Delaware’s Latest M&A Ruling: When Buyers Frustrate the Earnout Mechanism

“Earnout provisions bridge valuation gaps but can leave sellers vulnerable after they cede operational control to the buyer. To protect their contingent upside, sellers may negotiate procedural checks. The sellers here did just that.”

-Delaware Vice Chancellor Will

North Highland, a worldwide management consulting firm, purchased The Bridge, a Dallas-based technology consulting firm, for $90MM cash and a $50MM earnout target over 2 years, along with $40MM in rollover equity. In this case, the then CEO of strategic acquiror North Highland assured the CEO of The Bridge that the earnout would be a “layup.” North Highland then made it a full court shot.

In Eric Winton v. The North Highland Company LLC, decided on September 18, 2026, Delaware Vice Chancellor Will granted Eric Winton, the Seller’s Party Representative, access to information necessary to make its earnout calculation, and the court prevented North Highland from inserting extra-contractual criteria into the Earnout Addendum.

The earnout trigger was for The Bridge to hit 80% of its annual gross profit target of $25MM. One of the target’s procedural checks was a “Qualifying Projects” mechanism under the purchase agreement whereby the target CEO, who continued on in an executive capacity, would notify North Highland of potential qualifying projects before client proposals were submitted for the purpose of earnout calculation. Post closing, North Highland withheld data the target CEO needed to submit the “Qualifying Projects” and also excluded projects based on extra-contractual carve-outs.

The court said:

“The implied covenant can function as a “limited ‘gap-filler’” that “enforces the parties’ reasonable expectations in circumstances that they could not foresee and did not address in their written agreement, but it may not be used to rewrite or contradict express terms.” Applying it is a “cautious enterprise.” A court will not rewrite a contract simply because a party later wishes it had negotiated a better deal. But the court may “imply contract terms when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected.” The implied covenant also constrains the exercise of contractual discretion where necessary to preserve the parties’ reasonable expectations at signing.”

Some buyers frustrate the earnout mechanism rather than pay the seller upside. Delaware courts look to the plain text of the earnout to restore the seller’s bargain. That said, the implied covenant does not give carte blanch access to the seller. The seller is only entitled to the “minimum constraint necessary to protect the parties bargain.” In this case, it was access to data to help make the Qualifying Project determination but not the request for all pipeline data.

Jerome Fogel is a founding partner of Fogel & Potamianos LLP, a firm recognized by Chambers & Partners’ California Spotlight Guide for excellence in corporate law. A partner in the Corporate Practice Group and Chair of the Sports & Entertainment Group, he is known as an innovator and dealmaker in the legal community. He serves as a general counsel to privately held companies with a specialty in mergers and acquisitions.

Disclaimer: This content is not a substitute for obtaining legal advice from a qualified attorney for your company and its particular attenuating facts. This content may be considered attorney advertising in some states.