This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Chancery Court ordered general contractor Tutor Perini Corp. to turn over $8 million to Greenstar Services Corp.’s former owners, after finding they met the terms of a holdback agreement by collecting $60 million in change-order fees after Greenstar’s 2011 sale in Greenstar IH Rep, LLC et al. v. Tutor Perini Corp., No. 12885-VCS, memorandum opinion (Del. Ch. Dec. 4, 2019).

Vice Chancellor Joseph R. Slights III’s Dec. 4, 2019 memorandum opinion resolves a remaining dispute in Greenstar’s breach of contract suit over contingent considerations that were part of building contractor Tutor Perini’s $208.4 million payment for Greenstar’s specialty construction companies.

The opinion could prompt corporate officers and their counsel to reexamine the precision and comprehensiveness of the often-disputed terms of earn-out and hold-back agreements that frequently make up a substantial portion of the consideration in mergers and acquisitions.

After a three-day trial in Greenstar’s 2016 suit, the vice chancellor entered judgment for Greenstar and its former shareholders and officers, finding they presented the only reasonable interpretation of how the purchase pact’s collection milestone triggers would work.

In a separate ruling the same day, he also ordered Tutor Perini to pay Delaware limited liability company Greenstar’s attorney fees and expenses of $52,436 within 20 days.  Greenstar IH Rep, LLC et al. v. Tutor Perini Corp., No. 12885-VCS, letter opinion (Del. Ch. Dec. 4, 2019).

In his memorandum opinion, the vice chancellor said the 2011 merger, whereby Greenstar became a wholly-owned subsidiary of Sylmar, California-based Tutor Perini included:

  • An earnout agreement based on Greenstar and its plumbing and electrical/mechanical      specialty construction companies meeting certain profitability targets during the five-year period following the acquisition, and
  • A holdback pact requiring co-plaintiff Gary Segal and two other Greenstar principal shareholders — who stayed on post-merger to run the operating companies — to collect their estimated $60 million in change-order bills from customers in order to receive a contingent $8 million payment.

“As they are wont to do, the contingent consideration provisions prompted post-closing disagreements,” and even modifying the holdback in 2013 did not help, the vice chancellor said. “While intended to provide clarity,” that revision “did no such thing,” because Tutor Perini maintained that it owed Greenstar’s ex-owners nothing, and the parties went to trial, he said.

In a separate Oct. 31, 2017 decision, the Chancery Court ruled that Greenstar was entitled to $19 million in earn-out payments and dismissed Tutor Perini’s fraud and offset counterclaims. Greenstar IH Rep, LLC et al. v. Tutor Perini Corp., No. 12885-VCS, memorandum opinion issued (Del. Ch. Oct. 17, 2017).  The state Supreme Court affirmed that judgment, leaving only the holdback claim in the breach of contract suit. Tutor Perini Corporation v. Greenstar IH Rep. LLC, No. 507-2018 order issued (Del. May 11, 2017).

After trial on April 18 and post-trial argument on September 10 on the holdback issue, the vice chancellor said Greenstar had proved the existence of a valid contract, the breach of a contractual obligation and damages suffered because of that breach.

He found that the agreement’s “ordinary meaning leaves no room for uncertainty” and “the plain, common, and ordinary meaning of the words … lends itself to only one reasonable interpretation:” that the holdback agreement requires only collection of money that generates additional net profit.

By contrast, Tutor Perini’s interpretation of the holdback provides “no single formula for determining net profit” because its formula varies from job to job, he said.

Therefore, since the two parties agree that the contract is not ambiguous and the plaintiffs proffer “the only reasonable construction of the holdback agreement,” the plaintiffs are entitled to immediately receive the entire $8 million in the holdback escrow, the Vice Chancellor ruled.