Document: Clean Harbors, Inc. v. Safety-Kleen, Inc., C.A. No. 6117-VCP (Del. Ch. Dec. 9, 2011)
The Delaware Court of Chancery declined to dismiss plaintiff’s claim that defendant Safety-Kleen, Inc. (“Safety-Kleen”) breached a contractual obligation to make a good faith determination of the fair market value of its stock in connection with the exercise of a call right set forth in an option agreement. Plaintiff Clean Harbors, Inc. (“Clean Harbors”), a competitor of Safety-Kleen, acquired shares of Safety-Kleen subject to the call right from former Safety-Kleen employees, who held Safety-Kleen options, but did not have the funds to exercise the options before they expired. Clean Harbors financed the former employees’ exercise of the options and then bought the stock from the employees for $7.50 each, a small premium. However, only several hours after Clean Harbors closed its transaction with Safety-Kleen’s former employees, Safety-Kleen notified Clean Harbor that it was exercising a call right, under the option agreement, to purchase Clean Harbor’s shares at “fair market value,” which Safety-Kleen determined was $7.50—the same price Clean Harbors paid Safety Kleen’s former employees for their stock.
Clean Harbors alleged that Safety-Kleen breached a contractual obligation to pay it the “fair market price” of the stock and an explicit obligation, under the option agreement, to make such determination in “good faith.” Specifically, Clean Harbors argued that $7.50 was a submarket price that Safety-Kleen’s former employees accepted only because they had no other means of salvaging some of the value of their options. Clean Harbors also argued that the $7.50 price reflected a discount for the stock being subject to a call right. The Court found that Clean Harbor’s allegations were sufficient to support a finding that the fair market value of the stock at issue was substantially higher than $7.50, and (2) Safety-Kleen had acted in “bad faith” in setting the call price. While Safety-Kleen argued that a contractual “bad faith” claim required Clean Harbors to establish that Safety-Kleen’s conduct constituted subjective bad faith–i.e., that its conduct was motivated by an actual intent to cause harm, the Court disagreed. Specifically, the Court found that the complaint need only allege facts related to the alleged act taken in bad faith and a plausible motivation for it. Because Clean Harbors plausibly alleged that Safety-Kleen was motivated by a desire to deprive a competitor from the benefits of its bargain (which also likely satisfied the “subjective” bad faith standard), the Court declined to dismiss its complaint.