21 January 2015
Practice Groups:
Corporate/M&A
Securities and
Transactional
Litigation
The Delaware Chancery Court Awards Lump-Sum
Expectation Damages, Including Interest and
Attorneys Fees, in the Amount of $194,000,000 for
Breach of a Covenant to Negotiate in Good Faith in a
Merger Agreement
By Roger R. Crane and Peter N. Flocos
This Legal Insight updates our Legal Insight dated June 25, 2013, regarding the Delaware
Chancery Court case captioned PharmAthene, Inc. v. SIGA Technologies, Inc., Civ. Action
No. 2627-VCP, in which K&L Gates LLP serves as litigation counsel for PharmAthene. This
case involves a suit to enforce a provision in a merger agreement between PharmAthene
and Siga that required the parties to negotiate in good faith a license for an early-stage drug
developed by Siga in the event the merger did not take place. The merger, in fact, did not
take place, and PharmAthene sued Siga in the Delaware Chancery Court for breach of its
obligations to negotiate in good faith and sought either a license for the drug or damages.
After a trial and a decision dated September 22, 2011, Vice Chancellor Parsons declined to
require Siga to enter into a license agreement for the drug and found that lump-sum
damages were too speculative and instead awarded a cash flow amounting to 50 percent of
Siga’s net profits running for 10 years after the first sale of the drug.
On appeal, the Delaware Supreme Court 1 affirmed the Chancery Court’s decision that Siga
had negotiated in bad faith. The Supreme Court also found, for the first time, that under the
circumstances of this case a party could recover its expectancy damages for breach of
covenant to negotiate in good faith as long as the damages were not speculative, and
remanded the case for further proceedings.
Following a new trial on remand, Vice Chancellor Parsons, in decisions dated August 8,
2014 and January 7, 2015, found that PharmAthene should indeed be awarded “lump-sum”
expectancy damages. The judgment was entered on January 15, 2015, awarding
PharmAthene $194,000,000, representing the present value of expected future profits from
sales of the drug (as of the date of the breach), plus prejudgment interest and attorneys fees.
The Chancery Court based its decision on the Supreme Court’s decision, new evidence
introduced since the first trial that Siga had entered into a contract to sell the drug to the
federal government, and a finding that the award was not speculative under the
circumstances.
The key take-away: A plaintiff may not be limited to its out-of-pocket damages, but may, in
fact, be able to recover substantial expectation damages in the form of a lump-sum award for
the defendant’s breach of a promise to negotiate in good faith. This may be true even though
the subject matter of the negotiation is a new start-up (in PharmAthene, a start-up drug) and
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SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.2d 330 (Del. 2013).
The Delaware Chancery Court Awards Lump-Sum
Expectation Damages in the Amount of $194,000,000 for
Breach of a Covenant to Negotiate in Good Faith in a
Merger Agreement
even though the ultimate sale of the product does not take place until several years after the
breach. Of course, the result in any given case depends on the applicable facts and
circumstances.
Authors:
Roger R. Crane
roger.crane@klgates.com
+1.212.536.4064
Peter N. Flocos
peter.flocos@klgates.com
+1.212.536.4025
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