Delaware Court of Chancery Draws a Line on Release Conditions in M&A

In a recent post-trial decision, the Delaware Court of Chancery held that a corporation breached its certificate of incorporation by conditioning payment of merger consideration on a stockholder’s execution of a joinder agreement that included a broad release of claims. The court held that the stockholder’s damages were limited to the merger consideration payable under the merger agreement and that prejudgment interest was owed as a matter of right. The decision is a useful reminder for deal lawyers that merger consideration generally should not be used as leverage to obtain a release unless the release is properly supported and enforceable.

The Release Condition That Broke the Deal

The case arose from OnSolve’s 2017 acquisition of SWN Communications Inc. for $250 million. The merger agreement provided that SWN stockholders would receive cash consideration, subject to deductions for items, including closing-date debt, acquisition expenses, escrow amounts, and representative expenses. It also provided that OnSolve would not pay merger consideration unless and until eligible stockholders delivered several items: stock certificates, a letter of transmittal, a Form W-9, and, as most relevant here, an executed Joinder, Indemnification, and Release Agreement.

The joinder agreement included a waiver of appraisal rights, a covenant not to transfer SWN shares before the merger’s effective date, and a broad release of claims against SWN, OnSolve, and the merger sub “from the beginning of time” through the merger’s effective date.

Plaintiff was a common stockholder of SWN. He initially demanded appraisal for his shares, then timely withdrew that demand after the merger closed. After the withdrawal, SWN did not pay plaintiff the merger consideration because he had not delivered the required documents, including the joinder agreement. Several years later, plaintiff demanded payment and objected to the requirement that he execute the release. OnSolve responded by tendering a check for what it believed was the amount due, but it refused to pay interest.

Litigation followed, and the Court of Chancery ultimately held that OnSolve breached the certificate of incorporation by conditioning payment of the merger consideration on plaintiff’s execution of the joinder agreement. Under Section 262(e) of the DGCL, which the court treated as incorporated into SWN’s certificate of incorporation, a stockholder who timely withdraws an appraisal demand may accept the merger consideration. And the court invoked prior Delaware authority holding that a stockholder cannot be forced to provide a release as a condition to receiving merger consideration where the release is not separately supported by consideration. OnSolve ultimately conceded that it could not compel plaintiff to sign the joinder agreement as a condition to payment.

The Merger Agreement Still Governed the Amount of Damages

Although plaintiff prevailed on breach, the Court of Chancery rejected his attempt to recover more than the merger agreement provided. Plaintiff argued that because he had not consented to the merger agreement and had pursued appraisal before withdrawing his demand, he should receive his pro rata share of the full $250 million purchase price without deductions for management bonuses and escrow-related amounts.

The court disagreed and held that the merger agreement governed the amount of merger consideration payable to plaintiff, just as it governed the amount payable to other SWN common stockholders. The certificate entitled plaintiff to receive the merger consideration after he withdrew his appraisal demand, but it did not entitle him to a better deal than other common stockholders. The court reasoned that accepting plaintiff’s theory would create a windfall where stockholders could demand appraisal, withdraw the demand, and then seek more favorable payment terms than the merger agreement provided.

Prejudgment Interest Was Owed as of Right

The Court of Chancery also awarded prejudgment interest. OnSolve argued that interest should be denied because plaintiff waited years to demand payment and could have received the merger consideration earlier had he acted with ordinary diligence. The court rejected that argument, explaining that prejudgment interest is awarded as a matter of right when plaintiff prevails on a breach of contract claim.

The court did, however, account for plaintiff’s delay when setting the form and interest rate. It awarded simple interest, rather than compound interest, at the legal rate in effect when payment became due, citing plaintiff’s delay in pressing his claims, extended periods of inactivity, and litigation conduct that did not materially narrow the issues.

Practical Takeaways

• Consider whether separate consideration is needed. If non-consenting stockholders are being asked to give up claims after closing, parties should assess whether the release is supported by separate consideration, like an additional cash payment, participation in a separate settlement, or another bargained-for benefit.
• Payment delays can create interest exposure. Even where the amount owed is not large, withholding merger consideration can create exposure to prejudgment interest. The court retains discretion over the rate and compounding, but not over whether a prevailing breach-of-contract plaintiff receives interest.

To read the full opinion, click here.

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