By: Mark Tarallo
In Fortis Advisors v. Dialog Semiconductor, C.A. No. 9522-CB, the Delaware Chancery Court rejected several claims made by the selling shareholders’ representative relating to the conduct of the buyer in relation to the earn-out. The equityholders of iWatt, Inc., sold their shares (in a transaction structured as a merger) to Dialog Semiconductor PLC, in a transaction that included both a cash payment and an earn-out. The Merger Agreement included language that the buyer would use “commercially reasonable best efforts” to operate the acquired business to achieve the earn-out, and also included a list of several specific obligations, covenants and restrictions applicable to the buyer in connection with the post-closing operation of the business. When the earn-out targets were not met, Fortis, as the shareholders’ representative, sued the buyer for, among other things, breach of the implied covenant of good faith and fair dealing. The buyer filed a motion to dismiss relating to the claims, and the Chancery Court ruled in favor of the buyer with respect to the allegations of breach of the implied covenant of good faith and fair dealing. The Chancery Court found that the Merger Agreement included very specific terms relating to the operation of the business in connection with the earn-out, and that “the allegations of the complaint fail to state a claim for breach of the implied covenant because Fortis has not identified, as it must, a gap in the Merger Agreement to be filled by implying terms through the implied covenant.” In light of the decision, parties that are negotiating acquisition documents under Delaware law should be careful not to rely on the implied covenant for post-transaction enforcement where the documents contain specific language addressing the obligations of the parties, as the Delaware courts will not impose the implied covenant where there is no gap in the documents.
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