A Delaware court on Sept. 9 denied Essendant’s motion to dismiss breach-of-contract claims filed by Genuine Parts, which had expected to merge S.P. Richards with its distribution rival Essendant last year. The decision to deny Essendant’s motion to dismiss, made by the Court of Chancery in Georgetown, Delaware, revived a legal battle that started last year when Essendant terminated its merger agreement with GPC to accept what the Essendant board determined was a better deal to be acquired by Sycamore Partners, a private equity firm that owns office supplies merchant Staples Inc.
Sycamore acquired Essendant last year in a deal valued at close to $1 billion. Essendant, which sells to thousands of other distributors and resellers and reported $5 billion 2017 revenue before the acquisition, now cooperates with Staples in serving the office supplies and related markets. GPC, a diversified distributor of automotive, industrial and business products, reported 2018 revenue of nearly $19 billion.
But while Essendant and GPC have moved on with new growth strategies, including through multiple B2B ecommerce operations, their legal fight over their aborted merger plan lingers on.
Why the court sided with GPC
In denying Essendant’s motion, the court sided with GPC in its contention that Essendant failed to meet its contractual obligations by simply paying GPC a $12 million merger termination fee, which Essendant contended met its contractual responsibility. GPC asserted that the termination fee was not only inadequate compensation, but that Essendant was liable for breaching other contract terms, most notably a “non-solicitation” provision.
The court this week said that the merger agreement did “not clearly and unambiguously provide that GPC’s remedy is limited to recovery of the termination fee in circumstances where, as here, GPC has well-pled that Essendant breached the agreement’s non-solicitation provision,” Joseph R. Slights, vice chancellor of the Court of Chancery, wrote in his memorandum opinion, according to a transcript on the court’s website. “Accordingly, Essendant’s motion must be denied.”
“I see no basis to conclude that GPC’s acceptance of the termination fee precludes it from pursuing breach of contract claims as a matter of law,” Slights also wrote, adding: “Essendant does not cite any provision of the agreement that prevents GPC from both accepting the termination fee and pursuing its breach-of-contract claims.”
The court, which laid out the interactions Essendant had with Sycamore before and after Essendant signed the April 12, 2018, merger agreement with GPC, accepted GPC’s argument that Essendant acted outside of a contract section designed to block Essendant from pursuing a competing transaction. “GPC has adequately alleged enough in total from which I can infer that Essendant, at least indirectly, encouraged or facilitated a proposal with respect to a competing transaction,” Slights wrote.
Efforts to get comments from Essendant, Staples and Genuine Parts were unsuccessful.
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