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Letter of intent can’t trump merger agreement, Del. high court decides

The Delaware Supreme Court, in a unanimous decision by Chief Justice Leo Strine, has held that a nonbinding letter of intent cannot supersede a merger agreement.

Theodore Olson, a partner at Gibson, Dunn & Crutcher LLP, argued the case before the Delaware court. Also working on the case was Christopher Dusseault, a partner in Gibson Dunn’s Los Angeles office.

Dusseault said in a telephone interview on Wednesday that the court originally heard arguments in March but decided to have the full court review the case, in what’s known as an en banc hearing.

The case involved the purchase by Ev3 Inc. of Appriva Medical Inc., a company that created a device to prevent strokes. The merger agreement provided that the shareholders would receive most of the payment “upon the timely accomplishment of certain milestones toward the approval and marketability” of the device, the court said in its ruling.

The letter of intent between the companies contained a nonbinding provision stating that Ev3 committed to funding “to ensure that there is sufficient capital to achieve the performance milestones.” After the final merger agreement, which included some but not all of the earlier letter of intent through an incorporation provision, Ev3 determined that the product wasn’t economic and abandoned its development.

The shareholders sued, and in a jury trial the Delaware judge allowed the shareholders to argue that the funding provision should stand despite evidence that the parties hadn’t planned to incorporate the provision into the final agreement.

In reversing, Strine said that although some of the early provisions were binding, that didn’t mean that the entire letter of intent survived.

To hold otherwise “would set a precedent that would undermine parties’ abilities to negotiate and shape commercial agreements,” he held.

Gibson Dunn’s Dusseault said, “The court recognized this issue is one of great applicability and one that needs to be unequivocal in Delaware law. These are letters of intent and parties cannot be penalized by having someone convert it into a binding deal later on.”

Jay Lefkowitz, a partner at Kirkland & Ellis LLP who argued the case for the shareholders, didn’t return a call seeking comment on the ruling.

The case is EV3 Inc. v. Lesh, 515, Delaware Supreme Court (Wilmington).