Split high court rules on classification of earnout payment in divorce dispute

Gill v. Gill, 2018 Minn. LEXIS 613; 2018 WL 5274126 (Oct. 24, 2018)

The parties’ dispute over how to classify earnout payments related to the sale of a valuable marital asset recently prompted a split ruling from the Minnesota Supreme Court. The issue was whether those payments were part of the sales consideration, on the relevant date, as the wife argued, or represented future compensation to the husband, as the district court found. 

The husband indirectly held an interest in Talenti, a well-known gelato and sorbet producer. In December 2014, Unilever bought Talenti’s parent company.  

The parties married in 1993 and separated in 2013. The divorce was finalized after the company's sale, in January 2016. Throughout 2013, members of the parent company negotiated the sale to Unilever. In a July 2014 letter of intent, Unilever agreed to pay “an aggregate maximum purchase price” of $350 million for the company. This amount included a $180 million upfront payment, which would be paid at the closing of the transaction, as well as two future earnout payments whose amounts were based on 2015 and 2016 net sales and would not exceed $170 million. The same provisions appear in the parties’ purchase agreement. In tandem with the sale, the husband negotiated a separate employment agreement and received extra compensation for the continuing employment. 

For purposes of divorce, the district court determined a valuation date of September 2014 and valued the company based on the upfront payment ($180 million). It noted the earnout payments were highly uncertain as of the valuation date and, to the extent they would materialize, they were based on the post-divorce, future efforts of the husband to achieve certain earnings targets for the company. The appeals court disagreed with this interpretation, and the husband appealed the case to the state Supreme Court. 

A majority of the high court found the district court had erred. A valuation of the husband’s interest, which was presumed to be a marital asset, had to include the earnout payments, the court’s majority said.

To find out more about the high court’s reasoning, click here.