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If there’s anything more likely to result in busted deal litigation than a binding letter of intent with a distressed seller, I haven’t encountered it. The Delaware Superior Court’s recent decision in Cercacor Labs v. Metronom Health, (Del. Super.; 4/25), in which the Court was called upon to address competing allegations of a breach of an LOI, is a case in point.

The defendant Metronom was a pre-revenue medical device company that had exhausted its funding and was winding down its operations when it began discussing a potential sale to Cercacor, a health and fitness technology company. Discussions moved quickly due to the target’s dire financial straits, and after a full day of negotiations, the parties entered into an LOI for a potential acquisition on the eve of Metronom shutting its doors.

The LOI contemplated that the buyer would acquire the target or its assets on a “cash free, debt free” basis in exchange for 100,000 shares of the buyer’s stock.  The LOI conditioned Cercacor’s acquisition proposal on satisfactory completion of due diligence and the negotiation and execution of a definitive acquisition agreement. It also contained a binding exclusivity provision as well as language obligating the parties to use good faith efforts to negotiate a definitive agreement as promptly as practicable.  During that period, Metronom agreed to “operate its business in the ordinary course consistent with past practice.”  Cercacor also agreed to pay the target’s operating expenses during the negotiating period (which it did).

As often happens when a buyer tries to catch a falling knife, things began to go south between the parties shortly after the LOI was signed.  Cercacor alleged that Metronom was dragging its feet on responding to due diligence requests and in obtaining debtholder releases. In turn, Metronom complained that it took Cercacor nearly a month to deliver a draft asset purchase agreement, which it also contended inaccurately described the business being acquired.  Ultimately, things deteriorated to a point where the parties ended up in court.

The buyer’s complaint threw the kitchen sink at Metronom, alleging breach of the LOI, breach of the implied covenant of good faith and fair dealing, conversion, unjust enrichment, and fraudulent inducement.  The target counterclaimed, alleging that Cercacor breached its obligations under the LOI and the implied covenant.

While the Court cleared some of the underbrush and dismissed a portion of each parties’ claims, it let stand each party’s claims that the other breached the LOI.  In refusing to grant Cercacor’s motion for summary judgment, the Court concluded that a material issue of fact existed as to whether the LOI required the target to deliver debtholder releases:

The parties first breach-of-contract dispute is one of interpretation—they disagree regarding whether the term “cash free, debt free” obligated Defendants to secure releases from Metronom’s debtholders. When “the issue before the Court concerns contract interpretation, `summary judgment is appropriate only if the contract in question is unambiguous.'” A term is ambiguous when it is “reasonably. . . susceptible of different interpretations.”

Under that standard, the phrase “cash free, debt free” in the LOI is ambiguous. Both parties invoke expert testimony, fact witness depositions, and extrinsic evidence, to support their interpretation of “cash free, debt free.” While the weight of this evidence suggests the parties intended the LOI to require Metronom to secure debtholder release, the Court doesn’t weigh evidence on a summary judgment motion. Because “cash free, debt free” is reasonably susceptible to more than one interpretation, the LOI is ambiguous regarding whether Metronom had to secure debtholder releases. And that precludes summary judgment on that issue.

Cercacor’s motion for summary judgment on its claims that Metronom dragged its feet in due diligence met the same fate, with the Court noting that these allegations involved factual issues that were inappropriate to resolve via summary judgment.  For similar reasons, the Court also declined to grant summary judgment on Metronom’s counterclaim alleging that Cercacor breached the LOI by “delaying and stalling” the closing.

In addition to these issues, a sideshow involving the target CEO’s alleged efforts to renegotiate the deal in order to sweeten the pot for himself resulted in Cercacor’s assertion of tortious interference claims which the Court declined to dismiss.

As I’ve said before, I’ve never been a fan of letters of intent, and the hot mess created by this one isn’t likely to make me rethink that position.

– John Jenkins