Chancery Allows Claims for Post-Closing Earn-Out Iniquities and Inequities

American Capital Acquisition Partners, LLC v. LPL Holdings, Inc., C.A. No. 8490-VCG (Del. Ch. Feb. 3, 2014).

This Court of Chancery opinion addresses a recurring theme of many cases in this court: disputed earn-out provisions that allow for potential additional consideration that would be due to the sellers of a company post-closing dependent upon the acquired company satisfying various milestones or performance targets. The claims that survived a motion to dismiss in this case related to allegations that clients and opportunities of the acquired company were diverted, post-closing, from the acquired entity to another subsidiary of the acquirer in order to thwart any opportunity for the acquired entity to meet performance guidelines that would have otherwise entitled the sellers to additional compensation.

Noteworthy about this opinion is that it is one of the few in which a claim for breach of the implied covenant of good faith and fair dealing survives a motion to dismiss, in connection with allegations that revenue was diverted to other affiliates in order to avoid the milestones or goals (hence the graphic of the goalpost), that would have triggered the earn-out provisions. See Slip op. at 18.

This is the archetype of an opinion on which Chancery’s reputation was based. After a thorough review of the facts the court analyzes the legal claims in a scholarly manner with efficiency.