Earnouts: Recent Delaware Cases Highlight Important Drafting Considerations

Earnouts in acquisition agreements are commonly used to bridge valuation gaps between a buyer and a seller. The buyer agrees to pay additional consideration to the seller if the acquired business achieves specific post-closing milestones, and the seller often negotiates certain contractual assurances with respect to the buyer's post-closing operation of the business, typically defining the "efforts" the buyer must undertake to support achieving the milestones.

The Delaware Chancery Court recently issued three decisions interpreting generally seller-favorable "outward-facing" efforts standards and generally buyer-favorable "inward-facing" efforts standards, as well as addressing a buyer's earnout-related claim for fraud by the seller.¹ "Outward-facing" efforts standards tend to be seller-friendly because they look to an industry standard or industry participant(s) as a point of comparison when evaluating a buyer's efforts, whereas "inward-facing" efforts standards