MERGERS & ACQUISITIONS RECENT DEVELOPMENTS OF IMPORTANCE

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1 MERGERS & ACQUISITIONS RECENT DEVELOPMENTS OF IMPORTANCE Prepared by: Al Hudec Tel: (604) Fax: (604) Trevor Scott Tel: (604) Fax: (604) & Teresa Tomchak Tel: (604) Fax: (604) Farris, Vaughan, Wills & Murphy LLP 700 West Georgia St, Suite 2500 Vancouver, BC V7Y 1B3 RECENT TRENDS IN DEAL TERMS FOR CANADIAN PRIVATE COMPANY ACQUISITIONS The 2014 Canadian Private Target M&A Deal Points Study (the Canadian Study ) recently released by the Mergers and Acquisitions Committee Market Trends Subcommittee of the Business Law Section of the American Bar Association surveys deal terms in acquisition agreements for the purchase of Canadian private companies by Canadian public companies. The study covers 60 acquisition agreements signed in 2012 and 2013 and shows that the trends established by prior surveys are continuing. These trends include a shift to more seller friendly terms and a convergence of Canadian and US deal terms. TYPICAL INDEMNIFICATION TERMS The trends are seen most clearly in changes to indemnification terms. Twenty years ago, a seller s indemnification obligations were seldom capped, either in amount or duration. More recently, a typical Canadian deal included a three year or more indemnification period with either no indemnification cap or a cap equal to the purchase price. The Canadian Study shows indemnification terms have further changed. Indemnification Cap In the Canadian Study, the indemnification cap is now less than the purchase price in 60 per cent of deals (up from 38 per cent in 2012 and 35 per cent in 2010). The cap equaled the purchase price in only 19 per cent of deals. In comparison, the US 2013 Private Target M&A Deal Points Study (the US Study ) showed that indemnification caps were less than the purchase price in 89 per cent of deals and equal to the purchase price in only five per cent of deals. Indemnification caps are equal to 10 per cent or less of transaction value in 60 per cent of US deals, but only 18 per cent of Canadian deals. Often certain fundamental representations are carved out from the indemnification cap. Examples include fraud (77 per cent of deals), taxes (24 per cent of deal) and title (22 per cent). Often matters such as taxes (53 per cent of deals) and environmental (nine per cent of deals) are the subject of separate stand-alone indemnities. Generally, indemnification obligations are subject to baskets which provide either that the seller will be responsible for losses in excess of some defined threshold deductible; or that the seller will be responsible for all losses from the first dollar once a threshold is crossed. First dollar baskets are more common in Canada (50 per cent of deals, compared to deductible baskets in 36 per cent of deals). The median first dollar basket is 0.64 per cent of transaction value, with a median of 0.31 per cent of transaction value for deductible baskets. In 68 per cent of deals with baskets, these baskets also apply to breaches of covenants. Again, carve outs for matters such as fraud, taxes and other fundamental representations are common. Indemnification Survival Periods Survival periods tend to be much longer in Canadian transactions; with 56 per cent of Canadian deals having a survival period of 24 months or more (only 11 per cent of US deals) and 21 per cent of deals having a survival period of 12 months or less (26 per cent of US deals). The most frequent survival period in Canada is 24 months, compared to 18 months in the US. Carve outs providing longer survival periods for fundamental representations and for matters such as taxes, environmental and fraud are common. In setting the indemnity survival period and, more importantly, when monitoring for possible indemnity claims post-closing, it is important to realize that contractual limitation periods may not, in some jurisdictions, override statutory limitation periods. For example, in British Columbia, the Limitation Act requires that a claim must be made within 24 months of it becoming discoverable and is silent on the issue of whether this limitation can be waived or extended by private contract. In Ontario, as a result of amendments to the Limitation Act, 2002, parties to business agreements are permitted by contract to shorten, extend, suspend or entirely exclude statutory limitation periods. Other Matters There are a number of other indemnification related clauses in acquisition agreements that tend to be highly negotiated. For example, as a result of the ABA deal surveys giving the clause greater exposure, whether or not to include an anti-sandbagging clause in an acquisition agreement is now more frequently debated. Clauses dealing with sandbagging are included in 51 per cent of US deals but only 29 per cent of Canadian deals. Fourteen per cent of Canadian deals include an anti-sandbagging provision excluding liability where the party seeking indemnification had knowledge of the breach prior to closing. Fifteen per cent of deals contain a benefit of the bargain or sandbagging provision that maintains the right to indemnification notwithstanding any knowledge of the indemnittee of the inaccuracy of the representation at or prior to closing.

