The Delaware Supreme Court thought so – even though most attorneys and business people, who regularly draft these documents know they’re always meant to be a non-binding expression of the major deal points to see if it makes sense to move forward with a deal and definitive, binding agreement. LOIs almost always state that they’re non-binding and courts in most jurisdictions seem to agree.
So what happened in the Delaware case SIGA Tech Inc. v PharmAthene, Inc. No 314, 2012, 67 A 3d 330 where the LOI was found binding is worth a close look. The parties in this case first entered into a non-binding licensing agreement term sheet (LATS) for a potential licensing deal, but PharmA insisted they explore a merger first. The parties then executed a Merger Agreement, which provided if the merger didn’t close by a certain date the parties would “negotiate in good faith with the intention of executing a definitive licensing agreement in accordance with the terms of the LATS”. The merger failed to close by the deadline. In a fortuitous turn of events for SIGA (but not so fortuitous in light of the high court’s later ruling), National Institutes of Health (NIH) agreed to provide significant funding for a new drug bumping the original valuation from $6mm to $40mm. SIGA refused to go forward with terms it earlier said were acceptable and PharmA, in turn, objected stating the terms were “radically different” from the LATS. SIGA then issued an ultimatum that PharmA negotiate “without any preconditions”. The lawsuit followed.
Even thought the LOI stated it was “non-binding” (most do to avoid potential claims and typically only state the major deal terms), the court found the language in the earlier License Agreement Term Sheet (LATS) incorporated into the merger agreement requiring negotiations “in good faith” compelling. The Delaware Supreme Court upheld the lower trial court’s decision that SIGA acted in bad faith. The Supreme Court went even further finding PharmA could recover “benefit of the bargain damages” (the value of the licensing agreement that would have been entered into but for bad faith) holding the parties were obligated to negotiate toward a license agreement on terms substantially similar if the merger wasn’t consummated. Great result for PharmA, not so much for SIGA.
The moral of the story? Draft carefully and include the most beneficial governing law provisions. LOIs have always been drafted and understood to be a non-binding first step to determine if parties want to move forward with a deal and definitive, binding agreement. What’s in the LOI and peripheral documents (here express good faith language or some other language a court may find binding and compelling enough to award damages) – must be carefully considered. Whether courts outside of Delaware may follow suit and what governing law provisions to include in the LOI must also be carefully considered.