Seller’s remorse leads to breach of agreement to negotiate in good faith, and in turn to $113MM damage award against it

Last week’s SIGA v. PharmAthene case provides a reminder that an agreement to negotiate in good faith might well be enforceable, and that breaching the agreement could be expensive:

• SIGA, the financially-troubled developer of an experimental smallpox drug, needed cash.
• The drug developer approached a potential rescuer, PharmAthene, about merging.
• The parties signed a detailed, non-binding term sheet in which the drug developer and its rescuer would enter into a “partnership”; in that partnership, the drug developer would eventually merge with the rescuer — but not before first licensing the smallpox drug to the rescuer (because the parties’ previous merger discussions had been unsuccessful).
• To provide the drug developer with some much-needed immediate cash, the parties also signed a separate bridge-loan agreement. Among other things, that agreement obligated the parties to negotiate in good faith a license agreement, in accordance with the detailed economic provisions set forth in the term sheet, if the merger agreement were to be terminated.
• The parties then turned their attention to the merger agreement itself; they eventually negotiated and signed the formal merger agreement, which likewise included an obligation to negotiate the license agreement in good faith if the merger failed to go through.
• After that, though, the drug developer got several items of good news: It was awarded a substantial financial grant from the National Institute of Allergy and Infectious Disease; its initial clinical trials of its new smallpox drug went very well; and it received a sizable contract from the National Institutes of Health, one rich enough to fund future development of the smallpox drug.
• The drug developer, concluding that it no longer needed to be rescued after all, terminated the merger agreement with its would-be rescuer. (The merger agreement gave the drug developer a termination right because the merger had not been completed on or before a drop-dead date, due to the SEC’s delay in approving a proxy statement.)
• The jilted rescuer informed the drug developer that the rescuer was ready to sign a license agreement for the new smallpox drug in accordance with the economic provisions of the now-abandoned term sheet.
• The drug developer, though, insisted on drastically re-trading the economics of the deal. (The ingrates ….)
• The rescuer sued the drug developer for breach of its contractual commitment to negotiate a license agreement for the new smallpox drug in good faith.

So what happened? Last week, the Delaware supreme court affirmed the Chancery Court’s award of $113 million against the drug developer for breach of its obligation to negotiate the license agreement in good faith. See SIGA Technologies, Inc. v. PharmaThene, Inc., No. 2627-VCP (Del. Dec. 23, 2015).