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The Enduring Allure and Perennial Pitfalls of Earnouts— Tutor Perini and Practice Points


By: Andrew J. Colosimo, Warren S. de Wied, Steven Epstein, Christopher Ewan, Arthur Fleischer, Jr., Andrea Gede-Lange, David J. Greenwald, Randi Lally, Mark H. Lucas, Scott B. Luftglass, Brian T. Mangino, Brian Miner, Philip Richter, Robert C. Schwenkel, David L. Shaw, Peter L. Simmons, Matthew V. Soran, Steven J. Steinman, Gail Weinstein

In Tutor Perini (Nov. 2017), a buyer who had agreed to an earnout based on pre-tax profits of the acquired business ceased making payments when it had reason to believe that the former CEO of the acquired business (who remained post-closing as the CEO of a major subsidiary) was providing fraudulent information to inflate the earnout payments. The Court of Chancery ordered the buyer to make the earnout payments, stating that the earnout provisions did not expressly provide for it to withhold payments if it doubted the information being provided to calculate them. The decision provides a stark illustration of the need for parties to seek to provide clear, specific earnout-related provisions and procedures (including for calculating the earnout amount and for resolving disputes that may arise)—and to follow the provisions and procedures precisely. In the attached Fried Frank M&A/Private Equity Briefing, we discuss the Tutor Perini decision and key points relating to earnouts. We also offer earnout-related practice points and summarize other major earnout decisions.

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