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From Securities Regulation Daily, April 24, 2015

Cyber-tech company loses appeal in Delaware Supreme Court

By R. Jason Howard, J.D.

On appeal from an earn-out dispute arising from a merger, the Delaware Supreme Court affirmed the decision of the Delaware Chancery Court, finding that the Court of Chancery did not misinterpret the merger agreement and that its factual conclusions warrant deference in spite of the fact that they were made in a succinct bench ruling (Lazard Technology Partners, LLC, v. Qinetiq North America Operations LLC, April 23, 2015, Strine, L.).

Background. Lazard Technology Partners, LLC  represented former stockholders of Cyveillance, Inc., a cyber-technology company. Qinetiq North America Operations, LLC paid $40 million up-front to Cyveillance and promised to pay up to another $40 million if the company’s revenues reached a certain level.

The merger agreement contained Section 5.4, which prohibited Qinetiq 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.

Cyveillance filed suit in the Court of Chancery, arguing that Qinetiq breached Section 5.4 of the merger agreement. Cyveillance also argued that Qinetiq violated the merger agreement’s implied covenant of good faith and fair dealing by failing to take certain actions that Cyveillance contended would have resulted in the achievement of revenue sufficient to generate an earn-out.

Court of Chancery. The Chancery Court’s bench decision reviewed the factual circumstances which Cyveillance alleged amounted to a breach of Section 5.4 of the merger agreement and the implied covenant. After review, the court found that the merger agreement meant what it said, which was 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.

The Court of Chancery found that Cyveillance had not proven that any business decision of Qinetiq was motivated by a desire to avoid an earn-out payment and also rejected Cyveillance's implied covenant claim.

Appeal. In its appeal, Cyveillance argued that the Chancery Court misinterpreted the merger agreement as to Section 5.4 and the implied covenant, and also that its factual conclusions did not warrant deference because they were made in a succinct bench ruling.

Cyveillance argued that the Court of Chancery erred because it should have recognized that Section 5.4 precluded any conduct by Qinetiq that it knew would have the effect of compromising Cyveillance’s ability to receive an earn-out. Cyveillance also claimed that the court 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 Cyveillance would be protected from post-closing conduct that could jeopardize an earn-out payment.

Delaware Supreme Court ruling. The Delaware Supreme Court said that Cyveillance’s arguments had no merit and that the “Court of Chancery acted properly in giving Section 5.4 its plain meaning.” Moreover, “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,” said the court.

Similarly, the court explained that Cyveillance’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 was without merit, saying that 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 Cyveillance had sought objective standards for limiting Qinetiq's conduct but lost at the bargaining table.

Finally, the court dismissed the argument the factual determinations of the Court of Chancery should not be given deference because they were set forth in a bench trial, explaining that “the bench ruling dealt with the key factual contentions of the seller and did so clearly.”

The case is No. 464, 2014.

Attorneys: Michael F. Bonkowski (Cole Schotz P.C.) and Roger A. Lane (Foley & Lardner LLP) for Lazard Technology Partners, LLC. Srinivas M. Raju (Richards, Layton & Finger, P.A.) and Allen M. Gardner (Latham & Watkins LLP) for QinetiQ North America Operations LLC.

Companies: QinetiQ North America Operations LLC; Lazard Technology Partners, LLC

MainStory: TopStory MergersAcquisitions ShareholderActivismNews DelawareNews

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