A recent case heard by the Delaware Court of Chancery gives guidance on an acquirer’s obligations to honor contingent purchase price provisions under a merger agreement.
As per American Capital Acquisition Partners, LLC v. LPL Holdings, Inc., the implied covenant of good faith and fair dealing compels the acquirer to refrain from actively depressing a contingent purchase price payment, as explained by John Stigi and Bridget Russell of Sheppard, Mullin, Richter & Hampton. However, minus a “best efforts” clause, the acquirer is not obliged to maximize that payment either.
In the case considered by the Delaware court, ACAP entered into a stock purchase agreement with defendant, LPL Financial, a subsidiary of LPL Holdings. LPL Financial acquired 100 percent of Concord Capital Partners, Inc., an investment management solutions provider formerly owned by ACAP. The deal included a contingent purchase price provision, which would afford additional compensation if Concord—now Concord-LPL—met certain revenue targets.
According to the plaintiffs, the defendants misrepresented that LPL Financial would supply Concord-LPL with the technological provisions needed to help the company meet these revenue targets. They also alleged that LPL Financial diverted revenue streams, and in so doing prevented Concord-LPL from having the opportunity to meet its revenue targets.
ACAP sued LPL Financial for breach of contract, breach of implied covenant of good faith and fair dealing, fraudulent inducement, equitable fraud and civil conspiracy. LPL Financial moved to dismiss all parts of the complaint.
The motion to dismiss was upheld with regards to the failure to provide the necessary technology.
“The parties anticipated that technological adaptations would be necessary, and the Plaintiffs failed to negotiate for a best efforts provision or another provision requiring LPL to make those adaptations,” the court wrote. “[T]he Plaintiffs cannot now write into their agreements an additional term for which they failed to bargain.”
However, the court agreed with the plaintiffs that LPL Financial had breached the implied covenant by diverting resources and sales away from Concord-LPL in order to avoid paying additional compensation.
“[H]ad the parties contemplated that the Defendants might affirmatively act to gut Concord-LPL to minimize payments under the SPA and employment agreements, the parties would have contracted to prevent LPL from shifting revenue from Concord-LPL,” according to the decision.