Delve into the intricate world of M&A earnouts with insights from the landmark Dolce v. WTS International, LLC case. Explore the complexities and risks involved in earnout disputes, including the crucial role of EBITDA calculations. Gain valuable lessons on navigating such legal intricacies to ensure smoother M&A transactions.
M&A Stories
April 13, 2024
In the dynamic landscape of mergers and acquisitions, transactions often involve earnouts, adding a layer of complexity and risk for sellers. Earnouts, while offering potential upside, can also lead to disputes, particularly regarding the accuracy of financial metrics such as EBITDA.
Enter Dolce v. WTS International, LLC, a recent case heard in the Delaware Court of Chancery, shedding light on the intricate process of resolving earnout disagreements.
Background: In December 2021, the owners of a New York City-based business specializing in design and management services for meeting, conference, and amenity centers sold their assets to WTS International, a global provider of hospitality services. The deal included both cash and potential earnout payments, contingent upon the performance of the acquired business.
The Crux of the Dispute: At the heart of the disagreement lay the calculation of EBITDA, the metric upon which the earnout hinged. WTS International contended that the sellers had not met the agreed-upon EBITDA threshold, thus disputing the earnout payment. In response, the sellers challenged the accuracy of the EBITDA calculation and requested further clarification from WTS International, to no avail.
Legal Proceedings: With the impasse unresolved, the matter found its way to the Delaware Court of Chancery. Here, the sellers sought to bypass the typical recourse of submitting the EBITDA calculation to expert accountants for determination. However, the court ruled that establishing the EBITDA calculation through accounting experts was a prerequisite before addressing any allegations of bad faith on the part of WTS International.
Key Takeaways:
- Expert Determination: Earnout disputes often entail submitting contested calculations to accountants for resolution. This process, akin to expert determination, grants accountants the authority to make binding decisions, providing a swift resolution mechanism distinct from traditional arbitration.
- Separation of Issues: While disputes over financial calculations are common, allegations of bad faith require separate consideration. In the case of Dolce v. WTS International, LLC, the court emphasized the sequential nature of addressing EBITDA accuracy before delving into claims of buyer misconduct.
Conclusion: Earnouts can be a double-edged sword in M&A transactions, promising rewards while introducing complexities. The Dolce case underscores the importance of meticulous financial scrutiny and the procedural nuances involved in resolving earnout disputes. By understanding the intricacies of such disagreements, stakeholders can navigate M&A transactions with greater clarity and confidence.
By distilling complex legal proceedings into actionable insights, Dolce v. WTS International, LLC serves as a valuable reference for entrepreneurs, business owners, and professionals navigating the intricate realm of mergers and acquisitions.
Case Reference: Dolce v. WTS InternationaL, LLC. C.A. No. 2023-0789-SKR., Court of Chancery of Delaware, (Submitted: February 16, 2024. Decided: February 20, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.
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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