## Facts

- Pennaco Energy, Inc., a publicly traded oil and gas exploration and production company, decided to pursue a sale of the company.
- The board chose not to conduct a broad auction or market canvass and instead pursued sequential, private negotiations with a single bidder.
- Pennaco entered into a cash merger agreement with Marathon Oil Company that offered a substantial premium over Pennaco’s pre-announcement trading price.
- The merger agreement included a fiduciary out permitting the board to terminate to accept a superior proposal.
- The merger agreement included a termination fee of approximately 3% of Pennaco’s equity value if Pennaco terminated to accept a superior bid.
- Stockholder plaintiffs sued, alleging the board breached fiduciary duties under Revlon by failing to shop the company and by accepting deal protections that could deter higher bids.
- Plaintiffs sought a preliminary injunction to block or delay the merger pending further process changes.

## Issues

1. Whether the board likely breached its Revlon duties by negotiating a sale to a single bidder without a broad pre-signing market check and by agreeing to the challenged deal protections.
2. Whether plaintiffs satisfied the requirements for a preliminary injunction, including likelihood of success on the merits, irreparable harm, and a favorable balance of equities.

## Decision

- The Court of Chancery denied the motion for a preliminary injunction.
- Plaintiffs failed to show a reasonable probability of success that the board’s process violated Revlon.
- The court found the fiduciary out and approximately 3% termination fee were not shown to be preclusive or coercive and did not foreclose competing bids.
- The absence of an identified topping bid or evidence that deal terms actually deterred bidders weighed against injunctive relief.
- The availability of post-closing monetary damages and the risk of depriving stockholders of a premium offer weighed against an injunction and favored allowing the stockholder vote to proceed.

## Legal Principles

- Revlon requires directors, in a sale-of-control setting, to seek the best value reasonably available; it does not mandate a single, prescribed sale method such as a formal auction in every case.
- A board may reasonably negotiate with one bidder where the decision is informed and directed toward obtaining the best value reasonably available under the circumstances.
- Deal protections are evaluated for whether they are coercive or preclusive; a fiduciary out coupled with a termination fee in a customary range (around 3%) is generally not preclusive absent additional facts.
- Preliminary injunctive relief requires a showing of (1) reasonable probability of success on the merits, (2) irreparable harm, and (3) that the balance of equities favors an injunction.
- Where damages may provide an adequate remedy and no concrete superior proposal is shown, courts are less likely to enjoin a premium merger before a stockholder vote.

## Conclusion

The court refused to halt Pennaco’s premium cash sale to Marathon because plaintiffs did not show that Revlon required a broader pre-signing market check on these facts or that the fiduciary out and modest termination fee foreclosed higher bids, and the injunction factors favored letting stockholders decide while preserving potential damages remedies.


In re Pennaco Energy S'holders Litig., 2001 Del. Ch. LEXIS 19 (Del. Ch. Feb. 8, 2001)