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Chancery Holds That Claim Based on Purposeful Tanking of Merger Agreement Earnout Is Breach of Contract Claim

Shareholder Representative Services LLC v. Albertson’s Companies, C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021)

Many merger agreements include earnout provisions under which the stockholders in the acquired company are entitled to additional consideration upon the occurrence of certain financial milestones. In this case, the Court of Chancery analyzed and considered the appropriate way to plead claims that the acquirer purposefully operated the company to miss earnout milestones.

DineInFresh, Inc., an e-commerce subscription meal kit delivery company, merged with Albertsons Companies, a chain of brick-and-mortar supermarkets. The Merger Agreement expressly gave Albertsons’ sole discretion in making business decisions post-closing, subject to the limitation that Albertsons’ could not take actions with the intent of decreasing or avoiding earnout payments. When DineIn did not meet the required milestones, the selling stockholders filed suit claiming, among other things, that Albertsons’ never intended to build out an e-commerce business as it had represented, and instead let DineIn die on the vine to ensure that the earnout milestones would not be met.

Addressing Albertsons’ motion to dismiss, the Court found that SRS had stated a proper breach of contract claim. If, as alleged, Albertsons’ intended not to invest the appropriate resources in integrating and building out DineIn’s e-commerce business, with knowledge that doing so would avoid the earnout milestones, then this would breach the Merger Agreement. With respect to the plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing, however, as the parties had expressly addressed both Albertsons’ discretion and limitations on that discretion in the Merger Agreement, there was no “gap” for the implied covenant to fill. Similarly, with respect to the fraudulent inducement claim, DineIn could not justifiably rely on any purported extra-contractual representations about Albertsons’ operation of the business post-Closing, when the Merger Agreement gave Albertsons’ sole discretion and did not specify how the e-commerce business would be run (if at all). The Court accordingly granted Albertsons’ motion to dismiss in part. 

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