The Evolution of Court-ordered Mergers: an Equitable Remedy or a Marriage Made in Hell? - Brandon Grinsted

• Publication year: 2002

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The Evolution of Court-Ordered Mergers: An Equitable Remedy or a Marriage Made in

Hell?

I. Introduction

Contracts are a cornerstone of our society. Everyday, individuals enter into agreements whereby each agrees to assume obligations in return for some promise, property, or monetary payment. However, contractual obligations are not always fulfilled. In some cases, a party to a contract fails to fulfill his or her obligation(s) under the terms of the agreement thereby depriving the other party of expected benefits. A party failing to live up to his or her contractual obligations is regarded as having "breached" the contract in one form or another.

When a party breaches an agreement with another, the "injured" party may be entitled to a wide array of statutorily-defmed damages. Such damages may be awarded to the injured person to compensate for the alleged loss or to punish the breaching party. On the other hand, if the innocent party cannot be adequately compensated by an award of monetary damages, the court may force the breaching party to fulfill its contractual obligations. This remedial action is known as "specific performance."¹

An agreement between two companies to merge into a single entity is nothing more than a contract between parties. Each entity agrees to particular terms and conditions and each assumes particular responsibilities. Like any other contract, the parties are free to seek statutory damages in the event of a breach. Although monetary damages are frequently sought, the innocent party may also request contractual performance. If the court finds that the innocent party cannot be adequately compensated in monetary terms, the court may consider the equitable remedy of specific performance.² Although enforcing a breached agreement is consistent with remedial principles, it raises significant issues in the context of merger agreements. By enforcing a merger agreement, a court essentially compels companies to merge with each other. In contrast to the typical specific performance case, judicially enforced merger agreements necessarily affect the entities' respective constituents. Accordingly, courts should engage in a detailed analysis of the effects of the merger on these constituents. However, courts have simply overlooked the hostility that arises between two corporate entities during litigation and, in the name of equity, have forced a "marriage" between two competing companies. In doing so, the interests of the directors, officers, employees, and communities are not sufficiently taken into account.

The problems associated with compulsory mergers are readily apparent in IBP, Inc. v. Tyson Foods.³ In that case, the Delaware Court of Chancery determined that Tyson Foods had breached a merger agreement with IBP.⁴ Consequently, the court ordered Tyson to consummate its merger with IBP.⁵ The court acknowledged the dangers associated with a forced merger; however, the court ultimately rejected such risks as being "a reality of today's M & A market."⁶ In this Comment, the Author will explore the evolution and application of specific performance to merger agreements and will identify the problems and risks associated with these forced marriages. Finally, the Author will identify a possible solution that will, at least, mitigate the possible adverse consequences of court-ordered mergers.

A. Specific Performance: Its Origins and Application

Specific performance is an "equitable remedy of very ancient origin" that is granted as a substitute for legal remedies providing for monetary compensation.⁷ The purpose of specific performance is to bestow upon the innocent party the benefit he or she would have received if the other party had fully performed his or her contractual obligations.⁸ Therefore, the remedy is nothing more than a "means of compelling a party to do percisely what he ought to have done without being coerced by a court."⁹

Specific performance is a discretionary decree that is not intended to be liberally applied to all parties who find themselves betrayed by another party to a contract. Inadequacy of monetary damages is essential for a court to consider granting this relief.¹⁰ Consequently, in order for the plaintiff to successfully move the court to compel another party to perform his or her contractual obligations, the innocent party must generally prove three elements. First, the innocent party must show that a valid and enforceable contract exists.¹¹ Second, the party must prove substantial compliance under the specific terms of the contract.¹² Finally, and most importantly, the innocent party must convince the court that there is no adequate remedy at law.¹³ This last prong necessarily requires a showing that monetary damages cannot completely compensate the innocent party for the injuries resulting from the breached agreement.¹⁴

