The American Lawyer named Yolanda C. Garcia and Angela C. Zambrano as its “Litigators of the Week” for their representation of Forterra Inc. and Lone Star Funds in an arbitration arising from Lone Star’s US$1.4 billion acquisition of Hanson Building Products from affiliates of HeidelbergCement AG. The acquisition purchase agreement included an earnout provision of up to US$100 million based on specified earnings targets, as calculated pursuant to the terms of the purchase agreement. At issue was the calculation of the earnout agreement with the plaintiffs seeking the full US$100 million earnout from Sidley’s clients. After the case was dismissed by the Delaware Court of Chancery, the dispute was submitted to a neutral accounting arbitrator. The hearing, originally scheduled for the spring 2020, was postponed due to the COVID-19 pandemic. A three-day arbitration hearing was held remotely using Zoom, and on September 10, 2020 the accounting arbitrator concluded that no earnout was due, confirming the position of Sidley’s clients.
Earnout clauses are often included in mergers or acquisitions to account for future or potential earnings that are difficult to determine at the time of the transaction. This particular earnout provision was very large (US$100 million), and this case presented important legal issues related to jurisdiction of the arbitrator and the significance of including different dispute resolution mechanisms in the terms of an agreement. The arbitrator’s decision provides important guidance to both buyers and sellers regarding the role courts and arbitrators should play in resolving earnout disputes and how earnout clauses should be structured in merger or acquisition agreements moving forward.
Angela and Yolanda led the Sidley team, which also included partner Rob Velevis.
