LAZARD TECHNOLOGY PARTNERS, LLC, as representative of the former equityholders of Cyveillance, Inc., Plaintiff Below, Appellant,
QINETIQ NORTH AMERICA OPERATIONS LLC, Defendant Below, Appellee
Submitted April 11, 2015
Case Closed May 11, 2015.
Court Below: Court of Chancery of the State of Delaware. C.A. No. 6815-VCL.
Michael F. Bonkowski, Esquire, Cole, Schotz, Meisel, Forman & Leonard, P.A., Wilmington, Delaware; Roger A. Lane, Esquire (argued), Courtney Worcester, Esquire, Foley & Lardner LLP, Boston, Massachusetts, for Appellant.
Srinivas M. Raju, Esquire, Robert L. Burns, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware; Allen M. Gardner, Esquire (argued), Jessica E. Phillips, Esquire, Latham & Watkins LLP, Washington, DC, for Appellee.
Before STRINE, Chief Justice; HOLLAND and VALIHURA, Justices; and GRAVES and WALLS, Judges; [*] constituting the Court en Banc.
STRINE, Chief Justice
This is an appeal in an earn-out dispute arising from a merger. The appellant represents former stockholders of Cyveillance, Inc., a cyber technology company (the " company" ), whom we refer to as the " seller" for the sake of clarity. The appellee (the " buyer" ) paid $40 million up-front to the company and promised to pay up to another $40 million if the company's revenues reached a certain level. Section 5.4 of the merger agreement prohibited the buyer from " tak[ing] any action to divert or defer [revenue] with the intent of reducing or limiting the Earn-Out Payment."  When the earn-out period ended, the revenues had not reached the level required to generate an earn-out.
The seller filed suit in the Court of Chancery, arguing that the buyer breached Section 5.4 of the merger agreement. The seller also argued that the buyer violated the merger agreement's implied covenant of good faith and fair dealing by failing to take certain actions that the seller contended would have resulted in the achievement of revenue sufficient to generate an earn-out.
After a trial, extensive briefing, and post-trial oral argument, the Court of Chancery issued a bench decision reviewing the factual circumstances the seller alleged amounted to a breach of Section 5.4 of the merger agreement and the implied covenant. In that decision, the Court of Chancery found that the merger agreement meant what it said, which is that in order for the buyer to breach Section 5.4, it had to have acted with the " intent of reducing or limiting the Earn-out Payment."  After reviewing each of the seller's theories as to how the buyer had acted with the requisite intent, the Court of Chancery found that the seller had not proven that any business decision of the buyer was motivated by a desire to avoid an earn-out payment.
Likewise, the Court of Chancery rejected the seller's implied covenant claim. The Court of Chancery held that the merger agreement was complex and required a number of actions, including actions that would occur post-closing. It thus found that the merger agreement's express terms were supplemented by an implied covenant. But as to whether conduct not prohibited under the contract was precluded because it might result in a reduced or no earn-out payment, the Court of Chancery held that, consistent with the language of Section 5.4, the buyer had a duty to refrain from that conduct only if it was taken with the intent to reduce or avoid an earn-out altogether.
On appeal, the seller argues that the Court of Chancery misinterpreted the merger agreement in both respects, and also that its factual conclusions warrant ...