Explore the legal battle in the Value Health Sols., Inc. v. Pharm. Rsch. Assocs., Inc. case and the implications of earnout agreements in M&A deals.
M&A Stories
October 16, 2019
Introduction:
In the world of mergers and acquisitions, the acquisition of clinical development software can be a tricky endeavor. The software’s success is often uncertain, making buyers hesitant to pay a hefty upfront price. To mitigate this risk, earnout agreements with milestones come into play.
Background:
In this particular case, we have a large, global contract research organization with 15,000 employees worldwide as the buyer. They provide clinical trial services to pharmaceutical and biotech companies. On the other side, we have a small clinical development software company. These companies create software tools that simplify the management and analysis of data from medical studies. They make the process of developing new medical treatments more efficient and organized.
The software developed by the seller was compatible with Salesforce, a widely used platform in clinical trials. This caught the buyer’s interest.
Both parties agreed to an Asset Purchase Agreement (APA). It included a $2.5 million cash payment at closing, with additional earnouts of $1 million in buyer stock upon reaching specific development milestones and substantial cash earnouts based on software licensing sales.
The buyer argued that none of the earnout milestones were met.
Legal Proceedings:
In response, the seller sued the buyer in North Carolina Business Court, a specialized court for complex business disputes. Unfortunately, the seller lost the earnout claim when the trial court ruled in favor of the buyer. The seller then appealed to the North Carolina Supreme Court.
Outcome:
The North Carolina Supreme Court sent the case back to the trial court. It ordered the trial court to evaluate the seller’s claims that the buyer breached the APA by refusing to pay the earnout. The court also rejected the buyer’s argument that achieving later milestones hinged on achieving earlier ones. Furthermore, it held that the seller could make a claim that $500 million in revenue from a software-as-a-service contract counted as a license sale of the seller’s software.
In Conclusion:
This high-stakes legal battle could potentially result in multimillion-dollar earnout recovery.
Case Reference:
Value Health Sols., Inc. v. Pharm. Rsch. Assocs., Inc., No. 100A22, Supreme Court of North Carolina (Filed September 1, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
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