Contentious Ruling from Minnesota High Court on Dealing with Earnout Payments in Divorce*
*Article reprinted from the BVWire Issue #195-1, December 5, 2018
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In an important ruling, a divided Minnesota Supreme Court recently ruled on whether earnout payments related to the sale of the husband’s interest in a lucrative company were a marital asset. Family law financial experts will appreciate the extended discussion of the concepts of valuation and classification.
The dispute involved Talenti, a gelato and sorbet producer (offering 43 flavors as of this date). The husband indirectly held an interest in Talenti through a different entity, Wyndmere. Eventually, David Goliath Group LLC (DGG) became the parent company of Talenti, and Wyndmere became one of several members of DGG. Under state law, Wyndmere (created during the marriage) was presumptively marital property.
The parties married in 1993 and separated in 2013, while DGG’s members negotiated a sale to Unilever. The sale closed in December 2014. Per a July 2014 letter of intent, Unilever agreed to pay “an aggregate maximum purchase price” of $350 million—$180 million would be paid at the closing of the transaction. Moreover, members of DGG were entitled proportional shares in two future earnout payments whose value was based on 2015 and 2016 net sales and would not exceed $170 million. The same provisions appear in the parties’ purchase agreement. The husband negotiated a separate employment agreement and received extra compensation for the continuing employment.
The district court determined a valuation date of September 2014 and valued the company based on the upfront payment ($180 million). The court found the earnout payments were highly uncertain (they could be as little as “$0,” the court said) and represented compensation for the husband’s future efforts to grow the company. Therefore, they were not marital property.
A majority of the state Supreme Court disagreed, finding the earnout payments were part of the purchase price. “Wyndmere received the contractual right to the upfront payment and the potential earnout payments only by selling the parties’ marital asset, which was acquired during the marriage and before the valuation date.” The controlling purchase agreement was unambiguous: all members of DGG had a right to the earnout payments, regardless of whether they continued to work for Talenti, the high court’s majority said. “[E]very person with a financial interest in David Goliath shared in the payments.” Even if the earnouts’ exact value was not certain and the payments were not received before the dissolution of the marriage, “the right to receive the payments was acquired before dissolution, on the date of closing,” the court’s majority emphasized. A valuation of Wyndmere therefore had to include the earnout payments. The majority remanded, ordering the trial court to value the earnouts and include their amounts in any equitable distribution.
The majority opinion triggered a sharp dissent.
A digest of Gill v. Gill, 2018 Minn. LEXIS 613 (Oct. 24, 2018), and the court’s opinion will be available soon at BVLaw.
*Article reprinted from the the BVWire Issue #195-1, December 5, 2018
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