FORTIS ADVISORS LLC, as the Equityholder Representative, Plaintiff,
DIALOG SEMICONDUCTOR PLC, Defendant.
Submitted: November 19, 2014
Kevin G. Abrams, Derrick B. Farrell, J. Peter Shindel, Jr. and David A. Seal of ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Plaintiff.
Kurt M. Heyman, Samuel T. Hirzel, II and Dawn Kurtz Crompton of PROCTOR HEYMAN LLP, Wilmington, Delaware; Neal A. Potischman, Sandra West Neukom and Alyse L. Katz of DAVIS POLK & WARDWELL LLP, Menlo Park, California; Attorneys for Defendant.
This action involves a dispute over whether earn-out payments are owed to the former equityholders of iWatt, Inc. ("iWatt") resulting from the sale of iWatt to Dialog Semiconductor PLC ("Dialog") through a merger transaction that closed in 2013. The gravamen of the case is whether Dialog breached the provision of the merger agreement obligating it to use "commercially reasonable best efforts" to achieve and pay the earn-out payments in full. That claim is not the subject of the present dismissal motion and is proceeding through discovery.
As seems all too common in disputes over earn-out payments, the complaint in this action asserts, in the alternative to the breach of contract claim, a claim for breach of the implied covenant of good faith and fair dealing. Notably, plaintiff admits it does not believe that any gaps exist in the merger agreement from which to imply an additional contractual term, but it nonetheless seeks to maintain the implied covenant claim as an alternative legal theory in case the Court may disagree in the future. I reject this approach to pleading, and conclude that the failure to identify any gap in the merger agreement in which the implied covenant would operate warrants dismissal of that claim.
I also conclude that plaintiff's claims for fraud and negligent misrepresentation must be dismissed. Among other things, the allegations of the complaint fail to satisfy the particularity requirement of Court of Chancery Rule 9(b) because the complaint does not identify the time or place of the false representations or specifically who made them.
A. The Parties
Plaintiff Fortis Advisors LLC ("Fortis") is a Delaware limited liability corporation with its principal place of business in La Jolla, California. Under the terms of an Agreement and Plan of Merger dated as of July 1, 2013 (the "Merger Agreement"), Fortis was appointed as the representative of the former equityholders of iWatt.
Non-party iWatt, formerly a Delaware corporation, was a provider of digital power management circuits. Before its sale to Dialog, iWatt designed, developed, and marketed digital-centric power management integrated circuits for AC/DC power conversion, LED solid-state lighting, and LED display backlighting markets. After the merger closed, iWatt was operated as a separate, stand-alone business unit of Dialog known as the Power Conversion Business Group.
Defendant Dialog Semiconductor PLC is incorporated in England and Wales with its principal place of business in Green Park, United Kingdom. Dialog is a provider of highly integrated power management, audio and short-range wireless technologies.
B. The Merger Agreement
In the Merger Agreement, which is governed by Delaware law, Dialog agreed to acquire iWatt for $310 million plus earn-out payments of up to $35 million depending on the post-merger revenues of Dialog's Power Conversion Business Group. Specifically, earn-out payments would be triggered if the revenues of the Power Conversion Business Group exceeded: (1) $51.3 million during the six months ended December 31, 2013 (the "First Earn-Out Period") and/or (2) $99.9 million during the nine months ended September 30, 2014 (the "Second Earn-Out Period").
Aware that Dialog would take control of iWatt's operations after the merger, the parties agreed to specific contractual provisions regarding the earn-out payments and Dialog's ability to manage the business post-closing. In particular, Section 3.04 of the Merger Agreement provides, in general terms, that Dialog (referred to as "Parent") was required to use its commercially reasonable best efforts to achieve and pay the earn-out payments in full:
From the Closing Date through the end of the Second Earnout Period,
Parent shall, and shall cause its Affiliates . . . to, use commercially reasonable best efforts, in the context of successfully managing the business of the Surviving Corporation, to achieve and pay the Earn-Out Payments in full (it being understood and agreed that one of the primary objectives of managing the business of the Surviving Corporation shall be to achieve and pay the Earn-Out Payments in full, provided that, subject in all respects to its obligations under this Agreement, Parent is entitled to make changes to the business in its reasonable commercial judgment in ...