Delaware Court Of Chancery Applies Implied Covenant Of Good Faith And Fair Dealing To Prohibit An Acquiring Entity From Diverting Revenues To Depress Payouts Under A Contingent Purchase Price Provision

In American Capital Acquisition Partners, LLC v. LPL Holdings, Inc., CA NO. 9490-VCG, 2014 WL 354496 (Del. Ch. Feb. 3, 2014), the Delaware Court of Chancery applied the implied covenant of good faith and fair dealing to a merger agreement's contingent purchase price provision. The court held that under the implied covenant an acquiring entity must refrain from diverting revenue streams from its subsidiary post-merger in a manner that would depress the payment under the contingent purchase price provision. The court also held, however, that the implied covenant did not require an acquiring entity actively to maximize revenue streams absent the inclusion of a best efforts provision in the merger agreement. American Capital Acquisition Partners defines the contours of the implied covenant of good faith and fair dealing as applied to an acquiring entity's actions affecting the application of a contingent purchase price provision in a merger agreement.

Plaintiff American Capital Acquisition Partners, LLC ("ACAP") is a New Jersey LLC and the former parent of Concord Capital Partners, Inc. ("Concord"), a provider of investment management solutions. Individual plaintiffs are the former officers and directors of Concord. Defendant LPL Financial LLC ("LPL Financial") is a wholly-owned subsidiary of defendant LPL Holdings, Inc. ("LPL"), a provider of investment advisory services. ACAP and LPL entered into a Stock Purchase Agreement ("SPA") whereby LPL acquired 100% of Concord, which became Concord-LPL. The SPA included a "contingent purchase price provision" under which LPL was obligated to pay additional compensation if LPL-Concord met certain revenue targets. The individual plaintiffs also entered into supplemental employment agreements with LPL-Concord, and the employment agreements contained a provision for additional compensation as well.

Plaintiffs alleged that defendants misrepresented that LPL Financial had, or would obtain, the technological ability to allow Concord-LPL to meet the revenue targets outlined in the SPA's contingent purchase price provision and the supplemental employment agreements, when, in fact, LPL Financial did not have the capability, or the intent, to implement the necessary technologies. Additionally, plaintiffs alleged that LPL Financial conspired to divert clients, personnel and opportunities from LPL-Concord to a subsidiary of LPL, denying Concord-LPL the opportunity to meet its revenue targets, and thus rendering the...