Arthur J. Gallagher & Co. must pay a $50mn earnout under terms of its acquisition of Patent Insurance Underwriting Services (PIUS) and Newlight Capital, according to a ruling by the Delaware Court of Chancery.
The payment stems from a 2021 asset purchase agreement with Joseph Agiato, who held a majority interest in PIUS and full ownership of Newlight.
Gallagher paid $50mn upfront and agreed to a potential $150mn in additional earnout payments based on net commission and fee income (NCFI). The agreement capped annual earnout payments at $50mn.
NCFI included revenue from agency-billed activities, such as due diligence, origination, loan monitoring, and commissions on policies placed by PIUS. Any income exceeding annual targets would carry over to the following year.
As part of the transaction, Gallagher and the sellers also placed $3.75mn in Gallagher common stock into escrow to secure indemnification claims. If unused, the shares would be released to the sellers after 18 months.
Agiato signed an employment agreement that required adherence to Gallagher policies and prohibited him from engaging in insurance work outside of the company.
Gallagher was obligated to issue an earnout statement by February 6, 2023, the first anniversary of the closing. The company failed to deliver the statement and terminated Agiato on March 4, citing cause.
Gallagher claimed revenue from third-party transactions fell outside the scope of the agreements and should be excluded from the earnout calculation. By its measure, NCFI totaled $12.72mn.
Agiato disputed this, asserting NCFI exceeded $28.4mn in the first year, qualifying for the full $50mn earnout and leaving $8.4mn to roll into the next period.
Gallagher shifted its position, stating the disagreement centered not on payout calculations but on Agiato’s alleged misconduct.
The company accused him of omitting a transaction from a disclosure schedule and argued that revenue from other deals should be reversed due to potential misalignment with the long-term value of the business.
Gallagher also sought to recover the escrowed shares under its indemnification rights. It sued Agiato for breach of contract. Agiato countersued for breach of the purchase and escrow agreements and sought restitution.
The court found Gallagher failed to justify withholding the earnout. It concluded the purchase agreement gave Gallagher operational control of the PIUS business but imposed no obligation on Agiato to ensure continued performance.
The court emphasized that Agiato never served as an officer or director of Gallagher or its affiliates and had no contractual responsibility to manage the business post-sale.
On the employment agreement, the court said Gallagher only required Agiato to sign it, not comply with its provisions as a condition for earnout eligibility.
The court ruled Agiato and the sellers are entitled to the $50mn earnout for the first year, plus prejudgment interest compounded quarterly.
However, the court rejected Agiato’s claim to the escrowed shares. Although Gallagher sent the indemnification notice on May 7 at 6:50 p.m. CT—outside Agiato’s claimed business hours—the court found business hours are context-dependent and that no specific record existed of either party’s official hours. Therefore, the notice was considered timely.