2 Consequential damages are expressly excluded from indemnification in 44 per cent of Canadian deals and expressly included in 11 per cent of deals. Care should be taken to exclude loss of profits only as a subcategory of consequential damages and not also in cases where a loss of profits is a direct loss resulting from a breach of representation and warranty. Also, great care should be taken in excluding fraud from indemnity caps, survival period limitations and exclusive remedy clauses. This has become common, but agreeing to include an undefined fraud exclusion in an acquisition agreement can have untoward consequences. Various legal concepts of fraud might be imported into the deal if the word is not defined. It may result in excepting false representations made during the negotiations from the nonreliance provision of the agreement, or serve as the basis of a suit based on equitable fraud where there is no intent to deceive, or be used as the basis for suits on broader theories of fraud such as promissory fraud or concepts of unfair dealings. Accordingly, the scope of the fraud exemption should be specifically limited through a defined term limiting it to situations where the seller deliberately and knowingly, with an intent to deceive, misleads the buyer with respect to representations and warranties in the agreement. 1 good solution is to provide drag along provisions in the charter documents of the target, providing that minority shareholders are required to accept the deal on the same terms as the majority shareholder, including the indemnity provisions. PRESERVING PRIVILEGE ON BEHALF OF SELLING SHAREHOLDERS As a result of the recent decision of the Delaware Chancery Court in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 3 M&A lawyers are now paying more attention to ways for a seller to protect privilege with regard to its business and the sale process itself. In the Grant Hill Equity case, a single law firm represented both the target company and the selling shareholder. After the transaction closed, the buyer and seller ended up in a dispute about an indemnity claim. In the course of the dispute, the buyer found computer files containing communications between the target and the seller s lawyers which it believed supported its claim that it had been mislead. The Court held that the privilege remained with the company that had been purchased, and that the selling shareholder could therefore not claim privilege in the communications from its lawyer. A similar result occurred in Canada in NEP Canada ULC v. MEP OP LLC. 4 LEGAL BUSINESS BINDING ALL SHAREHOLDERS TO THE INDEMNIFICATION An issue frequently encountered in practise is how to bind all shareholders, particularly, smaller shareholders, to the post-closing indemnification provisions of the acquisition agreement. Often, in a private company situation, the selling shareholders may include numerous employees, ex-employees and smaller early-stage investors; and it may not be practical or sometimes even possible to get all of the selling shareholders to sign the acquisition agreement. One alternative is to include in the transmittal letters signed by all shareholders an adhesion clause that binds all shareholders to the indemnification and release provisions of the acquisition agreement whether or not they have actually signed it, and to appoint a shareholder representative to act on their behalf in administering claims on the indemnity escrow. A recent decision of the Delaware Court of Chancery in Cigna Health and Life Insurance Company v. Audax Health Solutions 2 has created concerns with this solution on the basis that a statutory merger gives effect to the share exchange and creates the entitlement of the selling shareholders to their consideration; and that to seek indemnification after the fact in the letter of transmittal is to seek to impose further covenants without consideration. In response to Cigna, consideration should be given to structuring the escrow in an acquisition agreement as a contingent right to proceeds, rather than as a holdback or claw back. Another alternative in Canada is to give effect to the transaction pursuant to a plan of arrangement which includes an order binding all shareholders to the indemnity provisions and appointing a shareholder representative to act as agent on their behalf. If the problem of binding minority shareholders to the terms of the deal was anticipated at the time that the target was formed, a There are several ways to deal with this problem. One is to include in the acquisition agreement not only a consent to the target s lawyers continuing to represent the selling shareholders after closing, but also specific clauses designed to retain the privilege. The agreement should make clear that the parties recognize that it would be impracticable to purge all seller s privileged communications from the target s files and that no waiver is intended, and include an agreement from the buyer not to look for or use such communications. Alternatively, the seller and the target could negotiate an agreement prohibiting the use of privileged communications against each other. WORKING CAPITAL ADJUSTMENTS Post-closing purchase price adjustments are very common in Canadian deals, with 73 per cent of transactions including some form of price adjustment provision. Adjustments for working capital are the most common form of price adjustment (70 per cent of Canadian deals that had price adjustment provisions). In a typical Canadian private company acquisition transaction, the parties agree on a cash free, debt free price which must then be adjusted post-closing to account for the target s actual cash, debt and working capital. Working capital adjustment provisions are found in the majority of private transactions and account for a significant portion of post-closing disputes. Often, the seller (48 per cent of deals) will prepare an estimate of the adjustment for purposes of determining the price at closing, with the buyer usually (61 per cent of deals) calculating the final post-closing adjustment. Generally, the methodology prescribed in the agreement for calculation of the working capital amount will be defined by reference to the target s existing practices, including existing accounting principles, methods and practices

