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Chancery Declines to Order Acquirer to Make Contingent Payments after Discontinuing Development of a Medical Product

Posted In Chancery, Earn-Out, M&A

Pavel Menn v. ConMed Corp., C.A. No. 2017-0137-KSJM (Del. Ch. June 30, 2022)
Plaintiff was a representative of stockholders who had entered into a stock purchase agreement (“SPA”), in which the defendant acquired a company engaged in developing a medical product. The SPA allocated the risk of continued development via a contingent payment structure, including milestone payments and earn-out payments. The defendant agreed to use “commercially best efforts” to maximize the payments, and to accelerate the payments to the stockholders if the defendant permanently discontinued development or sale of the product, except for certain reasons, including risk of injury to patients. After making several milestone payments, the defendant discontinued development due to concerns of the risk of injury to patients. The plaintiff demanded acceleration payments and brought claims when defendant declined to make these payments.

In a post-trial opinion, the Court held that the defendant was not liable for additional contingent payments. Although the Court found that the defendant had permanently discontinued development of the product, the defendant proved that it met the requirements for an exception to its repayment obligations because the defendant had discontinued development in the good-faith belief that the product posed a risk of injury to patients. Over multiple years, the defendant’s personnel had shown a continued concern regarding risk of injury, and the Court found their belief of a safety risk was formed in good faith. The Court also ruled that the decision to discontinue was “commercially reasonable” because it was made in accordance with commonly accepted commercial practices, as evidenced by independent analysis and on a consensus from internal personnel. The Court reasoned that “commercially best efforts” had the same meaning as “best efforts,” and the record demonstrated that defendant had met its contractual obligation. The Court then rejected the plaintiff’s implied covenant claim as duplicative of its contract claims.



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