April 23, 2015
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 no deference because they were made in a
succinct bench ruling. As to the first argument, the seller argues that the Court of Chancery erred because it should have recognized that Section 5.4 precluded any conduct by the buyer that it knew would have the effect of compromising the seller's ability to receive an earn-out. It also claims that the Court of Chancery erred when it held that the implied covenant must be read consistently with Section 5.4 because the specific standard in that contractual term reflected the parties' agreement about how the seller would be protected from post-closing conduct that could jeopardize an earn-out payment.
The seller's arguments are without merit. The Court of Chancery acted properly in giving Section 5.4 its plain meaning. By its unambiguous terms, that term only limited the buyer from taking action intended to reduce or limit an earn-out payment. Intent is a well-understood concept that the Court of Chancery properly applied. The seller seeks to avoid its own contractual bargain by claiming that Section 5.4 used a knowledge standard, preventing the buyer from taking actions simply because it knew those actions would reduce the likelihood that an earn-out would be due. As Section 5.4 is written, it only barred the buyer from taking action specifically motivated by a desire to avoid the earn-out. Contrary to the seller's argument, the Court of Chancery never said that avoiding the earn-out had to the buyer's sole intent, but properly held that the buyer's action had to be motivated at least in part by that intention.
Likewise, the seller's argument that it could rely on the implied covenant of good faith and fair dealing to avoid the burden to prove that the buyer intentionally
violated Section 5.4 is without merit. Section 5.4 specifically addressed the requirements for an earn-out payment and left the buyer free to conduct its business post-closing in any way it chose so long as it did not act with the intent to reduce or limit the earn-out payment. And as the Court of Chancery found, " [the seller] attempted to negotiate for a range of additional affirmative post-closing obligations, but [the buyer] rejected all of them . . . . Instead of the various affirmative obligations, the agreement provided only that [the buyer] could not take action with the intent of reducing or undermining the earnout payment."  Accordingly, the Court of Chancery was very generous in assuming that the implied covenant of good faith and fair dealing operated at all as to decisions affecting the earn-out, given the specificity of the merger agreement on that subject, and the negotiating history that showed that the seller had sought objective standards for limiting the buyer's conduct but lost at the bargaining table. Therefore, the Court of Chancery correctly concluded that the implied covenant did not inhibit the buyer's conduct unless the buyer acted with the intent to deprive the seller of an earn-out payment.
Finally, we reject the seller's argument that the Court of Chancery's factual determinations should not be given deference because they were set forth in a bench ruling. That bench ruling dealt with the key factual contentions of the seller and did so clearly. The ruling explained that the Court of Chancery was not persuaded that the buyer had acted with the requisite intent that would allow the seller to prevail on its breach of contract claim.
The Court of Chancery is a busy court charged with giving parties answers to complicated questions in a range of cases, often on an expedited basis. One of the ways in which the judges of that court handle their demanding caseload is by issuing prompt bench decisions on the basis of settled law when they believe they can do so responsibly. That is what the Vice Chancellor did here, and his decision is well grounded in the facts of record and entitled to our deference.
For these reasons, we conclude that the seller's appeal is without merit and that the judgment of dismissal entered for the buyer should be AFFIRMED.