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Inc. v. Lesh

Supreme Court of Delaware

September 30, 2014

EV3, INC., Defendant-Appellant,
v.
MICHAEL LESH, M.D., and ERIK VAN DER BURG, acting jointly as the Shareholder Representatives for former shareholders of Appriva Medical, Inc., Plaintiffs-Appellees

Submitted September 10, 2014

Revised: April 20, 2015.

Court Below: Superior Court of the State of Delaware in and for New Castle County. C.A. No. 05C-05-218-CLS.

Matt Neiderman, Esquire, Gary W. Lipkin, Esquire, Benjamin A. Smyth, Esquire, Duane Morris LLP, Wilmington, Delaware; Jeffrey J. Bouslog, Esquire, Bret A. Puls, Esquire, Dennis E. Hansen, Esquire, Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota; Theodore B. Olson, Esquire, Gibson, Dunn & Crutcher LLP, Washington, District of Columbia; Christopher D. Dusseault, Esquire, Joshua S. Lipshutz, Esquire, Michael Holecek, Esquire, Gibson, Dunn & Crutcher LLP, Los Angeles, California, for Appellant.

Jon E. Abramczyk, Esquire, Matthew R. Clark, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Robert A. Goodin, Esquire, Francine T. Radford, Esquire, Goodin, MacBride, Squeri, Day & Lamprey LLP, San Francisco, California; Jay P. Lefkowitz, Esquire, Joseph Serino, Jr., Esquire, Eric F. Leon, Esquire, John Del Monaco, Esquire, Kirkland & Ellis LLP, New York, New York; John C. O'Quinn, Esquire, Bob Allen, Esquire, Kirkland & Ellis LLP, Washington, District of Columbia, for Appellees.

Before STRINE, Chief Justice, HOLLAND, and RIDGELY, Justices; and LASTER and GLASSCOCK, Vice Chancellors,[*] constituting the Court en Banc.

OPINION

Page 528

STRINE, Chief Justice

I. INTRODUCTION

This is an appeal from a jury verdict finding that ev3, Inc., the buyer of Appriva Medical, Inc. (" Appriva" ), breached its contractual obligations to Appriva's former shareholders, who gave up their shares in the merger. The merger agreement between ev3 and Appriva (" merger agreement" ) provided for the bulk of the payments to the Appriva shareholders to be contingent upon the timely accomplishment of certain milestones toward the approval and marketability of a medical device that Appriva was developing.

After it became clear that the milestones were not going to be achieved, the former Appriva shareholders sued. Although the case was pursued by former shareholders of Appriva, for simplicity we refer to the plaintiffs as Appriva. Appriva argued that the full amount of contingency payments was due because ev3 had breached its obligation under § 9.6 of the merger agreement to fund and pursue the regulatory milestones in its " sole discretion, to be exercised in good faith." [1] But instead of confining itself to that argument, Appriva also contended that ev3 had breached a provision of a non-binding letter of intent that had been signed by the parties early in their negotiations. That non-binding provision stated that 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" (the " Funding Provision" ).[2]

Because the merger agreement contained an integration clause stating that the letter of intent was not superseded by the merger agreement, the Superior Court accepted Appriva's argument that the letter of intent was not inadmissible parol evidence, but a part of the entire agreement between the parties. At the same

Page 529

time, the Superior Court excluded evidence of the negotiating process that demonstrated 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.

At many points during the trial, ev3 attempted to convince the Superior Court that the non-binding letter of intent should not be used to interpret or contradict the clear terms of § 9.6, but the Superior Court adhered to the contrary view advocated by Appriva. Thus, Appriva was permitted to argue to the jury that ev3 not only failed to act in good faith under § 9.6, but that it breached a " promise" to honor the Funding Provision contained in the non-binding letter of intent. The jury agreed that ev3 had breached its contractual obligations and determined that ev3 owed Appriva the full amount of the milestone payments, $175 million.

On appeal, ev3 argues that the Superior Court, in various related ways, erred by permitting Appriva to argue that the Funding Provision in the non-binding letter of intent continued to bind ev3, and also that the non-binding letter of intent modified the " sole discretion" standard set forth in § 9.6. We conclude that the Superior Court erred by accepting Appriva's position that the non-binding Funding Provision within the letter of intent was admissible to affect the meaning of § 9.6. By its clear terms, § 9.6 overrode any " provision to the contrary." Even more specifically, it made clear that the sole discretion given to the buyer extended to the obligation to " provide funding for the surviving corporation, including without limitation funding to pursue achievement of any of the Milestones." These clear terms negated Appriva's contention that the Funding Provision in the letter of intent was binding and that it tempered ev3's obligation to act in good faith.

Moreover, the integration clause does not aid Appriva for two reasons. First, the letter of intent contained binding and non-binding commitments. To find that the non-binding Funding Provision became binding because the letter of intent was not wholly superseded by the merger agreement would set a precedent that would undermine parties' ability to negotiate and shape commercial agreements.[3] Delaware law is clear that 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

Page 530

is preliminary and non-binding.[4]

Second, by its plain terms, § 9.6 overrode any " other provision in the Agreement to the contrary." Thus, whether or not the letter of intent survived for some purposes, any provisions that conflicted with § 9.6 were without force and effect. Because the Funding Provision was inconsistent with § 9.6, it 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. Relatedly, it was also error to allow Appriva to use the Funding Provision as evidence of a binding promise, but to deny ev3 the opportunity to refute this argument with the broader negotiating history.

II. BACKGROUND[5]

Plaintiffs Dr. Michael Lesh and Erik van der Burg founded Appriva, a California corporation, to develop the " PLAATO" medical device. Before PLAATO could come to market and be sold profitably, Appriva had to run a regulatory gantlet to prove that PLAATO's benefits to patients outweighed its risks. It also had to demonstrate PLAATO's commercial potential.

In late 2002, ev3, a medical device company primarily financed by private equity funds sponsored by Warburg Pincus and The Vertical Group, 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. But during the course of negotiations, ev3 became concerned about the costs and risks of achieving regulatory approval and bringing PLAATO to market. In light of these risks, ev3 sought to reduce the upfront payment to Appriva and increase the milestone payments.

The parties signed a non-binding letter of intent during the negotiation process. Certain provisions, which addressed confidentiality, transferability, and restrictions on the ability of Appriva to engage in discussions with other potential buyers, were specifically designated as binding.[6] Negotiating parties often expect these types of provisions to remain binding throughout negotiations and for some of them to even persist after the signing of a definitive agreement.[7] For example, during

Page 531

the negotiation process, these binding provisions are often prerequisites to the parties' willingness to risk sharing information while exploring a high-stakes deal. After execution of a definitive acquisition agreement, the confidentiality requirement embodied in an earlier agreement often continues to bind the parties, whereas any restrictions on the target's ability to ...


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