Explore the complexities of M&A legal battles through the lens of a recent case in a Delaware court, where a $70 million earnout deal faced challenges. Gain insights into the key findings, legal actions, and implications for M&A transactions.
M&A Stories
December 4, 2023
Introduction:
In the realm of M&A, legal battles often ensue when anticipated earnouts fail to materialize. A recent case in a Delaware court sheds light on the complexities that can arise in such scenarios.
Background:
Before 2015, a German and UK-based company specializing in supporting Dornier 328 regional aircraft faced financial challenges. The company aimed to resume large-scale production when market conditions improved. In 2013, discussions with a larger Reno-based buyer began, with the buyer insisting on exclusive negotiations. The buyer claimed to have secured funding from the Turkish government for an ambitious aircraft manufacturing program.
On January 30, 2015, a Stock Purchase Agreement (SPA) was executed, with the buyer agreeing to pay $30 million upfront and a $70 million earnout based on post-closing aircraft production. The SPA stipulated that the buyer would manage the business in line with past practices.
Controversy:
Post-SPA, the Turkish government’s funding fell through due to misunderstandings. The buyer’s efforts to sell or license the target’s intellectual property faced setbacks. The seller received no earnout, leading to legal action in a Delaware court.
Legal Actions:
The seller alleged that the buyer breached the SPA by failing to manufacture Dornier aircraft and monetize intellectual property. The buyer’s attempt to dismiss the claim was denied by the court.
Key Findings:
The court acknowledged the buyer’s commitment in the SPA to operate the business in line with past practices. The breach allegations regarding aircraft manufacturing and intellectual property monetization were deemed plausible, allowing the seller’s claim to proceed.
Implications:
This case highlights the significance of explicit commitments in SPAs, as the ordinary course clause played a pivotal role. Studies by the American Bar Association suggest that buyers often avoid such commitments, making this case an exception
Case Reference:
Shakesby v. SNC International, C.A. No. N22C-11-070 MAA CCLD Superior Court of Delaware (November 27, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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