Clients often tell their attorneys they have bridged a stubborn valuation gap in a deal by agreeing to an earnout as if the hard part is over. The attorney gently warns the client it may have just scheduled a lawsuit for three years from now. Earnouts are one of the most useful tools in M&A and one of the most litigated. Two 2026 decisions from Delaware — where most significant deals are governed, no matter where the companies actually sit — show exactly how these provisions go wrong, and how to draft around the wreckage.
First, the basics. An earnout is a post-closing promise: the buyer pays the seller additional money if the acquired business hits agreed targets after the deal closes — revenue, regulatory approvals, product milestones, whatever the parties choose. I explained it in greater detail in prior posts: What Is An Earnout? – Seidman Law and All About Earnouts – Seidman Law
I shared examples of Earnout disputes in this blog post: Examples of Earnout Litigation – Seidman Law
The marquee case is Fortis Advisors LLC v. Johnson & Johnson, decided by the Delaware Supreme Court in 2026. It grew out of J&J’s acquisition of Auris Health, a surgical-robotics company, where up to $2.35 billion in earnout payments turned on two robotic-surgery programs reaching regulatory and commercialization milestones. The merger agreement required J&J to use “commercially reasonable efforts” to achieve each milestone. The sellers said J&J failed. The Court of Chancery had agreed and awarded the sellers more than $1 billion, based on the estimated likelihood the milestones would have been met absent the buyer’s breach. On appeal, the Delaware Supreme Court reversed part of that award — finding the lower court had misapplied the implied covenant of good faith and fair dealing as to one milestone — but otherwise affirmed that the buyer had breached its efforts obligations. The headline for dealmakers: an “efforts” clause has teeth, and a buyer who diverts resources or deprioritizes a program can be on the hook for enormous sums.
The companion decision, Fortis Advisors LLC v. Krafton, Inc., came out of the Court of Chancery and attacked the problem from the other direction. Instead of leaning on the implied covenant, the court enforced the express operational-control provisions the parties had negotiated. The contrast between the two cases is the whole lesson in miniature: courts will protect an earnout either through the specific operating covenants you wrote, or — failing that — through the implied covenant of good faith. The first path is far more predictable. The second is a coin flip you do not want to be flipping.
These two join a now-familiar line of Delaware earnout decisions — Himawan v. Cephalon, Shareholder Representative Services v. Alexion, and Fortis v. Medtronic among them — that together map the terrain. Read as a group, they deliver a consistent message: vague efforts standards and silence about how the business will be run after closing are invitations to litigate.
So how do you keep an earnout out of court? By reading this blog post Proactively Avoiding Earnout Disputes – Seidman Law. Do the work at the drafting table while everyone still likes each other. There is no excuse not to do so.
Careless earnout provisions convert signed transactions into years of expensive litigation over issues like what “reasonable efforts” really meant when the agreement was signed.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues. In particular, he has a significant amount of experience in hospitality law by representing third party management companies, owners, and developers.
He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
Photo credit:
