Topic: Earn-Out Payment

Misunderstanding Regarding Dates Does Not Provide Grounds to Reform Earn-Out Provision in Purchase Agreement, Rules Chancery Court

By Scott E. Waxman and H. Corinne Smith

In Glidepath Limited v. Beumer Corporation, the Delaware Court of Chancery ruled against the sellers of a limited liability company, holding that the purchase agreement should not be reformed to correct the dates comprising the earn-out period for the transaction. The Court reasoned that while the seller was in fact mistaken about the terms of the agreement, there was neither a mutual mistake nor a unilateral mistake with knowing silence; additionally, the Court was unable to reform the contract because the parties did not come to a specific prior understanding that differed from the written agreement.

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Chancery Court Finds No “Gap” to be Filled, No Implied Covenant Claim in Earn-Out Dispute

By Nick Froio and Lauren Garraux

Chancery Court grants defendant’s motion to dismiss alternative claims of breach of the implied covenant of good faith and fair dealing, fraudulent inducement and negligent misrepresentation in earn-out dispute, holding that merger agreement set the standard to determine whether non-payment of earn-out was improper.

Fortis Advisors LLC v. Dialog Semiconductor PLC, C.A. No. 9522-CB (January 30, 2015) involves a dispute over whether earn-out payments are owed to the former equityholders of iWatt, Inc. (“iWatt”) pursuant to an Agreement and Plan of Merger dated as of July 1, 2013 (the “Merger Agreement”) whereby Dialog Semiconductor PLC (“Dialog”) acquired iWatt. Under the Merger Agreement, Dialog was to pay earn-out payments of up to $35 million depending on the post-merger revenues of Dialog’s Power Conversion Business Group, of which iWatt became a part post-closing. In addition, the terms of the Merger Agreement required that Dialog use its “commercially reasonable best efforts” to achieve and pay the earn-out payments in full. Revenues, however, fell short of the threshold amount to trigger the earn-out payments.

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American Capital Acquisition Partners, LLC, et al. v. LPL Holdings, Inc., et al. No. 8490-VCG (February 3, 2014) (Glasscock, V.C.)

By David Bernstein

In 2011, LPL Holdings, Inc. (“LPL”) acquired Concord Capital Partners, Inc. (“Concord”) from American Capital Acquisition Partners, LLC (“American Capital”) under a purchase agreement (the “Purchase Agreement”) that provided for a contingent addition to the purchase price that could be as much as $15 million based upon the 2013 gross margin of Concord (which was renamed “Concord-LPL”). Conford-LPL also entered into employment contracts with senior executives of Concord, which provided for bonuses based upon Concord-LPL’s reaching specified revenue targets in 2011, 2012 and 2013. At the time of the acquisition, LPL discussed with American Capital and Concord’s senior executives the synergies that could be achieved by using LPL’s computerized custody system to provide custody services for Concord-LPL trust accounts. In fact, the LPL computer system could not process those accounts, and LPL did not modify the system to enable it to process them. As a result, Concord-LPL did not generate gross margins sufficient to entitle American Capital to the contingent additional payments and did not generate sufficient revenues to reach the specified targets in the employment contracts. American Capital and the former Concord senior executives sued LPL, alleging that LPL had committed fraud in stating that LPL could, or would become able to, process Concord-LPL’s trust accounts, and had breached the implied covenant of good faith and fair dealing in (a) not doing what was necessary to enable the LPL computer system to be used to process those accounts and (b) diverting business away from Concord-LPL to another company to avoid having to make additional payments to American Capital under the Purchase Agreement and provide bonuses to Concord’s senior executives under the employment contracts.

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