The Earnout Reckoning: What Delaware Courts Are Telling Dealmakers in 2026

The earnout, a payment to the seller that depends on the acquired business hitting future financial or operational targets, has been one of the most heavily used instruments in the post-pandemic deal market. Surveys of middle market transactions over the last three years show earnouts appearing in roughly one out of every five private deals, often as the bridge that closed valuation gaps when buyers and sellers could not agree on a single price. Many of those earnout periods are now reaching their measurement dates, and the disputes that follow are landing on the desk of the Delaware Court of Chancery. A wave of recent rulings has begun to clarify how these provisions will be enforced, and the results carry direct implications for any owner currently negotiating or holding contingent consideration.

A new Arnold and Porter advisory issued in April 2026 walks through several of the most consequential decisions, including the Court of Chancery's post-trial opinion in Camaisa v. Pharmaceutical Research Associates and the Delaware Supreme Court's decision in Fortis Advisors LLC v. Johnson and Johnson. Read together, the rulings sharpen what buyers can and cannot do during an earnout period, what sellers can credibly claim when targets are missed, and how the implied covenant of good faith will be applied when the contract language leaves room for interpretation.

What Has Changed in the Case Law

The Delaware approach to earnouts has long been deferential to the negotiated language of the merger agreement. If the parties wrote a precise contract, the court tends to enforce it as written, even when the result feels harsh. What the recent decisions add is a more careful articulation of three boundaries.

First, anti-reliance language matters. Sellers who allege that the buyer's pre-signing statements led them to accept an inadequate earnout structure increasingly run into anti-reliance clauses that limit those claims. The court will not rescue a sophisticated seller who agreed to a broad anti-reliance provision and then later argues the buyer misled them.

Second, the implied covenant of good faith remains a real constraint, but it is narrow. The court is reluctant to impose obligations beyond what the parties wrote, particularly when the agreement gives the buyer broad discretion over post-closing operations. In Fortis, however, the Delaware Supreme Court emphasized that buyers cannot use that discretion to actively undermine the earnout. There is space between affirmative obligation and active interference, and that space is where the live disputes are now being fought.

Third, the integrated picture. Courts will look at the deal record holistically when language is ambiguous, including the parties' communications, the integration plan, and operating decisions made during the earnout period. Buyers who keep clean records and document their commercial rationale on key decisions are markedly better positioned than those who do not.

Why the Litigation Wave Is Just Starting

The earnout periods being litigated today were typically negotiated between 2022 and 2024, when valuation expectations were elevated and buyers were unwilling to pay full price in cash. Earnouts were the structural compromise. Many of those instruments had three-year measurement periods, which is why disputes are now arriving in court.

The economic backdrop has also moved against many earnouts. Several of the assumptions baked into the 2022 to 2024 cohort, including assumptions about interest rates, growth, supply chain costs, and tariff treatment, have shifted unfavorably for sellers. When the underlying business does not hit the targets, sellers reach for arguments based on buyer behavior. Was the integration plan executed in a way that made the targets harder to reach? Were resources reallocated away from the acquired business? Did the buyer change a metric definition or modify a sales channel in ways that affected the calculation?

Each of those arguments has been tested in court over the last 12 months. The pattern emerging is that buyers who can document a defensible commercial rationale, even for decisions that hurt the earnout, generally prevail. Buyers who cannot, particularly where internal communications suggest the rationale was post hoc, face exposure on implied covenant grounds.

Drafting Lessons From the Bench

For deals being negotiated now, three drafting choices have outsized influence on how disputes will play out three years from today.

The first is precision in metric definitions. EBITDA is not a single number; it is a definition embedded in specific assumptions about which expenses are included, how non-recurring items are treated, and how acquired or divested operations are handled. Earnout disputes often turn on whether a particular item belongs in the calculation. The cleaner the definition, the lower the probability of litigation.

The second is the operating covenants that describe what the buyer must and must not do during the earnout period. Covenants that require the buyer to operate the business in the ordinary course are common but vague. Specific covenants that address research and development spending, sales force allocation, channel pricing, and integration milestones give the seller more protection without freezing operational flexibility entirely.

The third is the dispute resolution mechanism. Many earnouts now route calculation disputes to an independent accountant under a tightly defined scope, with broader interpretive disputes routed to arbitration or to the courts. A clear sequence reduces the temptation to litigate every disagreement and tends to deliver faster resolution.

What This Means for Sellers Sitting on Earnouts Today

For owners whose earnout measurement period is still running, the recent decisions reinforce the importance of active engagement. Sellers who pay attention to operational decisions, document their concerns through formal channels, and exercise their information rights are better positioned than those who go quiet after closing. Information rights, often underused in practice, are critical because they preserve the ability to assemble a record before the dispute becomes formal.

For sellers approaching the calculation date, preparation should begin at least 12 months in advance. Engage your advisors. Reconcile the calculation methodology. Identify points of likely disagreement. Decide whether to escalate informally before the calculation is delivered or to wait until the formal dispute clock starts running.

For buyers, the message from the bench is consistent. The freedom to operate the acquired business is real, but it is not unlimited. Buyers who treat the earnout period as if it were a standalone management challenge, with disciplined documentation of every consequential decision, tend to defend their positions successfully. Those who treat the earnout as an afterthought create exposure that compounds quickly.