DealLawyers.com Blog

Earlier this week, in Thompson Street Capital Partners, IV v. Sonova (Del. Sup.; 4/25), the Delaware Supreme Court reversed the Chancery Court’s March 2024 dismissal of a complaint alleging an indemnification claim notice was insufficient under the terms of a merger agreement and that escrowed funds should not be held in a claim reserve beyond the indemnity escrow expiration date. Both the merger agreement and related escrow agreement set forth procedures governing the submission of a claim notice, and the Chancery Court’s order had distinguished the analysis governing release of the indemnity escrow fund (governed by the escrow agreement) from the analysis of whether the buyer waived its right to pursue indemnification (governed by the merger agreement) and focused on the buyer’s compliance with the less onerous terms in the escrow agreement.

On appeal, the plaintiff argued that the Chancery Court erred in finding that the escrow agreement’s internal notice clause governed the case “to the exclusion” of the notice provision in the merger agreement, which required that notice include an estimated amount and copies of written evidence. They also pointed to this sentence in the merger agreement provision governing claim procedures:

The Purchaser Indemnified Parties shall have no right to recover any amounts pursuant to Section 9.2 unless the Purchaser notifies the Members’ Representative in writing of such Claim pursuant to Section 9.3 on or before the Survival Date.

Pointing to the integration clause, the Supreme Court read the merger and escrow agreements as a unitary contractual scheme and sought to give effect to the notice provisions in both agreements – meaning the buyer also had to comply with the specificity requirements in the merger agreement. And, unfortunately for buyer, the sentence above “clearly and unambiguously conditioned [buyer’s] right to recover any amounts” on its compliance with the merger agreement notice requirements so that failure to provide sufficient notice meant a potential forfeiture of buyer’s indemnification rights. The merger agreement’s “no waiver” provision didn’t change that outcome since “where specific and general provisions conflict, the specific provision ordinarily qualifies the meaning of the general one.”

Since it was “reasonably conceivable” on the record that buyer failed to comply with the merger agreement’s notice requirements, the final analysis was whether noncompliance may be excused because, in Delaware, “common law abhors a forfeiture.” On that issue, the Supreme Court remanded the decision to the Chancery Court for additional fact-finding since the record was insufficient to settle the materiality and disproportionate forfeiture issues that factor into the excusal analysis.

– Meredith Ervine