This blog dives into a key M&A case from the Delaware Court of Chancery that underscores the importance of earnout clauses in asset acquisition deals. It centers on a $1.7 million acquisition in the data management sector, where the buyer faced a claim after declining a potential Walmart contract. Learn how a “buyer-friendly” earnout provision shielded the buyer from the seller’s claim, with the court affirming the buyer’s right to prioritize its own interests. This case study offers insights for M&A professionals on structuring earnouts to protect buyers while managing seller expectations.
M&A Stories
November 12, 2024
This case highlights a 2021 asset acquisition of a data management company serving the beverage alcohol industry. The purchase price was $1.7 million, with an additional potential earnout of up to $5.5 million, contingent on revenue targets.
At the time of the sale, the seller had been seeking a contract with Walmart for data management services. Almost two years after closing, Walmart issued a request for proposal for a five-year contract and informed the buyer that its products appeared uniquely suited to Walmart’s needs. Walmart invited the buyer to submit a proposal.
On the deadline for submitting, the buyer informed Walmart that it would not be bidding. The buyer later explained to the seller’s founder that it opted out because it was in the midst of negotiations to bring in an equal partner.
The seller responded by filing suit in Delaware’s Court of Chancery, alleging that the buyer had intentionally bypassed the Walmart opportunity to avoid triggering the earnout. The buyer moved to dismiss, arguing that even if the seller’s claims were accurate, they did not constitute a breach of the earnout provision.
The court ruled in the buyer’s favor, characterizing the earnout clause as “buyer-friendly.” The clause explicitly allowed the buyer to operate the acquired business in its own best interests, irrespective of earnout effects. The only restriction was that the buyer could not act in bad faith with the specific intent to reduce the earnout.
The court noted the absence of seller-friendly terms in the provision—there was no requirement for best efforts, commercially reasonable efforts, or even good faith efforts to meet the earnout.
Ultimately, the court dismissed the seller’s claim, finding no evidence that the buyer’s choice to pass on the Walmart proposal, especially amid a major investment transaction, constituted bad faith.
This case illustrates the protective power of a buyer-friendly earnout provision, though it may be challenging to negotiate such terms with a seller who has leverage and skilled advisers.
See: STX Business Solutions, LLC v. Financial-Information-Technologies, LLC, C.A. No. 2024-0038-JTL, Court of Chancery of Delaware, (October 31, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recenegal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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