The Chancery Court Gives M&A Participants Some Clear Rules for the M&A Road

Jun 29, 2021 | Blog

The Delaware Chancery Court has once again demonstrated why it is the premiere jurisdiction for the resolution of business disputes, especially those arising out of complex M&A transactions. In a case decided on June 7, the Chancery Court relied on clear contract law principles in addressing alleged breaches of earnout provisions in a merger agreement. The agreement governed the acquisition of the e-commerce business Plated by the supermarket chain Albertsons. The representative for the former shareholders of Plated brought an action with three principal allegations: First, that Albertsons had failed to honor its contractual commitment not to take any action with the intent of decreasing or avoiding the earnout due to Plated after the closing of the acquisition; second, that Albertsons had breached its duty of fair dealing to Plated’s former stockholders; and third, that Albertsons had fraudulently induced the Plated shareholders to enter into the acquisition with promises that were never kept.

The subject of the opinion is the motion by Albertsons to dismiss the representative’s complaint. Treating the allegations as if they were true, as the Court was obligated to do in this context, Vice Chancellor Slights found that Albertsons could indeed have breached the contractual obligations it undertook to operate the business of Plated separately from its own business. Among other allegations, the representative claimed that Albertsons confined the business of Plated to Albertsons’ brick-and-mortar supermarkets with the intent to avoid the earnout altogether by causing Plated to miss the milestones at which earnout payments would become due. With respect to the representative’s fair dealing claim, the Court found that because the merger agreement had prescribed the post-acquisition obligations of the parties in explicit terms and imposed limits on the buyer’s discretion, there was no need to rely on a covenant which may be implied at law. Finally, the incorporation of a standard integration clause in the merger agreement was adequate to defeat the fraudulent inducement claims, although, had the plaintiff framed its inducement allegation differently, the integration clause would not have provided a complete defense to the claims. The opinion makes clear that to fend off all claims of fraudulent inducement, the integration clause must further state that the sellers were not relying on any representations made outside the contract.

The Court also makes clear a principal advantage of Delaware law: if a contract is not ambiguous, Delaware courts will uphold the contract as written, thereby providing a commercially predictable outcome.

The Chancery Court’s opinion provides a succinct and determinative guide for the drafting of earnout provisions and integration clauses in M&A agreements and, at the same time, lessens the risk of litigation by drawing the lines so clearly.

The full case, Shareholder Representative Services LLC vs. Albertsons Companies, Inc. (C.A. No. 2020-0710-JRS) can be accessed here.

If you have any further questions regarding complex M&A transactions or Barton’s M&A practice, please contact William Newman.