ARTHUR J. GALLAGHER & CO.; ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Plaintiffs, v. JOSEPH A. AGIATO, JR. (individually and as Sellers’ Representative), Defendants.
C.A. No. 2024-0494-LWW
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
July 31, 2025
WILL, Vice Chancellor
Date Submitted: April 11, 2025
Brian E. Farnan & Michael J. Farnan, FARNAN LLP, Wilmington, Delaware; Vineet Bhatia & Armando Lozano, SUSMAN GODFREY LLP, Houston, Texas; Stephen Morrissey, SUSMAN GODFREY LLP, Seattle, Washington; Counsel for Defendant Joseph A. Agiato, Jr.
MEMORANDUM OPINION
The sellers’ representative has moved for partial judgment on the pleadings, raising two key issues. First, he argues that the initial earnout payment is due. I agree, as the sole condition for it has been satisfied. Second, he seeks the release of escrowed shares, which were set aside as security for indemnity claims. Resolving that issue is precluded by factual disputes.
The motion is therefore granted in part and denied in part.
I. FACTUAL BACKGROUND
The following description is drawn from undisputed facts in the pleadings and documentary exhibits the parties submitted.1
A. The Asset Purchase Agreement
Defendant Joseph A. Agiato, Jr. is a North Carolina resident.2 He is the founder and former CEO of Patent Insurance Underwriting Services, LLC (“PIUS“)
Arthur J. Gallagher Risk Management Services, Inc. is an Illinois corporation providing risk management and insurance services.6 It is a subsidiary of defendant Arthur J. Gallagher & Co., a Delaware corporation (with Arthur J. Gallagher Risk Management Services, Inc., “Gallagher“).7
On November 8, 2022, Gallagher entered into an Asset Purchase Agreement (the “APA“) with the Sellers and their members.8 Agiato signed the APA individually as a member and as the “Sellers’ Representative.”9
1. Earnout Payments
Gallagher paid an upfront $50 million purchase price.10 It also agreed to make up to $150 million in possible earnout payments.11 The earnout payments were contingent on the “New PIUS Division“—PIUS and Newlight operating as a division of Gallagher—achieving Net Commissions and Fee Income (“NCFI“)
The Addendum specified a “Base NCFI” for each of the four years.14 The earnout payment would be equal to a 7.15 multiple on actual NCFI above the Base NCFI, capped at $50 million per year (with an aggregate cap of $150 million).15 NCFI is recognized as cash is received.16 If NCFI exceeds a “Target NCFI” for any
2. Sellers’ Representations and Warranties
Section 6 of the APA contains representations and warranties made to Gallagher by the “Sellers and the[ir] [m]embers jointly and severally,” including Agiato as a member of the Sellers.18 They include the following:
- § 6(g)(i): “Except as set forth in Paragraph 6(g) of the [d]isclosure [s]chedule, since December 31, 2021... the business of the Sellers has been conducted only in the Ordinary Course of Business“;
- § 6(o): “Except as set forth in Paragraph 6(o) of the [d]isclosure [s]chedule, neither Sellers nor any manager or member of Sellers or any Associate of Sellers or of such persons have any direct or indirect interest in any firm, corporation, association or business enterprise which competes with, is a customer or sales agent of or is engaged in any insurance business of the kind being conducted by Sellers“; and
- § 6(o): “Except for employment relationships and compensation, benefits and travel advances in the Ordinary Course of Business, neither Sellers nor any manager or member of Sellers or any Associate of such persons have any interest, directly or indirectly, in any contract with, commitment or obligation of or to, or claim against Sellers.”19
The Sellers and their members were to disclose any exceptions to these
Section 9(b) of the APA gives Gallagher a right to indemnification for the “breach of, or the failure to fulfill, any representation, warranty, agreement, or covenant” in the APA.23 To make an indemnification claim, the claimant must “promptly” provide written notice to the indemnitor “setting forth all specifics of the [c]laim then known by the [c]laimant.”24 Claims are subject to a threshold amount ($200,000 in the aggregate or $5,000 per claim) that must be exceeded for the claimant to obtain indemnification or reimbursement of associated expenses.25
3. Agiato‘s Post-Closing Obligations
The APA imposed obligations related to the New PIUS Division‘s operation. For example, Section 4(b) includes an assurance that “[f]ollowing the [c]losing, regardless of the effect on the [e]arnout, the continuing New PIUS Division . . . shall conduct its business in accordance with Gallagher‘s business practices, policies and procedures.”27 It adds that the “New PIUS Division will be managed for the long-term benefit of Gallagher‘s shareholders.”28
B. The Escrow Agreement
Concurrent with the APA, Gallagher and Agiato (as Sellers’ Representative) entered into an Escrow Agreement.29 The parties agreed that “Sellers shall deliver $3,750,000 of Gallagher Common Stock” (the “Escrowed Shares“) to the escrow agent “[a]s security for the indemnification obligations of Sellers and [their m]embers.”30
If Gallagher became “entitled to indemnification pursuant to the provisions of
