In most M&A transaction agreements, a clause (commonly referred to as an integration clause) is included in the miscellaneous section near the end stating that the agreement contains the entire understanding of the parties about the transaction and supersedes all other agreements and understandings. Occasionally, there may be a reason to incorporate other provisions that you wish to remain enforceable. While that may be desirable, you should pay careful attention if you do this to ensure that the referenced agreement does not inadvertently conflict, or even modify, what is in the definitive agreement. This nearly occurred in ev3, Inc. v. Lesh, M.D., et al (Del. 2014).
ev3, Inc. entered into a merger agreement in which it acquired Appriva Medical, Inc. in exchange for a closing cash payment and additional contingent post-closing payments upon achievement of certain milestones. Following closing, it became apparent that Appriva would not achieve these milestones. The former stockholders of Appriva claimed that ev3 breached its obligations in both the merger agreement (which required ev3 to fund and pursue the milestones in its “sole discretion, to be exercised in good faith” and in a provision included in the parties’ non-binding letter of intent (which stated that ev3 “[would] commit to funding based on the projections prepared by its management to ensure there is sufficient capital to achieve the performance milestones”).
If the merger agreement contained an integration clause simply superseding all other agreements and understandings, the stockholders’ argument to apply the obligation contained in the letter of intent would likely have been immediately dismissed, as the letter of intent would have been superseded by the merger agreement. In this case, however, the integration clause provided that all other agreements and understandings were superseded, other than the letter of intent As such, the Delaware Superior Court permitted the stockholders to enter the Letter of Intent into evidence as part of the definitive agreement. The Delaware Supreme Court overturned this decision because the provision regarding ev3’s funding commitment was non-binding and nothing in the integration clause provided that non-binding provisions of the letter of intent would become binding.
Notwithstanding the eventual result, by not narrowly tailoring the integration clause to make it clear that the only provisions of the letter of intent remaining enforceable were the binding provisions (which would typically include confidentiality, exclusivity, governing law but generally would not include the business terms which may be further negotiated in connection with the preparation of the definitive agreement), the parties opened up the possibility of inadvertently modifying the terms of the merger agreement. If the parties wish to ensure that certain provisions of the letter of intent were to remain enforceable, which may be appropriate in transactions which do not close simultaneously with the signing, it would be preferable to explicitly supersede the letter of intent in its entirety, other than the specific provisions the parties wish to remain enforceable.
For more information contact Joshua E. French.