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Summary Judgment Granted On Earnout Provisions of Merger Agreement

By Francis G. X. Pileggi, Esq.

Comet Systems, Inc. v. Miva, Inc., (Del. Ch., Oct. 22, 2008), read opinion here. This Chancery Court opinion involves the interpretation of an earnout provision and a change-of-control bonus in a merger agreement. The Court's own introductory overview of the the factual background and the issue addressed is the most efficient means to summarize this case and it will also allow the reader to determine if it sparks enough interest to download the whole decision at the above link. What follows is a quote from the first page of the Court's 20-page decision:

This breach of contract case arises out of a dispute between the former
stockholders of a software company and a successor entity which purchased that
company over the interpretation and performance of the earnout provisions of the
merger agreement in which those stockholders were bought-out. The former
stockholders have moved for partial summary judgment as to the first count of
their verified complaint, and the purchasers have cross-moved for summary
judgment on all counts.

The central issue presented by these motions is whether a change-of-control
bonus paid to the employees of the target corporation prior to the closing of the
merger is a “one-time, non-recurring expense” that should be excluded from the
target’s costs for the purpose of computing the earnout. If the bonus payment is
excluded from the cost calculation, the former stockholders will be entitled to an
additional payment of approximately $1.67 million under the earnout. The court
finds that this is a pure question of law, on which the former stockholders are
entitled to summary judgment. The court also concludes that, as a result of a delay
in payment, the former stockholders are entitled to an award of interest on the
portion of the earnout they already received, as well as on the portion which the
court finds they should have gotten.

Full post as published by Delaware Corporate and Commercial Litigation Blog on November 03, 2008 (boomark / email).