Delaware Supreme Court Holds that a Covenant to Negotiate in Good Faith Is Enforceable and that a Plaintiff May Receive Its Expectation Damages for Breach of the Covenant


As many of you know, we serve as litigation counsel for PharmAthene, which recently received a favorable Delaware Supreme Court decision in SIGA Technologies, Inc. v. PharmAthene, Inc., 2013 WL 2303303 (Del. Supr., May 24, 2013). This decision has generated a fair amount of buzz in the M&A community regarding good faith negotiations of LOIs and other preliminary agreements.

While the lawsuit, which started in December 2006, has us headed back to the Chancery Court on the issue of appropriate expectancy damages, we thought it would be helpful to share some of the issues resolved by the Court and some key take-aways for corporate lawyers to keep in mind:

The case involved a term sheet for a license that had a “non-binding” footer on both pages. The term sheet was subsequently attached to a bridge loan agreement and a merger agreement. Both agreements required the parties to negotiate in good faith a license for an early-stage drug in accordance with the terms of the term sheet. After a trial, the Court of Chancery held that this created an enforceable obligation and awarded PharmAthene 50% of the net profits for the sale of the drug for 10 years from the first sale. On appeal, the Supreme Court...

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