(Article from Securities Law Alert, October 2014)
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In a decision dated September 30, 2014, the Delaware Supreme Court held that a non-binding provision in a letter of intent did not become binding simply “because the letter of intent was not wholly superseded by the [final] merger agreement” between the parties. ev3, Inc. v. Lesh, 2014 WL 4914905 (Del. 2014) (Strine, C.J.). The court emphasized that under Delaware law, parties “should not be bound by terms other than those they ultimately assent to in a complete agreement, particularly when express language indicates that a previous understanding [was] preliminary and non-binding.”
Background
Appriva is a California corporation that was created to develop “PLAATO,” a medical device designed to prevent strokes by eliminating blood clots in the heart. In 2002, ev3, a medical device company, “made an unsolicited offer to purchase the equity of Appriva for $190 million, with $115 million to be paid upfront and the remainder to be paid upon the completion of certain regulatory milestones on the way to PLAATO’s approval for sale to the public.”
In the course of their negotiations, Appriva and ev3 entered into a non-binding letter of intent. Several provisions in the letter of intent “were specifically designated as binding.” These binding provisions “addressed confidentiality, transferability, and restrictions on the ability of Appriva to engage in discussions with other potential buyers.” The remaining provisions of the letter of intent were non-binding, including the following provision (the “Funding Provision”):
Prior to closing, ev3 shall provide to Appriva a detailed plan describing the operating, funding and strategic plan for the first 12 months after Closing, which will include details about how Appriva and the Appriva employees will be integrated into the ev3 organization. ev3 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 above.
Appriva and ev3 later entered into a final merger agreement that differed substantially from the terms of ev3’s original offer. The final merger agreement called for ev3 to “pay $50 million at closing,” but provided for “the bulk of the potential consideration — $175 million” to be paid “on the timely accomplishment of [certain] milestones.”
Section 9.6 of the final merger agreement provided as follows:
Notwithstanding any other provision in the Agreement to the contrary, from and after the closing, [ev3’s] obligation to provide funding for the Surviving Corporation, including without limitation funding to pursue achievement of any of the Milestones, shall be at [ev3’s] sole discretion, to be exercised in good faith.
The merger agreement contained an integration clause providing that it “supersede[d] and replace[d] all prior and contemporaneous understandings, oral or written, with regard to such transactions, other than the Letter of Intent.”
After the merger was consummated, former Appriva shareholders (collectively, “Appriva”) eventually brought suit in Delaware Superior Court alleging that “ev3 had breached its contractual duties to fund and pursue achievement of the milestone payments ‘in good faith.’” The case went to trial before a jury.
Over ev3’s objection, the Delaware Superior Court permitted Appriva to argue before the jury “that the non-binding Funding Provision in the letter of intent was a binding promise that comprised part of the overall agreement of the parties.” The court also allowed Appriva to contend that “the binding ‘sole discretion’ standard in § 9.6 was subject to the specific promise made in the non-binding Funding Provision.” However, the court did not allow ev3 to present “evidence of the negotiating process … demonstrat[ing] that § 9.6’s final language was the product of ev3’s rejection of Appriva’s attempt to turn the non-binding Funding Provision into a binding contractual obligation.”
The jury found that “ev3 had breached its contractual obligations and determined that ev3 owed Appriva the full amount of the milestone payments, $175 million.” The court denied ev3’s motion for a new trial; ev3 appealed.
Delaware Supreme Court Finds the Trial Court Erred by Allowing Appriva to Argue That the Funding Provision of the Letter of Intent Governed ev3’s Funding Obligations
The Delaware Supreme Court found that the “Superior Court [had] erred by permitting Appriva to argue that the non-binding Funding Provision in the letter of intent was in fact binding, either as an independent promise that was part of the parties’ overall bargain, or as a limitation on the sole discretion given to ev3 in § 9.6” of the final merger agreement.
Significantly, the Delaware Supreme Court held that “[t]he reference to the letter of intent in the integration clause did not convert the non-binding Funding Provision into a binding contractual obligation.” The court found that “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 … would not be extinguished by the integration clause.” The court explained that “[t]he parties would not necessarily have wanted to release each other from” provisions in the letter of intent addressing issues such as confidentiality “just because they signed a merger agreement.”
The Delaware Supreme Court determined that “the non-binding provisions of the letter of intent were just that: non-binding.” The court found that these non-binding terms “were the framework provisions that outlined the contours of a potential deal that the parties might ultimately strike contractually in a binding form.” The court explained that “[t]he fact that the parties designated certain provisions of the letter of intent as binding confirms that the remainder of the letter of intent, including the Funding Provision, was non-binding.”
The Delaware Supreme Court further held that “the non-binding Funding Provision” in the letter of intent had “no force or effect” because it was “inconsistent with § 9.6” of the final merger agreement. The court explained that “by its plain terms, § 9.6 overrode any ‘other provision in the Agreement to the contrary.’” Since the Funding Provision conflicted with § 9.6, the Delaware Supreme Court found that “[i]t was error for the Superior Court to allow Appriva to argue that the Funding Provision was binding as a promise and that the sole discretion standard in § 9.6 was subject to compliance with or tempered by the Funding Provision.” The Delaware Supreme Court determined that the trial court had “compounded” this error by “allow[ing] Appriva to use the Funding Provision as evidence of a binding promise” while “deny[ing] ev3 the opportunity to refute this argument with the broader negotiating history.”
The Delaware Supreme Court reversed the Superior Court’s final order denying ev3’s motion for a new trial, and remanded the case for further proceedings consistent with its opinion.
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