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Chancery Dismisses Implied Covenant Claim For Former Stockholders’ Alleged Improper Demands That Company Take Actions To Achieve Earn-out Milestones

Pacira Biosciences, Inc. v. Fortis Advisors LLC, C.A. No. 2020-0694-PAF (Del. Ch. Oct. 25, 2021)
There generally cannot be a claim under the implied covenant of good faith and fair dealing for conduct that is addressed by the plain language of an agreement. Even when a contract is silent, the Court will not use the covenant to rewrite the contract to imply contractual provisions that a party failed to obtain at the bargaining table.

This case dealt with a contract dispute under a merger agreement, in which the plaintiff corporation brought suit against selling stockholders for taking actions after the transaction that the stockholders apparently believed would enhance the corporation’s chances of meeting certain regulatory milestones, thereby entitling them to earn-out payments. The corporation argued the defendants breached the implied covenant of good faith and fair dealing by making bad faith and improper demands from the corporation and its employees about actions the corporation should take to reach the milestones, and by hiring the corporation’s pre-transaction outside counsel to assist them in doing so. The corporation argued that provisions in the merger agreement giving it discretion about operating the business and limiting the defendants’ role to receiving milestone payments supported an implied covenant that the defendants would not so interfere. The Court held, however, that the implied covenant was not breached because the contract specifically provided for a process for communications about calculating milestone payments. The Court stated that if the parties had wanted to include a provision regarding improper demands or contact with employees or former counsel, they could have drafted such a provision. The Court accordingly dismissed this claim. 

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