The Escrow Agreement requires that written notice be delivered to Gallagher‘s General Counsel if an indemnity claim is made against Gallagher, and to Agiato if it is made against the Sellers.33 It further directs that the Sellers’ counsel—Kerry T. Smith, Esq. of M&H, LLP—be notified.34 According to Gallagher, in March 2024, Smith asked that he and M&H be “removed from all notice provisions in all agreements relating to Gallagher‘s PIUS division.”35
C. The Employment Agreement
When the APA closed, Agiato signed an Employment Agreement with
In the Employment Agreement, Agiato agreed to a four-year tenure “unless earlier terminated by either party” with “21 days written notice to the other party.”38 The Employment Agreement allowed Gallagher to terminate Agiato “with no liability” under certain conditions, including for “Cause.”39
Agiato was promised a $600,000 annual base salary plus up to $400,000 for achieving specified “key strategic initiatives.”40 In return, the Employment Agreement obligated Agiato to “devote his full energies, abilities, attention and business time to the performance of his employment obligations and responsibilities.”41 He was required to “comply with all [Gallagher] policies and procedures in effect and applicable to him.”42 He was also prohibited from
D. The Earnout Dispute
The “Year 1” earnout was based on NCFI earned between November 1, 2022 and October 21, 2023.44 Gallagher was to deliver an earnout statement for that period within 90 days of the first anniversary of the transaction—by February 6, 2024.45
Gallagher did not deliver an earnout statement in February.46 On March 4, it sent Agiato a letter purporting to fire him for cause.47 It explained that no earnout payment would be made:
As to Year 1 [e]arnout payments specifically, the revenue, commissions, and fees derived from transactions involving [a third party] were not earned in compliance with your obligations under the APA and Employment Agreement and, thus, must be excluded from calculations of the New PIUS Division‘s [NCFI]. After such exclusion, the New PIUS Division‘s NCFI for Year 1 failed to meet necessary thresholds to trigger an [e]arnout payment.48
Gallagher also acknowledged its obligation to furnish an earnout statement and
Agiato responded two days later in his capacity as Sellers’ Representative. He wrote that “NCFI for Year 1 was in excess of $28.4 million,” meaning that “the maximum [e]arnout of $50 million for Year 1 was earned by the Sellers and members with a carryover to Year 2 of more than $8.4 million applicable to the NCFI for Year 2.”50 He requested Gallagher‘s “books, records, and work papers” used to calculate NCFI and a detailed breakdown of the revenue received by the New PIUS Division in Year 1.51
Gallagher ignored Agiato‘s letter and a subsequent email.52 On March 19, Agiato followed up through counsel to dispute Gallagher‘s NCFI calculations and again request books and records.53 His counsel demanded that Gallagher participate in the contractual dispute resolution process.54 Under this process, outlined in
On April 3, Gallagher responded that the earnout dispute resolution process in the APA was “inapposite” because Agiato‘s alleged misconduct was at issue—not “an accounting dispute over how [e]arnout payments (if owed) should be calculated.”56 It claimed that one of the transactions it excluded when calculating NCFI had been improperly omitted from the Sellers’ disclosure schedule.57 It explained that it had “made the accounting decision to reverse the booking of revenues associated with several of the transactions entered into by [] Agiato during Year 1 of the [e]arnout period” because such transactions were, in its view, contrary to Agiato‘s obligations and “not reflective of the actual, long-term value of the acquired business.”58 It attached another spreadsheet showing NCFI of $12,722,225
E. The Escrowed Shares Withholding
The APA and Escrow Agreement require Gallagher to deliver notice of any indemnification claim to the escrow agent and Agiato before May 8, 2024.60 The Escrow Agreement explains that notice sent “after normal business hours” will be considered sent the next day.61
On May 7, at 6:50 p.m. Central Time, Gallagher emailed the escrow agent and Agiato a letter purportedly serving as “written notice to the [m]embers and escrow agent pursuant to the terms of the Escrow Agreement as it relates to the indemnification to which Gallagher is entitled under the APA.”62 Gallagher requested the return of the full amount held in escrow as indemnification.63 As a
F. This Litigation
Gallagher initiated this litigation on May 10, advancing breach of contract and declaratory judgment claims against Agiato (both individually and as Sellers’ Representative).64 On June 7, Agiato answered the Complaint and brought counterclaims against Gallagher for breach of the APA and the Escrow Agreement, and for restitution.65
The dispute narrowed on November 27, when Gallagher stipulated that the Year 1 NCFI threshold was met.66
On January 10, 2025, Agiato moved for partial judgment on the pleadings.67 The motion was fully briefed as of February 27,68 and I held argument on April 11.69
Agiato‘s motion for partial judgment on the pleadings centers on two main issues.
