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Ambiguity in Earnout in Merger Leads to Delaware Litigation

Published May 9, 2017 by Ed Grenville

Earnouts – the right to receive additional consideration from the sale of a business after the closing based on achieving future milestones – remain common in M&A transactions, but carry significant risks. One of the major challenges for the seller and purchaser is to adequately define the future event that triggers the payment. Seemingly straightforward, the recent case of Shareholders Representative Services LLC v. Gilead Services, Inc., Delaware Court of Chancery (March 15, 2017) illustrates the difficulties. In Gilead, a $50 million milestone earnout payment to the seller of a pharmaceutical company boiled down to the meaning of the word “indication” as used in the phrase “Hematologic Cancer Indication.” The court found that the term was ambiguous in the merger agreement, and used external evidence to determine that “indication” meant “disease,” which did not trigger the milestone payment.

What can be learned from Gilead?

  • Use as much precision as possible when defining technical terms in earnouts. Using experts to clarify that “indication” meant “disease” and reflecting that definition in the merger agreement could have avoided the litigation.
  • Where financial milestones are part of the earnout, work closely with accountants and other financial advisors to draft the earnout provisions.
  • Use examples to clarify the events that are meant to trigger the earnout.


New 2017 Amendment to the California Finance Lenders Law

Published May 17, 2017 by Ed Grenville

If a lender makes a loan in California, and the lender is not a bank or other financial institution already regulated by federal or state law, they will be subject to licensing requirements under the California Finance Lenders Law (“CFLL”). The CFLL therefore often applies to non-traditional and alternative lenders, which could, for example, include leasing companies or investment funds. The CFLL has exemptions, however, for those not engaged in lending as a regular part of their business, who therefore are not subject to the CFLL. There is an exemption from the CFLL for lenders making five or fewer commercial loans in California in a 12-month period “incidental” to their business. It is not completely clear, however, what “incidental” means, which could be a source of uncertainty. The uncertainty has been partially addressed by a new exemption from the CFLL, effective January 1, 2017, which permits a lender to make one commercial loan in a 12-month period even if the loan is not incidental to their business. The new amendment, therefore, will permit anyone to make one commercial loan in California in a 12-month period without having to be concerned whether they need to be licensed under the CFLL.