3 and applicable GAAP. Frequently, however, the methodology applicable to a number of specific line items will be particularized in the agreement. For example, restricted cash required to be held for a specific purpose might be excluded, together with cash in till (since it will be needed for operations immediately after closing). The write down policy for obsolete assets might be specifically defined; and prohibitions on the reversal of reserves may be imposed. In 10 per cent of Canadian deals, tax assets and liabilities are excluded, particularly if the target will be highly levered in the future and the buyer does not place a value on the tax assets. Increasingly, adjustment amounts are paid from a separate working capital escrow (23 per cent of deals in the Canadian Study, compared with 14 per cent in 2012 and 10 per cent in 2010). LOCKED BOX TRANSACTIONS The calculation and settling of post-closing working capital takes significant time, and can often lead to frustrations or acrimony. Accordingly, as a substitute for a working capital adjustment, it is sometimes worth looking at the possibility of a locked box transaction, as is common in the UK and EU. In a locked box transaction, the price is set at signing, based on a recent balance sheet (the date of such balance sheet being the Reference Date ). Cash, debt and working capital are known to the parties at that date. The buyer takes on the economic risk of the business from the Reference Date onwards, with interest paid to the seller from the Reference Date to closing. Leakage from the locked box is prohibited and any exceptions must be expressly negotiated e.g., management retention bonuses, target transaction costs, etc. EARN-OUTS Earn-outs, where a portion of the purchase price is paid post-closing based on the performance of the target business, are becoming more common in Canadian private deals. The Canadian Study shows that 25 per cent of deals included an earn-out, up from 20 per cent in 2012 and three per cent in Similarly, 25 per cent of deals in the US Study include an earn-out, though this is down from 38 per cent in 2010 and 29 per cent in 2008, illustrating that the frequency of use of earn-outs tends to vary with economic cycles. Earn-outs are most often used when there is a gap between a seller s perception of the value of a business and a buyer s desire to reduce the risk of overpaying for the business. Valuation gaps often arise in situations involving: (i) development-stage companies (entrepreneurs often have an inflated perception of the value of their businesses, notwithstanding limited operating history); (ii) companies financially dependent on new product lines or technologies that have not been proven in the market; (iii) turnaround acquisitions where the sellers will likely argue that historical financial information is not an accurate measure of the value of the business; and (iv) fast-growing market sectors where differences in valuation may be heightened. Earn-outs are not suitable for every transaction. For example, earn-outs become more difficult to implement when the acquired business is being fully integrated into the buyer s business or when the product lines of the buyer and the acquired business are essentially the same, because it is harder to measure the financial performance of the acquired business accurately. Typical Earn-Out Metrics Earn-outs can be based on financial metrics such as revenues (12 per cent of earn-out clauses in the 2014 study), EBITDA (33 per cent of earn-out clauses); or on other metrics (53 per cent) such as nonfinancial milestones, e.g., regulatory approval of drug applications, entering into post-closing contracts or the launch of products. Keeping the earn-out metric simple reduces the likelihood of future disputes. When accounting measures are used in performance metrics, it is important to understand that they are often open to interpretation, even where they are expressly to be calculated in accordance with GAAP. GAAP permits different accounting methods and requires many estimates and judgments. Even where the acquisition agreement provides that amounts are to be calculated in accordance with GAAP as consistently applied, accounting judgments and estimates will still be required for items such as bad debts, allocating corporate overhead, obsolete inventory, warranty claims, product returns, product liabilities, environmental claims, litigation claims, and accrued contingent liabilities. In addition, there could be different judgments surrounding the timing of revenue and expense recognition. To avoid disputes, the parties should expressly agree on parameters to apply to certain estimates and judgements. It is also important to determine in advance if any adjustments to the accounting measures are appropriate. For example, amounts may be adjusted to exclude administrative and overhead amounts of the buyer allocated to the acquired business, for intercompany transactions not conducted at fair market value, to exclude interest on incremental indebtedness incurred in connection with the acquisition, to include an allocation for services provided by the buyer (e.g., insurance coverage), and for tax credits. Typical Earn-Out Periods Earn-outs can be performance based, and be paid out when certain milestones are reached; or dependent on revenues or earnings over a period of time. In Canada, earn-out periods are varied. In the Canadian Study, 33 per cent of the deals had earn-out periods of 12 months, seven per cent had 24 months, 20 per cent had 36 months, 13 per cent had 60 months and seven per cent had greater than 60 months. The earn-out periods for transactions in the US are similar, with the exception that it is uncommon in the US for earn-outs to have periods of more than 48 months. In the US Study, six per cent had earn-out periods of less than 12 months, 32 per cent had 12 months, 18 per cent had 24 months, three per cent had greater than 24 months but less than 36 months, nine per cent had 36 months and 12 per cent had 48 months. Obviously, an earn-out becomes more risky to a seller as the earn-out period increases, since unforeseen changes in circumstances may make it more difficult to achieve the metric.

