Delaware Superior Court Interprets Contractual Language Governing Earn-out Payment
As this decision demonstrates, Delaware courts will enforce the plain and ordinary meaning of contractual terms governing an earn-out payment, including the process by which a payment is to be calculated, noticed, and contested.
B&C Holdings involved plaintiff’s sale of a business segment to defendant and a promissory note defining an earn-out that formed part of the deal’s consideration. If for any month between January and June 2017, the business’ last-twelve-months gross profit reached $19 million, the seller was entitled to an earn-out payment of $6 million. The buyer was required to prepare monthly statements with supporting documentation and a final statement by July 15, 2017 in connection with the earn–out’s calculation. The seller then had 15 days to dispute the final statement.
In February 2017, the buyer verbally informed the seller of its entitlement to the full $6 million earn-out. The buyer never sent seller a monthly statement. After a July 2017 email confirmed the earn-out to seller, buyer made interest payments in July and November corresponding to a $6 million earn-out. Seller did not raise the issue of buyer not having provided a statement or documentation of the earn-out. In August 2018, buyer asserted that it had made erroneous, non-GAAP calculations, and that the earn-out’s calculation was just under $1 million, not $6 million. Buyer ceased making interest payments, and the seller sued.
On the parties’ cross-motions for summary judgment, the Superior Court held that the buyer’s July 2017 email constituted the final statement of the earn–out’s calculation based on the plain and ordinary meaning of the promissory note’s language, and that the earn-out became final and binding once the seller had not objected within the contractual time period. The Court explained that the buyer’s failure to comply with certain requirements of the promissory note (such as issuing monthly statements) was a non-performance of covenants intended for seller’s benefit, and were not conditions precedent to the seller enforcing the earn-out agreement. The Court further reasoned that the parties had not negotiated a framework where buyer’s failure to comply with GAAP in its own calculations of the earn-out was grounds to override the overall framework governing the earn-out process and calculation, a framework designed to provide certainty for both parties if the seller did not object to the buyer’s final statement of the earn-out by its contractual deadline.Share