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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 www.ncbar.org

The Chairs Comments


New Year, New You?
The ringing-in of the New
Year always seems to turn our
minds toward some level of introspection. Its a good time to
pause and be thankful for all that
was right with 2015 and to set our
Hunter
goals for 2016. If your New Years
resolution tends towards kickstarting your career, then youve come to the right place.
Those of you that were able to attend the Nov. 13
Lunch & Learn program in Charlotte on representation
and warranty insurance witnessed the kind of event for
which the Corporate Counsel Section is increasingly becoming known a cutting edge discussion by nationally
recognized experts on a topic that can help our members
not only with daily practice issues but also provide tools
for career advancement. An additional Lunch & Learn
event is being planned for the Triad in May. Our CLE
Committee has put together another phenomenal program for the CLE event that is associated with our Annual Meeting in Cary this month. This day-long program
will feature wide-ranging discussions on topics such as
current intellectual property issues, labor and employment law changes, recent court decisions affecting North
Carolina business, and developing a merger and acquisition game plan. Tailored specifically to in-house practitioners, and always timely and relevant, this annual CLE
program has become the favored way for in-house counsel to fulfill their annual CLE requirements.
In addition to CLE events, the Section holds two
Thought Leadership events during the year. These
events, which combine networking over cocktails and
dinner with a thought-provoking panel discussion,
have become an engaging staple of the Sections annual
programming. Our event in November in Greensboro
on cyber security was a significant success, bringing
together in-house and outside counsel practitioners as

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

Inside this Issue...

Continued on page 2

www.ncbar.org
919.677.0561
@NCBAorg

3 | The Ethics of Social Media Research

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.

The Chairs Comments, continued from the front page


well as representatives from academia and the media to discuss the legal and practical issues of
addressing cyber security concerns. On April 6, the Section will gather at the Umstead Hotel
in Cary. The spring event will feature a panel of General Counsels discussing what it takes to
become a GC. This has proven to be an incredibly popular event so mark your calendar and
watch your in-box for registration information.
The programs noted are just a few of the ways that your membership in the Corporate
Counsel Section can help you grow in your in-house role and fulfill your career goals. Membership, however, is what you make of it. Were here to help. Attend a program, become engaged
with a committee lots of exciting things are happening. We look forward to helping you make
your 2016 the best year yet!
Caveat, continued from page 1
from a third party that would maximize the earnout payments to the seller.10 The court reasoned that the purchaser did not act with the intent to lower the earnout payments and that
the implied covenant of good faith and fair dealing cannot be applied to give seller contractual
protections that they failed to secure for themselves at the bargaining table.11
What can a seller do to protect the value of its earnout payments? Sellers should seek an
express good-faith obligation from the purchaser to maximize the earnout and not rely solely
on the implied covenant of good faith and fair dealing to expand the purchasers earnout obligations. Conversely, purchasers should be cautious about any implied covenants and reject
requests from sellers to include express good-faith obligations to maximize the earnout.
John Treadwell is vice president/divisional counsel at Laboratory Corporation of America
Holdings. Brian Brown is a partner in the Raleigh office of K&L Gates and focuses his
practice on corporate law, mergers and acquisitions, life sciences, health care, estate planning
and estate administration. Bud Baker is an associate in the Raleigh office of K&L Gates and
a member of the corporate group.
(Endnotes)
1
The word earnout is also spelled with a hyphen as earn-out.
2
Delaware law is cited because of the well-developed body of corporate case law and the significant

number of companies incorporated in Delaware.
3 Airborne Health, Inc. and Weil, Gotshal & Manges LLP v. Squid Soap, LP, C.A. No. 4410-VCL (Del.

Ch. Nov. 23, 2009).
4 Id.
5 American Capital Acquisition Partners, LLC v. LPL Holdings, Inc., CA NO. 9490-VCG, 2014 WL

354496 at *5 (Del. Ch. Feb. 3, 2014).
6 Id. at *33.
7 Lazard Technology Partners, LLC v. Qinetiq North America Operations LLC, 114 A.3d 193

(Del. 2015).
8 Id.
9 Winshall v. Viacom Intl., Inc., 76 A.3d 808, 816 (Del. 2013).
10 Id. at 816.
11 Id.

2016 CORPORATE COUNSEL ANNUAL MEETING


Friday, January 29, 2016
NC Bar Center, Cary + Live Webcast
CLE Credit: 6.0 Hours, including 1.0 Hour SA/MH
Register online at tinyurl.com/472CCM

The Inside Scoop


www.ncbar.org

The Ethics of Social Media Research


By James M. Dedman IV
court shall conduct an in camera inspection of [plaintiff s social
media sites.]). In sum, lawyers should narrowly tailor these discovery requests to avoid an unnecessary discovery dispute.
When research prompts a desire to contact the owner of a
social media profile, ethical issues abound. Obviously, a lawyer
should refrain from sending a friend request to a represented party.
As long as the lawyer does not friend the other party or direct a
third person to do so, accessing the social network pages of the
party will not violate [the ethical rule]. See NY State Bar Op. No.
843 (2010); see also San Diego County Bar Association Opinion
2011-2 ([T]hose rules bar an attorney from making an ex parte
friend request of a represented party.). As always, ex parte conduct
is prohibited.
Lawyers should also remain cautious when contacting
witnesses via social media. [T]he attorneys duty not to deceive
prohibits him from making a friend request even of unrepresented
witnesses without disclosing the purpose of the request. San Diego County Bar Assn Op. 2011-2; see also Philadelphia Bar Assn
Professional Guidance Committee, Op. 2009-02 (finding friend
request to fact witness deceptive because it omit[ted] a highly
material fact, namely, that the third party who asks to be allowed
access to the witnesss pages is doing so only because he or she is intent on obtaining information and sharing it with a lawyer for use
in a lawsuit to impeach the testimony of the witness). That said,
[a] lawyer may request access to non-public information if the
person is not represented by counsel in that matter and no actual
representation of disinterest is made by the lawyer. See Oregon
State Bar Ethics Committee Op. 2013-189. In light of the foregoing,
friend witnesses at your peril.
Of course, these are not the only ethical principles governing social media research. In light of the duty to stay abreast of
such issues, corporate counsel should consider these rules before
beginning such research or instructing outside counsel to do so on
their behalf.

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

megaphone

James M. Dedman IV is a partner in the Charlotte office of


Gallivan, White, & Boyd, P.A., and focuses his practice on transportation law, torts and insurance practice, drug and medical device litigation, toxic tort litigation, products liability and banking
litigation.

Speakers Wanted: Tell Us What You Know


NCBA Foundation CLE hosts many webcasts throughout the year
and is looking for new speakers. If you have a one-hour, hot-topic
CLE idea and are interested in sharing your expertise, please email
Angela Allen at aallen@ncbar.org.
3

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"Forging a Path: Becoming a General Counsel"
A thought leadership discussion on what it takes to become, lead and succeed as General Counsel.

WHEN | Wednesday, April 6, 6:00 p.m.


WHERE | The Umstead Hotel & Spa | 100 Woodland Pond Drive, Cary
AGENDA | 6:00 p.m. drinks | 6:30 p.m. dinner | 7:00 p.m. panelists

More information and registration coming soon!


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