DealLawyers.com Blog

Here’s news from Steve Haas of Hunton & Williams: In ev3, Inc. v. Lesh, C.A. No. 515, 2013 (Del. Sept. 30, 2014), the Delaware Supreme Court recently addressed the effect of an integration clause in a merger agreement. The appeal was brought after a Superior Court trial in which a jury awarded $175 million to the former stockholders of a target company who claimed that the buyer breached its contractual obligations relating to post-closing “milestone payments.”

A letter of intent between the parties provided that the buyer “will commit to funding based on the projections prepared by its management to ensure that there is sufficient capital to achieve the performance milestones detailed [in the letter of intent]” (the “Funding Provision”). This portion of the letter of intent was expressly made non-binding. In contrast to the Funding Provision, Section 9.6 of the definitive merger agreement stated that “Notwithstanding any other provision in the Agreement to the contrary… [buyer’s] obligation to provide funding for the Surviving Corporation, including without limitation funding to pursue achievement of any of the Milestones, shall be at [buyer’s] sole discretion, to be exercised in good faith” (emphasis added).

Following closing, the target’s former stockholders sued the buyer after the milestones were not reached and no further payments were made. The stockholders argued that the letter of intent demonstrated the parties’ understanding about the buyer’s obligation to pursue the milestones. In particular, they noted that the letter of intent survived under the merger agreement’s integration clause, which provided, in relevant part, that:

This Agreement contains the entire understanding among the parties hereto with respect to the transactions contemplated hereby and supersede and replace all prior and contemporaneous agreements and understandings, oral or written, with regard to such transactions, other than the Letter of Intent…..

Writing for the Delaware Supreme Court, Chief Justice Leo Strine held that:

The reference to the letter of intent in the integration clause did not convert the non-binding Funding Provision into a binding contractual obligation. Survival is not transformational. Rather, the integration clause’s provision that allowed the letter of intent to survive simply had the effect of ensuring that the expressly binding provisions contained in the letter of intent – which negotiating parties in the merger and acquisition context often expect to survive – would not be extinguished by the integration clause.

As a result, he said the Superior Court erred by allowing the former stockholders to argue to the jury “that the Funding Provision constitutes a contractual promise in itself, or was binding in the sense that it was a condition on [buyer’s] sole discretion” under Section 9.6 of the merger agreement. He noted that the letter of intent might have been relevant to some of the buyer’s potential defenses, but the Superior Court would still have to give the jury “a clear limiting instruction stating that the letter of intent was non-binding and any conflicting provision in the letter of intent could not alter the meaning of § 9.6.”