In Thompson Street Capital Partners IV, L.P. v. Sonova U.S. Hearing Instruments, LLC, C.A. No. 2023-0922 (Del. Apr. 28, 2025), the Delaware Supreme Court offered new guidance on the enforcement of indemnification notice provisions in merger agreements. The dispute centered on a series of acquisitions in which Sonova U.S. Hearing Instruments (Sonova) acquired audiology practices from Thompson Street Capital Partners (Thompson). The Court emphasized the importance of strict compliance with indemnification notice requirements contained within contract governed by Delaware law and balanced such compliance with Delaware common law that “abhors a forfeiture.” Accordingly, because such strict compliance qualifies as a condition precedent that could result in a forfeiture the Court required additional factual finding concerning the materiality and disproportionate nature of such forfeiture to determine whether noncompliance could be excused.
The buyer, Sonova, sought indemnification under the merger agreement for alleged improper billing practices resulting in unquantified damages to Sonova by delivering its written indemnification notice to both Thompson as well as the parties’ escrow agent. The parties’ merger agreement, however, required Sonova to provide that written indemnification notice by a specific date and contain specific information and documentation. As a result, Thompson filed its complaint in the Court of Chancery seeking a declaratory judgment that Sonova’s indemnification claim was invalid under the merger agreement because it failed to provide supporting documentation and was not filed on time.
Sonova moved to dismiss Thompson’s complaint arguing that its written indemnification notice was both timely and sufficient under the parties’ agreement. The Court of Chancery gratned Sonova’s motion and dismissed Thompson’s complaint, finding that Sonova’s indemnification notice was sufficient; in doing so, it based its holding on the looser notice requirements of the parties’ escrow agreement, rather than the more stringent notice requirements of the parties’ merger agreement. The Court of Chancery held that Sonova had complied with the escrow agreement’s deadline and was not required to attach written material to the notice.
The Delaware Supreme Court reversed the Court of Chancery’s decision, instead viewing the escrow agreement and the merger agreement as integrated agreements to be interpreted as a unitary contractual scheme. Accordingly, the Court held that the parties were required to follow the stricter standards in the merger agreement. Additionally, the Court held that the agreement’s notice requirement conditioned indemnification on a party providing sufficient notice, thus allowing forfeiture of the indemnification where notice was insufficient.
Specifically, the Court looked to the language of the merger agreement, holding that it created a condition precedent for forfeiture by providing that a party “shall have no right to recover” unless that party provided notice with specific terms and deadlines. Based on the pleadings before the Court of Chancery, the Court found it reasonably conceivable that Sonova failed to satisfy the notice requirements by not providing supporting documentation and providing notice too late. Thus, Thompson’s complaint stated a claim and Sonova may be subject to a forfeiture of its indemnification rights under the contract.
Yet in light of the common law concerning forfeiture, the Delaware Supreme Court examined whether Sonova’s potential forfeiture could be excused, thus allowing for indemnification where the parties’ provided notice was insufficient. The Court held that “[c]ourt[s] may excuse the nonoccurrence of a condition that would cause a disproportionate forfeiture unless its occurrence was a material part of the agreed Exchange.” The Court remanded the case to the Court of Chancery because the record below contained no determination on either materiality or disproportionality.
This decision has practical implications for Delaware law regarding indemnification provisions in contract. Drafters should consider including express language regarding whether indemnification notice provisions are material and explicitly set forth what constitutes sufficient notice, including whether supporting documentation must be attached. This decision serves to further cement Delaware’s contraction approach and serves as a reminder that Delaware law may sanction significant forfeiture for failure to strictly adhere to a contractual condition precedent so long as that condition was a material part of the parties’ agreement.
*Peter Arleo, a summer associate at the firm not yet admitted to the bar, contributed to this alert.