Private Equity

There persists a myth among the uninformed that oral contracts are unenforceable.  The truth is, however, that unless the applicable statute of frauds requires a particular agreement to be in writing, a written agreement is simply the means of evidencing the terms of the parties’ contract to thereby avoid later disagreements about what those terms were.  Once reduced to a written agreement, of course, that written agreement is the parties’ contract and, as a general rule, the terms memorialized in that agreement cannot be contradicted by testimony of other or different oral understandings respecting the subject matter of that agreement.  But “‘the fact that the parties to an oral agreement manifest an intention to prepare and adopt  a written memorial’ will not prevent contract formation if evidence reveals ‘[m]anifestations of assent that are in themselves sufficient to conclude a contract.’”^[1]  Thus, in the absence of an agreement required to be in writing by the statute of frauds, simply manifesting an intent to later document a deal in writing that has otherwise been made orally, will not render that otherwise concluded oral contract unenforceable just because that anticipated more formal written agreement is never signed.

This is not the first time we have been reminded of these truths.  Indeed, the efficacy of oral agreements in general and the limited exceptions provided by the statute of frauds was discussed in a recent post to Weil’s Global Private Equity Insights blog regarding an alleged oral agreement arising from a discussion in a London pub involving “five guys and a barman.”^[2]  And another recent post to Weil’s Global Private Equity Insights blog reinforced the truth that an otherwise preliminary agreement containing all of the “essential” terms of a deal can become a definitive agreement notwithstanding the manifested intent that another more formal agreement is intended to be entered into.^[3]  But a recent Delaware Court of Chancery decision takes these basic truths about contract law a step further by ordering the specific enforcement of an oral settlement agreement respecting a proxy contest, requiring that two designated directors be added to a board.

Sarissa Capital Domestic Fund LP v. Innoviva, Inc., C.A. No. 2017-0309-JRS (Del Ch. Dec. 8, 2017) involved a proxy contest by activist shareholders of Innoviva intent on electing their proposed directors in lieu of the slate proposed by the existing Board.  As the shareholder meeting neared, the Board was advised by their proxy solicitors that the vote was “too close to call.”  The Board then specifically authorized one of its members, James Tyree, to try and reach a settlement with the activist shareholders (“Sarisssa”).  The settlement under discussion involved (a) the expansion of the Board from seven to nine members, (b) the appointment of two (rather than the proposed three) directors specified by Sarissa, and (c) a standstill restricting Sarissa, for a specified period, from making any tender or merger proposal, acquiring more than a specified percentage of Innoviva’s stock, or further engaging in proxy solicitation.  But Sarissa refused to agree to the standstill throughout the negotiations, while the Board continued to press for the standstill as a must have.  However, the Board was advised the day before the shareholder meeting that one of the two remaining large shareholders intended to vote in favor of Sarissa’s proposed slate of directors, and the assumption was that the other large shareholder was likely to follow suit.  The Board then dropped its demand for the standstill and authorized Tyree to communicate a settlement proposal that included only the expansion of the Board and the election of two of Sarissa’s nominees.  Tyree did just that by phone with Sarissa’s representative, who “confirmed they ‘had a deal’ and that they would leave it to others on their respective teams to prepare the ‘paperwork to get it done.’”  But no one on that call stated specifically “that the settlement was contingent upon the execution of the ‘paperwork.’”

The paperwork was then finalized (but not yet signed) and the press release nearly so, when the Board learned that the other large shareholder had surprisingly voted for the Board’s slate of directors.  With that vote in hand the Board no longer needed to settle with Sarissa and determined (over Tyree’s objection) to proceed with the shareholder’s meeting without honoring the deal Tyree had struck orally with Sarissa.  Tyree, for his part, later resigned from the Board.  Sarissa, of course, sued to specifically enforce the oral deal.  The Board’s view (sans Tyree) was that there was no deal unless and until it was “memorialized in an executed written agreement.”  And for good measure the Board also said that (a) “Tyree lacked authority to bind Innoviva to the alleged oral contract,” and (b) “[t]he parties had never reached a meeting of the minds on all materials terms of the settlement.”

The court had little trouble concluding that Tyree had both actual and apparent authority to enter into a settlement with Sarissa on the terms outlined in the phone call between Tyree and Sarissa’s representative.  The court also had little trouble concluding that the oral agreement made between the parties included all of the “essential” terms necessary to settle the proxy contest.  According to the court, the test for whether an agreement (oral or otherwise) includes all of the essential terms is “whether a reasonable negotiator in the position of one asserting the existence of a contract would have concluded, in that setting, that the agreement reached constituted agreement on all of the terms that the parties themselves regarded as essential and thus that that agreement concluded the negotiations.”^[4]

As to whether the oral agreement was contingent upon the execution of a written agreement, the court found that the evidence was clear that while the parties may have contemplated the execution of a written agreement following their oral agreement, they did not make the execution of such a written agreement an express condition to the binding effect of their oral agreement.  Under Delaware law, in fact, “[w]here a settlement agreement has been reached, `the fact, alone, that it was the [parties’] understanding that the contract should be formally drawn up and [executed], [does] not leave the transaction incomplete and without binding force, in the absence of a positive agreement that it should not be binding until so reduced to writing and formally executed.’”^[5]

And then finally, because “no sum of money damages would fully compensate Sarissa for its loss of the opportunity to secure representation on Innoviva’ s Board,” and because the terms to be enforced based on the oral agreement were “clear and definite,” the court ordered specific enforcement of that oral and binding agreement made by Tyree and the Sarissa’s representative by phone.  In concluding his decision, Vice Chancellor Slights describes the Board’s efforts to walk away from the deal struck with Sarissa as follows:

Here, with the clock ticking, Innoviva waited to solve its impending electoral drubbing until the last possible moment, just before the votes were to be counted. When it sensed that a loss would be announced at any moment, it did what it thought it had to do to manage the risk and keep its incumbents on the Board—it deliberately struck a deal with Sarissa at the 59th minute. Its efforts to walk away from that deal, after discovering that the risk it thought it perceived was not real, will not be countenanced.

So, absent the applicability of the statute of frauds (which can change everything), your word really is your bond (and under the right circumstances, it’s even specifically enforceable).