STRINE, Chief Justice:
This is an appeal from a jury verdict finding that ev3, Inc., the buyer of Appriva Medical, Inc. ("Appriva"), breached its contractual obligations to Appriva's former shareholders, who gave up their shares in the merger. The merger agreement between ev3 and Appriva ("merger agreement") provided for the bulk of the payments to the Appriva shareholders to be contingent upon the timely accomplishment of certain milestones toward the approval and marketability of a medical device that Appriva was developing.
After it became clear that the milestones were not going to be achieved, the former Appriva shareholders sued. Although the case was pursued by former shareholders of Appriva, for simplicity we refer to the plaintiffs as Appriva. Appriva argued that the full amount of contingency payments was due because ev3 had breached its obligation under § 9.6 of the merger agreement to fund and pursue the regulatory milestones in its "sole discretion, to be exercised in good faith."
Because the merger agreement contained an integration clause stating that the letter of intent was not superseded by the merger agreement, the Superior Court accepted Appriva's argument that the letter of intent was not inadmissible parol evidence, but a part of the entire agreement between the parties. At the same
At many points during the trial, ev3 attempted to convince the Superior Court that the non-binding letter of intent should not be used to interpret or contradict the clear terms of § 9.6, but the Superior Court adhered to the contrary view advocated by Appriva. Thus, Appriva was permitted to argue to the jury that ev3 not only failed to act in good faith under § 9.6, but that it breached a "promise" to honor the Funding Provision contained in the non-binding letter of intent. The jury agreed that ev3 had breached its contractual obligations and determined that ev3 owed Appriva the full amount of the milestone payments, $175 million.
On appeal, ev3 argues that the Superior Court, in various related ways, erred by permitting Appriva to argue that the Funding Provision in the non-binding letter of intent continued to bind ev3, and also that the non-binding letter of intent modified the "sole discretion" standard set forth in § 9.6. We conclude that the Superior Court erred by accepting Appriva's position that the non-binding Funding Provision within the letter of intent was admissible to affect the meaning of § 9.6. By its clear terms, § 9.6 overrode any "provision to the contrary." Even more specifically, it made clear that the sole discretion given to the buyer extended to the obligation to "provide funding for the surviving corporation, including without limitation funding to pursue achievement of any of the Milestones." These clear terms negated Appriva's contention that the Funding Provision in the letter of intent was binding and that it tempered ev3's obligation to act in good faith.
Moreover, the integration clause does not aid Appriva for two reasons. First, the letter of intent contained binding and non-binding commitments. To find that the nonbinding Funding Provision became binding because the letter of intent was not wholly superseded by the merger agreement would set a precedent that would undermine parties' ability to negotiate and shape commercial agreements.
Second, by its plain terms, § 9.6 overrode any "other provision in the Agreement to the contrary." Thus, whether or not the letter of intent survived for some purposes, any provisions that conflicted with § 9.6 were without force and effect. Because the Funding Provision was inconsistent with § 9.6, it was error for the Superior Court to allow Appriva to argue that the Funding Provision was binding as a promise and that the sole discretion standard in § 9.6 was subject to compliance with or tempered by the Funding Provision. Relatedly, it was also error to allow Appriva to use the Funding Provision as evidence of a binding promise, but to deny ev3 the opportunity to refute this argument with the broader negotiating history.
Plaintiffs Dr. Michael Lesh and Erik van der Burg founded Appriva, a California corporation, to develop the "PLAATO" medical device. Before PLAATO could come to market and be sold profitably, Appriva had to run a regulatory gantlet to prove that PLAATO's benefits to patients outweighed its risks. It also had to demonstrate PLAATO's commercial potential.
