## Facts

- Capital Re, a Delaware specialty reinsurance company, explored strategic alternatives and received a $75 million investment from ACE, resulting in ACE owning about 12.3% of Capital Re’s common stock.
- On June 10, 1999, ACE and Capital Re entered a stock-for-stock merger agreement providing 0.6 shares of ACE for each Capital Re share.
- ACE also obtained voting agreements with Capital Re stockholders holding about 33.5% of the shares, giving ACE influence over roughly 45.8% of the vote when combined with its existing stake.
- The merger agreement included a no-talk clause restricting Capital Re from soliciting or engaging with competing bids, with an exception conditioned on board determinations tied to fiduciary duties, confidentiality, and notice to ACE.
- The agreement also included a termination mechanism allowing Capital Re to terminate to accept a superior proposal, subject to conditions including a termination fee.
- After signing, ACE’s stock price declined, reducing the merger’s value to Capital Re stockholders.
- XL Capital made a higher all-cash offer that Capital Re’s board viewed as financially superior, and the board began moving toward accepting it.
- ACE sought a temporary restraining order to prevent Capital Re from terminating the merger agreement and from pursuing XL’s offer, arguing Capital Re breached the no-talk provision by engaging XL without first obtaining written advice from outside counsel.

## Issues

1. Whether ACE showed a likelihood of success that Capital Re breached the merger agreement’s no-talk and related provisions by engaging with XL and moving toward termination.
2. Whether ACE’s strict construction of the no-talk clause would be unenforceable because it would improperly restrict the board’s ability to satisfy fiduciary duties in a sale-of-control setting.
3. Whether the TRO factors, including irreparable harm and the balance of equities, justified restraining Capital Re from pursuing the higher XL bid.

## Decision

- The Court of Chancery denied ACE’s motion for a temporary restraining order.
- The court found Capital Re’s reading of the agreement more plausible and concluded ACE failed to demonstrate a sufficient likelihood of success on the merits.
- The court reasoned that enforcing ACE’s interpretation would likely render the no-talk restriction invalid because Delaware law does not permit directors to contract away fiduciary obligations.
- The court held the balance of harms favored allowing Capital Re’s board to proceed toward a financially superior transaction for stockholders.

## Legal Principles

- Deal-protection provisions, including no-talk clauses, are construed and enforced consistently with directors’ continuing fiduciary duties, particularly the duty to seek the highest value reasonably attainable in a sale-of-control context.
- Courts generally prefer contract interpretations that preserve the board’s ability to evaluate and act on superior proposals when the agreement includes a fiduciary-out mechanism.
- Extraordinary injunctive relief in merger disputes requires a strong showing of likely success and equitable need; where an injunction risks depriving stockholders of a materially better offer, equitable balancing weighs heavily against restraint absent a clear contractual breach.

## Conclusion

The court refused to enjoin Capital Re from pursuing a superior all-cash bid, interpreting the merger agreement’s no-talk and fiduciary-out provisions to allow the board to respond to better offers in line with Delaware fiduciary-duty constraints and finding that stockholder harm from blocking the higher bid outweighed ACE’s claimed injury.


Ace Ltd. v. Capital Re Corp., 747 A.2d 95 (Del. Ch. 2000)