Dorsey discusses Survival of Non-Binding LOI Provisions

On September 30, 2014, the Delaware Supreme Court reversed a jury verdict finding that ev3, Inc. breached its contractual obligation to the shareholders of Appriva Medical, Inc., a company purchased by ev3. In ev3, Inc. v Lesh, No. 515m 2013, the Delaware Supreme Court ruled that an integration clause in a definitive merger agreement that provided for survival of a previously signed letter of intent did not transform the non-binding provisions of the LOI into binding provisions. The case was remanded to the Delaware Superior Court for further proceedings consistent with the Delaware Supreme Court’s opinion.

Post-Merger Milestone Payments

The case involved the purchase of Appriva by ev3 pursuant to a merger agreement. The merger agreement provided for a closing payment of $50 million and four contingent payments of up to an aggregate amount of $175 million based on the achievement of four future performance milestones. Shortly following the closing of the acquisition of Appriva, ev3 made the determination that Appriva’s technology did not hold the promise that ev3 once thought it had, so ev3 stopped funding its development. The shareholder representatives sued ev3 once it became clear that the milestones would not be achieved and, thus, the four contingent payments would not be paid to Appriva’s former shareholders.

Key Contractual Provisions

In addition to the milestone payment provisions, the merger agreement contained two provisions of particular relevance to the dispute. First, Section 9.6 provided that “notwithstanding any other provision in the Agreement to the contrary,” ev3’s obligation to fund Appriva following the closing, including to pursue the achievement of any of the milestones, would be at ev3’s sole discretion to be exercised in good faith. Second, the integration clause of the merger agreement provided that the merger agreement contained the entire understanding among the parties and superseded all other agreements or understandings among the parties except for the LOI, which contained a clause that ev3 would commit to funding Appriva to ensure that there would be sufficient capital to achieve the performance milestones (the “LOI Funding Provision”). However, as is fairly typical, the LOI contained a provision stating that certain of its provisions were binding (i.e., exclusivity and confidentiality) and all other provisions, including the LOI Funding Provision, were not binding.

Survival Does Not Transform

The Delaware Supreme Court found that the Superior Court erred in allowing Appriva to argue that the LOI Funding Provision was binding on the parties because the integration clause did not convert the non-binding LOI Funding Provision into a binding contractual provision. Put another way, the integration clause simply allowed the binding provisions of the LOI to survive and continue in effect, but the non-binding provisions of the LOI remained non-binding even if those non-binding provisions were integrated into the merger agreement. In the Supreme Court’s words, “survival is not transformational.”

Moreover, the Supreme Court also found that the opening words of Section 9.6, i.e., “notwithstanding any other provision in the Agreement to the contrary,” rendered any contrary provision ineffective. Since Section 9.6 made clear that ev3 had sole discretion as to whether to provide funding to Appriva following closing subject only to its duty to act in good faith, it was contrary to the LOI Funding Provision. So even if the LOI Funding Provision had been included in the parties’ agreement as a binding obligation, Section 9.6 would have trumped the LOI Funding Provision. As such, the LOI Funding Provision was not binding either as an independent covenant or as a limitation on ev3’s sole discretion in Section 9.6.

Practice Pointers

The first lesson from this decision is that integrating a non-binding provision from a letter of intent will not make that non-binding provision binding in the acquisition agreement. In other words, Appriva should have included a provision like the LOI Funding Provision in the merger agreement. As it turns out, the negotiation history of the ev3-Appriva transaction included an attempt by Appriva to include a binding obligation in the merger agreement that would have committed ev3 to a specific funding schedule, but that attempt was resisted by ev3, and Appriva ultimately relented. The Delaware Supreme Court specifically noted that it was an error on the part of the Superior Court to allow Appriva to use the LOI Funding Provision as evidence of a binding promise, but to deny ev3 the opportunity to refute the argument with the transaction’s negotiation history. Thus, the second lesson from this decision is that if sellers desire specific actions to be taken by the buyer following the closing to help achieve performance milestones so the sellers have the opportunity to receive a post-closing payment, such actions should be reflected in the acquisition agreement in the form of express post-closing covenants by the buyer.

The full and original memorandum was published by Dorsey & Whitney LLP on October 7, 2014, and is available here.