Inadequacy of monetary damages can be shown in one of two ways. First, specific performance may be awarded in those cases in which monetary damages are inadequate because of the unique, peculiar, or special nature of the contract's subject matter. In addition, inadequacy of monetary damages may be proven when they are impossible or extremely difficult to ascertain due to the peculiar nature of the injury.¹⁵

For example, in Laclede Gas Co. v. Amoco Oil Co.,¹⁶ the Court of Appeals for the Eighth Circuit enforced a contract between a supplier ("Amoco") and distributer ("Laclede") of propane gas based on the unique value of the service to Laclede.¹⁷ In that case, Laclede entered into a long-term contract with Amoco whereby Amoco agreed to provide a continuous supply of propane to Laclede's development sites. Amoco terminated the contract after a propane shortage, and Laclede moved the court to enforce the contract.¹⁸ After finding Amoco in breach of the agreement, the court ordered Amoco to perform its obligations under the contract.¹⁹ The court found that monetary damages were inadequate because the contract was inherently valuable to Laclede.²⁰ The court reasoned there was no assurance that Laclede would be able to secure another source of propane for the areas in question, and even if it were possible, the expenses associated with securing another contract could not be estimated in advance.²¹

Similarly, in Boeving v. Vandover,²² the Missouri Court of Appeals enforced a contract for the purchase of a new car after finding that the car in question was of significant value to the purchaser.²³ In that case, plaintiff contracted with defendant for the purchase and delivery of a new Buick. Rather than delivering the car to plaintiff, defendant sold it to another customer. The court found that plaintiff could not obtain another car of the kind and character contracted for without significant difficulty and delay because manufacturers simply could not produce enough cars to meet demand.²⁴ In addition, the expenses associated with finding a similar car could not be estimated with any degree of certainty.²⁵ As a result, the court found that plaintiff was entitled to specific performance of the purchase agreement.²⁶

As the above cases indicate, the application of specific performance depends upon the nature of the contract's subject matter. If the property is unique and of such inherent value that monetary valuation is impossible, courts are more likely to compel performance of the contract. In addition, if the innocent party's injury is of such unique character as to require mere speculation of damages, then application of specific performance is warranted.²⁷ Whether the property is capable of accurate valuation is an essential issue in contracts for the sale of securities. Such issues form the foundation for the evolution of judicially enforced merger agreements.

B. Contracts for the Sale of Securities

Whether a party is entitled to specific performance of a contract for the sale of securities almost exclusively depends upon whether the stock is private or public. The market value of stock issued by private or closely held companies cannot be obtained simply by looking to the stock market. Rather, one must look to the financial records of the company to determine the "book value" of such interests. In Hyer v. Richmond Traction Co.,²⁸ Justice Brewer described the difficulty with valuing public as opposed to private stock:

If stock has a recognized market value, courts will ordinarily leave the parties to their action at law for damages for breach of the agreement to sell, but in cases where the stock has no recognized market value, is not purchasable in the market, or has a value which is not settled, but is contingent upon the future workings of the corporation, equity will sometimes decree specific performance of a contract of purchase.²⁹

Because of the difficulty associated with valuation, courts have enforced contracts for the sale of private securities because valuation of such stock is difficult to ascertain. However, a decree of specific performance is not automatic; the plaintiff must show that he cannot be adequately compensated through the imposition of money damages.³⁰ In Bernier v. Griscom-Spencer Co. ,³¹ the court explained this burden by analogizing the sale of stock to the sale of sheep:

If [A] alleges that the sheep contracted and paid for are of a peculiar breed, of special character and value, and that B[.] has them, and that they cannot be obtained elsewhere or in the market or have no market value, or that value is fluctuating (possibly) or uncertain, equity would entertain the action and decree performance. Why? For the simple reason it is made to appear that A[.] has no full, complete, or adequate remedy at law.³²

In Bernier plaintiff executed a contract for the sale of twenty-thousand dollars worth of stock with defendant. Defendant allegedly failed to complete the transfer; however, plaintiff failed to request a decree of specific performance in his complaint. In addition, plaintiff neglected to show why damages could not be...