• Delaware Chancery Court Grants Partial Judgment On Post-Acquisition Earnout Payments, Finding They Were Not Conditioned On Compliance With Other Provisions

  08/05/2025

  On July 31, 2025, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted partial judgment on the pleadings on a breach of contract counterclaim asserted by defendant, the former majority owner of two intellectual property insurance underwriting companies that were sold to a risk management company (the “Buyer”), in his individual capacity and also as the representative of the sellers (the “Sellers’ Representative”) in a post-acquisition dispute. The complaint was brought by the Buyer, as plaintiff, seeking declaratory judgment that it was not obligated to pay the sellers certain post-acquisition earnout payments under the parties’ asset purchase agreement (“APA”) and asserting other contract claims because defendant allegedly breached certain obligations and representations under the APA. Arthur J. Gallagher & Co. v. Agiato, C.A. No. 2024-0494 (Del. Ch. July 31, 2025). The Court found in favor of defendant on the counterclaim holding that the earnout payment requirement was not conditioned on defendant’s satisfaction—or the absence of a breach—of other obligations.

  Under the APA, the Buyer agreed to pay the Sellers $50 million in cash up front along with earnout payments for each of the four years following the transaction based on the acquired companies achieving certain financial thresholds as a new division of the Buyer, with an aggregate cap of $150 million. Defendant agreed to continue to manage the new division as an employee of the Buyer. Approximately one year after the transaction, the Buyer declined to deliver the first earnout payment and purported to fire defendant for cause. The Buyer stipulated that the requisite financial threshold for the earnout payments had been met, but argued that it was excused from making the payment because of alleged breaches of certain representations and other obligations under the APA, including that (i) the new division would be run according to the Buyers’ practices and policies for the long-term benefit of the Buyers’ shareholders, and (ii) defendant would sign an employment agreement and continue to run the division.

  In rejecting the Buyer’s arguments and granting partial judgment on the pleadings to defendant on the earnout, the Court found that the plain language of the APA did not place any conditions on the earnout payment aside from meeting the agreed-upon financial thresholds. For example, the Court held that the APA provisions that directed the new division to be run according to the Buyer’s practices and policies reflected the Buyer’s rights, but did not impose obligations on defendant. The Court similarly found that, while the APA was conditioned on defendant signing the employment agreement, which he did, the earnout payments were not conditioned on his continued employment nor his satisfying specific terms of the employment agreement itself.

  Accordingly, since the Buyer conceded the financial thresholds for the first year had been met, the Court ordered the Buyer to make the required $50 million earnout payment plus prejudgment interest. The Court held that factual disputes precluded judgment on plaintiff’s other claims.

  Category: Deal Disputes
  

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• Arthur J. Gallagher & Co. v. Agiato