Delve into the complexities of earnout disputes in mergers and acquisitions through the lens of the Barnard v. Marchex, Inc. case. Explore how earnouts, though crucial for aligning buyer-seller interests, can lead to litigation due to ambiguous terms and breaches of good faith. Learn about the importance of meticulous drafting and clear contractual safeguards to mitigate disputes and ensure post-transaction integration success. Navigate the volatile landscape of M&A with insights into earnout structures and legal pitfalls.
M&A Stories
April 7, 2024
In the intricate landscape of mergers and acquisitions, earnouts serve as a crucial mechanism for aligning buyer and seller interests on purchase price. However, beneath their apparent simplicity lies a potential minefield of disputes, as illustrated by the case of Barnard v. Marchex, Inc.
In this case, a strategic stock acquisition involving a business-to-business call analytics company unfolded with promise but ended in litigation. The initial deal saw a $10.1 million cash payment at closing, coupled with a tantalizing $3 million earnout opportunity, contingent upon the target’s sales meeting predefined financial goals over two twelve-month periods.
However, the post-closing phase revealed fractures in the buyer-seller relationship. Allegations flew as the sellers accused the buyer of operating the acquired business in bad faith, purportedly to evade the earnout obligation. Claims centered on restrictive measures limiting the former CEO’s client interactions, allegedly steering them towards the buyer, and triggering an earnout acceleration event due to a drop in employee count below the agreed threshold of thirty-five.
The dispute escalated to a Delaware federal district court, where the buyer sought dismissal, contesting the sufficiency of the seller’s allegations. Nevertheless, a magistrate’s recommendation to continue the lawsuit underscored the complexity and volatility of earnout arrangements.
This case underscores the inherent risks in earnout structures and highlights the importance of clear contractual safeguards. While earnouts can align incentives and bridge valuation gaps, meticulous drafting is essential to safeguarding the seller’s interests post-closing. Specific provisions, such as defining acceleration events like maintaining a minimum employee count, can mitigate disputes and foster smoother post-transaction integration.
In the dynamic realm of M&A, where certainty is elusive and disputes are rife, prudent navigation of earnout agreements can spell the difference between fruitful collaboration and protracted legal battles.
Case Reference: Barnard v. Marchex, Inc C.A. No. 1:22-cv-01382-RGA, United States District Court, D. Delaware, (February 2, 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 recent legal 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
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments