Last week, in Viasat, Inc. v. L3Harris Technologies, Inc. (Del. Ch.; 9/26), the Chancery Court addressed motions for summary judgment in a post-closing purchase price adjustment dispute. The asset purchase agreement provided that any dispute regarding the working capital adjustment would be resolved by an independent accounting expert. When the expert largely resolved the disputed items in buyer’s favor, the seller sued seeking to overturn those judgments on the basis that they were inconsistent with the APA.
The APA established a three-tier hierarchy of accounting principles for calculating adjustments to Working Capital and clarified that the “Reference Statement of Working Capital” shall “take precedence” over GAAP.
Viasat contends that Grant Thornton impermissibly interpreted the legal scope of the “shall take precedence” clause by proceeding to consider GAAP (Tier 2) after concluding that Viasat complied with the Reference Statement (Tier 1) as to the three disputed items. After doing so, Grant Thornton rejected Viasat’s calculations for non-compliance with GAAP, flipping the outcome to L3Harris. L3Harris counters that because the Reference Statement and GAAP are in different tiers, Grant Thornton properly sought to satisfy both requirements when possible. L3Harris also contends that Grant Thornton’s interpretation of certain APA terms is subject to manifest error deference.
On these questions, Vice Chancellor Will sided with Viasat.
L3Harris’s argument that the court should defer to Grant Thornton’s interpretation of the “shall take precedence” clause lacks merit. To be clear, the court defers to the expert’s accounting determinations—such as whether an item constitutes a “loss” or an “account receivable.” But Grant Thornton approached the Accounting Principles as a checklist and evaluated whether Viasat’s calculations complied with the Reference Statement and also with GAAP. Whether that approach is consistent with the text of the APA presents a pure “question of contract interpretation, and therefore, of law” that requires no specialized expertise. Grant Thornton’s interpretation of the “shall take precedence” clause is afforded no deference.
L3Harris’s reading of the “shall take precedence” clause—like Grant Thornton’s interpretation—conflicts with the plain terms of the APA. Black’s Law Dictionary defines “precedence” as “[g]enerally, the quality, state, or condition of going before something else according to some system of priorities.” Applied here, it means that if the Reference Statement resolves an issue, the inquiry ends. If the Reference Statement and GAAP produce conflicting outcomes, the Reference Statement is prioritized and controls [. . .]
Finally, L3Harris insists that this reading of the “shall take precedence” clause is absurd because no reasonable buyer would agree to an approach contrary to GAAP. “An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract.” It is not absurd, however, for sophisticated parties to negotiate bespoke accounting metrics that depart from GAAP to allocate risk in a post-closing true-up. That L3Harris now wishes it had negotiated differently is of no consequence. “Parties have a right to enter into good and bad contracts, the law enforces both.”
Ultimately, Vice Chancellor Will determined that Grant Thornton misapplied the three-tier hierarchy set forth in the APA with respect to one disputed adjustment because the first tier of the hierarchy, not GAAP, applied. For two other adjustments, she found that it was appropriate that the inquiry didn’t end with the first tier.
Disputed Items 2 and 3 present a different situation. For each, the Reference Statement supplies a procedural mechanism for evaluating an adjustment but, unlike Disputed Item 1, lacks a definitive substantive constraint. For both Disputed Items 2 and 3, the Reference Statement does not fully resolve the disputed issue. Tier 1 is therefore not determinative, meaning that Tier 2—GAAP—applies under the Accounting Principles’ hierarchy.
Last week, in ACON Igloo Holdings, LLC v. Dometic Corporation (Del. Ch.; 9/26), the Chancery Court resolved an earnout dispute arising from Dometic Corporation’s 2021 acquisition of Igloo Acquisition Holdings Corporation (the cooler company) from a private equity firm. This case involved facts similar to the decision I blogged about yesterday, but with a better outcome for the continuing CEO, who discussed but did not pursue actions that might have maximized the earnout at the expense of long-term value.
