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Last week, the Chancery Court dismissed a variety of contract and tort claims arising out of a dispute over a buyer’s compliance with the terms of an asset purchase agreement. Now, before we dive into the substance of the case, I want to tell you a few things about this case and then ask you a brief question.

– First, the case involves claims arising out of an earnout provision.

– Second, the complaint alleges breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract, and fraudulent inducement.

– Third, the opinion was authored by Vice Chancellor Laster.

Okay, with that background, let me ask – how long do you think this opinion is? I’m guessing most of you would say at least 100 pages, since I know that’s what I would’ve said given these facts.  But that’s not the case, because in STX Business Solutions v. Financial-Information-Technologies, (Del. Ch.; 10/24), the Vice Chancellor disposed of all of these claims in just 14 pages!

The opinion’s brevity is attributable in large part to the language of the contract, which gave the buyer broad discretion with respect to post-closing operations:

Seller and each Seller Party acknowledges that Buyer is entitled, after the Closing, to use the Purchased Assets and operate the Business in a manner that is in the best interests of Buyer or its Affiliates and shall have the right to take any and all actions regardless of any impact whatsoever that such actions or inactions have on the earn-out contemplated by this Section 2.7; provided, that, prior to the Earn-Out Measurement Date, Buyer shall not take any action in bad faith with respect to Seller’s ability to earn the Earn-Out Consideration or with the specific intention of causing a reduction in the amount thereof.

The Vice Chancellor pointed out that the language of earnout provision only prohibited the buyer acting in bad faith, and that the plaintiffs’ failed to plead facts that supported an inference of bad faith. One of the plaintiffs’ claims centered upon the buyer’s failure to pursue a business opportunity with Walmart, which they alleged would have enabled the business to achieve the earnout milestones. The buyer chose not to pursue that business because it would complicate negotiations with a new investor. Pointing to the language of Section 2.7 quoted above, Vice Chancellor Laster concluded that deciding whether or not to pursue this business “required a business judgment that the Buyer was empowered to make.”

The plaintiffs also contended that the buyer acted in bad faith by structuring its arrangements with the new investor in such a way as to avoid trigging the earnout through a sale of control.  That didn’t get any traction with the Vice Chancellor either – he said that the only reasonable inference from the structure of the transaction was that the buyer did not want to sell control to the new investor, not that it acted in bad faith by not selling control.

The implied covenant claims were based on the same allegations as the bad faith claims and met a similar fate.  The plaintiffs alleged that the buyer intentionally terminated negotiations with Walmart for the express purpose of depriving the seller of the earnout and facilitating the buyer’s deal with the new investor, and that it structured its deal with the new investor for the same purpose.  However, Vice Chancellor Laster concluded that those claims conflicted with the rights the buyer had under the express terms of the agreement, and that those terms left no gaps to be filled by the implied covenant.

Since there was no underlying breach of the contract, the plaintiffs’ tortious interference were tossed as well, and because the complaint didn’t offer any reason to infer that the buyer had a duty to speak or engaged in fraudulent concealment, that claim also bit the dust.

– John Jenkins