A Delaware court recently issued a ruling in a case involving a dispute over a business sale between Rodney Prosser and others, and PharmaLogic Holdings Corp. The ruling, which came on July 7, 2026, addresses claims related to breach of contract and an earnout payment scheme following the sale of a nuclear pharmacy business. This decision impacts the sellers and the buyer, highlighting the complexities of post-sale agreements and the enforcement of contractual obligations.
The case, known as Prosser v. Pharmalogic Holdings Corp. (C.A. No. N25C-08-284 MAA CCLD), centers around allegations from the sellers that the buyer altered business operations to reduce earnings before interest, taxes, depreciation, and amortization (EBITDA) to avoid making an earnout payment. The court's ruling is significant as it clarifies the boundaries of contractual agreements in business sales and the enforceability of earnout provisions.
The plaintiffs in this case are Rodney Prosser, Frank Ruddy, and Kok Wayne Wong, who sold their nuclear pharmacy business to PharmaLogic Holdings Corp., a Delaware corporation. The dispute arose after the sale, which was finalized on January 6, 2021, when the sellers claimed that PharmaLogic made operational changes that negatively impacted the business's EBITDA. The sellers argue this was done to avoid paying a $6.6 million earnout payment that was contingent on achieving certain EBITDA targets.
The sellers had negotiated an earnout provision in the Securities Purchase Agreement (SPA), which stipulated that if the business achieved an EBITDA between $7 million and $7.5 million, they would be entitled to the additional payment. However, PharmaLogic reported an EBITDA of only $6.8 million, just below the threshold for the earnout payment. The sellers contend that PharmaLogic’s operational changes were intended to decrease EBITDA and thus avoid the earnout payment.
The legal battle escalated when the sellers filed their initial complaint in August 2025, followed by an amended complaint in November 2025. In their claims, the sellers alleged that PharmaLogic breached the SPA by failing to operate the business in good faith and by not providing adequate financial records to support the EBITDA calculation. They also sought a declaratory judgment that PharmaLogic's actions constituted a material breach of contract.
PharmaLogic responded by filing a motion to dismiss the amended complaint, arguing that the sellers’ breach of contract claim should be resolved through an alternative dispute resolution process outlined in the SPA. The buyer contended that the sellers had waived their right to claim a material breach by continuing to perform under the contract after the alleged breach occurred.
In its ruling, the court granted the motion to dismiss in part and denied it in part. The court found that the sellers' breach of contract claim could proceed, stating, "the relevant alternative dispute resolution provision is not a true arbitration provision." The court emphasized that while the Auditor was tasked with resolving certain disputes regarding the earnout statement, the issues raised by the sellers concerning the operational changes and the maintenance of financial records fell outside the Auditor's authority.
Furthermore, the court agreed with the sellers that PharmaLogic's failure to maintain site-specific financial records could constitute a breach of the SPA. The court noted that the sellers had a reasonable expectation to access detailed financial records to assess the business's performance during the earnout period. The court's opinion highlighted the importance of transparency and good faith in business transactions, particularly in the context of earnout agreements.
The court also addressed the sellers' claims regarding tax refunds related to pre-closing tax payments. The sellers argued they were entitled to these refunds based on the business's tax structure as a pass-through entity. However, the court sided with PharmaLogic, stating that the existence of a comprehensive contract addressing tax matters precluded the sellers' claims for unjust enrichment.
This ruling has significant implications for both parties involved. For the sellers, it allows their breach of contract claim to proceed, which could potentially lead to a resolution that enforces their rights under the SPA. For PharmaLogic, while the court dismissed some of the sellers' claims, the ruling underscores the importance of adhering to contractual obligations and maintaining transparent financial practices post-acquisition.
Looking ahead, the case may continue to evolve as both parties prepare for further proceedings. The court's decision leaves open the possibility for an appeal, particularly regarding the issues related to the earnout payment and the operational changes made by PharmaLogic. The outcome of this case could set a precedent for future disputes involving earnout provisions in business sales, emphasizing the need for clear contractual terms and good faith in negotiations.