Document: C.A. No. 8490-VCG (Del. Ch. February 3, 2014)
Parties to a contract should take care to negotiate specific provisions covering all areas of concern they may have in connection with a transaction because the Delaware courts have made it clear that the implied covenant of good faith and fair dealing will not improve the bargain for them.
The seller of a software company filed suit alleging that the buyer interfered with the acquired company’s ability to meet revenue and profit targets that would have generated additional payments to the seller. The claims fell into two groups: 1) that the buyer did not possess or acquire the technological proficiency promised as part of the deal, and 2) the buyer siphoned business away from the acquired company into another subsidiary. Specific claims included breach of the implied covenant of good faith and fair dealing and breach of contract.
The Delaware Court of Chancery partially granted the defendants motion to dismiss. Regarding the technology-related claims, the Court found that the parties were aware of the technological requirements before entering the purchase agreements and the sellers could have bargained for guarantees on the buyer’s part to ensure full technical integration, but they failed to bargain for such guarantees. The implied covenant, the Court said, is a “gap filler,” and it is not meant to allow parties to renegotiate their contracts after the fact.
However, the Court did not dismiss the claims that the buyer had breached the implied covenant by siphoning business away from the acquired company. The Court found the seller’s allegations “sufficiently specific” to survive the motion to dismiss. Unlike the technology issue, the Court found the seller had not discussed this matter before entering the contracts. The Court said, “had the parties contemplated that the [buyer] might affirmatively act to gut [the acquired company] to minimize payments under the [agreements], the parties would have contracted to prevent” the buyer from doing so.
The Court also found that the complaint sufficiently pleaded that the buyer’s alleged actions to transfer business away from the acquired company interfered with the buyer’s ability to determine the revenue generated by the acquired company, as required by the agreements. However, because there were no provisions in the agreements governing the action to be taken with regards to technology, that breach of contract claim failed. Other claims included in the complaint for fraud in the inducement and civil conspiracy also failed. The first, because fraud was not pleaded with sufficient particularity, and the second, because there was no underlying tort on which to premise a conspiracy.