Plaintiffs in this case alleged that defendants conspired to purposely and unreasonably undervalue Rue La La, an internet “private sales” business in order to avoid triggering an earnout provision in a previously negotiated merger agreement. The case ultimately went to trial and resulted in a defense jury verdict and a complete victory for Compass Lexecon’s clients.
Professors Gordon Klein and Bradford Cornell acted as consultants in the case to defendants and testified by deposition. Professor Klein analyzed the accounting treatment of the transactions by all parties, and rebutted several opposing experts who opined that the multiple contemporaneous analyses of value were biased and should not be presumed to be fair value. Professor Cornell explained the typical measures of value used in earnout agreements and concluded that the earnout at issue did not include protections that could have been included if sellers had viewed the “fair value” of the company upon a subsequent sale as a “second way” of capturing value apart from the primary earnout terms, (which were based solely on EBITDA).
Compass Lexecon was retained by and worked with John Hardiman and Benjamin Walker of Sullivan & Cromwell LLP. We also worked with Alexandra Walsh of Paul, Weiss, Rifkind, Wharton & Garrison LLP. Dr. Cornell and Professor Klein were supported by a team from CL’s Pasadena office led by Elisabeth A. Browne, John Hirshleifer, and John Haut.