DealLawyers.com Blog

Earlier this month, Meredith blogged about the Chancery Court’s decisions in two earnout cases, ACON Igloo Holdings, LLC v. Dometic Corporation, (Del. Ch.; 9/26), and In re Saama Technologies Litigation (Del. Ch., 9/26). This Taft memo says that these two decisions highlight the risks associated with earnouts, and identifies these key insights to be drawn from the decisions:

First, the decisions illustrate the importance of clearly allocating operational control during the earnout period. Earnouts frequently require continued involvement by seller-side management, whose financial incentives may not align with those of the buyer or acquired business. Saama demonstrates the potential consequences when executives exercise that authority to pursue personal financial interests at the company’s expense.

ACON Igloo confirms that a buyer may enforce negotiated ordinary-course limitations even when doing so prevents the seller from achieving an earnout. Transaction documents should therefore expressly address management authority, pricing and discount discretion, operating restrictions, and the circumstances in which buyer approval is required.

Second, earnout disputes are not just contract cases. Saama shows that the same conduct can expose continuing management to personal fiduciary-duty liability. Contractual authority to pursue a target does not shield an executive who knowingly sacrifices the company’s interests to maximize contingent pay. Buyers and sellers should build post-closing governance that addresses these conflicts, including oversight procedures, approval requirements, and careful treatment of management incentives.

Third, both decisions underscore the importance of contemporaneous evidence in post-closing disputes. In each case, the Court closely examined internal communications, financial projections, pricing decisions, and management’s stated reasons for pursuing or rejecting particular business strategies. Those records were central to determining whether the conduct reflected legitimate business judgment, compliance with contractual limitations, or an improper attempt to influence the earnout.

For litigators, the decisions underscore importance of obtaining evidence concerning management’s motivations and the economic consequences of challenged decisions. Transactional counsel should carefully establish clear decision-making procedures and document the business rationale for material operating decisions during the earnout period.

– John Jenkins