In late 2002, ev3, a medical device company primarily financed by private equity funds sponsored by Warburg Pincus and The Vertical Group, made an unsolicited offer to purchase the equity of Appriva for $190 million, with $115 million to be paid upfront and the remainder to be paid upon the completion of certain regulatory milestones on the way to PLAATO's approval for sale to the public. But during the course of negotiations, ev3 became concerned about the costs and risks of achieving regulatory approval and bringing PLAATO to market. In light of these risks, ev3 sought to reduce the upfront payment to Appriva and increase the milestone payments.
The parties signed a non-binding letter of intent during the negotiation process. Certain provisions, which addressed confidentiality, transferability, and restrictions on the ability of Appriva to engage in discussions with other potential buyers, were specifically designated as binding.
The parties also specified that the remainder of the letter of intent was non-binding. The non-binding provisions were those most typically associated with a letter of intent. They outlined the preliminary framework for a potential agreement that the parties might ultimately sign after due diligence was completed, negotiations had taken place, and the parties could balance all the risks and rewards and embody them in a comprehensive definitive acquisition agreement. Reflecting this, the letter of intent said:
Among the non-binding provisions of the letter of intent was the one we refer to as the Funding Provision. This provision states in full:
The record below reflects that after the letter of intent was signed, Appriva attempted to include a binding obligation in the merger agreement that would have required ev3 to commit to a pre-determined business plan detailing a specific funding schedule to meet the relevant milestones.
In the final merger agreement, ev3 promised to pay $50 million at closing, but the bulk of the potential consideration — $175 million — was made contingent on the timely accomplishment of the following milestones:
The merger agreement also contained an integration clause stating that:
Thus, the merger agreement superseded all prior agreements and understandings between the parties, except for those contained in the letter of intent. Because, as has been discussed, letters of intent often contain provisions that parties wish to remain binding after the execution of a definition acquisition agreement — such as confidentiality and standstill provisions — this type of integration clause is not unusual.
The merger agreement also contained a specific provision dealing with the obligation
Shortly after ev3 and Appriva consummated the merger, ev3's ardor to pursue the development of PLAATO waned. For its part, ev3 contended at trial that the development costs of getting regulatory approval for PLAATO ballooned beyond what anyone had believed to be viable. As PLAATO's commercial prospects became less promising, ev3 began to believe that PLAATO was not worthy of the further investment required to secure FDA approval and bring PLAATO to market expeditiously.
Although the reasons were hotly disputed at trial, the record shows that ev3 did not expeditiously pursue FDA approval. When the deadline for the first milestone arrived, ev3 had not met it. At that point, former Appriva shareholders brought suit in the Superior Court and made various claims, including a claim for breach of contract. Appriva contended that ev3 had breached its contractual duties to fund and pursue achievement of the milestone payments "in good faith."
As the case proceeded, the parties dueled over the contours of Appriva's contractual claim. Both sides agreed that § 9.6 was clear and unambiguous, although they had different views about what that meant. In the context of a ruling that denied ev3's motion for summary judgment, the Superior Court agreed that § 9.6 was clear and unambiguous. After the Superior Court made this ruling, ev3 sought to prevent Appriva from arguing to the jury that the non-binding Funding Provision was a contractual promise, or that it operated to temper the sole discretion standard in § 9.6. ev3's efforts took the form of a motion in limine, proposed jury instructions, and arguments to the Superior Court about the admissibility of evidence at trial.
As the case was presented to the jury, Appriva was permitted to and did argue that the non-binding Funding Provision in the letter of intent was a binding promise that comprised part of the overall agreement of the parties, and thus, a breach of the Funding Provision justified relief. Appriva also argued that the binding "sole discretion" standard in § 9.6 was subject to the specific promise made in the non-binding Funding Provision, and thus, ev3 had not acted in good faith when it did not comply with the Funding Provision.