4 Covenants To Protect The Earn-Out The buyer and seller of a business will have different incentives after the business is sold. For example, a seller may be motivated to achieve short-term targets that increase the earn-out but which may be inconsistent with the long-term objectives of the buyer. A buyer will generally want to control the acquired business and change certain aspects to integrate it into its business. Holdings, 5 makes clear that a court will be reluctant to read into an earn-out clause, obligations requiring the buyer to proactively take steps to maximize the earn-out where the parties have failed to negotiate such protections. On the other hand, the case also makes clear that the courts will not tolerate attempts by a seller to divert resources, opportunities or revenues away from an acquired business to thwart or undermine an earn-out. 6 LEGAL BUSINESS Earn-outs are complicated to negotiate and to draft because they raise a multitude of issues. Who will run the business postclosing? Will the purchaser make the necessary investments in the business? What assurances are there that the buyer will do what needs to be done to maximize the earn-out provision and will not divert opportunities to its other business units or a competing business acquired in the future? The seller will want to include various affirmative and negative obligations governing the continuing operation of the acquired business during the earn-out period. It will want to control decisions respecting the target business during the earn-out period, but if the buyer is to operate the business, the seller may require that the business be operated consistent with past practice (of the seller, or of similarly situated industry participants) or that the buyer will operate the business in such a way as to maximize the earn-out. If the seller is to continue to operate the business, it might want control over significant strategic and operational decisions, such as making capital expenditures and hiring, firing and directing employees, as well as determining their incentive compensation. In addition, the buyer might be required to provide working capital for the operation of the business, and be precluded from consolidating the acquired business with its other operations, selling the business or buying another related business. The Canadian Study shows, surprisingly, that draftspersons seldom provide such covenants. Only 20 per cent of earn-out deals included an express obligation on the buyer to run the acquired business consistent with past practice (23 per cent in 2012) and none contained a stronger express obligation on the buyer to run the business to maximize the earn-out. Practice in the US is similar to Canada. In the US Study, 18 per cent of deals contained an obligation on the buyer to run the business consistent with past practice (down from 27 per cent in 2010 and 29 per cent in 2008), and six per cent contained an obligation to run the business to maximize the earn-out (down from eight per cent in 2010 and 10 per cent in 2008). In Canada, no deals contained an express disclaimer by the buyer of any fiduciary duty to the seller with respect to the earn-out. In the US, it is more common to make such a disclaimer; 15 per cent of deals in the US study contained such a disclaimer (three per cent in 2010 and six per cent in 2008). Recent Case Law Impacting Earn-Outs Recent case law suggests that drafters of Canadian acquisition agreements should do more to protect earn-outs as there are limits on the extent to which a court will read implied covenants of good faith and fair dealing into a deal. A recent United States decision, American Capital Acquisition Partners, LLV v. LPL In Canada, the Courts have traditionally been reluctant to impose a duty of good faith in ordinary commercial agreements (except in Québec, where the civil code expressly recognizes a duty of good faith in the performance of contracts). However, in November 2014, the Supreme Court of Canada in its landmark decision in Bhasin v. Hrynew 7 addressed the role of honesty and good faith in contracts. The Court made two significant findings. First, the Court recognized that good faith contractual performance is a general organizing principle of Canadian common law, but at the same time made clear that this organizing principle does not constitute a free-standing rule, the breach of which is enforceable in and of itself. Instead, it forms a standard that manifests itself in other recognized, enforceable doctrines where the law already requires honest, candid, forthright, or reasonable contractual performance. The Court confirmed that the pursuit of business objectives that cause loss to another party is not necessarily contrary to good faith and cautioned that the principle is not intended to be a basis for a court to scrutinize the motives of contracting parties or to impose its own sense of morality. Secondly, the Court held that there is a common law duty, which applies to all contracts, to act honestly in the performance of contractual obligations. The Court explained: This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one s contractual performance. The duty of honesty does not require a party to disclose material information to the other contracting party. However, a party cannot actively mislead or deceive the other contracting party in relation to performance of the contract. The Court found that, because the duty of honest contractual performance is a general doctrine of contract law that applies to all contracts, the parties cannot contractually agree to exclude it. That said, the Court acknowledged that the scope of this duty may be relaxed in certain contexts, and even limited by express contractual terms so long as those terms respect minimum core requirements of the duty. Bhasin did not involve earn-outs and there is currently no Canadian case law that considers good faith obligations in the

