Integrated Agreements: It’s Not Always About Conflicts

On April 28, 2025, in Thompson Street Capital Partners IV, L.P. v. Sonova United States Hearing Instruments, LLC,² the Delaware Supreme Court clarified how Delaware courts interpret and enforce indemnification notice requirements when merger agreements and escrow agreements contain different provisions addressing the same subject matter. The Sonova court’s analysis provides crucial guidance for lawyers, generally about contract integration and the condition precedent doctrine for agreements in M&A transactions or any other transactions where two or more agreements are integrated and intended to be read together.

Facts

The case arose from Sonova United States Hearing Instruments, LLC’s (“Sonova”) acquisition of several audiology practices operated by Alpaca Group Holdings, LLC, a Delaware limited liability company, which was a portfolio company of Thompson Street Capital Partners IV, L.P. (“Thompson Street”). On January 13, 2022, the parties entered into a merger agreement and a corresponding escrow agreement that established an $8.5 million escrow fund, of which $7.75 million was designated as an indemnity escrow fund. Through a commonly used integration clause, the merger agreement explicitly integrated the escrow agreement such that both agreements (along with certain other related agreements) “constitute[d] the complete, integrated agreement among the Parties” with respect to the transaction.³ The merger agreement designated Thompson as the members’ representative for purposes of any post-closing disputes about the transaction.

Eighteen months after closing, Sonova determined that it had suffered indemnifiable losses from the acquisition. On August 25, 2023, one business day before the August 29, 2023 claim submission deadline, Sonova delivered an indemnification claim notice to Thompson Street and the escrow agent seeking to reserve the entire $7.75 million indemnity escrow fund for its as yet unquantified damages claim. A dispute arose because, while Sonova’s notice complied with the notice requirements in the escrow agreement, it did not satisfy the more demanding indemnification notice requirements in the merger agreement. The escrow agreement required only that the notice “specify in reasonable detail the nature and dollar amount of the Claim.”⁴ The merger agreement demanded significantly more: the claim notice had to “describe the Claim in reasonable detail,” “include the justification for the demand under [the merger] [a]greement with reasonable specificity,” “include copies of all available material written evidence thereof,” and “indicate the estimated amount, if reasonably practicable, of Damages.”⁵

Thompson Street filed suit in the Court of Chancery seeking a declaratory judgment that Sonova’s notice failed to comply with the merger agreement’s requirements and therefore did not constitute an indemnification claim to recover for its alleged losses. Sonova moved to dismiss the case. The Court of Chancery granted Sonova’s motion, focusing primarily on the escrow agreement’s requirements and finding that Sonova’s notice was sufficient “for the purpose of stopping a release of the Indemnity Escrow Fund.”⁶ The Delaware Supreme Court reversed.

Court's Analysis

The Court first addressed basic questions of contact interpretation. The parties created what the Court termed a “unitary contractual scheme” through explicit integration language between the merger agreement and the escrow agreement.⁷ However, this created an interpretive challenge because the two agreements contained different requirements for the same obligation: providing notice of Sonova’s indemnification claim. The two indemnification notice provisions did not conflict. Rather, they created a hierarchy of requirements. Sonova argued that, for purposes of the indemnification claim notice, it needed only to comply with the escrow agreement’s lower standard. Sonova reasoned that “the Escrow Agreement governs the release of the escrow funds, whereas the Merger Agreement governs the merits of any indemnification claim,” a reading the Court rejected as beyond the plain meaning of the agreements.⁸

The Court applied the principles that integrated agreements must be “read together as a unitary contractual scheme” and interpreted to “give each provision and term effect.”⁹ The Court noted long-held Delaware case law that, when two agreements are integrated and address the same subject matter with varying levels of specificity, parties must satisfy their obligations under both provisions. Where a more specific provision conflicts with a more general one in another integrated agreement, “the specific provision ordinarily qualifies the meaning of the general one.”¹⁰ The Court extended this principle of the “primacy of the specific” to situations where provisions do not technically conflict but create different compliance standards. Based on this reasoning, the Court concluded that the more detailed and specific requirements in the merger agreement controlled. The Court noted an additional fact in support of the conclusion that the specific controls: the escrow agreement expressly required Sonova to certify that “the information set forth in such Claim Notice complies with the terms of the Merger Agreement.”¹¹

