Professional Documents
Culture Documents
Published by the Corporate Counsel Section of the North Carolina Bar Association Vol. 28, No. 2 January 2016 www.ncbar.org
Caveat Earnout1
By John Treadwell, Bud Baker and Brian Brown
Earnouts are frequently used in M&A transactions as a tool for
purchasers and sellers to resolve disagreements over the value of a target
company or assets. Generally an earnout provides for payment of a portion of the purchase price to be deferred until after the closing by adopting
certain performance targets or the occurrence of certain defined events.
Earnouts are appealing because not only do they bridge the valuation gap
between purchaser and seller, but in some instances, can incentivize sellers
to assist in continuing to grow the business for the benefit of purchasers
after the closing. A major caveat, however, as one Delaware2 court noted,
is that an earnout often converts todays disagreement over price into tomorrows litigation over the outcome.3
Recent litigation in Delaware has focused on what, if any, obligations and duties a purchaser may have to ensure that the target company reaches goals agreed upon in an earnout provision. The courts have
found that where there is an earnout an implied covenant of good faith
and fair dealing requires the purchaser to conduct the acquired business reasonably and in good faith after the closing.4 However, the covenant only serves a gap-filling function creating an obligation only when
a contingency arises that the purchaser and seller did not anticipate at
the time of contracting.5 The test is whether it is clear from what was
expressly agreed upon that the parties would proscribe the conduct later
complained of had they thought to negotiate with respect to that matter.6
A purchaser is in breach of the covenant when it acts with an intent to
lower or avoid an earnout payment and that action was not contemplated by the parties at the time of contracting.7 To find intent courts look
to whether the purchaser took action specifically motivated by a desire
to avoid the earnout; simply showing that a purchaser had knowledge
that conduct would reduce the likelihood of an earnout payment is not
enough.8 Thus, unless specifically contracted for, purchasers have no affirmative obligation to maximize the amount of an earnout payment in
the absence of bad faith.9
For instance, the Delaware Supreme Court found in one case that
a purchaser was not required to accept certain lower distribution fees
Continued on page 2
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The Inside
Scoop
Published by the Corporate
Counsel Section of the North
Carolina Bar Association
Vol. 28, No. 2
January 2016
Editor
Burgin Hardin
Chair
Robert Craig Hunter
Immediate Past Chair
Jason M. Hensley
Vice Chair
Elizabeth Carroll Southern
Secretary
Bradley Allen Roehrenbeck
Treasurer
Clayton Morgan
Section Council
Carl S. Aldridge II
Elizabeth M. Bostian
Candice W. Brown
Clara Cottrell
Gregory Higgins
Jennifer Edwards Hoverstad
James Preston Hutcherson
Virginia A. Fitt
Ryan S. Luft
Christine Mazzone
Tammy D. Nicholson
Vaddrick Parker
Donald Ray Teeter Jr.
Gerald L. Walden Jr.
2016 North Carolina Bar Association. Views and
opinions expressed in articles published herein are
the authors only and are not to be attributed to
The Inside Scoop, the Corporate Counsel Section
or the NCBA unless expressly stated. Authors are
responsible for the accuracy of all citations and
quotations. No portion of the publication may be
reprinted without permission.
Lawyers now find themselves well into the era of social media
discovery. Time was, Internet evidence was a novelty, and courts
eyed such issues with wonder and skepticism. Cf. St. Clair v. Johnnys Oyster & Shrimp, Inc., 76 F. Supp. 2d 773, 774 (S.D. Tex. 1999)
([A]ny evidence procured off the Internet is adequate for almost
nothing . . . .). These days, these inquiries are routine. Accordingly,
corporate counsel should be aware of the ethical principles governing social media research in litigation (whether they be conducting
such research internally or relying on outside counsel to do so).
First and foremost, lawyers must familiarize themselves with
legal technology issues. Generally, a lawyer should keep abreast of
changes in the law and its practice, including the benefits and risks
associated with relevant technology . . . . See ABA Model Rule of
Prof l Conduct 1.1, cmt. In fact, North Carolina has applied this
requirement to social media specifically, noting that [c]ompetent
representation includes knowledge of social media . . . . See NC
2014 Formal Ethics Opinion 5.
Certainly, reviewing publicly accessible social media information is generally acceptable. In litigation, [a] lawyer may access
publicly available information on a social networking website. See
Oregon State Bar Ethics Committee Op. 2013-189. More specifically, [a] lawyer representing a client in pending litigation may access the public pages of another partys social networking website
(such as Facebook or MySpace) for the purpose of obtaining possible impeachment material for use in the litigation. See NY State
Bar Opinion No. 843 (2010). That said, practitioners should be
aware of the courts increasing appreciation of an individuals privacy in this context. Cf. Riley v. California, 134 S. Ct. 2473, 2490
(2014) (An Internet search and browsing history . . . could reveal
an individuals private interests or concerns.) (noting privacy implications of mobile phone searches). In light of the recognition of
these privacy issues, courts have increasingly limited the scope of
social media discovery requests. See Smith v. Hillshire Brands, No.
132605, 2014 WL 2804188, at *4 (D. Kan. June 20, 2014) ([T]he
record does not support defendants extremely broad discovery request for all-inclusive access to plaintiff s social media accounts.);
Pereira v. City of New York, No. 26927/11, 2013 WL 3497615, at
*2 (N.Y. Sup. Ct. June 19, 2013) ([D]ue to the likely presence of
material of a private nature that is not relevant to this action, this
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