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WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C.: Court of Chancery Makes Clear that a Fiduciary Out Is Not Required so Long as There Was No Breach of Fiduciary Duty When Entering into the Contract

October 28, 2010

In WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C., C.A. No. 2993-VCS (Del. Ch. Sept. 17, 2010), the Court of Chancery made clear that if there is no violation of fiduciary duty when entering into an agreement not to solicit other offers, then the company is obligated to honor its commitment.

After a series of refinancings, Millennium Digital Media Systems, LLC’s (“Millennium”) creditors demanded that it sell assets in order to repay its debt. Millennium engaged in an open sales process, and, with the blessing of its secured creditors (the “Senior Lenders”) and holders of its high-yield senior increasing rate notes (the “IRN Holders”) (the only holders of Millennium securities that the Court indicated from which consents may have been required to effect an asset sale), Millennium executed an asset purchase agreement with WaveDivision Holdings LLC and Michigan Broadband LLC (collectively, “Wave”) for the sale of a certain cable system as well as a largely identical unit purchase agreement for the sale of certain other cable systems (collectively, the “Agreements”).

The Agreements contained no-solicitation and reasonable best efforts provisions that obligated Millennium not to shop for any alternative transaction and to use its reasonable best efforts to obtain the consents of the Senior Lenders and the IRN Holders to the sales contemplated by the Agreements. However, in the months following execution of the Agreements, Millennium actively continued to seek and negotiate refinancing alternatives, especially with the IRN Holders who would receive no debt repayment under a sale to Wave. In this regard, Millennium acted as an in-house banker for the IRN Holders, assisting them in analyzing an alternative refinancing plan in which Millennium would retain ownership of the cable systems instead of selling them to Wave. Further, Millennium retained an investment banker at its own expense to explore financing alternatives to the sale to Wave. As a result of these efforts, Millennium terminated the Agreements with Wave and executed refinancing and restructuring agreements that transferred ownership of Millennium to the IRN Holders.

In response, Wave filed a breach of contract action against Millennium alleging breach of the no-solicitation and reasonable best efforts provisions. The Court of Chancery rejected Millennium’s argument that its performance under the Agreements was excused because its lenders would not have consented to the sale under any circumstances. The Court held that Millennium could not rely on the failure of a condition to excuse its performance when its own conduct materially caused the condition’s failure. The Court also rejected Millennium’s attempt to “frame its unusual and duplicitous conduct in the months after signing the Agreements as an elaborate attempt to obtain the consent of its lenders.” The Court held that Millennium repeatedly breached the no-solicitation provisions in the Agreements, including by acting as an in-house banker for the IRN Holders and by retaining an investment banker to explore financing alternatives to the sale to Wave.

The Court also rejected Millennium’s argument that enforcing the no-solicitation provisions against it would cause its management committee to breach its fiduciary duties to its creditors. The Court found that this argument “makes no economic or legal sense” because the whole point of the Agreements was to sell the cable systems to pay off the creditors, as the creditors had themselves demanded. Further, “it remains the case that Delaware entities are free to enter into binding contracts without a fiduciary out so long as there was no breach of fiduciary duty involved when entering into the contract in the first place.” The Court also held that Millennium breached the reasonable best efforts provisions in the Agreements, citing Millennium’s “lax attitude” towards the consent process, lack of effort to obtain the necessary consents, and the fact that Millennium spent most of its energy and resources helping develop alternatives to the sale to Wave. Based on these breaches, the Court awarded Wave expectation damages in an amount equal to $14.8 million.