Long after a business is sold, the parties may find themselves litigating any number of aspects of the deal.  In recent years, post-closing disputes involving “earnout” provisions have become increasingly common in Delaware.  Under a typical earnout arrangement, the seller of the business receives a portion of the purchase price up front, and it receives the remaining portion (the earnout payment) only if the business meets some financial or performance metric by a specified time after the sale.

This earnout arrangement creates a potential incentive problem.  Because the buyer controls the business after closing, it may have the practical ability to influence whether the business reaches the target that triggers the earnout payment to the seller.  To reduce that risk, the seller often negotiates for assurances in the purchase agreement, such as a promise that the buyer will not interfere with the business to prevent the earnout-payment trigger.  But if the seller believes that those assurances have proven inadequate, then the parties may find themselves in court.

Such was the case in a recent decision issued by the Delaware Superior Court’s Complex Commercial Litigation Division in Prosser v. PharmaLogic Holdings Corp., C.A. No. N25C-08-284 MAA CCLD (Del. Super. Ct. July 7, 2026), which granted in part and denied in part the buyer’s motion to dismiss.  In that decision, the Superior Court addressed several contractual provisions that regularly arise in earnout disputes, highlighting potential issues that business leaders and transaction planners may be wise to consider as they craft earnout provisions in purchase agreements.

Background

Rodney Prosser, Frank Ruddy, and Kok Wayne Wong founded a nuclear pharmacy business.  As the three co-founders approached retirement, they decided to put the business up for sale.  On March 20, 2020, they entered into a Securities Purchase Agreement (“Agreement”) with PharmaLogic Holdings Corp.  The deal closed on January 6, 2021.

The purchase price was $30 million plus a potential earnout.  Under the Agreement, the sellers would receive an additional payment if the business met specified EBITDA (earnings before interest, taxes, depreciation, and amortization) targets during the earnout period.  The threshold most relevant to the dispute was $7 million in EBITDA, with EBITDA between $7 million and $7,499,999 triggering a $6.6 million earnout payment.

The Agreement also restricted how the buyer could run the business during the earnout period.  In substance, the buyer agreed to act in good faith, operate the business in a manner not designed or intended to impede or interfere with EBITDA, and not take actions intended to decrease EBITDA.  Once the earnout period ended, the buyer had to prepare an earnout statement in good faith and provide reasonably detailed supporting documentation.

According to the sellers, the buyer later reported EBITDA of $6.8 million—$200,000 below the $7 million threshold for the $6.6 million payment.  As alleged, the buyer’s earnout statement was a single-page document unaccompanied by analysis, and later disclosures showed significantly higher bad debt, a new 401(k) match, sales bonuses, and more than $170,000 in additional expenses from switching to a new supplier.  The sellers also alleged that the buyer had stopped keeping site-specific financial records, which made it more difficult to evaluate performance by location.

What the Court Held

The buyer moved to dismiss, arguing in part that the dispute belonged before an independent auditor rather than the court.  At this early pleading stage, the court was required to accept well-pleaded allegations as true and deny dismissal if recovery was reasonably conceivable.  The court rejected the auditor argument as to the sellers’ principal breach-of-contract claim.

The Agreement’s language drove that result.  As the court explained, the Agreement provided that the auditor’s role was limited to disputes over the “amounts” in the earnout statement. But the sellers were alleging more than a math error or accounting recalculation: their theory was that the buyer had made recordkeeping, accounting, and operational changes for the purpose of depressing EBITDA and avoiding the earnout.

That difference mattered.  Although an auditor can perform calculations, the sellers’ claims turned on legal and state-of-mind questions about whether the buyer acted with an improper purpose under the Agreement.  Because the Agreement did not clearly authorize the auditor to decide those broader issues, the court allowed the breach claim to proceed.

The court also held that the sellers had stated a plausible claim at the pleading stage.  The timing and economics of the alleged conduct were central: the sellers claimed that the buyer avoided a $6.6 million earnout by keeping EBITDA $200,000 below the contractual threshold.  At this early stage, allegations that the buyer changed recordkeeping practices, bad-debt accounting, employee benefits, sales compensation, and supplier arrangements to avoid a larger earnout payment were enough to move the case into discovery.

The court separately declined to dismiss the breach claim as time-barred.  Although the sellers filed more than three years after the earnout-period restrictions expired, the court held that discovery was needed to determine when the sellers were on inquiry notice of the alleged wrongdoing, including what information they actually received and what Mr. Wong knew from serving in his limited post-closing role at the business.

Yet the sellers did not prevail across the board.  On the declaratory-judgment claim, the court held that the sellers could not rely on the buyer’s alleged material breach to avoid the Agreement’s dispute-resolution process after they continued to operate under the Agreement.  But because the court had already held that the core books-and-records and earnout-statement issues were not assigned to the auditor, it directed the parties to meet and confer about how the unresolved portion of that claim should proceed.

The court also dismissed the sellers’ claims for tax refunds under the implied covenant of good faith and fair dealing and unjust enrichment.  In the court’s view, tax refunds were foreseeable, the Agreement addressed tax matters in detail, and the court would not use implied or equitable doctrines to rewrite the parties’ bargain to add a refund right they had not included.

Practical Takeaways

• 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.
• Both sides should address tax refunds and overpayments directly in the purchase agreement. If the issue was foreseeable during negotiations, Delaware courts may be reluctant to use implied or equitable doctrines to supply a refund allocation after the fact.
• Do not assume information rights or post-closing employee access will resolve limitations issues at the pleading stage.  The court’s analysis turned on what information the sellers actually had and when that information put them on inquiry notice of the alleged breach.

Why It Matters

Prosser is a useful reminder that earnouts can generate serious post-closing friction, especially when the buyer controls the business and the seller’s additional compensation depends on future performance.  Clear drafting on operating covenants, financial records, dispute procedures, tax treatment, and information flow can reduce the risk of expensive litigation later.  For parties considering a transaction that includes an earnout or another contingent payment, careful drafting at the outset can prevent difficult disputes after closing.