Brief Fact Summary. Plaintiff, ACE Limited, brought this action to enjoin Defendant, Capital Re Corporation, from terminating their merger agreement after a better offer was presented to Defendant.
Synopsis of Rule of Law. An acquisition agreement that denies the directors of a company the ability to carry out their fiduciary duty owed to shareholders to obtain the highest value for the shareholders is invalid.
That type of restriction is perfectly understandable, if not necessary, if good faith business transactions are to be encouraged.View Full Point of Law
Issue. The issue is whether Plaintiff is likely to prevail in proving that Defendant breached their merger agreement with Plaintiff once Defendant entered discussions with a third party for a proposed merger.
Held. The court held that Defendant would be the one to suffer irreparable harm if a restraining order was granted, and also was more likely to prevail than Plaintiff, and therefore the order was denied. The court interpreted the provision of the merger agreement that allowed for Defendant’s directors to cancel the agreement to allow for a cancellation in this case where there is a good faith judgment by the directors that they were obligated by their fiduciary duties to weight the other merger proposal. If the agreement did not allow for the directors to cancel the merger, then the agreement would be invalid as against Delaware law from preventing directors to carry out their duties to the shareholders to find the highest bid for the company’s shares.
Discussion. The court follows the rule outlined in Paramount Communications, Inc. v. QVC Network, Inc. which disallows an agreement that would contract away a board’s fiduciary duty obligations.