The Delaware Court of Chancery recently issued an opinion that provides guidance for the application of extra-contractual principles in an earn-out context, further stressing the importance of precise drafting of earn-out provisions.
In Glidepath v. Beumer (C.A. No. 12220-VCL) (Feb. 21, 2019), the court refused to apply the implied covenant of good faith and fair dealing in an earn-out context where the subject at issue (the operation of the acquired company during the subsequent earn-out period) either could have been anticipated by the parties or was expressly covered by a contractual agreement between the parties. Additionally, the court found that when analyzing a potential breach of fiduciary duties in an earn-out context in a situation where the seller continues as an equity holder in the company, the conflicting interests arising from an earn-out arrangement (namely, the company’s interests in maximizing company value vs. the buyer’s interests in minimizing the earn-out payments) may give rise to the more stringent entire fairness standard of review.
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