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Comet Systems, Inc. Shareholders' Agent, et al. v. MIVA, Inc., C.A. No. 2793-VCL (Del. Ch. Oct. 22, 2008)

October 22, 2008

In this breach of contract case arising out of the interpretation and performance of certain earnout provisions in a merger agreement, the Court of Chancery granted summary judgment in favor of the former stockholders of Comet Systems, Inc. with respect to two of their claims. Comet was acquired by MIVA’s predecessor entity in 2004, and under the merger agreement the Comet shareholders were potentially entitled to receive additional earnout payments calculated on the basis of Comet’s performance over several metrics in 2004 and 2005. The Comet shareholders argued that MIVA miscalculated the 2004 earnout and that they were entitled to an additional $1.67 million over the $1.1 million calculated by MIVA. The parties’ dispute centered around MIVA’s calculation of “cost per user”, which the merger agreement defined as “Operating Costs Excluding Amortization and One-time, Non-recurring Expenses”. In calculating cost per user, MIVA treated the $800,000 bonus that was paid under a bonus plan to Comet’s employees at the time of the merger as an operating expense, rather than a “one-time, non-recurring” expense. MIVA argued that the bonus was paid to retain and incentivize Comet’s employees, that Comet paid bonuses in the past that were treated as normal operating costs, that bonuses are common in the technology industry to which Comet belongs, and that after the merger

the continuing employees of Comet were eligible for, and received bonuses from, the MIVA bonus pool. The Court held that the fact that the merger bonus payment might constitute an ordinary cost of business did not preclude treatment of the expense as one-time and non-recurring. Examining the purpose for which the “onetime, non-recurring expense” exclusion was being applied - the calculation of the earnout payment - the Court held that the natural reading of “one-time, non-recurring” was to exclude charges and costs which occur as a result of the merger and are not expected to be representative of future costs in the business. Accordingly, the Court held that the merger bonus was a one-time, non-recurring expense that should have been excluded for purposes of calculating the earnout.

The Court also awarded the Comet shareholders interest on the $1.1 million previously paid by MIVA for the 2004 earnout. Although MIVA had determined by March 16, 2005 that $1.1 million was payable for the 2004 earnout, it did not pay the amount until June 2006. There was no term in the merger agreement stating when the earnout provision was required to be paid, but the Court held that MIVA had an implied duty to make the payment within a reasonable time in the absence of a contractual term to the contrary and that it would have been reasonable to expect MIVA to pay the $1.1 million within 90 days of March 16, 2005. The Court therefore awarded statutory interest from June 2005 until June 2006.

Finally, the Court awarded summary judgment to MIVA on the shareholders’ claim that additional amounts were due under the 2005 earnout, finding that plaintiffs had not attempted to take any discovery on this issue, presented absolutely no evidence to support their claim, and could not now assert that summary judgment was improper because discovery was needed.

The full opinion is available here