Arthur J. Gallagher & Co. must pay a $50 million earnout tied to its 2022 acquisition of Patent Insurance Underwriting Services LLC (PIUS) and Newlight Capital LLC, the Delaware Court of Chancery ruled.
The payment stems from an asset purchase agreement with then-owner Joseph Agiato that provided for up to $150 million in performance-based earnouts, capped at $50 million annually, in addition to a $50 million upfront payment.
The agreement measured performance through net commission and fee income (NCFI), which included due diligence, origination, loan monitoring fees, and commissions from policies placed by PIUS. Income above the annual target could be carried over to the next year.
Gallagher was also to place $3.75 million in its common stock into escrow to secure indemnification obligations, with release after 18 months absent claims.
On the transaction’s first anniversary in February 2023, Gallagher was to provide an earnout statement but did not. Weeks later, it terminated Agiato for cause, contending certain third-party revenues were outside the agreements and should be excluded.
Gallagher calculated first-year NCFI at $12.72 million, while Agiato said it exceeded $28.4 million – enough for the maximum annual payout and an $8.4 million carryover.
Gallagher argued the dispute was linked to Agiato’s alleged misconduct, including omitted disclosures and transactions it said conflicted with long-term value goals. It also sought return of the escrow shares. Agiato counterclaimed for breach of the purchase and escrow agreements.
Gallagher acquired PIUS Limited and affiliate Newlight Capital in November 2022, expanding into intellectual property insurance and related specialty lines. PIUS’ offerings included coverage that leveraged clients’ intellectual property assets as collateral, an area Gallagher sought to integrate into its Northeast retail P&C operations.
Agiato remained in his existing location following the transaction, reporting to Gallagher’s regional leadership.
The court found that the purchase agreement allowed Gallagher to operate the acquired business for its own interests and did not impose additional operational obligations on Agiato. It also said the earnout was not contingent on his continued employment, entitling the sellers to the $50 million first-year payment plus prejudgment interest, compounded quarterly.
On the escrow dispute, the court ruled Gallagher could retain the shares. The indemnification notice, sent at 6:50 p.m. on May 7, 2024, was considered timely, as the agreement’s “18 months from the date hereof” language encompassed the full day.
The court said “normal business hours” were fact-specific and not shown to have been limited in a way that made the notice late.
The ruling follows other legal challenges for Gallagher, including a $21 million settlement in a class-action lawsuit over a 2020 data breach that exposed personal information. That case, while unrelated to the earnout dispute, underscores the company’s ongoing exposure to litigation risk across different aspects of its operations.
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