5 context of earn-outs. However, the Supreme Court of Canada did note in Bhasin that the list of applicable doctrines based in good faith is not closed and that the organizing principle should be developed where the existing law is found to be wanting. Consequently, good faith obligations may in the future be implied in earn-out arrangements by Canadian courts, and it is prudent to be mindful of the circumstances discussed above where Courts in the United States implied such obligations. Acceleration Of Earn-Out The earn-out may be subject to acceleration upon the occurrence of certain specified events, resulting in the payment of the full amount, the present value of the full amount, or some other predetermined amount. A seller will desire acceleration of the earn-out where significant changes in circumstances arise. For example, the seller may have developed a good working relationship with, and degree of trust of, the buyer s management during the negotiations and subsequent operation of the acquired business. This relationship could be jeopardized if the buyer experiences a change in control or sells the business before the earn-out period ends. Accordingly, a seller may insist on acceleration of the earn-out upon a change in control. Conversely, the buyer may also negotiate a right to terminate the earn-out and pay the seller a predetermined amount if, for example, the buyer finds that the earn-out would interfere with a desired disposition, acquisition or reorganization. In the Canadian Study, only seven per cent of deals expressly provided that the earn-out accelerated in the event of a change of control of the acquired business. In the US, it is much more common to expressly provide for the earn-out to be accelerated; 23 per cent of deals in the US Study contained such a provision (down from 35 per cent in 2010 and 33 per cent in 2008). Offsetting Indemnity Payments Against Earn-Out Generally, a buyer will want the right to offset any claim for indemnification against any amounts due to the seller under the earn-out. In the Canadian Study, 40 per cent of deals expressly provide that the buyer can offset any indemnity payments to which it is entitled against any earn-out payments it is required to pay. Only 13 per cent of deals expressly provide that the buyer cannot offset payments, while the balance of deals were silent or indeterminable. It is less common in the US for deals to be silent on this issue, with 62 per cent of all deals in the US Study expressly permitting offsets (62 per cent in 2010 and 58 per cent in 2008), no deals expressly preventing offsets (five per cent in 2010 and 10 per cent in 2008) and only 23 per cent being silent or indeterminable (32 per cent in 2010 and 2008). NO SHOP/NO TALK The no shop/no talk covenant in an acquisition agreement provides that between the date of the agreement and the closing, the seller is prohibited from soliciting or accepting any alternative proposal or participating in any communications or furnishing any information with respect to the same. According to the Canadian Study, more than half of the Canadian deals contain a no shop/no talk covenant. When the seller agrees to such a provision, the board of the seller must ensure that it is complying with its duty to act in the best interests of the company. Where it is clear that the directors have made the decision honestly, prudently, in good faith, on reasonable grounds and have acted in an impartial and informed basis, the business judgment rule provides that the decision will not be second guessed by the courts. However, in order to avail themselves of the business judgment rule in Canada, the court will consider whether the board has followed appropriate procedures and processes. While there is no duty to maximize short term value, the target board will need to ensure that it is truly acting in the best interests of the company when it agrees to the no shop/no talk provision. Whether that is the case will of course depend on numerous factors including the extent to which alternatives have already been pursued and the benefits to be achieved by the deal, including the price. A lesser extreme to the no shop/no talk provision is to provide a break fee as that provides more flexibility for a board of the seller with respect to alternatives. MAE QUALIFIERS The concept of a Material Adverse Effect (MAE) is usually found in acquisition agreements, both in establishing a materiality threshold for breaches of representations and warranties and in defining conditions precedent for closing. MAE Defined Most Canadian private deals (88 per cent) provide a definition of an MAE. An MAE is typically defined to mean any result, occurrence, fact, change, event or effect that has a material adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), or results of operation of the target (or any of its subsidiaries). MAE clauses are usually forward looking (77 per cent of Canadian deals), also covering matters that could reasonably be expected to have a material adverse impact and many (40 per cent of deals) also cover changes impacting on prospects of the target company. An MAE may also be defined to include an effect that has an MAE on the seller s ability to consummate the transactions contemplated or the buyer s ability to operate the business of the target immediately after closing in the manner operated by the seller before closing. In roughly half of the deals, the definition included the target and its subsidiaries together. In most of the remainder of the deals, the agreement was silent except in a very small percentage of deals where the MAE applied to the target or subsidiaries individually. In spite of comments that drafters should try to be more specific in quantitative terms as to what they mean by an MAE, only a very small percentage of deals (four per cent), make reference to a specific dollar amount threshold in defining an MAE.

