Opinion ID: 2826332
Heading Depth: 1
Heading Rank: 1

Heading: Merger Agreement and Arbitration

Text: Vocada developed and sold a medical software program called Veriphy. In 2007, Vocada began discussing the possibility of a merger with Nuance, a global computer software corporation with a rapidly expanding healthcare division. Nuance proposed a merger with a total of $45 million in potential merger consideration: an initial $20 million in cash or stock going to the Vocada stockholders, $4 million in cash or stock going to employee retention and management bonuses, and an additional $21 million in contingent “earnout consideration” conditioned on the Veriphy software hitting certain revenue targets and payable in three $7 million tranches over a three-year period. Because Vocada’s board members valued the company at no less than $40 million, it was crucial to Vocada’s board that Nuance expend every effort 1 We draw most of the following background from the factual allegations in Vocada’s complaint, which we must accept as true at this stage in the litigation. See Wood v. Moss, 134 S. Ct. 2056, 2065 n.5 (2014). Ordinarily, we are confined to reviewing the allegations in the plaintiff’s complaint, including its attachments, when reviewing a district court’s ruling on a motion to dismiss under Rule 12(b)(6). See Brand Coupon Network, L.L.C. v. Catalina Mktg. Corp., 748 F.3d 631, 635 (5th Cir. 2014). We “may also consider documents attached to either a motion to dismiss or an opposition to that motion when the documents are referred to in the pleadings and are central to a plaintiff’s claims.” Id. Finally, because they are public records, we also take judicial notice of court pleadings in other cases. See Funk v. Stryker Corp., 631 F.3d 777, 783 (5th Cir. 2011) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)); see also Fed. R. Evid. 201(d) (“The court may take judicial notice at any stage of the proceeding.”). 2 Case: 14-10819 Document: 00513149396 Page: 3 Date Filed: 08/11/2015 No. 14-10819 to maximize the earnout consideration post-closing. As the negotiations continued, Vocada therefore placed an overriding emphasis on Nuance’s assurances that it would commit the necessary capital and resources to achieving the full earnout consideration. Responding to these concerns, Nuance sent a “side letter” to Vocada about the earnout consideration. In the side letter, Nuance stated it “intend[ed] to fully pursue the Veriphy business and consider[ed] the achievement of the earnout targets very important to the realization of the benefits of the transaction for Nuance.” After discussing the merger agreement and the side letter at Vocada’s final board meeting, Vocada’s board voted to approve the merger, and the merger agreement closed on November 2, 2007. The merger agreement requires arbitration of “any . . . dispute relating to the Earnout Consideration.” In June 2009 and June 2010, Nuance sent “earnout notices” to Vocada’s stockholder representative reporting that the Vocada stockholders were due no payments under the first and second $7 million tranches of the earnout consideration because none of the earnout targets had been met. In response, Vocada filed a demand for binding arbitration in December 2010 in New York. Vocada asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and statutory fraud under section 27.01 of the Texas Business and Commerce Code. For the fraud claim, Vocada alleged that Nuance made false representations about the steps Nuance would take to try to reach the earnout revenue targets. Vocada sought both benefit-of-thebargain damages (that is, the $21 million earnout consideration) and out-ofpocket damages. In support of its request for out-of-pocket damages, Vocada contended that its business was worth more than the $24 million that the stockholders had received for the company, and it asked the arbitration panel 3 Case: 14-10819 Document: 00513149396 Page: 4 Date Filed: 08/11/2015 No. 14-10819 to award it the difference in value. The parties stipulated that all of the claims were arbitrable. On October 5, 2012, after an eight-day arbitration hearing, a threemember arbitration panel concluded that Nuance fraudulently induced Vocada’s board and stockholders to enter into the merger agreement by making material misrepresentations in the side letter. The arbitration panel also concluded, however, that Vocada was not entitled to recover damages on its statutory fraud claim because Nuance’s misrepresentations did not significantly contribute to Vocada’s inability to receive the earnout consideration. Even if Nuance had complied with its contractual promise to pursue revenue goals for the Veriphy software, the arbitration panel found that it was reasonably certain that Veriphy would not have achieved any of the three earnout thresholds identified in the merger agreement. As the arbitration panel elaborated in its findings of fact, Veriphy performed worse than expected, its deal pipeline was “substantially overstated,” and demand for the product was limited. As a result, the arbitration panel concluded that “Vocada shall take nothing on its claims” and stated that “[t]his Award is in full settlement of all claims and counterclaims submitted to this Arbitration. All claims not expressly granted herein are hereby denied.”