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In Hartfield, Titus & Donnelley, LLC v. MarketAxess Holdings, Inc., (Del. Ch.; 7/25), seller sought to reform a membership interest purchase agreement to reduce the minimum threshold that would allow it to pay cash to “top-up” to the maximum earnout target. It argued that re-writing the contract was appropriate under the doctrine of mutual or unilateral mistake because the parties had previously agreed to prorate the earnout target itself to reflect the transaction’s mid-month closing date. Yesterday, the Chancery Court denied the seller’s request because it failed to show a meeting of the minds that the cash top-up threshold would be similarly prorated. Here’s more background:

In September 2020, MarketAxess Holdings entered into a membership interest purchase agreement to acquire HTD’s municipal bonds trading platform. The purchase price included an up-front cash payment and multiple potential earnout payments. HTD could receive an earnout by achieving targets measured by the amount of annual system license fees HTD paid MKTX to use the acquired platform during the earnout period, with a maximum earnout target of $3,250,000 in system license fees. But, if the system license fees paid by HTD were between $2,750,000 and $3,250,000, it could pay an amount in cash to “top-up” to the maximum $3,250,000 earnout target.

When the closing date was set for April 9, the parties sought a way to address a mid-month closing in the earnout calculation and settled on adjusting the earnout table to prorate the target figures (356/365ths of what was negotiated). “The parties did not think to similarly prorate the minimum threshold triggering HTD’s ability to pay cash to “top up” to the maximum prorated earnout target.” When the actual license fees at the end of the first earnout period were short of the agreed-upon cash top-up threshold but above a prorated amount — and the parties failed to reach an agreement on a new earnout structure — litigation ensued over whether the failure to adjust the “top up” minimum was a “mistake.”

In a memorandum opinion issued after a four-day trial, Vice Chancellor David found that HTD failed to prove either mutual or unilateral mistake.

‘Regardless of which doctrine is used, the plaintiff must show by clear and convincing evidence that the parties came to a specific prior understanding that differed materially from the written agreement’ . . . In this action, HTD has failed to meet its burden to prove by clear and convincing evidence that the parties reached a prior understanding to prorate the Cash Top-Up Threshold . . .

HTD argues that when the parties negotiated the Amendment, they “reached a specific prior understanding to ministerially prorate all targets to account for a shortened initial earnout calculation period[,]” which, according to HTD, included the Cash Top-Up Threshold.

But the record evidence shows that the parties never discussed whether, let alone agreed that, the Amendment would prorate the Cash Top-Up Threshold. Both parties point to a March 29, 2021 email . . . proposing three alternatives to address the effect of a mid-month closing on the earnout calculation. HTD accepted MKTX’s proposal to “adjust the table so that the system license fee target figures are 356/365ths of the figures expressed in the table” but did not mention prorating the Cash Top-Up Threshold . . .

There could be “no meeting of the minds about how the [Cash Top-Up Threshold] would operate” with the prorated system license fee targets because the parties never discussed the issue. Only after the First Earnout Calculation Period was nearly over did HTD assert that the Cash Top-Up Threshold should have been prorated, but HTD reached that view months after the parties executed the Amendment, and it therefore does not support a specific prior understanding at the time the Amendment was signed.

– Meredith Ervine