Thompson Street Capital Partners IV, L.P. acquired Sonova United States Hearing Instruments, LLC through a merger transaction governed by a merger agreement that included post-closing earn-out provisions. Under the agreement, Thompson Street Capital Partners IV, L.P. became entitled to additional payments if Sonova’s post-merger financial performance met specified benchmarks over defined earn-out periods.
The earn-out provisions tied additional consideration to revenue and earnings metrics calculated according to accounting standards set out in the merger agreement. The agreement also contained provisions governing post-closing operations, dispute resolution procedures, and limitations on how the buyer could operate the business during the earn-out period.
After the merger closed, Sonova continued operating its hearing instrument business under the ownership structure established by the transaction. During the earn-out period, disputes arose regarding whether Sonova’s financial results satisfied the earn-out thresholds.
Thompson Street Capital Partners IV, L.P. asserted that Sonova’s post-closing operational decisions and accounting practices improperly reduced earn-out payments. The dispute centered on whether Sonova complied with the contractual requirements governing business operations, revenue recognition, and cost allocation during the earn-out period.
Sonova maintained that it operated the business in compliance with the merger agreement and that the financial results were calculated in accordance with the agreed-upon accounting principles.
Thompson Street Capital Partners IV, L.P. filed an action in the Delaware Court of Chancery asserting breach of contract claims arising from the earn-out provisions. The claims focused on alleged failures to operate the business consistently with past practice and alleged manipulation of financial results affecting the earn-out calculation.
Sonova moved to dismiss portions of the complaint. The motion challenged whether the merger agreement imposed enforceable obligations regarding post-closing operations beyond those expressly stated and whether the allegations plausibly supported a breach of the earn-out provisions.
The Court of Chancery analyzed the merger agreement’s language governing earn-outs and post-closing conduct. The court reviewed provisions addressing accounting methodologies, operational discretion, and the extent to which the agreement restricted Sonova’s ability to manage the business during the earn-out period.
The court examined whether the agreement required Sonova to maximize earn-out payments or merely to avoid actions taken in bad faith to prevent the earn-out from being achieved. The court also considered integration clauses and disclaimers that limited reliance on prior negotiations or expectations not reflected in the written agreement.
The court concluded that the merger agreement did not impose a general obligation on Sonova to operate the business to ensure the earn-out targets were met. Instead, the agreement limited post-closing obligations to specific contractual commitments expressly set out in the text.
The court reviewed the allegations regarding accounting practices and operational changes. It determined that some allegations failed to identify contractual provisions that were breached, while others sufficiently alleged conduct that, if proven, could violate express terms governing financial calculations.
Based on that analysis, the court dismissed certain breach claims tied to generalized expectations about post-closing operations. Other claims relating to the interpretation and application of accounting provisions were allowed to proceed.
The Court of Chancery granted the motion to dismiss in part and denied it in part. The court permitted claims grounded in specific contractual language governing earn-out calculations to continue, while dismissing claims based on broader theories not supported by the merger agreement’s terms.
If you’re dealing with disputes arising from mergers, acquisitions, or earn-out provisions, Whitcomb Selinsky PC handles mergers and acquisitions matters. Reach out to our team to schedule a consultation and learn how our team can assist with your situation.