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Airborne Health, Inc. and Weil, Gotshal & Manges LLP v. Squid Soap, LP, C.A. No. 4410-VCL (Del. Ch. Nov. 23, 2009)

November 23, 2009

The Court of Chancery entered judgment on the pleadings in plaintiffs’ favor as to nearly all claims arising out of an Asset Purchase Agreement (the “APA”), pursuant to which plaintiff Airborne Health, Inc. (“Airborne”) acquired the assets of defendant Squid Soap, LP (“Squid Soap”).

Squid Soap developed a soap dispenser and sought brand-name recognition. Through the APA, Squid Soap agreed to sell its assets to Airborne. The APA required that Airborne return the assets to Squid Soap if Airborne did not meet certain business targets by an agreed date. Airborne did not meet these targets due, in part, to litigation filed against Airborne prior to the closing of the APA that had not been disclosed to Squid Soap before the APA was signed.

Squid Soap asserted that Airborne fraudulently induced Squid Soap to enter into the APA by failing to disclose the pending litigation. The APA required that Airborne disclose litigation affecting Airborne’s ability “to enter into [the APA] or consummate” the deal, but the Court did not find a contractual representation addressing the general existence of legal proceedings. The Court also concluded that the phrase “consummate the transactions contemplated hereby” referred only to transactions required to close, and not to any post-closing obligations affected by the pending litigation, such as the obligation to make earn-out payments.

The Court also concluded that the APA did not bar fraud claims based on extra-contractual representations, as its standard integration clause did not meet the requirements of an anti-reliance provision, but that Squid Soap did not plead allegations of extra-contractual fraud with sufficient particularity to satisfy Court of Chancery Rule 9(b).

With respect to Squid Soap’s claim for equitable fraud, the Court found the existence of no special circumstance, such as the existence of a fiduciary relationship, that might trigger operation of the equitable fraud doctrine.

Squid Soap also asserted that Airborne breached the APA by making false representations about its marketing abilities, failing to disclose pending litigation, and failing to promote Squid Soap’s products. The Court found that the APA did not contain any representations about Airborne’s marketing abilities and that Airborne’s failure to disclose the litigation did not constitute a breach for the same reasons it did not constitute fraud. The Court also found that the “plain language” of the APA did not require the promotion of Squid Soap’s products.

The Court also rejected Squid Soap’s claim for breach of the implied covenant of good faith and fair dealing. Although the APA contained explicit business targets (without explicitly requiring Airborne to expend resources), the Court concluded that there existed no basis to support a claim that Airborne exercised its contractual discretion in bad faith. As a “sophisticated party represented by able counsel,” the Court concluded that Squid Soap could have insisted on specific contractual commitments regarding product promotion had that been intended.

Plaintiff Weil, Gotshal & Manges, LLP (“Weil”) served as Airborne’s counsel for purposes of drafting the APA. The Court held Weil not liable on claims of aiding and abetting and conspiracy in connection with the APA, as the Court found no underlying wrong.

The full opinion is available here