Colaco sold his company to Cavotec, which was to transfer to Colaco $21 million in shares plus two $2 million performance earn-out payments.  Colaco, in turn, was to transfer all assets of his company to Cavotec except for contracts that couldn’t be transferred without his customers’ consent.  As to those, he was to remit all customer payments to Cavotec after the closing and make good faith efforts to obtain customer consents.  Instead, Colaco pocketed customer payments and backdated invoices to cover up the misdeed.  As a result, Cavotec withheld the final $2 million earn-out payment.  Held, the earn-out payment and turnover of customer payments were independent covenants since they were to be performed at different times and for different purposes.  Since the jury found that Colaco had misappropriated $1.3 million in customer payments, those damages had to be offset by the $2 million that Cavotec had not paid.  However, Cavotec was also entitled to recover damages from Caloco for breach of the fiduciary duties he owed it under his employment contract, and the fact that the $2 million offsets zeroed out compensatory damages did not provide any basis for setting aside the $2 million punitive damage award against him.  Finally, the employment contract’s choice of California law provision was not overridden by Delaware’s internal affairs doctrine since California law imposed no duty contrary to Delaware law (which governed Cavotec’s internal affairs). So Colaco’s fiduciary duties were properly judged under California law.

California Court of Appeal, Fourth District, Division 3 (Aronson, J.); July 11, 2018 (published August 10, 2018); 2018 Cal. App. LEXIS 705