The first issue is whether Gallagher must make the Year 1 earnout payment.70 It implicates Gallagher‘s Count III (whether Agiato‘s conduct relieved Gallagher of its obligation to pay the earnout) and Agiato‘s Count II (whether Gallagher breached the APA by failing to make earnout payments).71
The second issue is whether Gallagher must immediately release the Escrowed Shares—either because Gallagher failed to provide timely notice of indemnity claims or because those claims lack merit.72 It implicates Gallagher‘s Counts I and II (whether Agiato breached the APA by failing to comply with representations and warranties and to manage the business as required) and Agiato‘s Count V (whether Gallagher breached the Escrow Agreement by failing to release the Escrowed Shares).73
The court may grant judgment on the pleadings “only when, accepting as true all of the nonmoving party‘s well-pleaded factual allegations, ‘there is no material
“The proper interpretation of language in a contract, while analytically a question of fact, is treated as a question of law both in the trial court and on appeal.”77 Thus, “judgment on the pleadings... is a proper framework for enforcing unambiguous contracts.”78
The APA is governed by Delaware law.79 “Delaware law adheres to the objective theory of contracts,” meaning that “a contract‘s construction should be that
The Escrow Agreement is governed by Illinois Law.85 “The rules governing Illinois contractual interpretation generally track those of Delaware.”86
The APA provides that an earnout payment is due to the Sellers and “Key Employees” if the New PIUS Division achieves over $20,000,000 in NCFI during Year 1.87 Gallagher has stipulated that “the amount of cash generated and received by the New PIUS Division equaled or exceeded $20,000,000” during that period.88 It has also stipulated that “[a]t least $20,000,000 of Year 1 [c]ash [r]eceipts fell into the six categories comprising NCFI, as set forth in Addendum I to the APA.”89
Still, Gallagher insists that it is excused from paying the Year 1 earnout. It grounds this argument in three APA provisions that: (1) confirm the New PIUS Division will be run according to Gallagher‘s practices and policies and for the benefit of Gallagher‘s shareholders;90 (2) condition the transaction on Agiato‘s execution of the Employment Agreement;91 and (3) contain representations and warranties by the Sellers in Section 6.92
None of these provisions bear on whether Gallagher owes the Year 1 earnout. Although Gallagher requests I imply conditions to payment of the earnout, Delaware
1. Post-Closing Operations Under Section 4(b)
Gallagher asserts that “Agiato failed to conduct the business of the New PIUS Division in accordance with Gallagher‘s business practices, policies, and procedures and failed to manage the New PIUS Division for the long-term benefit of Gallagher‘s shareholders.”94 In its view, Agiato‘s purported mismanagement “represents a failure of a condition precedent to [the] [e]arnout payments.”95
Gallagher‘s argument rests on APA Sections 4(b)(ix) and 4(b)(x), which Gallagher reads as imposing on Agiato “obligations related to the post-acquisition operation[] of . . . [the] New PIUS Division.”96 Section 4(b)(ix) states that “[f]ollowing the [c]losing, regardless of the effect on the [e]arnout, the continuing New PIUS Division . . . shall conduct its business in accordance with Gallagher‘s business practices, policies and procedures . . . .”97 Section 4(b)(x) states that the
Neither Section 4(b)(ix) nor Section 4(b)(x) creates a condition precedent to the earnout payment. Although “‘[t]here are no particular words that must be used to create a condition precedent,’ a condition precedent must be expressed clearly and unambiguously.”99 “Parties’ intent to set a condition precedent to performance may be evidenced by such terms as ‘if,’ ‘provided that,’ ‘on condition that,’ or some other phrase that conditions performance” connoting “an intent for a condition rather than a promise.”100 APA Section 4 lacks this conditional language.101
Instead, Sections 4(b)(ix) and 4(b)(x) unambiguously address how Gallagher will manage the New PIUS Division after closing. The Sellers bargained for some limited protections, including that Gallagher must “operate [PIUS and Newlight] in a manner not intentionally designed for the purpose of avoiding or reducing any
[e]arnout payments” and refrain from performing certain actions.102 But Sections 4(b)(ix) and 4(b)(x) balance these protections by ensuring that Gallagher has discretion to run the business consistent with its own policies and for the “long-term benefit of Gallagher‘s shareholders,” “regardless of the effect on the [e]arnout.”103Gallagher‘s reading of the APA is inconsistent with this structure.104 Nothing in the APA grants Agiato authority to direct the New PIUS Division‘s operations after closing. Agiato was never an officer or director of Gallagher or its affiliates. The APA lets Gallagher run the New PIUS Division to serve Gallagher‘s interests—even if the earnout is affected—so long as it does not “intentionally” avoid or reduce the earnout.105
