No chickening out.

• Author: KABACK, HOFFER
• Position: Contract law - Brief Article

When the Delaware court orders specific performance, boards should listen.

DELAWARE Vice Chancellor Leo Strine's mid-June 2001 decision ordering chicken giant Tyson Foods to close its acquisition of fresh meat company IBP Inc. merits attention.

Tyson claimed it had justifiably terminated its merger agreement with IBP because there had occurred events having a "material adverse effect" upon IBP's business; IBP had restated its (warranted) financials, thereby breaching that agreement; and IBP had "inappropriately induced" Tyson to enter into the agreement. The Vice Chancellor disagreed, concluding that it was Tyson that had breached.

His 146-page opinion contains extensive factual and legal exposition. I focus instead on these broader themes: (a) specific performance; (b) the court's references to Tyson's "constituencies"; (c) the notion of "benefit of the bargain" in the context of a takeover; and (d) lessons for directors.

Specific Performance and 'Constituencies'

Specific performance as a remedy in a breach of contract case is not usual. The opportunity involved in the contract must be "unique" and money damages inadequate.

The classic case for specific performance involves a contract to buy real estate. On the other hand, courts do not generally order persons specifically to perform contracted-for services; thus, a singer would not be compelled by court order to sing on a particular date at a particular hall. So, there is some asymmetry here.

In IBP, Vice Chancellor Strine went so far as to say that specific performance was "the decisively preferable remedy." He was influenced by the fact that the merger consideration consisted in part of Tyson securities; therefore, he concluded, unless he awarded specific performance, measuring damages sustained by IBP shareholders would be too difficult.

He also confessed that "the impact of a forced merger on constituencies beyond the stockholders and top managers of IBP and Tyson weighs heavily on my mind" (my emphasis). Thus, the Delaware Court of Chancery, more or less in passing, has here seemingly embraced some version of the notion that such "constituencies" possess a cognizable interest in a merger agreement involving business corporations. Indeed, the Vice Chancellor opined that "the Tyson constituencies would be better served on the whole by a specific performance remedy, rather than a large damages award that did nothing but cost Tyson a large amount of money" (my emphasis).

Benefit of the...