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Chancery Denies Motion to Dismiss Claim for Breach of Earn-Out When Unable to “Divine any Meaning” From Provision

Western Standard, LLC v. SourceHOV Holdings, Inc., C.A. No. 2018-0280-JRS (Del. Ch. July 24, 2019).

Defendant Pangea acquired BancTec through a merger agreement that provided for an earn-out to former BancTec stockholders in the event that Pangea’s controlling stockholder realized certain returns on its post-merger stock.  Plaintiff alleged that the earn-out was triggered when Pangea’s parent company became a wholly owned subsidiary of another company through a stock-for-stock transaction.

Plaintiff filed for breach of contract when Defendant refused to pay the earn-out or comply with other earn-out related provisions in the contract.  Defendant moved to dismiss, and argued that the earn-out was not triggered under the relevant provisions of the contract.  The Court explained that typically at the pleadings stage the Court must determine whether the contract is unambiguous, in which case the Court can apply the relevant provisions to the Plaintiff’s claim for breach, or ambiguous, in which case the Court will require extrinsic evidence to glean the parties’ intent.  In this case, however, the Court was “unable to divine any meaning from the contract” and found that neither party provided an interpretation that made sense of the provisions; therefore, the Court denied the motion to dismiss to allow the parties to present extrinsic evidence that would allow the Court to discern the meaning of the relevant contract provisions.