333 A.3d 227
Del. Ch.2025Background
- Comvest (the Buyers) acquired Dura Medic (the Company) in a reverse-triangular merger closing June 6, 2018; Sellers were thirty-nine pre-closing stockholders who signed the Merger Agreement.
- The Merger Agreement included representations about the Financial Statements (stating a Gross-to-Net Ratio of 25.7%), Law compliance (disclose audits on Schedule 4.8), and Significant Customers (no notice of termination/limitation by the ten largest customers).
- Pre-closing CMS contractor activity included a TPE review, at least two ZPIC audits (one with a very high error rate), and a 2017 RAC audit; Sellers disclosed the Second Zone 4 ZPIC Audit on Schedule 4.8 but did not disclose the TPE, the First Zone 4 ZPIC Audit, or the 2017 RAC Audit.
- Two listed Significant Customers (Stanford Health Care and a Baptist Health hospital) gave notice that they would terminate or limit services pre-closing; Sellers did not list those notices as exceptions.
- After close, Buyers held back Medicare billings, discovered broader compliance problems, and brought indemnification claims for breaches of representations; Sellers counterclaimed that Buyers abused discretion by withholding claims to depress earnings and avoid paying the Seller Note.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Section 4.5 (Financial Statements / 25.7% GNR) was breached | Buyers: the actual Gross-to-Net ratio (22.5%) differed from the 25.7% stated, so the representation was false | Sellers: the provision described how Net Patient Revenue was calculated (an accounting estimate), not a warranty of future collections | Held: No breach — the contract described the calculation method and reflected Sellers’ good-faith estimate; Buyers could have bargained for a forward-looking warranty but did not. |
| Whether Section 4.23 (Counterparty Representation) was breached by undisclosed customer notices | Buyers: Stanford and Baptist notified Company pre-closing; omission on Schedule 4.23 was a false representation and caused damages | Sellers: such notices were rumors or immaterial; loss was not permanent or multiplier inappropriate | Held: Breach proved; notices required disclosure. Damages awarded: $2,847,890 (lost earnings multiplied by the transaction EBITDA multiple), plus interest. |
| Whether Section 4.8 / 4.7 (Law Compliance Representation) was breached by undisclosed audits (TPE, First Zone 4 ZPIC, 2017 RAC) | Buyers: nondisclosure of material CMS audits violated express representations and was material given high error rates and enforcement risk | Sellers: Buyers learned of audits in diligence or audits were immaterial | Held: Breach proved for TPE, First Zone 4 ZPIC, and 2017 RAC; Sellers did not prove disclosure in diligence and audits were material. Damages awarded: $100,000 (portion of van Halem fees), plus interest; other consequential damages (loan/acquisition costs) were too attenuated. |
| Whether Sellers’ counterclaims (implied covenant breach and tortious interference for Buyers’ withholding of Medicare claims) succeed | Sellers: Buyers intentionally withheld Medicare billings to depress short-term revenues, pursue indemnity, and avoid Seller Note payments, breaching implied covenant and causing injury | Buyers: withholding was part of a pre-closing plan to overhaul billing and comply with CMS; conduct was reasonable and within contract discretion | Held: Counterclaims fail — no contractual gap that the implied covenant should fill; Buyers’ actions were consistent with pre-closing plans and reasonable; tortious interference fails for lack of underlying contract breach. |
Key Cases Cited
- Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728 (Del. 2006) (court gives priority to parties’ objective intent when construing contracts)
- Salamone v. Gorman, 106 A.3d 354 (Del. 2014) (parties’ intent is judged by an objective reasonable third-party standard)
- In re Viking Pump, Inc., 148 A.3d 633 (Del. 2016) (interpretation gives effect to the four corners of the agreement and all provisions)
- Cobalt Operating, LLC v. James Crystal Enters., LLC, 945 A.2d 594 (Del. 2008) (reliance is not a required element of an indemnification/representation breach claim)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (the implied covenant will not imply terms that contradict clear express contractual rights)
- Dieckman v. Regency GP LP, 155 A.3d 358 (Del. 2017) (principles governing the implied covenant of good faith and fair dealing)