Fortis Advisors LLC v. Dialog Semiconductor PLC, C.A. No. 9522-CB (Del. Ch. Jan. 30, 2015) (Bouchard, C.)
In this memorandum opinion, the Court of Chancery granted a motion to dismiss certain claims relating to a dispute over earn-out payments owed to the former equity holders of iWatt, Inc. (“iWatt”) following the sale of iWatt to Dialog Semiconductor PLC (“Dialog”) pursuant to a merger transaction. The action was brought by Fortis Advisors LLC (“Plaintiff”), the appointed representative of the former equity holders of iWatt under the terms of a merger agreement.
Plaintiff’s complaint asserted five claims against Dialog: (1) breach of Section 3.04 of the merger agreement, which provides that Dialog will “use commercially reasonable best efforts. . . to achieve and pay the Earn-Out”; (2) in the event that the Court denies the claim for breach of the merger agreement, breach of the implied covenant of good faith and fair dealing; (3) specific performance relating to a second earn-out payment; (4) fraudulent inducement; and (5) negligent misrepresentation. Dialog only moved to dismiss the implied covenant, fraudulent inducement, and negligent misrepresentation claims.
The Court dismissed the implied covenant claim because Plaintiff failed to identify any gap or ambiguity in Section 3.04 or elsewhere in the merger agreement as a basis for implying an additional obligation owed by Dialog. The Court explained that by requiring Dialog to use “commercially reasonable best efforts”, the merger agreement set a contractual standard by which to evaluate whether Dialog’s failure to achieve and pay the earn-out payments was improper. Because the parties carefully negotiated the contours of Dialog’s obligations to achieve and pay the earn-out, there was no gap for the implied covenant to fill. In dismissing the implied covenant claim, the Court also rejected Plaintiff’s argument that its implied covenant claim should survive because it is pled in the alternative. The Court explained that the right to plead alternative claims does not obviate the need to provide factual support for each theory.
In dismissing Plaintiff’s fraudulent inducement claim, the Court held that Plaintiff failed to plead its claim with the requisite particularity required by Court of Chancery Rule 9(b). Plaintiff’s fraud claim was based on alleged affirmative misrepresentations. Plaintiff failed to allege the specific date that the misrepresentations were made, who made the particular misrepresentations and to whom they were made, and where or by what means any of the misrepresentations were made. The Court held that these missing details, when considered together, fail to meet the particularity requirement of Rule 9(b).
Because Plaintiff failed to state an underlying fraud claim with particularity, its negligent misrepresentation claim also failed. In addition, the Court held that a negligent misrepresentation claim lies only if there is a special relationship between the parties over which equity takes jurisdiction (like a fiduciary relationship) or a justification for a remedy only equity can afford. The Court found that plaintiff had not made a meritorious argument that the case involves either circumstance. Plaintiff did not make any allegation that Dialog owed iWatt fiduciary duties, nor could it—the dispute involved a transaction negotiated at arm’s-length between sophisticated parties. And the complaint expressly sought damages, not any form of equitable relief.