6 MAE Carve Outs Most deals (83 per cent) also have carve outs from the definition of MAE to exclude matters that arise from specified matters. The most frequently contained carve outs relate to effects arising from economic or industry conditions. The majority of deals also have carve outs for effects resulting from changes in law or effects resulting from actions required by the deal agreement or the announcement of the deal itself. Roughly half of deals have carve outs relating to war or terrorism, financial market downturn or changes in accounting principles. Roughly half of the deals including carve outs also had a term qualifying the carve out so that it has no effect where the event, change or action affects the target in a substantially disproportionate manner. DISPUTE RESOLUTION The use of Alternative Dispute Resolutions (ADR) provisions is more common in Canadian acquisition agreements than in the US. In the Canadian Study, 30 per cent of agreements included a general ADR provision, with 94 per cent of those providing for binding arbitration and the remainder (6 per cent) providing for mediation followed by binding arbitration. The US Study showed that only 15 per cent of deals have a general ADR-type dispute mechanism. This lack of reliance on arbitration as a dispute resolution tool is not surprising. Although arbitration proceedings generally have a more streamlined procedural and pleading process, limited discovery, short hearings, fewer expert witness, there is a common belief that they tend to lead to unprincipled splitting of the baby rather than a principled determination on the merits. Where the acquisition agreement provides for arbitration, it will also specify the rules which will be applicable to the arbitration usually one of the provincial Arbitration Acts, the International Commercial Arbitration Rules or the Rules of the ADR Institute of Canada. The costs of the arbitration will generally be allocated by the arbitrator (54 per cent) or evenly split (33 per cent). Although arbitration is relied on relatively infrequently as a general dispute resolution mechanism, it is normal to provide for an expert determination by a qualified independent accounting firm to resolve disputes relating to working capital adjustments or earn-out calculations. CONCLUSION The ABA Deal Studies provide a useful tool to M&A practitioners in indentifying typical at market deal terms and are having a noticeable impact on the terms of acquisition agreements for private companies in Canada. 1. That Pesky Little Thing Called Fraud: An Examination of Buyers Insistence Upon (and Sellers Too Ready Acceptance of) Undefined Fraud Carve-Outs in Acquisition Agreements, Business Lawyer, Volume 69, Issue 4, pp Delaware Chancery Court, Nov 26, Delaware Chancery Court, Nov 26, ABQB Delaware Chancery Court, Feb 3, Other US courts have recognized implied duties of good faith and fair dealing in the following circumstances: the buyer of a pharmacy failed to obtain a Medicaid provider number for six months, even though half of the pharmacy s prescription business was Medicaid funded (Naiem Pharmacy Corp. et al. v. Walgreen Eastern Co., Inc., 2014 US Dist. LEXIS (JLL)); the buyer diverted the sale of products and services through channel partners, lowering the business performance (Kirsch et al. v. Brightstar Corporation, No. 12 C 6966; 2015 US Dist. LEXIS 4999 (N.D. Ill, 2015)); the buyer changed the acquired business brands and shifted production priority to its own branded products (O Tool v. Genmar Holdings, Inc. 387 F.3d 1188; 2004 US App. LEXIS (10th Cir. US Appeals, 2004)); the buyer did not use reasonable efforts to develop and promote the technology and products of the acquired business (Sonoran Scanners, Inc. v. PerkinElemer, Inc., 2009 WL (1st Cir. 2009)); the buyer did not use reasonable efforts to sell products or generate revenue (Chabria v. EDO Western Corp., 2007 WL (S.D. Ohio 2007)); and The buyer failed to operate the business diligently (Duafala, (Representative of ComSource, Inc. Stockholders), v. Globecomm Systems Inc US Dist. LEXIS) SCC 71 LEGAL BUSINESS