Value Health Solutions, Inc. v. Pharm. Research Assocs., Inc.

• Court: North Carolina Supreme Court
• Writing for the Court: BARRINGER, Justice.
• Citation: Value Health Solutions, Inc. v. Pharm. Research Assocs., Inc., 385 N.C. 250, 891 S.E.2d 100 (N.C. 2023)
• Docket Number: 100A22
• Decision Date: 01 September 2023
• Parties: VALUE HEALTH SOLUTIONS, INC. and Nagarajan Neil Parthasarathy v. PHARMACEUTICAL RESEARCH ASSOCIATES, INC. and PRA Health Sciences, Inc.

385 N.C. 250

891 S.E.2d 100

VALUE HEALTH SOLUTIONS, INC. and Nagarajan Neil Parthasarathy v. PHARMACEUTICAL RESEARCH ASSOCIATES, INC. and PRA Health Sciences, Inc.

No. 100A22

Supreme Court of North Carolina.

Filed September 1, 2023

Guidry Law Firm PLLC, by David G. Guidry, for plaintiff-appellants.

Barnes and Thornburg LLP, by John M. Moye, Allen R. Baum, Raleigh, and Mitchell Osterday, for defendant-appellees.

BARRINGER, Justice.

I. Factual Background

Pharmaceutical Research Associates, Inc. and PRA Health Sciences, Inc. (collectively defendants, will be referred to as PRA in the singular), together form a large contract research organization, providing clinical trial services to pharmaceutical and biotechnology companies around the world. Value Health Solutions, Inc. (VHS) is a software company, founded by plaintiff Neil Parthasarathy. VHS developed three software applications for use in the clinical trial process: ClinTrial Max (CTMax), Cloud Max, and Info Max (collectively, the Solutions). The Solutions were compatible with a platform called Salesforce, which is widely used by organizations involved in clinical trials. The Solutions caught the interest of PRA.

A. PRA's Evaluation of VHS's Software Capabilities

PRA approached Parthasarathy in early 2014, expressing interest in acquiring the Solutions. A year-long negotiation process and due diligence period ensued, during which PRA had full access to the Solutions. PRA tested the Solutions to determine what enhancements would be necessary if PRA were to acquire it. PRA identified several functional deficiencies in the software and prepared a list of enhancements PRA would require to "close the gap" between the Solutions and the software PRA was using at that time. PRA advised Parthasarathy of these functional deficiencies.

B. PRA's Letter of Intent

PRA's Executive Vice President and Chief Financial Officer, Linda Baddour, sent Parthasarathy a "Non-Binding Letter of Intent" (LOI) on 15 October 2014. The LOI outlined PRA's proposal to acquire VHS. The LOI included, among other things, that PRA would make the following payments: (1) a one time, up-front payment to VHS and Parthasarathy of between one and three million dollars; (2) incentive payments of $333,000.00, with each conditioned upon the completion of one of three "Integration Milestones" within eighteen months of PRA acquiring VHS; and (3) future incentive payments to VHS and Parthasarathy, conditioned upon the completion of certain "Performance Milestones" as related to external sales of licenses of VHS's software.

As summarized by the trial court, the LOI proposed the following structure for the Performance Milestones:

i. a payment of $2.5 million for reaching $25 million in annual sales within two years of closing;

ii. a payment of $5 million for reaching $50 million in annual sales within three years of closing;

iii. a payment of $7.5 million for reaching $75 million in annual sales within four years of the closing; and

iv. payment of a one percent (1%) annual royalty on sales for an additional four years after the $75 million sales amount is reached.

The LOI also stated that it

constitutes a statement of the intentions of the parties with respect to a potential Transaction, and does not contain all matters upon which agreement must be reached in order for a definitive agreement to be finalized or for the transaction to be consummated. Except for sections 3 through 8 of [the] LOI, which shall be legally binding in accordance with their respective terms, neither this LOI nor the acceptance thereof is intended to, nor shall it, create a binding legal obligation, or any obligation by any of the parties hereto to enter into any transaction, negotiate or take any other action in contemplation thereof, or [execute] any definitive agreements. The parties further acknowledge and agree that, except as otherwise provided in the immediately preceding sentence, none of this LOI, any proposal made ..., nor the current on-going discussions between the parties are intended to (and shall not) create a legally binding obligation or commitment on the part of any party with respect to the negotiation or completion of the Transaction.

C. The Asset Purchase Agreement

On 21 May 2015, plaintiffs and defendants entered into an Asset Purchase Agreement (APA), governed by Delaware law. Under the terms of the APA, the Solutions would be sold to PRA, by plaintiffs, in exchanged for PRA stock and $2.5 million. The APA further provided for "contingent payments" if certain milestones were achieved.