Another principle animating the Court’s decision was Delaware law’s reluctance to ignore or render meaningless any language in either of the contracts. The Court emphasized that “[i]n upholding the intentions of the parties, a court must construe the agreement as a whole, giving effect to all provisions therein” and that “[a] court interpreting any contractual provision ... must give effect to all terms of the instrument, must read the instrument as a whole, and, if possible, reconcile all the provisions of the instrument.”¹² Where provisions conflict, such an approach may not be possible. But where, as here, the provisions do not conflict, both should be given effect. If Sonova could satisfy its notice obligations by complying only with the escrow agreement’s limited notice requirements, the Court reasoned, then the more specific and demanding requirements in the Merger Agreement would be rendered “meaningless or illusory.”¹³ As a result, the Court concluded that Sonova was required to comply with both requirements. Based on the record before it, the Court held that Sonova failed to do so.

The Court then turned to whether non-compliance with the more specific notice requirements in the merger agreement should foreclose Sonova’s right to seek recovery for indemnification claims. The Court reviewed case law on conditions precedent to answer that question. The Court highlighted a specific sentence of the merger agreement, which made clear that non-compliance with the indemnification notice requirements would result in the loss of Sonova’s right to make an indemnification claim: “The Purchaser Indemnified Parties shall have no right to recover any amounts pursuant to Section 9.2 unless the Purchaser notifies the Members’ Representative in writing of such Claim pursuant to Section 9.3 on or before the Survival Date.”¹⁴ The sentence included each key element necessary to demonstrate an unambiguous condition precedent. First, the use of “unless” constituted what the Court called “unmistakable language of condition.”¹⁵ Second, the provision explicitly stated the consequence of noncompliance: Sonova “shall have no right to recover.”¹⁶ Third, the condition required notice “pursuant to Section 9.3,” which incorporated all of the merger agreement’s detailed notice requirements.¹⁷

The Court distinguished the Delaware Superior Court's decision in Blue Cube Spinco LLC v. Dow Chemical Co.,¹⁸ on which Sonova relied, in which the court held that a notice provision did not create a condition precedent. The Court rejected Sonova’s argument, distinguishing the facts in Blue Cube from those in Sonova. In Blue Cube, the notice provision was “silent on a non-conforming notice’s consequences” and did not “identify the way in which it can be enforced.”¹⁹ By contrast, the Sonova provision explicitly stated both the required performance and the consequence of non-performance.

Last, the Court addressed the limited circumstances in which Sonova could pursue its indemnification claims against Thompson Street and the other sellers notwithstanding a failure to comply with the merger agreement’s more specific notice requirements – namely, if the loss of Sonova’s right to make an indemnification claim constituted a “disproportionate forfeiture” of its rights under the merger agreement. Despite finding a clear condition precedent and Sonova’s failure to comply, the Court recognized the tension between Delaware law’s contractarian principles and abhorrence of forfeitures. The Court turned to the Restatement (Second) of Contracts § 229, which provides that courts may excuse non-occurrence of a condition if the timing and specificity requirements were not material to the agreement and the noncompliance would result in a disproportionate forfeiture.

The Court concluded that the disproportionate forfeiture analysis involves two sequential inquiries: (1) whether the condition was “a material part of the agreed exchange,” and (2) if the condition was not material, whether enforcing it would cause “disproportionate forfeiture.”²⁰ A court must first determine whether the breached requirements were “a material part of the agreed exchange.”²¹ Factors relevant to this inquiry include the extent to which the injured party is deprived of its reasonably expected benefit, whether the injured party can be adequately compensated, the extent of forfeiture the breaching party would suffer, the likelihood of cure and whether the breach comports with standards of good faith and fair dealing. The materiality analysis should also examine “the negotiations of the parties along with all other circumstances relevant to the formation of the contract or to the requirement itself.”²² If the conclusion is that the condition was material to the agreement among the parties, then the disproportionate forfeiture inquiry is at an end, and the forfeiture of the right is valid.

If the condition is not material, then a court must proceed to the proportionality analysis. This requires the court to “weigh the extent of the forfeiture by the obligee against the importance to the obligor of the risk from which he sought to be protected and the degree to which that protection will be lost if the nonoccurrence of the condition is excused to the extent required to prevent forfeiture.”²³ The Court emphasized that this rule is a flexible one whose “application is within the sound discretion of the court.”²⁴

Court's Conclusion

Ultimately, the Court held that there was a clear condition precedent in the merger agreement and Sonova’s non-compliance with that condition was “reasonably conceivable on the record.”²⁵ At the same time, the record was insufficiently developed to resolve either the materiality or proportionality questions – whether Sonova’s loss of a right to make an indemnification claim was a material part of the overall bargain between the parties and, if not, whether its loss of its ability to make an indemnification claim was disproportionate. Therefore, the Court reversed the Court of Chancery's dismissal of Thompson Street's complaint and remanded the case for additional factual development regarding both materiality and disproportionate forfeiture.

Key Takeaways

1. Deal Team Management: From a drafting perspective, it always bears repeating that agreements that are intended to be integrated and read together must be harmonized. Deal teams for M&A transactions often bifurcate drafting of the merger agreement and escrow agreement among different team members, which can result in siloed drafting. Despite the often hectic and stressful dynamics of such deals, deal teams should ensure appropriate coordination of drafting efforts.
2. Contract Interpretation: Whether for M&A or any other type of transaction, parties should bear in mind two key principles of Delaware law related to integrated agreements. First, Delaware courts are biased towards enforcing the more specific relative to any general requirements where two sets of requirements address the same subject matter: “[G]eneral terms of the contract must yield to more specific terms.”²⁶ This applies whether or not the two sets of provisions conflict. Second, where two provisions governing the same matter do not conflict, Delaware courts will strive to avoid rendering any terms meaningless.
3. The Importance of Conditions Precedent: To avoid the uncertainty that disproportionate forfeiture considerations would raise, negotiating parties (particularly sellers in M&A transactions) should follow the Court’s guidance and draft language that clearly states any conditions precedent.
4. Consequences of Non-Compliance: Drafters should ensure that conditions precedent and any failure to satisfy such conditions are expressly and unambiguously linked to the loss of rights under the agreement. Failure to draft accordingly could subject any dispute to a far less certain outcome if a Delaware court undertakes what appears to be a highly subjective analysis of proportionality: “If the language does not clearly provide for a forfeiture, then a court will construe the agreement to avoid causing one.”²⁷

¹ Kavya Sahni, an O’Melveny law clerk, contributed to the content of this newsletter.
² Thompson Street. Capital Partners IV, L.P. v. Sonova United States Hearing Instruments, LLC, A,3d No. 166, 2024 (Del. Apr. 28, 2025).
³ Sonova at 5-6.
⁴ Sonova at 7.
⁵ Sonova at 4-5.
⁶ Sonova at 12.
⁷ Sonova at 20 (citing Fortis Advisors LLC v. Medtronic Minimed, Inc., 2024 WL 3580827 at 9-10 (Del. Ch. July 29, 2024)).
⁸ Sonova at 26.
⁹ Sonova at 19-20.
¹⁰ Sonova at 19 (quoting Nucor Coatings Corp. v. Precoat Metals Corp., 2023 WL 6368316 at 10 (Del. Super. Aug. 31, 2023)).
¹¹ Sonova at 27.
¹² Sonova at 20 (quoting Am. Healthcare Admin. Servs., Inc. v. Aizen, 285 A.3d 461, 475 (Del. Ch. 2022) (quoting E.I. du Pont de Nemours & Co. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985)).
¹³ Sonova at 21.
¹⁴ Sonova at 29.
¹⁵ Sonova at 33.
¹⁶ Id.
¹⁷ Sonova at 34.
¹⁸ 2021 WL 4453460 (Del. Super. Sept. 29, 2021).
¹⁹ Sonova at 32.
²⁰ Sonova at 45.
²¹ Id.
²² Sonova at 46.
²³ Sonova at 47 (quoting Restatement (Second) of Contracts § 229).
²⁴ Sonova at 38.
²⁵ Sonova at 37.
²⁶ Sonova at 21-22.
²⁷ Sonova at 25 (quoting QC Holdings, Inc. v. Allconnect, Inc., 2018 WL 4091721 at 7 (Del. Ch. Aug. 28, 2018)).

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Nate P. Gallon, an O’Melveny partner licensed to practice law in California; Amy S. Park, an O’Melveny partner licensed to practice law in California, New York, New Jersey; and Kavya Sahni, an O’Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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