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Court Upholds but Limits Claims Arising From Merger Agreement

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April 6, 2016
By: Lewis H. Lazarus
Delaware Business Court Insider

The Delaware courts regularly address contract claims arising out of merger agreements. Among other recurring issues are whether and how the parties limited claims based on alleged misrepresentations or omissions, whether a party can state a claim for breach of the implied covenant of good faith and fair dealing, and the nature of the remedies available in the event of breach. The recent case of Haney v. Blackhawk Network Holdings, C.A. No. 10851-VCN (Del. Ch. Feb. 26, 2016), addresses each of these issues and provides guidance to transactional and litigation attorneys concerned about minimizing litigation risk.

Background Facts

Haney arose out of a merger agreement between seller CardLab Inc. and acquirer Blackhawk Network Holdings Inc., which each provided gift cards and other prepaid financial products to customers. Prior to the negotiations between CardLab and Blackhawk, CardLab had been in negotiations with a third party, GameStop, to provide prepaid cards to GameStop, which would then provide those cards to its customers in exchange for used games and other electronics. GameStop and CardLab expected to complete a contract with an estimated 2015 gross margin to CardLab of $8.6 million. Thereafter, Blackhawk submitted a proposal to purchase CardLab for $25 million at closing, plus a performance-based cash payment of up to $50 million to be made within 60 days following the end of 2015 (the earnout payment).

Greg Haney, as the seller representative, alleges that the offer was attractive in part because the anticipated GameStop contract would help CardLab achieve the earnout payment. The litigation arose because, according to Haney, Blackhawk knew, but did not disclose, that GameStop had an existing contract with Blackhawk's largest competitor that contained an exclusivity clause that prohibited GameStop from distributing Blackhawk products through August 2015. The merger agreement permitted Blackhawk to withhold $2.5 million at closing to be placed in escrow until GameStop signed the contract and completed steps to roll out the program. CardLab agreed to this provision as long as Blackhawk agreed that CardLab could receive a full year of the GameStop earnout. Blackhawk agreed to that term provided that the GameStop contract commenced no later than April 1, 2015, and repeated its expectation that the GameStop contract proceed without delay.

Court Denies Blackhawk's Integration Claim

After first denying Blackhawk's claims that a limited remedies provision in the merger agreement barred Haney's claims because CardLab had adequately alleged that the contract did not preclude fraud claims based on extracontractual representations, the court also denied its motion to dismiss based on an integration clause in the merger agreement. Delaware law provides that an integration clause will not bar extracontractual claims unless it contains "'language that ... can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract's four corners in deciding to sign the contract,'" citing Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004). Because the court found the integration clause at issue did not express "anti-reliance language," the court denied Blackhawk's motion to dismiss based on the integration clause.

Court Grants Blackhawk's Motion to Dismiss

Haney alleged that Blackhawk's deliberate conduct to prevent CardLab from achieving its entitlement to the earnout payment and its failure to disclose the exclusivity agreement violated the implied covenant of good faith and fair dealing. The court held that the merger agreement specifically addresses the conduct required to enable the seller to achieve the earnout payment, including that Blackhawk enable certain of the seller's personnel to devote substantial time and effort with certain customers and prospects and that "Blackhawk dedicate commercially reasonable resources (both personnel and services)" to those identified customers and prospects. The merger agreement also defined "commercially reasonable resources" as "similar to what Blackhawk provides for its products and services." With those provisions in the parties' contract, the court found there was no gap to be filled by the implied covenant. Similarly, because the merger agreement required Blackhawk to deliver monthly a written report as to specified customers and prospects, "to the extent Blackhawk had a continuing obligation to inform sellers of the exclusivity provision, the obligation [to disclose the exclusivity provision] is subsumed within the express provisions of the merger agreement and Haney's implied covenant claim must fail."

Court Upholds Haney's Claim for Unjust Enrichment

Haney pleaded that Blackhawk was unjustly enriched by the $2.5 million in merger consideration it conditioned on timely execution of the GameStop contract and "the revenue that will accrue to Blackhawk (with no earnout consequence) if it executes the GameStop contract upon expiration of the exclusivity provision." Blackhawk claimed the plaintiff was not entitled to a remedy based on the doctrine of unjust enrichment because "the parties' relationship was governed by the merger agreement." While recognizing that mere doubt about the validity of a contract will not support a claim for unjust enrichment, the court held that the plaintiff's fraud allegation, which rendered the contract subject to rescission, and its seeking of equitable remedies, including reformation and the imposition of a constructive trust, reflected adequate pleading of an entitlement to a remedy based on the doctrine of unjust enrichment.

Lessons Learned

The outcome of contract disputes generally depends on the specific terms of the contract and the nature of the claims and defenses, but certain general principles will guide a Delaware court's analysis. The Haney case reaffirms that if a buyer wants to preclude claims based on extracontractual representations, it cannot do so on the basis of an integration clause, unless that clause contains express anti-reliance language. At the same time, a seller cannot expect to seek damages based on an alleged violation of the implied covenant of good faith and fair dealing unless it can plead gaps in the contract at issue. Finally, a seller may be entitled to damages based on the doctrine of unjust enrichment if it adequately pleads that the contract may be vitiated by fraud and seeks equitable remedies such as reformation and the imposition of a constructive trust. For transactional and litigation attorneys, the Haney case provides instructive guidance concerning the likelihood of contract claims and defenses surviving a motion to dismiss.

Delaware Business Court Insider |  April 6, 2016

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