Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Finding Merger Agreement Provisions Regarding Milestone Payments Ambiguous, Delaware Court Of Chancery Denies Dismissal Of Post-Merger Breach Claims<br >  
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  • Finding Merger Agreement Provisions Regarding Milestone Payments Ambiguous, Delaware Court Of Chancery Denies Dismissal Of Post-Merger Breach Claims
     
    08/21/2018
    On August 10, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of contract claims stemming from a merger agreement pursuant to which defendant, Stora Enso AB, acquired non-party, Virdia, Inc.  Fortis Advisors LLC v. Stora Enso Ab, C.A. No. 12291-VCS (Del. Ch. Aug. 10, 2018).  Plaintiff, Fortis Advisors LLC, as shareholder representative of Virdia’s pre-merger equity holders, asserted that Stora Enso breached the merger agreement in connection with its failure to achieve certain post-closing milestones obligating it to make certain contingent milestone payments.  Finding competing interpretations of the merger agreement both reasonable, the Court declined to dismiss the breach claims. 

    Stora Enso acquired Virdia pursuant to a merger agreement, which provided for a payment at closing and two post-closing payments contingent on the completion of milestones by particular dates.  Specifically, the milestones involved the construction and commission of two renewable materials plants and the production of certain materials.  The milestones were not met and Stora Enso did not make the contingent payments.  

    Plaintiff asserted that defendant breached certain of its representations in, and failed to satisfy certain requirements of, the merger agreement, both of which were intended to increase the likelihood the milestones would be achieved.  Plaintiff alleged that a representation in the merger agreement by defendant that the latter had “taken all corporate action necessary . . . to perform its obligations” under the merger agreement required defendant to have received pre-closing authorization to order, in a timely manner following closing, a piece of equipment alleged to be the “centerpiece” of achieving one of the milestones.  Defendant argued, however, that the representation was nothing more than “a standard corporate authorization provision that simply acknowledged [its] legal authority to enter into and consummate the [m]erger” and not a representation that it had obtained all internal approvals required to take all post-closing steps necessary to build the plants contemplated by the milestones.  Plaintiff also alleged that defendant breached a provision of the agreement obligating business to be conducted in accordance with a “financial and human resource plan” that included a timeline for a required number of employees and expenditures in connection with the milestone process.  But defendant countered that the timeframes were guidelines and plaintiff’s construction would nullify the contingency of the milestone payments.

    The Court deemed both Fortis’s and Stora Enso’s proffered constructions of the relevant contractual language to be reasonable interpretations.  Thus, because Stora Enso failed to demonstrate that its interpretation was “the only reasonable interpretation,” the Court denied the motion to dismiss and noted that the parties will be afforded the opportunity to discover and present extrinsic evidence.
    CATEGORY: Deal Disputes

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