September 29, 2023

Earnouts: Del. Chancery Refuses to Re-Write Contract Terms Once Again

This week in AECOM, et al. v. SCCI National Holdings, Inc., (Del. Ch.; 9/23), the Chancery Court declined a buyer’s request to re-write the terms of a purchase agreement and dismissed its claim that the agreement’s earnout provisions should be reformed based on the doctrine of mistake.

The buyer asserted fraud claims arising out of alleged misrepresentations by the sellers concerning the amount of “soft revenue” the target expected to realize from a bridge construction project. However, this motion to dismiss addressed the buyer’s separate, independent claim for reformation of the contract based on its misunderstanding of the amount of that soft revenue. The buyer anticipated that revenue would approximate $210 million, but the sellers had discounted the expected value of this project in documentation that was not shared with the buyer. When the actual amount was substantially less, the buyer withheld the earnout payment, on the grounds that the target had not profited from the project, despite that not being a condition of the earnout provision, and sellers sued. The buyer claimed that reformation of the earnout’s terms was necessary to enable it to realize the benefit of its bargain.

In her letter opinion, Vice Chancellor Zurn rejected that argument. She first noted that the relief sought by the buyer was “extreme and unusual,” and that in order to invoke it based on the doctrine of mistake, the buyer had to “not only establish that the written agreement was not the agreement intended by the parties, but also what was the agreement contemplated by them when executed.”  She concluded that buyer didn’t carry that burden with respect to the earnout arrangement, which was contained in Section 2.13 of the purchase agreement:

Here, Buyer avers reforming Section 2.13 “will give Buyer the benefit of its bargain had Sellers’ representations in Section 3.7(b) been true.” But Buyer does not allege any prior agreement as to how obligations under Section 2.13 might change depending on Shimmick’s soft revenue from the GDB Project. Buyer never expressly articulates how its request to reform Section 2.13 (as opposed to any other section) stems from a specific agreement between the parties.

Buyer has not alleged any “agreement” that Section 2.13 earnout payments are entirely conditioned upon Buyer breaking even, in the event soft revenue projections were inaccurate or some other circumstance caused soft revenue to fall below $200 million. Put another way, Buyer has not pled any prior agreement that is inconsistent with Section 2.13 as written. Indeed, Buyer’s and Sellers’ descriptions of Section 2.13 and what it expresses are identical. Their agreement reflects what’s written, and what’s written reflects their agreement. Buyer offers no prior agreement to which I could contrast and conform Section 2.13’s terms.

The opinion didn’t necessarily foreclose the buyer completely from reformation as a potential remedy for the sellers’ alleged breaches of its representation. That’s because of the buyer’s separate fraud claim, which was not part of this motion to dismiss. VC Zurn noted that under Delaware law, “a plaintiff who has pled a claim for fraud, which reformation might remedy, need not plead a formal count for reformation: she need only convince the Court that reformation is the proper remedy.”

– Meredith Ervine