Nature of the Case
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Facts
Capital Re was in a capital crunch and was looking for a merger partner. Re talked with ACE, and as a result, ACE supplied them with $75 million in 1999 in exchange for newly issued Re shares which amounted to 12.3% of the company. Even with the extra monies, Re was downgraded by Moody’s. Re talked with ACE once more, and negotiations resulted in a merger agreement. Re stockholders were to get .6 of a share of ACE for each share of Re they held. The value of .6 of a share of ACE on June 10, 1999 was $17.00. When the Re board executed the merger agreement it knew that ACE held its 12.3% and had voting agreements with stockholders with another 33.5% of Re shares. ACE held 46% of the vote going into the merger. Both ACE and Re agreed that the merger would not result in a change of control of RE within the meaning of QVC. Even so, they both agreed that the merger was of great significance to Re stockholders as well as for ACE. There was a true bargaining process over whether the agreement and the terms under which the parties could terminate the merger. ACE wanted the strongest legally binding commitment they could get and Re new that the fiduciary out in the agreement was crucial if it was to protect its stockholders. ACE shareholder agreements were valid unless Re terminated the agreement. There was a no talk provision to prohibit Re’s key officials from soliciting other offers. The scope of this agreement restricted Re from participating in such discussions or even supplying information to third parties unless there was a good faith determination by the board that such a transaction was likely to result in a superior proposal, such discussions were required to prevent a breach of fiduciary duty, any competing offers entered into a confidentiality agreement, and notice was provided to ACE. Under another provision, Re had to give ACE notice of any superior agreements and gave ACE a first right of refusal, and if the agreement were terminated, Re would pay a $25 million fee to ACE. Once the agreement was announced, ACE stock fell to less than $10 per share. A day before the stockholder vote, XL Capital made an unsolicited offer to purchase the shares for $12.50 cash. Re convened an emergency meeting. Counsel told them entering into discussions with XL was consistent with their fiduciary duties. The board found itself duty bound to enter into discussions with XL and XL raised its offer to $13.00. Goldman Sachs gave Re advice that the XL offer was more advantageous than a merger. This was deemed a superior offer under the agreement unless ACE increased the consideration within 5 days. ACE increased to stock worth $13 per share and then XL increased to $14 all cash. Another termination notice was sent to ACE with ACE having five days to match. ACE did not match but filed suit. ACE argues that Re violated the agreement as it did not have written legal advice from outside counsel and Re contends that the agreement leaves outside negotiations open to the board’s own good faith.
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