On October 31, 2024, the Delaware Court of Chancery issued an opinion in STX Business Solutions, LLC, et al., v. Financial-Information-Technologies, LLC, et al., granting the defendants’ motion to dismiss all claims relating to an unpaid earnout. The court held that the plaintiffs’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing failed based on the terms of the agreement, that the tortious interference with contract claim failed due to a lack of an underlying breach, and that the fraudulent inducement claim failed to sufficiently plead fraud through silence.
For background, on July 1, 2021, Financial-Information-Technologies, LLC (Fintech), acquired the assets of STX Business Solutions, LLC (STX), by way of an asset purchase agreement (the Agreement). As consideration, Fintech agreed to pay $5.3 million, assume certain liabilities, issue STX $1.7 million worth of common units in Fintech’s parent entity, and employ STX’s founder, Jon Thompson, as vice president of business development. Importantly, the Agreement further provided that STX would receive additional consideration if the purchased assets met certain specified revenue goals (the Earnout). The Earnout had a maximum of $5.5 million.
In connection with the Earnout, the Agreement contained specific language providing how Fintech could operate the business after closing. Specifically, Section 2.7 of the Agreement provided that Fintech was entitled to “use the Purchased Assets and operate the Business in a manner that is in the best interest of [Fintech] or its affiliates” and would have “the right to take any and all actions regardless of any impact whatsoever that such actions or inactions have on the earn-out….” However, prior to the Earnout measurement date, Fintech could “not take any action in bad faith with respect to [STX]’s ability to earn the Earn-Out Consideration or with the specific intention of causing a reduction in the amount thereof.” Further, upon the closing of a sale of the company, any amounts necessary to satisfy the maximum Earnout would become due and payable.
Meanwhile, before entering into the Agreement, STX had begun pursuing a contract with Walmart for data management services. On April 5, 2023, well after closing, Walmart issued a request for proposal for a five-year data management services contract. Walmart specifically invited Fintech to submit a proposal by May 1, 2023, as it found Fintech’s products to be the only viable solution for its needs. Fintech prepared to submit a proposal but ultimately informed Walmart by email on May 1 (the last day to submit the proposal) that it would not, in fact, be submitting a proposal. Fintech cited the constraints of an exclusive relationship with Information Resources, Inc. (IRI), as the reason for its non-submittal. Before that May 1 email, however, neither STX nor Thompson knew anything about Fintech’s relationship with IRI. Fintech also had never mentioned that it might not be able to respond to Walmart’s request due to some other relationship it had. Seeking information on the issue, Thompson reached out to Fintech’s parent entity but received no response.
Thereafter, on May 16, 2023, General Atlantic, LP (GA), acquired a 48.1 percent membership interest in Fintech’s parent entity. It therefore equally owned the parent entity with nonparty TA Associates Management (TA). Together, the two shared control over the parent entity’s board of managers, with each having the right to appoint two managers. Fintech’s CEO would hold one of the positions. On May 17, 2023, Fintech’s CEO informed Thompson that Fintech declined to submit a proposal to Walmart because it had been negotiating its agreement with GA and did not want to threaten that transaction in any way.
STX and Thompson (together, Plaintiffs) filed suit on January 17, 2024, alleging claims of breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract, and fraudulent inducement.
The court declined both of Plaintiffs’ theories for breach of contract. The court explained that the first theory, that Fintech breached the Agreement by failing to respond to Walmart’s request for proposal for the express purpose of depriving STX of the Earnout, failed because the plain language of the Agreement authorized Fintech to operate the business as it deemed fit, even if doing so would interfere with STX’s ability to earn the Earnout, so long as Fintech “did not take action in bad faith or with the specific intention of causing a reduction in the Earnout.” Fintech’s desire to not complicate its transaction with GA did not suggest bad faith but a “business judgment that [Fintech] was empowered to make.”
Plaintiffs also argued that Fintech acted in bad faith by structuring the transaction with GA so as to evade the Agreement’s definition of a sale of the company. Again, the court found the theory not to be a reasonably conceivable inference. Instead, it explained that the only reasonable inference as to the transaction’s structure was that it was based on TA’s decision to protect itself by only accepting shared control and did not have anything to do with avoiding triggering the maximum Earnout.
The court also declined both of Plaintiffs’ theories as to a breach of the implied covenant of good faith and fair dealing. Plaintiffs argued both that (1) Fintech intentionally discontinued negotiations with Walmart to deprive STX of the Earnout, and (2) the parties intended for the maximum Earnout to be triggered if TA gave up sole control of the company. The court found that neither theory identified a gap to be filled and that, in fact, both theories were specifically addressed by the Agreement’s provisions and conflicted therewith. Specifically, the first theory was addressed by the language of Section 2.7 of the Agreement, so there was no gap to fill. And the second theory was also addressed by the Agreement, as it contemplated a payout of the maximum Earnout if control of the company changed so that there was a new controller. The transaction resulted in shared control. The parties could have drafted a trigger based on the loss of sole control, but they did not.
Finally, the court addressed Plaintiffs’ tortious interference with contract and fraudulent inducement claims. As to tortious interference with contract, the court reasoned that given its finding that there was no breach of the Agreement, in turn there could be no tortious interference with contract claim. As to the fraudulent inducement claim, the court pointed out that Plaintiffs contended Fintech failed to disclose its relationship with IRI that led to its refusal to pursue the Walmart contract, but Plaintiffs failed to give any reason why Fintech had a duty to do so, nor did they allege an act of intentional concealment. The court acknowledged that, when dealing with a fraud claim, some facts may be within a defendant’s control so as to require less particularity in pleading fraud. However, the court explained that plaintiffs asserting “omission-based fraud claims still must allege facts giving rise to a duty to speak or that support an inference of intentional concealment.” Plaintiffs did neither.
This opinion emphasizes that parties should be careful to specify exactly what is intended when drafting an agreement, particularly the circumstances that may trigger certain events. Where parties generally address an event’s trigger but do not consider all the different scenarios that may occur, they leave themselves at risk. This is particularly so under Delaware law, where courts read the plain language of agreements and enforce them as written, expecting sophisticated contracting parties to abide by the terms of the agreement they negotiated.