Gallagher‘s argument is further belied by other APA provisions. When the parties wanted to impose obligations on Agiato, the APA refers to him by name or as the Sellers’ Representative.106 Section 4(b)(ix) and 4(b)(x), by contrast, make no
2. Provisions Related to Agiato‘s Employment
Gallagher next maintains that Agiato‘s compliance with his Employment Agreement is a condition precedent to payment of the earnout. It asserts that “one of the conditions of the transaction agreed to ... was that Agiato would offer his services and connections to Gallagher as an employee pursuant to the terms of his Employment Agreement.”109 And it notes that the Employment Agreement “requires that Agiato comply with Gallagher‘s business practices, policies, and procedures.”110 Gallagher reads these provisions together to mean that its refusal to
This argument finds no support in the APA. The APA merely required, “as a condition to the consummation of the [t]ransaction,” that Agiato “execute” his Employment Agreement.112 The Employment Agreement similarly specifies that the “execution of this Agreement is a condition to the effectiveness” of the APA.113 It is undisputed that Agiato executed the Employment Agreement.114 The APA is not conditioned on Agiato satisfying the terms of the Employment Agreement itself or on his continued employment.115
Gallagher posits that the coterminous four-year terms of the Employment Agreement and earnout create “deliberate alignment underscor[ing] that the [e]arnout was directly tied to Agiato‘s continued employment.”116 It highlights APA Section 5(b)(iii)—providing that Agiato “shall have entered into a four-year
3. Representations and Warranties in Section 6
Gallagher argues that in “addition to Agiato‘s failure to satisfy the express contractual conditions for receipt of the [e]arnout, any earnout is independently barred by Agiato‘s other material breaches of the APA.”120 It alleges violations of three representations and warranties in APA Section 6: (1) that “the business of the Sellers ha[d] been conducted in the ‘Ordinary Course of Business‘“; (2) that Sellers
I need not resolve whether Gallagher identified a viable breach of the APA. Such a breach would provide it with grounds to seek indemnification—not to withhold the earnout.
The APA sets out an intricate process for one party to obtain renumeration from another for “breach of, or ... failure to fulfill, any representation, warranty, agreement, or covenant” in the APA.122 It describes the process for making a written claim, and sets both a base amount required to seek indemnification and a cap.123 The Escrow Agreement facilitates the APA‘s indemnification process by ensuring that funds are set aside to compensate Gallagher for a valid indemnification claim.124
The APA‘s earnout provisions omit any reference to indemnification process. The APA also does not condition earnout payments to the Sellers on their fulfillment
Gallagher suggests that if Agiato‘s breaches were sufficiently material, Gallagher may be “excused from performance under [the APA].”126 And it argues that the materiality of Agiato‘s breaches cannot be determined on a motion for judgment on the pleadings. But Gallagher cannot argue that its performance under the APA is excused while invoking the contractual indemnification process in Section 9.127 Its pursuit of indemnification “indicates a desire to continue to accept
* * *
The APA entitles the Sellers to an earnout payment if an annual NCFI threshold is met. Because that target was met for Year 1, and nothing in the APA or related agreements places other conditions on the earnout, Agiato is entitled to judgment in his favor on Agiato‘s Count II and Gallagher‘s Count III. The Sellers must make the $50 million Year 1 earnout payment.130 Agiato is also entitled to prejudgment interest on this amount, compounded quarterly.131
B. Escrowed Shares
In the Escrow Agreement, the Sellers agreed to deliver the Escrowed Shares to an escrow agent as security for their indemnification obligations in the APA.132 The escrow agent was to release the Escrowed Shares after 18 months absent a valid
Agiato seeks an order compelling Gallagher to release the Escrowed Shares. He offers two grounds for that relief. First, he asserts that Gallagher failed to provide timely and proper notice of indemnification.134 Second, he argues that Gallagher‘s indemnification claims fail as a matter of law.135 Neither theory entitles Agiato to judgment in his favor; both raise material factual disputes.
