Tech company stockholders’ $3.1M award in earnout dispute upheld

The Indiana Court of Appeals on Thursday affirmed a more than $3 million award to stockholders of a technology company in a purchase agreement dispute.

After 25 years of ownership, Christine Mullholand sold her Columbus, Indiana-based engineering and consulting company Cybermetrix, Inc. to SGS North America, Inc. in a stock purchase agreement. The agreement provided a $21 million base purchase price plus an additional contingent purchase price mechanism whereby CMX stockholders would potentially receive additional payments from SGS based on whether CMX’s 2015 and 2016 earnings before interest, taxes, depreciation, and amortization exceeded certain threshold amounts.

SGS concluded CMX’s 2015 EBITDA exceeded the applicable threshold of just over $4,6 million and paid the stockholders the first contingent payment of $5 million. It didn’t make the second payment however, claiming that CMX’s 2015 and 2016 combined EBITDA did not meet the applicable threshold.

Unable to resolve their disagreement about that decision, the parties brought in a designated auditor from Ernst & Young to calculate CMX’s applicable EBITDA and to render a determination. The auditor ultimately determined that CMX’s 2015 and 2016 combined EBITDA met the threshold requirement for a second contingent payment and that the stockholders were entitled to just over $3,1 million. Despite the auditor’s “final, conclusive, and binding” determination, SGS declined to pay the stockholders.

Mullholand thus filed an amended complaint for confirmation of arbitration award, which the Marion Superior Commercial Court granted. It denied SGS’s motion to dismiss, finding that the parties unambiguously agreed to arbitrate earnout disputes, that Ernst & Young’s determination constituted an arbitration award, and that SGS was bound by that determination.

The Indiana Court of Appeals agreed in SGS North America Inc. v. Christine Mullholand, As Stockholder Representative of Cybermetrix, Inc., et al., 19A-PL-01283, finding with little difficulty that the parties “clearly and intentionally agreed to arbitrate earnout disputes, and to do so through the Designated Auditor process.”

“The process agreed to by the parties in Section 2.7(b) of the Purchase Agreement clearly sets out a binding dispute resolution procedure so similar to arbitration that reasonable persons would understand it as a clear agreement to arbitrate. In other words, an arbitration agreement is an arbitration agreement is an arbitration agreement,” Judge Terry Crone wrote for the appellate court.

“We conclude that Section 2.7(b) of the Purchase Agreement clearly and unambiguously reflects the parties’ intention to arbitrate earnout disputes. Accordingly, we agree with Mullholand that EY’s determination of the parties’ earnout dispute constitutes a binding arbitration award,” the panel wrote. “The trial court did not err in granting Mullholand’s application for confirmation of arbitration award and in denying SGS’s motion to dismiss her application for the same reasons.”

It therefore affirmed the entry of judgment in Mullholand’s favor and against SGS for $3,107,200 plus appropriate interest.

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