.[38] The next day, Essendant's board rejected GPC's proposed contingent value right.[39] After several additional months of negotiations with Sycamore, Essendant announced on September 10, 2018, that it had accepted Sycamore's bid, which had been increased to $12.80 per share.[40] Essendant's stock price closed at $12.84 that day, down from $14.25 the day before.[41] It continued to drop the following day, closing at $12.65 on September 11.[42]

         Upon termination of the Agreement on September 14, 2018, Essendant paid, and GPC accepted, the $12 million Termination Fee.[43] Essendant informed GPC that it had determined Sycamore's proposal was superior after discovering, among other information, documents from Essendant employees indicating that GPC was considered an Essendant competitor, thereby increasing the antitrust risks associated with the SPR merger.[44] According to GPC, the parties expected these kinds of documents to surface and anticipated the transaction would receive antitrust approval anyway, particularly given the positive feedback from customers and antitrust enforcement agencies.[45]

         F. Procedural Posture

         GPC filed its Complaint on October 10, 2018, alleging breach of contract for Essendant's engagement in ongoing discussions with Sycamore, its termination of the Agreement based on an inferior proposal, its failure to require Sycamore to enter a confidentiality agreement with terms at least as restrictive as those in GPC's confidentiality agreement and, finally, its failure to exercise reasonable best efforts to close the merger with SPR. Defendant moved to dismiss on November 5, 2019, under Rule 12(b)(6), on grounds that the Termination Fee is the sole remedy under the Agreement and GPC has failed adequately to plead breach of contract.[46]

         II. ANALYSIS

         In considering a motion to dismiss under Court of Chancery Rule 12(b)(6), the Court applies a well-settled standard:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are 'well-pleaded' if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.[47]

         Generally, the Court may address issues involving contract interpretation on a motion to dismiss "[w]hen the language of a contract is plain and unambiguous."[48] In this regard, the parties' disagreement as to the meaning or proper construction of contract provisions does not render the contract ambiguous.[49] Rather, ambiguity arises only "when the provisions in controversy are reasonably or fairly susceptible to different interpretations or may have two or more different meanings."[50]

         A. GPC Has Adequately Pled the Termination Fee Is Not the Exclusive Remedy for Termination

         As is typical in disputes arising from complex integrated contracts, the parties' competing constructions of the Agreement beckon a whistle-stop tour through several of its interconnected provisions. Most important to Defendant's motion is Section 9.03(e), which provides, in part, "notwithstanding anything in this Agreement to the contrary (including Section 9.02), in the event the Termination Fee is paid in accordance with this Section 9.03, the payment of the Termination Fee shall be the sole and exclusive remedy of GPC[.]"[51] Essendant terminated the Agreement under Section 9.01(g); therefore, it purported to pay the Termination Fee "in accordance with" Section 9.03(a)(ii).[52]

         As noted, Section 9.03(a)(ii) contemplates termination of the Agreement "pursuant to" Section 9.01(g), meaning "in conformity with" that provision.[53]Section 9.01(g) permits Essendant to terminate the Agreement "to enter into a definitive agreement with respect to a Superior Proposal to the extent permitted by, and subject to the applicable terms and conditions of, Section 7.03(d)(ii)[.]"[54] Section 7.03(d)(ii), in turn, allows for termination under Section 9.01(g) if, "in response to the receipt of an offer or proposal with respect to a Competing [Essendant] Transaction that did not arise from any material breach of Section 7.03(a), the [Essendant] Board determines in its good faith judgment . . . that such offer or proposal constitutes a Superior Proposal[.]"[55] Finally, Section 7.03(a) contains the Non-Solicitation Provision.[56]

         GPC argues that for Section 9.03(e)'s "sole and exclusive" language to apply, Essendant must follow the contractually-sequenced path outlined above. That is, Essendant must pay the Termination Fee "in accordance with Section 9.03," which requires terminating "pursuant to Section 9.01(g)," which entails meeting the requirements of Section 7.03(d)(ii).[57] Finally, GPC argues, Section 7.03(d)(ii) allows for termination only in response to a competing transaction that: (i) did not arise from a material breach of 7.03(a), and (ii) the Essendant board properly determined to constitute a Superior Proposal.

         Essendant argues GPC's construction attaches layers to Section 9.03(e)'s exclusive remedy provision that are not justified by its clear and unambiguous terms. By Essendant's lights, once GPC accepted the Termination Fee, it may not recover beyond that fee because it has acknowledged the fee was paid "in accordance" with Section 9.03 as required by Section 9.03(e). In this regard, Essendant does not take issue with GPC that Section 9.03(e) applies only to the extent Essendant has complied with Section 9.03(a)(ii), Section 9.01(g) and its related provisions.[58] But Essendant insists that GPC's acceptance of the Termination Fee precludes any argument that Essendant somehow failed to act "in accordance with" those provisions.

         In support of its position, Essendant cites Cirrus Holding Co. v. Cirrus Industries, Inc., where this court determined on a motion for preliminary injunction that a losing bidder was unlikely to get specific performance beyond the termination fee based on an argument that the target company breached a stock purchase agreement.[59] The court rested its conclusion, in part, on "unusually stringent provisions making receipt of [the termination fee] exclusive of other legal or equitable remedies."[60] As Essendant points out, the language of the exclusive remedy provision at issue in Cirrus (Section 11.5) was quite similar to Section 9.03(e) in the Agreement:

In the event the Cirrus Termination fee is paid to Purchaser pursuant to Section 11.3, such payment shall be the exclusive remedy at law of Purchaser, and Purchaser shall not be entitled to any further or other rights, claims or remedies at law all of which further rights, claims and remedies Purchaser irrevocably waives . . . .[61]

         Where Cirrus departs from this case, however, is in the language of the provisions incorporated by reference in that agreement's termination fee provision. To terminate "pursuant to Section 11.3," the termination notice had to be effective under Section 11.1.7, which, in turn, was satisfied "if Cirrus consummates an Alternative Transaction."[62] That the language in Section 11.1.7 was otherwise unconditional was important to Vice Chancellor Lamb's decision. Indeed, the court rejected plaintiff's argument that the court "should read into Section 11.1.7 words to the effect that any Alternative Transaction that is the predicate for a notice of termination under that section did not result from a breach of the SPA and, in particular, the lock-up provisions of Section 7.3.1."[63]

         In contrast to the language in Section 11.1.7, the Agreement's comparable provision, Section 9.01(g), provides that Essendant may terminate "to enter into a definitive agreement with respect to a Superior Proposal to the extent permitted by and subject to the applicable terms and conditions of, Section 7.03(d)(ii)[.]"[64] In other words, Section 9.01(g) contains, in essence, the condition that Cirrus found was missing in the comparable provision at issue there. Thus, while Section 9.03(e) appears at first glance to dictate the same result as in Cirrus, a comparison of the related provisions makes clear that, unlike in Cirrus, there is room in Section 9.03(e) for GPC to argue that the exclusive remedy provision does not apply because: (i) there was no Superior Proposal;[65] and, if there was one, (ii) it resulted from a material breach of the Agreement.[66] This is the only reasonable construction of the operative terms of the Agreement.

         B. GPC Has Not Waived Its ...


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