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Buyer Potentially Liable for Earnout Even Though it had Right to Operate Target in its Discretion

By | June 8, 2021

In Shareholder Representative Services LLC v Albertsons Companies, Inc., the aggrieved former shareholders of DineInFresh, Inc., d/b/a Plated, sought recovery of earnout consideration from Plated’s acquirer, Defendant, Albertsons Companies, Inc.  Plated had failed to reach any of the earnout milestones set forth in the Merger Agreement and Albertsons, therefore, refused to make any earnout payments.

In the Merger Agreement, Albertsons had bargained for the right to operate Plated post-closing in its discretion.  However, the foregoing right was limited by Albertson’s express commitment not to operate Plated in a manner intended to avoid the obligation to pay the earnout.

Plaintiff’s story was throughout the course of negotiating the merger, Albertsons made numerous representations regarding plans for the operation of Plated’s business post-closing.  According to Plaintiff, Albertsons asserted that Albertsons would continue to focus and grow Plated’s proven e-commerce business, rather than pivoting Plated’s operations to suit Albertsons’ traditional grocery retail business.

Plaintiff alleged that the revenue targets triggering the earnout were based on Plated’s past performance and forecasts, and, if Plated continued on its then current trajectory, Plated had a reasonable expectation that the revenue targets would be readily achieved.

According to Plaintiff, Albertsons’ internal documents reveal that it knew Plated’s success depended on investment in the e-commerce business; it acknowledged that if it provided support to Plated’s e-commerce business, the business would achieve +125% growth in 2018, well above the earnout levels.

Nevertheless, according to Plaintiff, immediately upon closing, Albertsons directed that Plated drastically reallocate its resources to get a retail product into 1,000 stores in the span of one week, to the detriment of the e-commerce business. Albertsons, according to Plaintiff, knew this endeavor was commercially unreasonable.  It created a reasonable inference that Albertson’s knew its push for in-store sales at the expense of subscriptions and the e-commerce business would cause Plated to fail to reach the earnout targets.

According to the Court, the reasonable inference allowed by Plaintiff’s allegations is not that Albertsons sabotaged a company it just paid $175 million for.   Rather it created an inference that Albertsons intended to avoid short-term earnout targets in favor of long term gains. Even if Albertsons took these actions only in part with the purpose of causing Plated to miss the earnout milestones, this was enough at the pleading stage to support Plaintiff’s breach of contract claim.

Albertsons argued that Plaintiff’s allegations cannot sustain a breach of contract claim when the conduct giving rise to the claim was expressly permitted under that same contract. In doing so the Court said Albertsons seized upon its contractual allowance to operate Plated within its discretion.  However, Albertsons had ignored the contractual prohibition against operational decisions intended to avoid or reduce the earnout.

The Court held that because Plaintiff’s well-pled allegations made it at least reasonably conceivable that Albertsons acted with the intent to avoid or reduce the earnout, it cannot be said, as a matter of law, that Albertsons’ conduct was expressly permitted.

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M&A