Background
New Mountain Capital and its partners acquired Ontario Systems, a software company serving healthcare providers and debt collectors, and pursued a strategy of adding payment-facilitation services. During diligence for the Ontario investment, they received claims that Ontario touched approximately $170 billion in annual payments, including about $34 billion in consumer payments. Later analysis based on actual vendor data estimated that Ontario touched only about $5.2 billion, of which approximately $3.3 billion was monetizable.
The buyers then negotiated to acquire the payment-facilitation business operated by Legacy SwervePay. SwervePay Acquisition, LLC—later renamed SwervePay, LLC—acquired that business. The consideration included cash and equity at closing plus cash and equity earnouts tied to post-closing financial milestones. Although the sellers sought information about Ontario’s payment volume to assess whether the earnouts were achievable, buyer representatives continued representing that Ontario had roughly $40 billion to $50 billion in payment volume captive to its platform. The acquired business did not reach the revenue targets, and the sellers received no earnout payments.
The Court’s Holding
After a five-day trial, the Court of Chancery held that the sellers proved their fraud claims against the buyers. It entered judgment for the sellers on Counts I through V, concluding that the buyers fraudulently induced the acquisition by misrepresenting Ontario’s payment volume.
The court awarded $43,750,000 for the cash earnout, $75,692,297 for the equity earnout, and $656,923 for the increased value of the sellers’ rollover units. It also awarded prejudgment interest at the statutory rate, compounded quarterly, beginning August 17, 2022, for the cash-earnout damages and December 31, 2024, for the equity-earnout and rollover-unit damages, plus post-judgment interest. The court denied the sellers’ request for attorneys’ fees.
Key Takeaways
- A buyer may face fraud liability when it supplies inflated operational metrics that materially shape acquisition consideration and earnout terms.
- The court measured damages by estimating the earnouts and rollover-unit value the sellers would have received if the represented payment volume had been accurate.
- A contractual provision stating that no interest was payable on earnout payments did not eliminate prejudgment interest on damages awarded for fraud.
Why It Matters
The decision highlights the risk of repeating headline diligence figures after internal analysis has undermined them, particularly when the counterparty expressly requests the data to evaluate contingent consideration. Deal participants should verify that operational metrics used to support earnouts remain accurate and disclose material contrary analyses.
It also illustrates the substantial damages that can follow fraudulent-inducement findings in earnout disputes: the court reconstructed the transaction economics, risk-adjusted several valuation assumptions, and awarded the value the sellers would have obtained had the representations been true.