November 14, 2011
Earnouts and Joint Ventures
From John Grossbauer of Potter Anderson: In Coughlan v. NXP, Delaware Vice Chancellor Glasscock interpreted a provision in a merger agreement by which NXP had acquired a company called Glo-Nav and agreed to certain earnout payments to former Glo-Nav stockholders. The Vice Chancellor applied the step-transaction doctrine to find that the creation by NXP of a new subsidiary of NXP to which it transferred assets including the former Glo-Nav assets, and the subsequent transfer by NXP of the subsidiary to a joint venture with ST Microelectronics, was covered by a provision of the merger agreement requiring the joint venture to either assume the earnout payments or to accelerate those payments to the former Glo-Nav stockholders.
However, the Court further found that the joint venture had complied with the obligation under the merger agreement to assume the obligations under the earnout provisions, and therefore the earnout payment did not accelerate upon transfer of the subsidiary to the joint venture, even though NXP retained the obligation to make the actual earnout payments when they became due.