Private Equity

The Delaware Supreme Court recently reminded us in SIGA Technologies Inc. v. PharmAthene, Inc., that “non-binding” term sheets may be more binding than the parties to a term sheet realize.  In SIGA, the court ruled that a party to a term sheet could recover expectation damages (damages to compensate for a party’s lost “benefit of the bargain”) upon a counterparty’s failure to negotiate a transaction in good faith, even if the term sheet describing the transaction was “non-binding” on its face.

The facts and circumstances surrounding the court’s decision to award the plaintiff expectation damages in SIGA very heavily favored the plaintiff.  This means that expectation damages may not be available to plaintiffs in the majority of cases involving failed negotiations.

• External Obligations to Negotiate. In SIGA, even though the term sheet itself was labeled as “non-binding,” it was attached as an exhibit to other documents where the parties agreed to negotiate pursuant to the term sheet in good faith. This created external obligations to negotiate pursuant to the term sheet.
• Defendant Already Advantaged by Negotiations. In SIGA, the defendant already received benefits of negotiating with the plaintiff (i.e., the plaintiff made a loan to the defendant while the parties were negotiating pursuant to the term sheet), and then the defendant thereafter tried to change previously agreed terms.
• Economic Conditions Favoring Renegotiations. In SIGA, economic conditions changed drastically in favor of the defendant, disincentivizing good faith negotiations.
• Evidence of Regret. In SIGA, the defendant made internal communications indicating it regretted entering negotiations, and the defendant also made an external statement to the plaintiff that there would be “nothing to talk about” if alternative terms were not acceptable.
• Likelihood of Agreement. In SIGA, the court found that, except for the defendant’s bad faith negotiations, the parties would have reached an agreement.
• Reasonable Certainty of Lost Profits. In SIGA, the court found there was reasonable certainty of the existence of the plaintiff’s lost profits (note: the court did not require a finding of reasonable certainty of the amount of lost profits).  In light of the SIGA decision, parties negotiating a transaction should consider the following practical tips regarding term sheets and letters of intent:

Courts adjudicating cases involving failures to negotiate in good faith may consider the following factors: (1) the magnitude of intent regarding a party’s breach of the obligation to negotiate in good faith (internal and external communications may be considered as evidence of intent), (2) the specificity of the terms in the term sheet and (3) the precision by which lost profits can be expected.

In light of the SIGA decision, parties negotiating a transaction should consider the following practical tips regarding term sheets and letters of intent:

• Clearly State Parties’ Intentions. If a term sheet is intended to be non-binding, and the parties intend no obligation to negotiate a definitive document pursuant to its terms, that fact should be obviously stated.  Parties should also consider whether to expressly disclaim an obligation to negotiate in good faith.
• Limit the Types of Damages. To prevent a court from awarding expectation damages, parties can specify in their term sheet that only certain types of damages (i.e., expenses incurred or liquidated damages) are available for breach of the term sheet.
• Consider Whether You Need A Term Sheet. Given that a court may award expectation damages if negotiations pursuant to a term sheet fail, if quick timing is not required, it may benefit the parties to skip the term sheet and go straight to definitive documents.
• Make the Transaction Conditional. To further evidence the non-binding nature of the term sheet, the definitive documents can be conditioned on board or investment committee approval, satisfactory due diligence, or other objective factors which can impede a court from finding that “but for” bad faith negotiations, a deal would have been reached.