Background
Saama Technologies founder Suresh Katta sold control of the clinical-data software company to an investor group led by The Carlyle Group in 2021. The parties used a contingent earnout to bridge a valuation gap: the sellers could receive as much as $67.5 million if Saama generated at least $72 million in 2021 GAAP revenue and achieved specified annual recurring revenue bookings.
The court found that Katta pursued the earnout through a “72-27” campaign that abandoned Saama’s historical pricing discipline, offered steep discounts and free implementation services, rewrote contract terms to inflate subscription revenue, and committed the company to supplying products that were unfinished or did not yet exist. Katta nevertheless submitted an earnout statement claiming $73.1 million in qualifying revenue and $32.3 million in ARR bookings. After Carlyle objected and no payment was made, Katta sued; the defendants counterclaimed.
The Court’s Holding
The court entered judgment for the defendants on Katta’s claims. It held that Saama did not satisfy the earnout’s threshold requirement because at least $3.06 million attributed to the AbbVie contract was improperly recognized in 2021. Excluding that amount, Saama’s 2021 GAAP revenue was at most $70.08 million; Deloitte later restated it to $67.4 million. The court declared that no earnout payment was due and also found that eligible ARR bookings would have fallen short of the amount required for the maximum payout even if the revenue threshold had been met.
On Saama’s fiduciary-duty counterclaim, the court found that Katta acted in bad faith and breached his duty of loyalty by pursuing the earnout at the expense of Saama’s business. It awarded Saama $7,300,172 in damages, representing the estimated 2022 gross-profit shortfall in the software-subscription business, plus prejudgment interest at the fluctuating legal rate compounded quarterly from July 1, 2022, and post-judgment interest. The court rejected a broader enterprise-wide damages model as insufficiently tied to Katta’s misconduct and dismissed the implied-covenant counterclaim without prejudice as moot.
Key Takeaways
- An earnout conditioned on a minimum GAAP-revenue threshold is not payable when improperly recognized revenue is necessary to reach that threshold.
- A fiduciary acts disloyally by manipulating contracts, pricing, and company resources to maximize a personal earnout while knowingly harming the company.
- Damages for disloyal conduct must have a reliable causal connection to the breach; the court confined recovery to the affected software-subscription business and the period supported by the evidence.
Why It Matters
The decision illustrates the risks created when a seller remains in operational control during an earnout period and has incentives that diverge from the company’s interests. Detailed eligibility rules, GAAP-based thresholds, audit procedures, and good-faith operating requirements can determine whether aggressive efforts to reach an earnout constitute permissible business conduct or actionable disloyalty.
It also shows the Court of Chancery’s remedial flexibility after a loyalty breach. The court resolved damages uncertainty against the wrongdoer but declined to award losses across the entire enterprise without evidence reliably attributing those losses to the misconduct.