For example, on the first day of trial, Appriva told the jury, "[y]ou're going to have to interpret the contract however you read it . . . Can ev3 really make all of these promises about good faith and ensuring adequate funds . . . and then take
Consistent with this, Appriva argued in closing that the Funding Provision in the letter of intent contained a binding promise:
The case ultimately went to the jury, which was asked to decide simply whether ev3 breached the merger agreement. The Superior Court did not instruct the jury that the integration clause did not convert the non-binding provisions of the letter of intent into binding ones. Nor did the Superior Court instruct the jury that by the plain terms of § 9.6, the Funding Provision had no force and effect, because it was contrary to § 9.6 and § 9.6 prevented the parties from considering contrary provisions.
Instead, the Superior Court provided a single jury instruction interpreting § 9.6. This instruction defined "good faith" and was the subject of debate between the parties. ev3 sought a specific instruction that required the jury to find that ev3 had acted in bad faith in order to breach § 9.6.
Ultimately, the jury found that ev3 had breached its contractual obligations and awarded Appriva $175 million in damages, the full amount of the milestone payments. The jury found for ev3 on all of Appriva's other claims, including its fraud claim. ev3 then filed motions for judgment as a matter of law and a new trial, which were denied by the Superior Court.
The Superior Court rejected that argument for two reasons. First and most important, the Superior Court reiterated its view that the Funding Provision in the letter of intent had been incorporated into the merger agreement, was not in conflict with § 9.6, and thus was not inadmissible parol evidence. The Superior Court also emphasized that the letter of intent had been admitted solely "because [it] related to the representations and reliance required to support Plaintiffs' fraud claim and not to contractual construction."
Second, the Superior Court contended that because the jury did not accept Appriva's fraud claim, there was no harm to ev3 from the omission of evidence showing that Appriva had attempted but failed to incorporate specific obligations to fund achievement of the milestones, similar to the Funding Provision, into the merger agreement.
On appeal, ev3 makes several arguments. We focus on the major one, which we distill into its essence. That argument is that the Superior Court erred by permitting Appriva to argue that the non-binding Funding Provision in the letter of intent was in fact binding, either as an independent promise that was part of the parties' overall bargain, or as a limitation on the sole discretion given to ev3 in § 9.6.
We agree. The reference to the letter of intent in the integration clause did not convert the non-binding Funding Provision into a binding contractual obligation.
By contrast, the non-binding provisions of the letter of intent were just that: nonbinding. These were the framework provisions that outlined the contours of a potential deal that the parties might ultimately strike contractually in a binding form.
The fact that the parties designated certain provisions of the letter of intent as binding confirms that the remainder of the letter of intent, including the Funding Provision, was non-binding.
As important, § 9.6 starts with the plain words: "Notwithstanding any other provision in the Agreement to the contrary." These words render ineffective any contrary provision in the merger agreement itself, otherwise binding or not, and thus, even if the letter of intent had been incorporated as part of the parties' larger agreement, any provisions of the letter of intent in conflict with § 9.6 must give way.
Section 9.6 makes clear that the sole discretion given to ev3 extended to the obligation to "provide funding for the surviving corporation, including without limitation funding to pursue achievement of any of the Milestones," subject only to its duty to act in good faith. A provision that allows a buyer to make funding decisions in its "sole discretion" is plainly inconsistent with the Funding Provision, which required ev3 to fund on a specific schedule
This is not to say that the Funding Provision of the letter of intent would necessarily be inadmissible for all purposes. For example, if ev3 contended that it never understood that the development of PLAATO would involve costs of the magnitude set forth in the Funding Provision of the letter of intent and the separate plan it referenced, the terms of the letter of intent itself would be admissible to contradict that assertion.
As the trial actually proceeded, Appriva did not use the Funding Provision in any such targeted way. Instead, it made broad arguments that the non-binding Funding Provision was in fact binding, in the sense that it had independent force, and also that it tempered the sole discretion given to ev3 in § 9.6. The Superior Court erred by permitting Appriva to make these arguments. That error was compounded because ev3 was denied the opportunity to admit evidence of the parties' negotiations that arguably would have demonstrated that Appriva knew that ev3 had not promised to abide by the Funding Provision, and that Appriva was knowingly asking the jury to embrace a false proposition.
