Florida Companies Governed by Delaware Law: Duty of Good Faith While Negotiating Term Sheets

This post is actually a follow up to my last blog post but with a special shift in focus to Delaware law.  Whereas my last post focused more on Florida companies governed by Florida law, this post is devoted to Florida companies that are negotiating term sheets, and that have elected to be governed by Delaware law – either at all times through company organizational documents or for a specific transaction using choice of law election provisions within a term sheet for a specific transaction. 

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Non-surprisingly, Delaware law comes up quite a bit even in Florida corporate law, because clients often consider whether to incorporate in Florida or Delaware (check this out if you’re currently weighing your options on Florida vs. Delaware for incorporation), or because Florida rule makers often look to Delaware law when creating Florida laws, such as the Florida Business Corporation Act or the Florida LLC Act.

Florida companies and Florida rule makers look to Delaware law because of its business friendly approach, a very developed business law framework (court case decisions and its General Corporation Law), and the certainty these factors ultimately provide in support of business operations.

Okay, so let’s dive in. To recap, it is the law in a number of other states, including Delaware, that a signed term sheet, which may be considered as a non-binding preliminary agreement (and therefore not binding with respect to the proposed transaction), still nonetheless obligates the parties to negotiate in good faith towards that objective of the proposed transaction. Interestingly, in Delaware and the other jurisdictions that take this approach, this may even be implied when the preliminary agreement does not explicitly contain any explicit reference to this good faith obligation to negotiate. Under this rationale, the term sheet creates an obligation to negotiate in good faith within the general framework provided by the document.

In Delaware, and other jurisdictions where such a duty exists, the remedy for a breach of the duty to negotiate in good faith has historically been reliance damages, which includes recovery of the non-breaching party’s costs incurred while negotiating due to acting in reliance on the perceived good faith of the other party. Notably, the Delaware Supreme Court, however, has ruled that under Delaware law, if the parties would have reached a definitive agreement but for the bad faith of the breaching party, the non-breaching party may recover contract expectation damages: an amount equal to the value that it could have reasonably expected to receive under a definitive agreement having those terms set forth in the term sheet. See, e.g. SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013).

**** This article is for educational purposes only and to provide a general understanding of the law, not to provide specific legal advice. By reading this blog post you understand that there is no attorney client relationship between you and TLA LAW. This blog or any article on the website should not be used as a substitute for obtaining competent personalized legal advice from a licensed attorney in your state.