1. Timely and Proper Notice
Under the Escrow Agreement, notice “shall be deemed duly given ... on the date sent ... if sent during normal business hours of the recipient, and on the next business day if sent after normal business hours of the recipient.”136
The parties entered into the Escrow Agreement on November 8, 2022, meaning that notice to the escrow agent was required on or before May 8, 2024 to prevent release of Escrowed Shares. Gallagher‘s counsel sent notice of its indemnifications claims at 6:50 p.m. Central Time on May 7, 2024, when it was
Agiato believes that 6:50 and 7:50 p.m. are after “normal business hours,” so the notice must “be deemed duly given” on “the next business day.”139 He reads the requirement that notice be within 18 months to mean by 12:00 a.m. on the deadline.140 He further extrapolates that the phrase “next business day” means “during business hours” on that day.141 As such, he submits that Gallagher‘s notice was untimely because it was due by midnight but not technically received “until business hours on May 8, 2024.”142
The meaning of “normal business hours of the recipient” is fact specific.143 Agiato‘s and the escrow agent‘s typical business hours are unknown to me. Agiato might work 9:00 a.m. to 5:00 p.m. Monday to Friday, or he might keep flexible hours, or perhaps some other industry-specific shift. Even if 7:50 p.m. were after hours for Agiato, the Escrow Agreement does not explicitly state that notice is due
Agiato also contends that Gallagher‘s notice was deficient because it did not copy Smith, as required by Section 7 of the Escrow Agreement.145 Gallagher‘s May 7 notice stated that Smith had asked to be removed from all correspondence going forward.146 Whether Smith had, in fact, waived notice is not in the record, leaving me unable to resolve the effect of any waiver.
2. Viability of Indemnity Claims
Agiato maintains that he is entitled to judgment in his favor on the Escrowed Shares because Gallagher‘s indemnity claims fail as a matter of law.147 But resolving whether Agiato breached the APA presents factual issues not properly resolved on the pleadings.
For example, Gallagher alleges that Agiato breached the representation in APA Section 6(g) that the Sellers’ business was operated in the ordinary course because he failed to disclose the “development of a new deal structure” closing
Gallagher also contends that the representation in APA Section 6(o) requiring disclosure of conflicts of interest was breached because Agiato neglected to raise “interests in at least one customer of the Sellers.”149 It further claims that Agiato violated Gallagher‘s policies and procedures and placed his interests above those of Gallagher‘s stockholders.150 Resolving these issues necessitates the presentation of evidence outside the pleadings.
C. Attorneys’ Fees
Agiato seeks an award of attorneys’ fees if the earnout payment dispute is decided in his favor.151 He invokes the fee shifting provision in APA Section 20:
In the event of an action at law or in equity between the parties hereto to enforce any of the provisions hereof, the unsuccessful party to such litigation or proceeding shall pay to the successful party all costs and expenses, including reasonable attorneys’ fees, incurred therein by such successful party on trial and appeal as adjudged by the court, and if such successful party or parties shall recover judgment in any such action or proceeding, such
costs, expenses and attorneys’ fees may be included as part of such judgment ....152
This request is premature. Agiato has prevailed, in part. But his motion was denied on some claims, and others are not implicated in the motion. I cannot yet conclude that Agiato is the “successful party” in this litigation.
III. CONCLUSION
Agiato‘s motion for partial judgment on the pleadings is granted in part and denied in part. Judgment is entered for Agiato and against Gallagher on Agiato‘s Count II and Gallagher‘s Count III. Agiato, as Sellers’ Representative, is entitled to a $50 million Year 1 earnout payment plus prejudgment interest at the legal rate, compounded quarterly. His motion is otherwise denied as to Agiato‘s Count V and Gallagher‘s Counts I and II.