The dispute is never about the number. It is about who ran the business afterwards.

Where do earnout disputes actually start?

In four places, and none of them is a disagreement about arithmetic. The first is the definition of the metric. Revenue and EBITDA both look like defined terms until the target sits inside a larger group and the question becomes which revenue, recognized on whose policies, net of which costs.

The second is the allocation of shared costs. After closing the business acquires a share of the buyer's overhead, its insurance, its systems, sometimes its head office charge. If the earnout is struck on EBITDA and the agreement is silent on allocations, the buyer has a lever that reduces the payment without anybody doing anything visibly wrong.

The third is a change in accounting method. Revenue recognition timing, capitalization policy, reserve levels and the treatment of deferred revenue all move the number, and a buyer integrating an acquisition has legitimate reasons to change all of them. Legitimate reasons and a lower earnout are not mutually exclusive.

The fourth is discretion over how the business is run, and it is the one that produces the litigation. Sales headcount, pricing, which pipeline gets prioritized, whether the founder keeps operational authority, whether a product launch lands inside the earnout period or outside it. Every one of those is a normal management decision, and every one of them changes what gets paid.

What did the Delaware courts decide in 2026?

Four decisions between January and March 2026 all turned on the fourth category, and read together they say something useful to a seller: the courts will police post-closing conduct, but only up to the point where the contract stops speaking.

The Delaware Supreme Court decided on 12 January 2026 a dispute over a medical device acquisition in which roughly 40 percent of the purchase price was contingent on regulatory milestones. It held that a commercially reasonable efforts obligation is an inward-facing standard, measured against the buyer's own usual practice for products of similar commercial potential at a similar stage, and that qualifiers listing permissible considerations are cabined: they let a buyer choose among reasonable paths to a milestone, but they do not let it deprioritize the earnout in favour of other business interests. It also reversed the lower court on the implied covenant of good faith and fair dealing, holding that the covenant cannot alter express terms and applies only where a genuine gap exists as to truly unanticipated developments (Mayer Brown, Delaware Law Alert, 5 February 2026).

Two Delaware Superior Court decisions in February then ran the other way on the facts. On 10 February the court declined to dismiss implied covenant claims, distinguishing between a buyer simply failing to pursue opportunities and a buyer deliberately pushing revenue outside the earnout period, and let prevention claims proceed even without an express efforts clause. On 18 February the court held that a broad discretion clause does not immunize bad-faith conduct, that the implied covenant applies even where there is no efforts clause, and that a seller must nonetheless show a bad-faith intent to avoid the earnout; summary judgment was denied and the matter went to trial (Reed Smith, Viewpoints, early 2026).

The Court of Chancery decision on 16 March 2026 is the one worth reading closely. On a transaction of 500 million dollars at closing plus up to 250 million dollars of contingent consideration, the court found that the buyer's terminations of key employees were pretextual and designed to avoid the earnout obligation. The remedy was not damages. The court ordered the chief executive reinstated with operational authority, extended the earnout period by 258 days, and enjoined further interference (Reed Smith, early 2026).

Does a sole discretion clause protect the buyer?

Not from opportunistic conduct, on the current Delaware record. The February decisions are explicit that broad discretion language does not immunize bad faith, and that the implied covenant reaches conduct even where the agreement contains no efforts clause at all.

What the January Supreme Court decision establishes is the limit on the other side. The implied covenant is a gap filler, not a rewriting tool. Where the parties addressed a contingency, or were on notice of it and drafted flexibility elsewhere in the document, there is no gap to fill and the express terms govern. A seller relying on the covenant is relying on the court finding that the parties never contemplated what happened, which is a weak foundation for the largest contingent line in the deal.

The practical read for both sides is the same. Specific contractual language about post-closing operations beats implied covenant enforcement, and the buyer's own internal communications are the evidence that decides whether conduct was pretextual. That is the mechanism by which a management decision becomes a finding of bad faith, and it is also why a seller should assume every one of its own emails during the earnout period will be read aloud.

What should a seller negotiate before signing?

Four things, in this order. First, the metric and its accounting basis in a schedule rather than a general reference to consistent application. List what is included, what is excluded, which policies apply, and state expressly that the policies used to calculate the earnout are the ones in force at signing regardless of what the buyer adopts afterwards.

Second, a cap on allocated costs. Either the earnout metric is calculated before any allocation of buyer overhead, management charge, insurance or shared services, or the allocation is fixed in dollars in a schedule. This single clause removes the most common quiet reduction in the mechanism.

Third, operational covenants with teeth. An affirmative obligation to run the business consistently with past practice, to maintain the sales and marketing resource at agreed levels, not to move revenue-generating activity out of the entity, and not to terminate named key employees without cause during the earnout period. The March decision is the clearest available evidence that courts will enforce this category, and it is far cheaper to write the covenant than to litigate the implied one.

Fourth, the remedy. Specific performance agreed at closing, information rights during the earnout period with a stated reporting cadence, an audit right over the calculation, and a dispute clause that sends only the disputed items to an independent expert. A seller who negotiates the remedy at signing does not need a court to invent one afterwards, which is the entire lesson of the four decisions.

What is the earnout worth once you price the dispute risk?

Less than the headline, and the discount is measurable. Twenty-four percent of private-target transactions outside life sciences now carry an earnout, up from 19 percent in 2014, and across deals carrying one, closer to one dollar in five of the available earnout consideration is actually paid (SRS Acquiom, M&A Earnout and Milestone Trends, published 7 July 2026, on a full-year 2025 deal population).

The exposure is heaviest at the small end. Thirty-five percent of the smallest lower-middle-market deals, those with closing payments at or below 25 million dollars, include an earnout, and 29 percent across all lower-middle-market deals at or below 50 million (SRS Acquiom, 2026 M&A Deal Terms Special Report: Lower Middle-Market Deals, published 5 June 2026, drawn from more than 4,400 private-target transactions). Those are also the transactions least able to fund a Delaware proceeding.

And the direction of travel is toward more contingency, not less. Practitioners report a rise in deferred purchase price mechanisms hedging seller performance against underwritten value through earnouts, seller notes and similar structures, as the gap between what buyers will pay and what sellers will accept gets bridged with structure rather than price (Andrew Silver, Much Shelist, quoted by PitchBook News, 6 July 2026).

One thing nobody can tell you is how often earnouts are disputed. No court, regulator or professional body publishes a dispute-frequency series for private-target earnouts, and any number offered for it is an estimate from somebody who advises on these transactions. What is on the public record is the case law, and the case law says the fights are about conduct. Draft for the conduct.