April 28, 2023

Looks Like an Amendment, Reads Like an Amendment, Must be an Amendment

At issue in S’holder Representative Services LLC v. HPI Holdings, LLC, (Del. Ch.; 4/23) was an earnout conditioned on the surviving entity signing a customer agreement with specific terms. While the surviving company signed a modified agreement maintaining the customer relationship, the buyer declined to pay the earnout because the specific payment conditions set forth in the purchase agreement were not met, and the shareholder representative sued.

There were two contractual earnout triggers at issue in the case. The first called for payment of the earnout if the buyer entered into a “new agreement” with the customer on substantially the same economic terms as the original agreement.  The second trigger required payment if the buyer signed an amendment to the original agreement removing an early termination clause.

With respect to the first trigger, the plaintiff argued that the modified agreement document was a new agreement since it was titled “Agreement to Amend Service Agreement” and because it supplanted certain provisions in the original agreement with the customer. Vice Chancellor Fioravanti was having none of this argument, calling it “a strained attempt to find ambiguity in the title” notwithstanding the document’s structure and function—to modify an existing contractual relationship—and the words consistently used to describe it throughout.

As to the second trigger, the plaintiff argued that if the modified agreement was just an amendment, the earnout payment was still triggered because the amendment removed the customer’s early termination right. VC Fioravanti also didn’t find this argument compelling, deciding that the modified termination provision, which maintained the customer’s ability to terminate on 90 days’ notice but only after a certain date, suspended—but didn’t eliminate—the early termination right. Accordingly, the defendant buyer’s motion to dismiss was granted because the specific criteria necessary to trigger payment under the unambiguous earnout provision were not met.

– Meredith Ervine