January 28, 2010
In Global Asset Capital, LLC v. Rubicon US Reit, Inc., C.A. No. 5071-VCL (Del. Ch. Nov. 16, 2009), the Court of Chancery temporarily enjoined Rubicon US Reit, Inc. from engaging in activities that were alleged to have breached its obligations under a binding letter of intent. In so doing, the Court recognized that binding letters of intent create enforceable rights and emphasized that the Court will protect those rights.
In early 2009, Global Asset Capital, LLC (“Global”) made a bid to acquire twelve office buildings (the “Properties”) owned by Rubicon US Reit, Inc. (“Rubicon”). Global’s bid contemplated that the Properties would be sold through a Bankruptcy Court supervised auction, with Global acting as a “stalking horse” bidder. Both the bid and the parties’ agreement was contained in a letter of intent (the “LOI”) entered into by the parties on November 4, 2009. The LOI, among other things, (i) required Rubicon to negotiate in good faith to complete a “Plan Support Agreement” pursuant to which Rubicon would file for bankruptcy protection and move to have Global’s “stalking horse” bidder status, including a break-up fee, approved by the Bankruptcy Court; (ii) prohibited Rubicon from disclosing Global’s offer and any contemplated transaction without Global’s prior written consent; and (iii) prohibited Rubicon from soliciting or considering any other offers during the duration of the LOI. Shortly thereafter, Global filed suit against Rubicon alleging that Rubicon and its directors had breached, and were currently breaching, Rubicon’s binding obligations under the LOI by (i) disclosing the contents of the LOI to third parties without Global’s consent, and (ii) engaging in sale discussions with third parties regarding the Properties while declining to negotiate with Global. In its complaint, Global sought temporary, preliminary and permanent injunctive relief against Rubicon to prevent the ongoing and further breaches of the LOI, as well as specific performance of the terms of the LOI.
In evaluating Global’s motion for a temporary restraining order, the Court concluded that Global had presented a colorable claim that Rubicon had breached provisions of the LOI and that the LOI was sufficiently definite to give rise to rights on the part of Global. In so finding, the Court stated that it regarded letters of intent, as well as the duty to negotiate in good faith, as rights of commercial importance and rights that the Court would protect. In that regard, the Court pointed to the no-shop clause and the confidentiality provisions of the LOI as examples of provisions that were definite and specific so as to give rise to rights on the part of Global.
In considering the requisite demonstration of irreparable harm necessary for a temporary restraining order, the Court emphasized that parties enter into letters of intent for a specific purpose and that these documents create rights. The Court noted that to the extent that parties wish to enter into nonbinding letters of intent, they can do so by expressly stating that the agreement is to be nonbinding. In the dispute before it, the Court found that the exclusivity provision of the LOI was a unique right that deserved to be protected. To that end, the Court emphasized that an exclusivity provision is an opportunity, and as such it cannot readily be reconstructed, nor can it be remedied by money damages. In response to Rubicon’s argument that in the exercise of its fiduciary duties, it was entitled to walk away from the contract to pursue a potentially higher bid from a different constituency, the Court noted that a contract does not have an inherent fiduciary out; instead, a fiduciary out must be an aspect of the bargain. While equity will enjoin certain contractual provisions that have been entered into in breach of fiduciary duty, the Court stated that this did not give a board carte blanche to walk away from a contract simply because they are fiduciaries. The Court also noted that it did not believe there to be any inherent fiduciary out for the benefit of a corporation’s creditors in a contract.
The Court ultimately held that Global had made the requisite showing for a temporary restraining order. Accordingly, the Court enjoined Rubicon from: (i) disclosing any of the contents of the LOI without prior written consent, (ii) soliciting or entertaining any third-party offers involving any of the Properties, and (iii) asserting that the LOI had terminated. While the Court did not grant Global’s request for an affirmative injunction to require Rubicon to negotiate in good faith, the Court stressed that Rubicon had a contractual obligation to do so, and that “radio silence is not negotiating in good faith.” Finally, while the Court did not issue a mandatory injunction requiring Rubicon to file for bankruptcy, it made clear that if Rubicon determined to do so, it would do so with the LOI, and Global’s rights thereunder, intact.
On January 20, 2010, Rubicon filed for Bankruptcy Court protection and the litigation was subsequently dismissed by Global.