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.