Because Appriva was permitted to argue that ev3 was bound by two separate promises, the breach found by the jury could have involved a breach of § 9.6 or a breach of the Funding Provision. As for the breach of § 9.6, the jury may have improperly relied on the non-binding Funding Provision when determining that ev3 did not act in good faith. On this point, the Superior Court's determination that there was no prejudice to ev3 because the Funding Provision was relevant only to a fraud claim on which ev3 prevailed was clearly erroneous. As we have noted, Appriva repeatedly argued that the Funding Provision was a binding promise that ev3 breached, which should subject ev3 to contractual damages. Because the jury was therefore permitted to hold ev3 responsible for breaching the contract on theories that are inconsistent with the unambiguous terms of the parties' agreement, we reverse
Because a new trial must be held on the breach of contract claim, we do not reach ev3's argument on appeal that the Superior Court's jury instruction regarding the meaning of good faith was erroneous. When the Superior Court crafted its instruction, it did not have the benefit of this Court's decision in DV Realty Advisors LLC v. Policemen's Annuity and Benefit Fund of Chicago.
In DV Realty, we also held that a plaintiff contending that a party did not comply with its express contractual duty of good faith would typically have to show that the party acted in subjective bad faith.
We believe it would be imprudent to accept ev3's invitation for us to craft specific jury instructions for use on remand. The record is clear that the Superior
We recognize that this task is not without complexity. ev3 agreed to pay the milestones on a shared assumption with Appriva that the development of PLAATO would generate profits sufficient to make its development worthwhile to ev3 after considering PLAATO's development costs and risks and the milestone payments. That is, that the timely development was expected to be a win-win proposition for ev3 and Appriva.
In this case, the transaction was structured around an assumption that both
Under DV Realty, it could therefore not constitute bad faith for ev3 to refuse to proceed with PLAATO if the pursuit, after taking into account the milestones and development costs, was not expected to yield ev3 a commercially reasonable profit, in the context of the industry within which it was operating. But it could be bad faith if the expected profits to ev3 were commercially reasonable and ev3 nonetheless acted to delay accomplishment of the milestones so as to shift additional profits its way at the expense of the former Appriva shareholders. The Superior Court, with further input from the parties and greater knowledge of the factual record, is best positioned to give a specific instruction to the jury at the new trial.
For these reasons, the Superior Court's final judgment order denying the motion for a new trial is REVERSED, and the case is remanded for proceedings consistent with this opinion.
ev3 also filed a "Motion For a Jury Instruction on the Impact of the Letter of Intent On the Meaning of Section 9.6 of the Merger Agreement," which asked the jury to set aside the letter of intent when interpreting § 9.6. App. to Opening Br. at 332. The Superior Court did not rule on this instruction, nor did it give any specific instruction interpreting § 9.6, other than an instruction that defined "good faith." Although Appriva argues on appeal that ev3 waived its request for that jury instruction by not repeating it at the prayer conference, we do not embrace that argument. In its own post-trial decision denying ev3's motion for a new trial, the Superior Court did not find that ev3 had waived its request and instead addressed the merits. See Lesh v. ev3, Inc., 2013 WL 6040418, at *3 (Del.Super. Aug. 29, 2013). That is understandable. ev3 had consistently, and at some risk of testing the Superior Court's patience, pressed its position regarding the admissibility of the letter of intent, and the Superior Court had consistently ruled against it. We will refuse to find waiver "`if the party's position previously has been made clear to the trial judge and it is plain that a further objection would be unavailing.'" E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 439 n. 4 (Del. 1996) (quoting WRIGHT & MILLER, 9A FEDERAL PRACTICE AND PROCEDURE § 2553 at 441). At no point did ev3 abandon its position, and any conduct that indicated some acceptance of the court's rulings was necessary to continue the trial. The court had articulated the law governing the case to be put to the jury and ev3 had to deal with that reality until it could challenge the Superior Court's rulings on appeal.