The agreement contemplated a contingent payment dependent on hitting an EBITDA target by year-end 2022. When it became apparent that Igloo wasn’t going to make the target, its continuing CEO “presented Dometic with a binary choice between strategies he titled ‘Deliver Earnout’ and ‘Optimize Long Term Value.'” (Hm…) At that point, Dometic’s leadership reminded him that “any short-term measures to achieve the earnout had to remain consistent with Igloo’s past practices.”
Eventually, the PE firm seller filed suit alleging that the buyer breached the purchase agreement and the implied covenant “by interfering with Igloo’s ability to operate in the ordinary course during the earnout period.” In a post-trial decision, the Chancery Court disagreed.
To show that Dometic breached the Ordinary Course Covenant, ACON focuses on Vargues’s October 23 email to Allen. ACON contends that the email barred Allen from taking any “short term actions” including “customer campaigns with discounted prices.” “After the email,” Allen was allegedly deprived of “reasonable authority to run the daily operations . . . consistent with the past practices of ACON” because his “team was not permitted to move forward with its planned sales programs and other short-term actions to achieve its EBITDA [t]arget.” ACON’s reliance on this email is misplaced.
This email was not a bar on Allen’s authority to operate Igloo consistently with its past practices before the acquisition. Vargues merely reminded Allen and Peak that the Purchase Agreement required Igloo’s business to be conducted during the earnout period “in the ordinary course of business consistent with past practices.” He further advised them that any short-term measures contradicting the principle stated in the previous sentence (i.e., measures that were not in the ordinary course of business and consistent with past practice) must be approved by Dometic.
The trial record demonstrates that Allen’s proposed measures were not ordinary course actions consistent with past practices. They were last-ditch efforts coordinated with ACON and its counsel to either achieve the earnout through unusual pricing and sales strategies or force a renegotiation. The very titles of Allen’s scenarios—“Deliver Earnout” and “Optimize Long Term Value”—make that plain.
Ultimately, the continuing CEO never implemented the plan to maximize the earnout. From what I can tell, there was talk of shutting down promotions or discounts completely to force a renegotiation of the earnout, but no action on that plan either. So, while the buyer made counterclaims in this case, they were for tortious interference with confidentiality agreements. And while the court agreed that some confidential information was inappropriately shared with the PE firm seller, it also found that the buyer had not proven an injury.
Last week, in In re Saama Technologies Litigation(Del. Ch., 9/26), the Delaware Chancery Court not only rejected a founder’s claim for an earnout payment but also found that he acted in bad faith and breached his fiduciary duties in attempting to maximize the earnout, awarding the defendant buyer $7.3 million in damages for harm the plaintiff caused to its software business. Paul Weiss, which represented the defendant buyer, The Carlyle Group, in the litigation, believes this “is likely the first time a buyer defendant has both defeated earnout claims and won damages on a counterclaim in the Court of Chancery.”
Target company, Saama Technologies, which operated a clinical data platform, was acquired by The Carlyle Group in 2021. Earnout payments were dependent on hitting a revenue threshold and annual recurring revenue bookings that the founder and sellers’ representative knew were difficult to achieve.
After signing the Merger Agreement, Katta accelerated Saama’s strategy to “aggressively win business” and “sell anything by the end of the year” to achieve the earnout. Certain employees were offered “72-27 bonuses” based on their contribution to ARR Bookings. Katta told VP of Customer Success Gondhali that he needed to “aggressively” push the “72-27 goals” or risk being replaced, since Katta needed someone “who [could] drive this upwards and onwards.”
Katta’s plan to achieve the earnout had two main components. First, Saama abandoned its historical pricing discipline […] Second, Katta directed his teams to rewrite contracts to artificially maximize ARR […] [M]any of the […] products sold to customers either did not exist or were in early stage development.
