Brown v. Building Engines, Inc.

Background

Michael Brown, acting as agent for former equityholders of Emergent Properties Inc., sued Building Engines under an earnout provision in the merger agreement through which Building Engines acquired Emergent Properties, doing business as LogCheck. The former equityholders could earn an additional payment of up to $1.5 million if specified targets were met one year after closing.

Brown sought a declaratory judgment that Building Engines’ sale to Jones Lang LaSalle in November 2021 was a “Sale Event” that accelerated the earnout and required Building Engines to pay $1.5 million plus interest.

Magistrate Judge’s Recommendation and Objections

The assigned magistrate judge recommended denying Building Engines’ motion to dismiss on forum non conveniens grounds, granting its motion to dismiss for failure to state a claim, and denying its request for attorneys’ fees. The recommendation also allowed Brown to replead. Building Engines did not object. Brown objected to the recommendation insofar as it rejected his theory that the November 2021 sale accelerated the payment.

The District Court reviewed the objected-to portions of the recommendation independently and adopted the recommendation in full and without modification. It adopted, without objection, the recommendations denying dismissal on forum non conveniens grounds, denying attorneys’ fees, and allowing Brown to replead.

Contract Analysis

The court applied Delaware law to the merger agreement. Section 2.2 defined a “Contemplated Recap” as “a Sale Event that occurs prior to December 31, 2021.” Section 2.3(e) stated that a Contemplated Recap, by itself, would not require acceleration of the earnout payment and that the parent or its successor would remain responsible for the payment obligations.

The parties did not dispute that the JLL acquisition was a “Sale Event” or that it occurred in November 2021, before December 31, 2021. Brown argued that “Recap” meant “recapitalization” and that the JLL transaction was not a recapitalization. The court rejected that reading because the agreement itself defined “Contemplated Recap” broadly enough to include the JLL acquisition. As a result, the transaction did not trigger the earnout-acceleration provision.

Disposition

The court adopted the Report and Recommendation. It denied Building Engines’ motion to dismiss on forum non conveniens grounds, granted its motion to dismiss Brown’s complaint for failure to state a claim, denied Building Engines’ application for attorneys’ fees, and granted Brown leave to replead. The Clerk was directed to terminate the motion.