Delaware Chancery: Must Be Gaps To Raise Implied Breach Claim

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By Michael Greene

Feb. 2 — To bring a claim for breach of an implied covenant of good faith and fair dealing, the plaintiff must identify a gap in the agreement that must be filled by implying terms, according to a Jan. 30 Delaware Chancery Court ruling.

Because the parties had carefully negotiated the contours of the defendant's obligation in the merger agreement, Chancellor Andre G. Bouchard dismissed the plaintiff's claim for breach of the implied covenant.

Accordingly, he found that the defendant's failure to achieve earn-out revenue thresholds must be analyzed within the confines of the express contractual obligations in the merger agreement.

The court also dismissed the plaintiff's fraud claims.


As part of a merger agreement, Dialog Semiconductor PLC agreed to acquire iWatt Inc. for $310 million.

The agreement included earn-out payments of up to $35 million that were conditioned on Dialog's Power Conversion Business Group exceeding certain post-merger revenue thresholds.

After Dialog's business group fell well short of the thresholds, Fortis Advisors LLC, a representative of the former equity holders of iWatt, alleged that Dialog breached a provision of the merger agreement requiring it to use “commercially reasonable best efforts” to achieve and pay the earn-outs in full.

No Gap in Agreement

In addition to its claim for breach of contract, the plaintiff alleged that Dialog breached an implied covenant of good faith and fail dealing.

Under Delaware law, this implied covenant attaches to every contract by operation of law and requires a contracting party to refrain from unreasonable conduct “‘which has the effect of preventing the other party to the contract from receiving the fruits' of the bargain.”

However, this implied covenant only applies when the contract does not speak directly about the issue in dispute, Bouchard noted.

And the court found that the plaintiff did not identify any gaps or ambiguity in the merger agreement as a basis for implying an additional obligation on the defendant. Instead, the plaintiff argued that the count “should survive just in case ‘the Court may disagree' down the road of this litigation.”

Because the merger agreement included a contractual standard by which to evaluate Dialog's failure to achieve and pay the earn-outs, Chancellor Bouchard found there was no implied contract term for the court to read into the agreement.

Fraud Claim

The court also granted a motion to dismiss the plaintiff's claims for fraud on the grounds that it was not pled with the requisite particularity.

The misrepresentations allegedly occurred during the approximately three-and-a-half-month time frame the parties began negotiating the merger agreement.

Chancellor Bouchard found this to be “the functional equivalent to providing no time parameter at all because the misrepresentations logically could not have occurred during any other period of time.”

He additionally ruled that the plaintiff failed to particularly state who made the alleged misrepresentation, where and by what means.

“The lack of these details, in isolation, may not warrant dismissal,” he opined.” But when the lack of any such details is considered together with the failure of the complaint to identify when any of the alleged misrepresentations were made and who made any of them, the complaint fails in my view to apprise Dialog of sufficient information concerning the circumstances of the alleged fraud.”

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