When the earnout statement was received, The Carlyle Group formally objected after PwC’s review questioned the revenue recognition practices reflected in the earnout statement. The business deteriorated post-closing, in part due to the founder’s overcommitments. The founder commenced litigation, and defendants made counterclaims related to the merger agreement’s express terms, the implied covenant and breach of fiduciary duty. As Paul Weiss notes:
Following a five day trial in March 2026 Vice Chancellor Lori Will found that Carlyle’s objection to making the earnout payment was “substantively correct” and made in good faith, and that Katta was “singularly focused on the earnout,” leading him to manipulate contracts, offer unprecedented discounts, and sell products that did not yet exist in pursuit of his goal, “culminat[ing] in an unsustainable trajectory that impaired Saama’s product business.” As the court held, this “was not a flawed business strategy; it was bad faith.” Accordingly, the court entered judgment in Carlyle’s favor on Katta’s claims and granted Carlyle $7.3 million for Katta for his bad-faith efforts to secure the payment.
It makes you wonder whether the founder made himself worse off by filing the lawsuit for the earnout claim. This decision reminds us that earnout disputes may not be purely contractual and that fiduciary obligations underlie a seller’s post-closing conduct when that person continues to manage the business.
Seyfarth Shaw recently published the 12th edition of its “Middle Market M&A SurveyBook,” which analyzes key contractual terms for over 160 middle market (i.e., purchase price of less than $1 billion) private target acquisition agreements signed in 2025 and the first half of 2026. Check out the full survey for info on trends in private target acquisition agreements. For example, they found that earnouts were more common in this latest survey set but the value tied to the earnouts had moderated a bit.
Of the deals surveyed in 2025/2026, 19% included earnouts, as compared to 13% in 2024/2025. In addition, of the deals surveyed in 2025/2026 with earnouts:
– 15% of such deals provided for earnout amounts of 50% or more of the purchase price (as compared to 45% in 2024/2025).
– 67% of such deals provided for earnout amounts between 10% and 50% of the purchase price (as compared to 30% in 2024/2025).
– 18% of such deals provided for earnout amounts less than 10% of the purchase price (as compared to 25% in 2024/2025).
The shift toward earnouts falling between 10% and 50% of the purchase price, rather than 50% or more, suggests that while earnouts became more common in 2025/2026, they are also being structured with more moderate stakes tied to future performance. This is generally a more balanced position for sellers, as it reduces the share of total consideration contingent on post-closing performance while still preserving (and increasing the use of) the earnout as a deal mechanism.
When the FTC issues an HSR Second Request, it may subsequently determine to modify that request if it “determines that a less burdensome request would be consistent with the needs of the investigation.” Last week, the FTC amended Section 2.20(b)(3) of its Rules of Practice to clarify that it may take into account all “relevant factors” in determining whether to modify the request.
The amended rule specifies that relevant factors may include “timing agreement negotiations, the competitive issues involved, the manner in which information and documents are maintained by the recipient, the type of information available to the recipient, the relative burdens to the recipient(s) of producing the requested information, and whether a less burdensome request would be consistent with the needs of the investigation.” This Gibson Dunn memo discussing the amendments offers some key takeaways for dealmakers. These include:
Greater Transparency in Second Request Negotiations. The amended rule codifies factors FTC Staff may consider when negotiating Second Request modifications, providing parties with a clearer framework for engaging with Staff on scope and burden. Notably, the amended rule now expressly states the linkage between modifications and timing agreements—a concept that has long been applied by FTC Staff but had not been codified until now. Parties and their counsel can now point to the enumerated factors—including the relative burden of production and timing agreement negotiations—when advocating for modifications that narrow the scope of a Second Request.
Proactive Engagement with FTC Staff Remains Critical. Parties receiving Second Requests should engage FTC Staff early and proactively regarding the scope of production. The codified factors, particularly those relating to how information and documents are maintained and the relative burdens of production, may provide avenues for productive dialogue about narrowing or tailoring requests.
