Gallagher should pay partial earnout in M&A dispute: Court

Arthur J. Gallagher must make a $50 million earnout payment to the head of an intellectual property insurance agent it bought, despite firing him for alleged contract violations, a court ruled.

In Arthur J. Gallagher & Co. v. Joseph A. Agiato, Jr., Delaware’s Court of Chancery ruled Thursday that Gallagher could not withhold the overdue payment.

Gallagher bought Cary, North Carolina-based PIUS Ltd. and its affiliate Newlight Capital in 2022. The managing general agent offered a specialty insurance product to cover intellectual property assets. Mr. Agiato was the company’s founder, CEO and majority owner.

Gallagher paid $50 million upfront and agreed to make up to $150 million in earnout payments, dependent on future revenue, over four years, with an annual cap of $50 million.

Mr. Agiato agreed to place $3.75 million in Gallagher stock in escrow as indemnification security related to the sale agreement.

Although the revenue threshold was met, Gallagher did not pay the first earnout amount by February 2024 as scheduled, and a month later, it fired Mr. Agiato, alleging several breaches of the original sale contract.

In its complaint, Gallagher alleged that PIUS and Newlight were “branching into a new and untested line of business and failed to disclose multiple conflicts of interest.”

In addition, Mr. Agiato failed to manage the business in line with Gallagher’s practices, the company alleged.

The court ruled that Mr. Agiato was never a Gallagher officer or director, that Gallagher could run the business to serve its interests and that the sale agreement required only that he “execute” his employment agreement with the broker rather than satisfy its conditions.

Other alleged breaches should be resolved under the indemnification agreement rather than through withholding the earnout, the court ruled.

Gallagher declined to comment on the ruling.