NACCO Sues Applica

On December 22, the Chancery Court in Delaware denied a motion to dismiss in the matter of NACCO Industries v. Applica Inc., a lawsuit arising out of a takeover battle in 2006.

What underlies this lawsuit is a classic "white knight" situation. The executives at Applica, an appliance firm which markets under the Black & Decker brand, weren't at all happy at the prospect of being taken over by NACCO. But another suitor, Harbinger Capital Partners, appeared more likely to let these executives keep their job. So (these unproven allegations run), some of the executives at NACCO passed nonpublic information to a consultant working for Harbinger. Harbinger then alegedly used that information to craft disclosure documents of its own that helped sink the deal.

Eventually (this part is not allegation, but public fact), Harbinger won the bidding war and combined Applica with another appliance company it controls, Salton Inc.

The whole opinion is available here, but to my mind, the most intriguing of the counts in the lawsuit is the allegation of tortious interference with contract, pp. 57-60.

There are five common-law elements for such a claim: (1) a contract, (2) a third party's knowledge of this contract, (3) an intentional act by that third party, (4) that act must be without justification and (5) it must cause damage.

The court said that there could be "no meaningful dispute" about either of the first two elements, and that in earlier sections of the opinion (dealing with breach of contract) he had setled the fifth, on the face of the complaint, in the plaintiff's favor. So what was unique to the tort claim was the dispute over elements (3) and (4).

The Court of Chancery found that the complaint satisfied these points, as well, by alleging that "Harbinger ... obtained an unfair advantage over NACCO by accumulating a large stock position based on false disclosures. Because of Harbinger's actioons, NACCO did not receive the full benefit of the contractual protections that NACCO bargained for...."

As merger-and-acquisitions activity revives from its recent dormancy, many are the market participants who will want to study this decision.