The memo points out that the amendment applies only to FTC-issued Second Requests, but that it represents a continuation of updates to Second Request procedures by both the FTC & the DOJ. It also notes that substantive standard for the information that the FTC may seek through the Second Request process remains unchanged.
Last month, Meredith blogged about Verisk Analytics v. ExactLogix, (Del. Ch.; 8/26), in which the Delaware Chancery Court held that because a prospective buyer’s actions were the “primary cause” of the FTC issuing a second request that prevented the HSR waiting period from expiring prior to the “drop dead” date, it could not terminate the merger agreement. The Court further ordered the buyer to continue using commercially reasonable efforts to obtain antitrust clearance and to close the transaction if it was obtained.
This Cooley blog says that the decision and the Chancery Court’s approach to the specific performance remedy are sufficient to take specific performance clauses out of the realm of boilerplate and into the boardroom. This excerpt focuses on what the Court did not find regarding the buyer’s conduct in reaching its decision and crafting its remedy, and the implications of that for buyers and their boards:
The striking part is what the court did not find. This was not a classic buyer’s-remorse case where the purported termination was a way to get out of a deal that the buyer regretted post-signing. The court found virtually no evidence that Verisk intended to scuttle the acquisition. Verisk met with the FTC nearly 30 times, hired experienced advisers and lobbyists, and spent almost $8 million responding to the agency.
Verisk lost anyway. Under the language the parties negotiated in the merger agreement, an intentional business decision terminating negotiation of an enhanced integration with a competitor of AccuLynx, was enough to eliminate Verisk’s right to validly terminate the merger agreement if that decision was the “primary cause” of the failed closing condition. This was so, even if that decision was not made in bad faith, not an action constituting a breach of the agreement and not undertaken as a deliberate effort to kill the deal.
For boards and CEOs, that makes Verisk more important than another bad-buyer morality tale. It shows that ordinary post-signing conduct can have extraordinary contractual consequences. A key question that board members should ask their counsel before signing is now: “If the transaction encounters obstacles to closing, what are each party’s continuing performance obligations?” Well-seasoned outside counsel should be able to give precise rationale for each provision’s language and how they interrelate and ensure that the rules of the road between signing and closing are communicated all the way down the chain.
Last week, in Gendreau v. Movora, (Del.; 9/26), the Delaware Supreme Court affirmed in large part a prior Superior Court decision holding that an indemnification provision in a membership interest purchase agreement that required the sellers to indemnify the buyer for post-closing willful misconduct was enforceable.
Under the terms of the purchase agreement at issue, the sellers agreed to indemnify the buyer for certain pending patent litigation involving the business sold as part of the transaction. The patent litigation settled some time after closing, and the buyer sought indemnity from the sellers for the full amount of its settlement.
While acknowledging responsibility for the portion of the damages attributable to pre-closing conduct, the sellers argued that the indemnification provisions of the purchase agreement did not extend to damages attributable to the buyer’s post-closing conduct. It also argued that permitting the buyer to obtain indemnification for losses caused by its own post-closing actions would encourage willful misconduct and violate public policy.
The Delaware Supreme Court rejected this argument. It observed that the language of the indemnification provision was broad, and obligated the sellers to “’indemnify, defend and hold harmless’ the Buyers from ‘any Damages suffered by the Company as a result of, or in connection with, the Patent Litigation[.]'” In turn, the term “Patent Litigation” was also broadly defined. As a result, the Court found the sellers’ efforts to distinguish between pre- and post-closing damages inappropriate:
[Sellers’] pre- and post-closing product divide is inconsistent with the breadth of the MIPA indemnification provision. “Patent Litigation” is defined broadly as the Florida federal court litigation, not any of its specific claims or defenses. As litigants (and contracting parties) know, it is not uncommon for plaintiffs to amend complaints to raise new claims arising out of post-complaint events. And as patent litigants know, it is not uncommon for multiple patents to issue at different times that cover the same subject matter and then be incorporated in pending litigation.
The Court also said that it did not believe that enforcing the post-closing indemnity provision would be commercially unreasonable because it incentivized buyers to “sell infringing products with impunity.” It cited expert testimony indicating that dealmakers can deal with this kind of problem through the customary “my watch, your watch” approach, which limited a seller’s indemnity obligations to pre-closing activities. However, as the Court noted, the language of the purchase agreement departed from this standard approach:
That approach normally appears in “standard language,” which was not present in the MIPA. Instead, the MIPA allocated all of the post-closing liability risk to the Sellers. Claude “cannot now obtain from the courts a right that [he] failed to achieve at the bargaining table.” The indemnity covered the sale of pre- and post-transaction devices.
In support of their argument that the indemnification provision was unenforceable as against public policy because it permitted willful patent infringement, the sellers cited the Superior Court’s 1983 decision in James v. Getty Oil, which stated that a “contract to relieve a party from its intentional or willful acts is invariably held to be unenforceable as being against clear public policy.”
The Court rejected this argument, and agreed with the trial court’s conclusion that the James case had not gained traction with Delaware courts – including the Supreme Court – in the years since it was decided:
Our post-James decisions have not, in any specific context, barred risk-shifting for willful conduct. In RSUI Indemnity Company v. Murdock, for example, we declined to hold that insurance is unavailable as a matter of public policy for losses tied to willful acts. We found support for this conclusion in the Delaware General Assembly’s authorization for corporations to obtain broad D&O policies under 8 Del. C. § 145(g).
We held that two public policies reinforced our conclusion that public policy does not bar coverage for losses arising from fraudulent conduct: Delaware’s policy of compensating innocent victims and its policy for enforcing freedom of contract. Moreover, we emphasized that “deferring to the parties’ contractual choices and to the legislature’s prerogative in matters of public policy” was a “wise” approach.
In the absence of a clear statement of public policy from the General Assembly related to willful conduct, we defer to Delaware’s public policy favoring freedom to contract. Accordingly, enforcing the Indemnification Provision in this situation does not violate public policy.
In Castle Tire Disposal v. Liberty Tire Services of Ohio, (Del. Ch.; 9/26), Vice Chancellor Will addressed a seller’s claim that a third party’s purchase of a buyer’s indirect parent was a “change of control” of the buyer that triggered an obligation to make a contingent value payment to the seller under the terms of an asset purchase agreement. Citing the language of the agreement and the principle of corporate separateness, the Vice Chancellor rejected that argument.
Under the terms of the asset purchase agreement, the seller was entitled to a contingent value payment upon the occurrence of a change of control, which the agreement defined as follows:
[T]he occurrence of any of the following events: (i) an acquisition of Buyer (or its successor) by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of any Seller), or (ii) a sale of all or substantially all of the Assets (collectively, a “Merger”), so long as in either case Buyer’s equityholders of record as of immediately following the Closing will, immediately after such Merger, hold less than fifty percent (50%) of the voting power of the surviving or acquiring entity.
Vice Chancellor Will observed that this language requires two events – a qualifying Merger and the requisite reduction in the voting power held by the buyer’s equityholders of record. In order for there to be a qualifying merger, a transaction must involve either “an acquisition of Buyer” or “a sale of all or substantially all of the assets.” She concluded that the transaction involving the third party’s acquisition of the buyer’s parent met neither of these criteria.
In rejecting the seller’s argument that the transaction with the buyer’s parent involved a sale of the buyer, she noted that the agreement limited a qualifying merger to the “acquisition of Buyer,” and defined that term quite specifically and in a manner that necessarily excluded other entities from the definition. She noted that Delaware corporate law is premised on the idea that “separate legal entities should be respected,” and that because the seller chose to contract with a specific legal entity, that distinction should not be disregarded.
