DealLawyers.com Blog

Last week, in In re Saama Technologies Litigation (Del. Ch., 9/26), the Delaware Chancery Court not only rejected a founder’s claim for an earnout payment but also found that he acted in bad faith and breached his fiduciary duties in attempting to maximize the earnout, awarding the defendant buyer $7.3 million in damages for harm the plaintiff caused to its software business. Paul Weiss, which represented the defendant buyer, The Carlyle Group, in the litigation, believes this “is likely the first time a buyer defendant has both defeated earnout claims and won damages on a counterclaim in the Court of Chancery.”

Target company, Saama Technologies, which operated a clinical data platform, was acquired by The Carlyle Group in 2021. Earnout payments were dependent on hitting a revenue threshold and annual recurring revenue bookings that the founder and sellers’ representative knew were difficult to achieve.

After signing the Merger Agreement, Katta accelerated Saama’s strategy to “aggressively win business” and “sell anything by the end of the year” to achieve the earnout. Certain employees were offered “72-27 bonuses” based on their contribution to ARR Bookings. Katta told VP of Customer Success Gondhali that he needed to “aggressively” push the “72-27 goals” or risk being replaced, since Katta needed someone “who [could] drive this upwards and onwards.”

Katta’s plan to achieve the earnout had two main components. First, Saama abandoned its historical pricing discipline […] Second, Katta directed his teams to rewrite contracts to artificially maximize ARR […] [M]any of the […] products sold to customers either did not exist or were in early stage development.

When the earnout statement was received, The Carlyle Group formally objected after PwC’s review questioned the revenue recognition practices reflected in the earnout statement. The business deteriorated post-closing, in part due to the founder’s overcommitments. The founder commenced litigation, and defendants made counterclaims related to the merger agreement’s express terms, the implied covenant and breach of fiduciary duty. As Paul Weiss notes:

Following a five day trial in March 2026 Vice Chancellor Lori Will found that Carlyle’s objection to making the earnout payment was “substantively correct” and made in good faith, and that Katta was “singularly focused on the earnout,” leading him to manipulate contracts, offer unprecedented discounts, and sell products that did not yet exist in pursuit of his goal, “culminat[ing] in an unsustainable trajectory that impaired Saama’s product business.” As the court held, this “was not a flawed business strategy; it was bad faith.” Accordingly, the court entered judgment in Carlyle’s favor on Katta’s claims and granted Carlyle $7.3 million for Katta for his bad-faith efforts to secure the payment.

It makes you wonder whether the founder made himself worse off by filing the lawsuit for the earnout claim. This decision reminds us that earnout disputes may not be purely contractual and that fiduciary obligations underlie a seller’s post-closing conduct when that person continues to manage the business.

– Meredith Ervine