Is My Non-Binding Letter of Intent Actually Binding?

ev3, Inc. v. Lesh
(Del. Sept 30, 2014) (addressing the impact of an acquisition agreement integration clause on provisions of a non-binding letter of intent previously executed by the parties)

The Delaware Supreme Court recently overturned a $250 million jury verdict that centered on contractual interpretation of an “integration clause” in a definitive acquisition agreement, as applied to provisions of the related letter of intent previously executed by the transaction parties. In ev3, Inc. v. Lesh, the Supreme Court ruled that an integration clause in an acquisition agreement does not transform non-binding provisions of a letter of intent into subsequently binding provisions. Accordingly, only those provisions in the letter of intent specified as binding (and surviving) will continue as operative provisions in connection with any integration clause.

Appriva was acquired by ev3 in 2002 for $50 million plus up to $175 million in contingent milestone payments. Shortly after the acquisition, ev3 made the determination that Appriva’s technology no longer appeared promising and ceased funding related development. Appriva’s stockholder representative sued, claiming that milestone payments should be paid in full following ev3’s alleged breach of (i) obligations in the acquisition agreement to fund and pursue regulatory milestones in ev3’s “sole discretion, to be exercised in good faith” and (ii) a non-binding provision in the previously executed letter of intent in which ev3 stated that it would commit to funding development and ensure sufficient capital to achieve the performance milestones. With respect to the second claim, Appriva relied on the integration clause in the acquisition agreement which provided that it contained the entire understanding among the parties and superseded all other agreements or understandings among the parties except for the letter of intent. As is typical, the letter of intent contained a provision delineating certain provisions as binding (e.g., confidentiality, exclusivity and transferability) and all others as non-binding.

With respect to the power of the integration clause, the Supreme Court held that only the provisions specified as binding (and surviving) would be operative pursuant to the acquisition agreement “integration clause.” Put simply, the integration clause in the acquisition agreement did not convert the previously non-binding funding provision of the letter of intent into a binding obligation. As the Court noted, “survival [of a provision] is not transformational.” The court also found that the lead in language to the milestone covenant in the acquisition agreement—”notwithstanding any other provision in the Agreement to the contrary”—rendered any contrary provision (i.e., the letter of intent funding provision) ineffective. As the covenant made it clear that funding was in ev3’s sole discretion, any contrary position in the letter of intent was superseded by the operative provisions of the acquisition agreement.

Going forward, parties to acquisitions with contingent consideration should ensure that covenants regarding earnout or milestone efforts are carefully and specifically drafted. No party should rely on non-binding provisions of a letter of intent. It’s what’s in the definitive acquisition agreement that counts!

Read the full opinion