Blog: Agreements to Agree can be Broken: Negotiating Letters of Intent

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On December 23, 2015, the Delaware Supreme Court held that SIGA Technologies, Inc. cannot avoid paying $113 million in expectation damages (plus interest) to PharmAthene, Inc. for breaching an express agreement to negotiate a strategic license in good faith in accordance with terms set forth in a term sheet. The parties had expressly agreed to enter into the license agreement in a merger agreement, in the event that their proposed merger transaction failed.  In a separate opinion issued in 2013, the Court found that SIGA breached its express agreement when, after terminating the merger agreement at the end date when the conditions to closing had not been satisfied, it proposed terms that differed dramatically from those set forth in the term sheet with an improper motive after recent developments suggested that SIGA’s antiviral drug for the treatment of smallpox (ST-246) could be much more profitable than anticipated. In this decision, the Court specifically upheld the award of lump sum expectation damages, ruling that because PharmAthene demonstrated the fact of the breach and that there would be an injury (i.e. lost profits), coupled with the wrongful conduct, it did not need to establish the precise amount of damages to receive what it bargained for.  An unusual dissent to the opinion argued that only reliance damages should have been paid.

The SIGA decisions continue to have wide implications for companies considering strategic arrangements – particularly in the life sciences sector where companies are often seeking financial help or regulatory expertise for a drug in the developmental stages and the viability, safety, and efficacy of the drug is uncertain.  These arrangements are often complex and key business terms frequently need to be sketched out on a preliminary basis before all of the key terms are resolved.

Typically, these preliminary agreements are not attached to a merger agreement as an alternative deal if the merger fails.  Rather, they are usually negotiated at the start of a deal as a preliminary, non-binding letter of intent to proceed in good faith toward a final agreement. Agreements to negotiate in good faith may also be contained in non-disclosure agreements prior to commencing due diligence for a potential deal.

While the facts in this case were unusual (and the rulings highly fact-based), the case serves as a reminder that express agreements to negotiate in good faith are enforceable, binding commitments in Delaware and many other states and that the intent of the parties is the key. If there is an express agreement to agree to terms set forth in accordance with a term sheet, the parties may not, in bad faith, propose terms that are “substantially dissimilar” to those contained in the term sheet. The Court suggests that while disagreements over open terms may prevent a party from reaching a final agreement on those terms or on the contract as a whole, a party cannot propose terms that are substantially different from those that were already agreed to.  Those terms will serve as a binding guidepost and not merely a “jumping off point” for the negotiations.  Therefore, if parties expressly agree to negotiate in good faith, they must remember that they are losing the leverage to reopen the agreed upon terms even if the agreement on those terms was based on a party’s wrong assumption that the open terms would be resolved in a certain manner.

The case serves as a practice point that if a preliminary agreement is truly intended to be non-binding, it should include specific language to that effect. This may include language (in the body of the agreement) providing that the terms (or certain terms) set forth therein are included for discussion purposes only and are not binding on the parties. It may also provide that any terms (including economic, timing or other pricing terms), however detailed, are considered “open” and subject to renegotiation and shall have no binding effect on the terms of a definitive agreement or whether any specific term or agreement is reached at all.  If a definitive agreement is signed, a properly drafted integration clause should provide that the definitive agreement shall be the only agreement among the parties and supersedes any earlier contracts or understandings.

See SIGA Technologies v. PharmAthene (Del. December 23, 2015) (affirming expectation damages).

See SIGA Technologies v. PharmAthene (Del. May 24, 2013) (affirming liability).

See PharmAthene v. SIGA Technologies (Del. Ch. September 22, 2011) (on liability).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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