She similarly rejected the seller’s contention that the acquisition of the buyer’s parent involved a sale of substantially all of the buyer’s assets. Again citing the principle of corporate separateness, the Vice Chancellor said that “’because a subsidiary is a separate entity, a parent and its subsidiary are not regarded as a single economic unit[.]’ The sale of a parent company’s stock is not a transfer of its downstream subsidiary’s assets.”
SRS Acquiom recently released its 2026 M&A Earnouts and Claims Study. The study collectively analyzes 1,174 private-target M&A deals that closed between 2009 and 2026 (most of which closed in the last three years). The study reviews earnout outcomes, claims frequency dispute resolutions and other post-closing matters that impact the economics of M&A transactions. Here are some of the key findings:
– While 52% of deals with earnouts resulted in at least a partial payment, the median earnout achievement rate was just 17% of the maximum potential amount.
– Earnout success is closely tied to performance period length, with shorter-duration earnouts producing significantly stronger achievement rates. Earnouts with performance periods of one year or less achieved a median earnout achievement rate of 66%, compared to 36% for earnouts with performance periods exceeding three years.
– Post-closing indemnification claims activity differs meaningfully depending on whether a deal includes RWI. 28% of deals analyzed experienced at least one post-closing indemnification claim, and RWI-backed deals were 29% more likely to experience a claim than deals without RWI. Among deals with a claim, those with RWI generally saw a greater percentage of escrow claimed than deals without RWI.
– Tax-related matters remain the most common source of RWI claims, and accounted for 38% of all breach of representations and warranties claims analyzed in the study.
The other major news from last week—which has been a bit overshadowed by the proposal to rescind Rule 14a-8—is the SEC’s proposal to modernize the proxy solicitation rules. Among other changes, the proposal would:
– Eliminate the requirement to provide a so-called “glossy” annual report;
– Eliminate the 20-business day deadline when documents are incorporated by reference in a proxy statement;
– Repeal the requirement to file Notices of Exempt Solicitation; and
– Shorten the broker search period from 20 business days to 5.
Many law firm memos have highlighted the practical impact that some of these procedural changes would have on M&A and activism. For example:
– Gibson Dunn suggests companies consider commenting on “whether eliminating the Notice of Exempt Solicitation submission requirement unreasonably reduces a company’s visibility into activist communications.”
– Fenwick and Alston & Bird both stress that the shortened broker search window would improve deal certainty and reduce “empty voting.” From Fenwick:
“The shortened broker search period could affect deal and proxy contest timing [. . .] Companies pursuing mergers or other transactions requiring a shareholder vote, or facing a contested election, have had to build the current 20-business-day period into their record-date planning. Under the proposed rules, that period could shrink to as little as five business days, allowing companies to move toward a vote more quickly and reducing the risk that market volatility, a new bidder, or other external developments arise during the search period. The SEC acknowledges that this could leave dissident shareholders less time to build a position or organize support before the record date, but notes that the current process is non-public, so shortening it may also reduce an existing informational advantage some dissidents hold over investors—’so a cost to dissident shareholders may also represent a benefit to other market participants.
The shorter broker search period could also affect share lending tied to voting. A narrower window could reduce opportunities for “empty voting” (voting borrowed shares without a corresponding economic interest), but the SEC notes that it could equally leave institutional holders less time to recall loaned shares in order to vote them. Companies and institutional investors may want to consider both effects if the rule is adopted.”
– Alston & Bird notes that the SEC also proposed eliminating the 20-business-day requirements in Forms S-4 and F-4.
– Cooley notes that, since Corp Fin’s January 2026 guidance prohibiting voluntary Notices of Exempt Solicitation, “market participants have already turned increasingly to press releases, other media and third-party platforms to publicize campaigns – all still subject to the proxy rules’ antifraud provisions. If the notice requirement is eliminated entirely, companies will need to monitor these channels with greater frequency rather than principally relying on EDGAR to learn they are the target of an exempt solicitation.”