Dive into the legal intricacies of M&A with our latest blog post, ‘Legal Battle Unfolds as Seller Struggles to Secure Earnout in Oregon Dental Practice Sale.’ Explore the complexities of a real case, Colby v. Interdent Service Corporation, revealing the challenges sellers face in securing earnout payments post-transaction. From allegations of buyer actions affecting revenues to court proceedings and challenges ahead, this M&A story sheds light on the risks and nuances of earnout agreements. Stay informed on industry-specific legal battles and navigate the complexities of post-closing disputes.
M&A Stories
August 9, 2018
In the intricate world of mergers and acquisitions, a recent legal dispute highlights the challenges sellers face in securing earnout payments. The case, Colby v. Interdent Service Corporation, involves the sale of a dental practice in Oregon, shedding light on the complexities that can arise post-transaction.
Background:
The seller, in this case, entered into an asset purchase agreement with the buyer, a dental care practice operating across multiple states. The deal, valued at $2.8 million in cash, included an earnout provision. The earnout was contingent on the practice’s revenues in the second year following the agreement’s execution, with a sliding scale ranging from $0 to $500,000 based on performance.
Allegations and Actions:
The seller claimed that the buyer’s post-closing actions thwarted the possibility of receiving the maximum $500,000 earnout. Initially, the seller operated the dental practice in a manner that would have qualified for the earnout. However, subsequent changes implemented by the buyer adversely affected the practice’s financial performance.
Key Changes Made by the Buyer:
The buyer canceled a dental services financing plan, leading to a substantial decline in appointments and revenue; terminated an agreement with a major healthcare insurance plan, resulting in a significant drop in patients and revenue; Failed to fulfill payment obligations to employed dentists as per employment agreements, causing a loss in revenues and the departure of high-producing dentists.
Legal Proceedings and Court Ruling:
In response to the seller’s lawsuit, the buyer moved to dismiss, The buyer moved to dismiss the seller’s lawsuit, arguing the seller failed to allege that the buyer acted in bad faith with the requisite intent to avoid the earnout payment.. The court sided with the buyer, emphasizing that the asset purchase agreement granted the buyer sole discretion in operating the practice.
However, the court allowed the seller to amend its complaint to include specific allegations of intentional acts by the buyer.
Challenges Ahead:
While the court permitted the seller to amend the complaint, it cautioned that proving intentional acts to deny the earnout payment would be an uphill battle. The court expressed skepticism about the seller’s theory, suggesting that the buyer’s conduct appeared more aligned with unwise business decisions than a deliberate effort to drive down revenues.
Commentary:
The seller’s agreement to receive a portion of the purchase price through an earnout carries inherent risks, as post-closing disputes are common. The Colby case serves as a reminder that recovering an earnout can be challenging for sellers, requiring robust evidence to support their claims.
Case Reference:
Colby v. Interdent Service Corporation, Case No. 6:18-cv-781-MC, United States District Court, D. Oregon, (August 1, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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