The first group of contingent payments was outlined in Article 2.6(a)(i), (ii), and (iii) of the APA. The first group of contingent payments pertained to the following: integration of the VHS software into PRA's clinical trial system; completion of product enhancements coinciding with functional deficiencies identified during PRA's due diligence efforts; and completion of the migration of PRA clinical trial studies into VHS software (collectively, the Development Milestones).

The second group of contingent payments was outlined in the APA in sections 2.6(a)(iv), (v), (vi), and (vii). The second group of contingent payments pertained to the external sales of licenses to the Solutions within four years of the APA closing (the Sales Milestones).

Article 2.6 of the APA provides:

Milestones. As additional consideration for the transactions contemplated hereby, and subject to the terms of this Section 2.6, Purchaser shall make (or [PRA] shall make on Purchaser's behalf) the following payments (each, a "Contingent Payment"):

i. upon completion of the integration of the parties’ Salesforce™ environments set forth on Schedule 2.6(a)(i), [PRA] shall issue to Seller (or as otherwise directed by Seller's Representative), within thirty (30) days after such completion, that number of shares of PRA Common Stock equal in value to Three Hundred Thirty-Three Thousand U.S. Dollars ($333,000.00), based on the Fair Market Value as of the date of issuance of such shares; provided, however, that completion occurs within the first consecutive eighteen (18) months from the Effective Time (the " Integration Period"); ii. upon completion of the key product enhancements set forth on Schedule 2.6(a)(ii), [PRA] shall issue to Seller (or as otherwise directed by Seller's Representative), within thirty (30) days after such completion, that number of shares of PRA Common Stock equal in value to Three Hundred Thirty-Three Thousand U.S. Dollars ($333,000.00), based on the Fair Market Value as of the date of issuance of such shares; provided, however, that completion occurs within the Integration Period;

iii. upon completion of the migration of the clinical trial management systems studies of Purchaser and its Affiliates into [CTMax] as set forth on Schedule 2.6(a)(iii), [PRA] shall issue to Seller (or as otherwise directed by Seller's Representative), within thirty (30) days after such completion, that number of shares of PRA Common Stock equal in value to Three Hundred Thirty-Three Thousand U.S. Dollars ($333,000.00), based on the Fair Market Value as of the date of issuance of such shares; provided, however, that completion occurs within the Integration Period;

iv. upon the achievement of aggregate External Sales equal to Twenty[-]Five Million U.S. Dollars ($25,000,000), Purchaser shall make, within thirty (30) days following the date on which [PRA] files its next quarterly report with the United States Securities and Exchange Commission (the "SEC") after such achievement, a cash payment of Two Million Five Hundred Thousand U.S. Dollars ($2,500,000.00) to Seller (or as otherwise directed by Seller's Representative) (the " First Milestone Payment"); provided, however, that such achievement occurs prior to the second (2nd) anniversary of the Closing Date (the "First Milestone period");

v. upon the achievement of aggregate External Sales equal to Fifty Million U.S. Dollars ($50,000,000.00), Purchaser shall make, within thirty (30) days following the date on which [PRA] files its next quarterly report with the SEC after achievement, a cash payment of Five Million U.S. Dollars ($5,000,000.00) to Seller (or as otherwise directed by Seller's Representative) (the " Second Milestone Payment"); provided, however, that such achievement occurs prior to the third (3 ^rd) anniversary of the Closing Date (the "Second Milestone Period");

vi. upon the achievement of aggregate External Sales equal to Seventy[-]Five Million U.S. Dollars ($75,000,000.00), Purchaser shall make, within thirty (30) days following the date on which [PRA] files its next quarterly report with the SEC after achievement, a cash payment of Seven Million Five Hundred Thousand U.S. Dollars ($7,500,000.00) to Seller (or as otherwise directed by Seller's Representative) (the " Third Milestone Payment"); provided, however, that such achievement occurs prior to the fourth (4 ^th) anniversary of the Closing Date (the "Third Milestone Period"); and

vii. for four (4) consecutive calendar years following the achievement of aggregate External Sales equal to Seventy-Five Million U.S. Dollars ($75,000,000.00) (the " Major Milestone", and the date on which the Major Milestone is achieved, the " Major Milestone Date"), Purchaser shall make, within thirty (30) days following the date on which [PRA] files its next quarterly report with the SEC after each of the four (4) anniversaries of the Major Milestone Date, a per annum royalty payment to Seller (or as otherwise directed by Seller's Representative) equal to one percent (1%) of the aggregate amount of External Sales made during the applicable calendar year (such payments, the " Royalty Payments"). For the avoidance of doubt, any such Royalty Payments shall be made regardless of whether the First Milestone Payment, the Second Milestone Payment and/or the Third Milestone Payment have previously been made.

The APA defines "External Sale" as "the sale...