September 16, 2026
Earnouts: Lessons from a Recent Delaware Superior Court Decision
Fox Rothschild recently blogged about the Delaware Superior Court’s decision in Prosser v. PharmaLogic Holdings Corp, (Del. Super.; 7/26), which involved several common contract issues that arise in earnout disputes.
The case arose out of the sale of a nuclear pharmacy business by its founders under the terms of a securities purchase agreement. That agreement called for a $30 million upfront payment plus a potential earnout under which the sellers would receive a $6.6 million earnout payment if EBITDA during the earnout period reached at least $7 million. The agreement also imposed operational restrictions on the buyer, requiring it to act in good faith and prohibiting actions intended to impede or reduce EBITDA.
The buyer ultimately reported $6.8 million in EBITDA during the earnout period, narrowly missing the $7 million milestone. The sellers sued, alleging that the buyer intentionally depressed EBITDA through a variety of accounting, recordkeeping, compensation, and operational changes to the business. The sellers also alleged that the buyer failed to provide adequate support for its EBITDA calculation and impaired their ability to evaluate performance by changing certain financial reporting practices.
The Court allowed most of the sellers’ breach-of-contract claims to proceed. It rejected the buyer’s argument that because the sellers were challenging its EBITDA calculations, the agreement required the dispute to be adjudicated by an independent auditor. The Court concluded that the sellers were not just challenging the EBITDA calculations, but were also alleging that the buyer deliberately manipulated operations and accounting practices to avoid paying the earnout.
Since these claims involved issues beyond simple accounting disputes, the Court concluded that they were outside the scope of the auditor’s authority under the agreement. The Court also rejected the buyer’s contention that the seller’s claims were time barred, concluding that further discovery was necessary to determine when the sellers were on notice of the buyer’s alleged wrongdoing.
This excerpt from the blog highlights some of the key takeaways from the case for parties considering including an earnout in their deals:
– Spell out who decides earnout disputes—and which issues go to that decision-maker. If the parties want an auditor to resolve disputes over document access, recordkeeping, operational decisions, or intent-based allegations, the agreement should say so expressly.
– Sellers should negotiate concrete protections for how the business will be run during the earnout period. A general good-faith obligation helps, but specific operating, accounting, and recordkeeping guardrails can reduce uncertainty and lower the odds of later litigation.
– Buyers should think carefully before making operational changes during the earnout period. Even ordinary business decisions can create litigation risk if their timing or effect suggests an effort to reduce an earnout payment.
– John Jenkins
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