In ev3, Inc. v. Lesh, No. 515, 2013 (Del. Sept. 30, 2014) the Delaware Supreme Court reversed a jury verdict in favor of the former stockholders of a company acquired by ev3, Inc. (“ev3”) and remanded for a new trial based on the principle that “survival is not transformational.” The case centered around the acquisition by ev3 of Appriva Medical, Inc. (“Appriva”) for $50 million, payable at closing, and $175 million, contingent on the timely completion of certain regulatory milestones with respect to PLAATO, a medical device in development by Appriva. Ultimately, after the transaction was completed, ev3 contended that the costs of pursuing regulatory approval outweighed the benefits, and stopped funding PLAATO’s development. The former shareholders of Appriva (also referred to as “Appriva”) sued ev3 for breach of contract.

During the negotiation process, the parties signed a letter of intent that included a term requiring funding “to ensure that there is sufficient capital to achieve the performance milestones.” Although certain provisions of the letter of intent were explicitly made binding, the rest, including the funding provision, were non-binding. As negotiations progressed, Appriva sought to obtain a similar mandatory funding provision in the merger agreement. ev3 rejected that provision, and Appriva did not press the issue. The final agreement provided in Section 9.6 of the agreement that, “notwithstanding any other provision in the agreement to the contrary,” ev3 would provide funding towards reaching the milestones in its sole discretion, to be exercised in good faith. The parties also included an integration clause within the final purchase agreement, stating that all prior agreements and understandings, excluding the letter of intent, were superseded.

At trial, Appriva successfully argued that the letter of intent, because it survived through the integration clause, should be admissible as part of the entire agreement between the parties. The Superior Court allowed Appriva to refer to the “promise” made in the letter of intent (the non-binding funding provision), and to argue that the non-binding funding provision was in fact binding, either as an independent promise or as a limitation on the sole discretion over funding granted to ev3 in Section 9.6. The court did not, however, allow ev3 to introduce evidence of the negotiations in which ev3 rejected a mandatory funding provision. Ultimately, the jury found that ev3 had breached its contractual obligations, and awarded Appriva $175 million, the full amount due assuming timely completion of all milestones.

On appeal, the Delaware Supreme Court held that the survival of the letter of intent did not transform all of its previously non-binding provisions into binding provisions, but rather preserved the already expressly binding provisions, including confidentiality. Further, the Court noted that even if the provision were part of the parties’ agreement, it was inconsistent with the funding provision in Section 9.6. Because Section 9.6 included the above “notwithstanding” language, the inconsistent funding provision could not be effective. The Delaware Supreme Court reversed and remanded for a new trial, holding that the lower court had erred by allowing Appriva to argue that the non-binding provision was binding. Ultimately, this case clarifies that a non-binding provision will not become binding merely because it survives the execution of a merger agreement, and parties must be explicit if that is their intent, or include that provision within the definitive agreement.