## Facts

- Pay Less Drug Stores, a public company, sought a merger partner and retained an investment bank to locate candidates.
- Jewel negotiated with Pay Less and the companies executed a written, board-approved merger agreement for a tax-free merger.
- The agreement obligated Pay Less to use best efforts to complete the merger and to avoid conflicting transactions outside the ordinary course.
- The merger’s consummation was expressly conditioned on approval by Pay Less shareholders.
- After the Jewel–Pay Less deal was announced, Northwest announced a competing tender offer for Pay Less stock at a higher price.
- The Pay Less board later unanimously recommended Northwest’s offer, entered into a merger agreement with Northwest, and Pay Less shareholders rejected the Jewel merger.
- Jewel ultimately tendered its Pay Less shares to Northwest and pursued damages claims for tortious interference with contract and with prospective economic advantage under California law.

## Issues

1. Whether an executed, board-approved merger agreement conditioned on shareholder approval is a valid, binding contract sufficient to support a tortious interference with contract claim.
2. Whether corporate directors’ fiduciary duties render such a merger agreement nonbinding as a matter of law.
3. Whether a competing bidder is categorically justified or privileged to induce abandonment of a merger agreement based on “free competition” in corporate control contests, defeating interference claims as a matter of law.

## Decision

- The court reversed summary judgment for Northwest and remanded.
- The executed, board-approved Jewel–Pay Less merger agreement was a valid and binding contract, with shareholder approval functioning as a condition precedent to performance rather than to contract formation.
- Directors’ fiduciary duties did not, as a matter of law, prevent Pay Less from entering a binding merger agreement.
- The court rejected a blanket rule that competing tender offers are automatically justified; whether Northwest’s conduct was improper or justified required a fact-specific inquiry.
- Jewel’s claims for interference with contract and interference with prospective economic advantage remained viable for further proceedings.

## Legal Principles

- A merger agreement executed and approved by corporate boards may constitute a binding contract even when consummation is conditioned on later shareholder approval; the condition typically goes to performance, not formation.
- Directors’ fiduciary duties do not automatically void or negate an otherwise valid merger contract; fiduciary constraints do not create a categorical bar to contractual commitment.
- California interference doctrine does not recognize a per se “competition privilege” immunizing a bidder that induces breach or disruption of a merger agreement; justification depends on context, including motive, means, and reasonableness, and often presents factual questions.
- A protectable expectancy supporting interference with prospective economic advantage may exist in a pending merger transaction, and competitive bidding alone does not automatically defeat the claim.

## Conclusion

The Ninth Circuit held that a board-approved merger agreement conditioned on shareholder approval can be a binding contract for interference purposes and that takeover competition does not create an automatic privilege to disrupt such agreements; the propriety of the bidder’s conduct must be evaluated under ordinary, fact-dependent interference standards.


Jewel Cos., Inc. v. Pay Less Drug Stores Nw., Inc., 741 F.2d 1555 (9th Cir. 1984)