Delaware Supreme Court Reinforces the Importance of Precision in Drafting ADR Provisions in Merger Agreements

Key Takeaways

• Arbitration covers earn‑out calculation and related bad‑faith claims
• Delaware courts enforce parties’ chosen dispute‑resolution mechanisms
• Ambiguous ADR language invites threshold litigation and higher costs
• Dealmakers must explicitly define disputes reserved for courts versus arbitrators

Pulse Analysis

In M&A transactions, earn‑out provisions are a common way to bridge valuation gaps, but they also create fertile ground for post‑closing disputes. The Fortis Advisors v. Stillfront case illustrates how a seemingly narrow arbitration clause—originally intended to resolve accounting calculations—can be interpreted to cover broader claims of bad‑faith conduct. By anchoring its analysis in the parties’ language and prior precedent, the Delaware Supreme Court signaled that the substance of a dispute, not its label, determines arbitrability.

The court leaned heavily on the Viacom International precedent, which held that any issue affecting the calculation of an earn‑out, including what financial data to consider, falls within the arbitrator’s remit. This approach aligns Delaware’s stance with federal policy favoring the enforcement of agreed‑upon dispute‑resolution mechanisms. Practitioners now have clearer guidance that arbitration clauses must be drafted with an eye toward the full spectrum of potential disagreements, especially when earn‑out metrics are tied to performance thresholds.

For dealmakers, the practical takeaway is straightforward: precision in ADR drafting is no longer optional. Agreements should expressly delineate which claims—such as breach of covenant or bad‑faith allegations—are subject to arbitration and which remain for court adjudication. Including detailed definitions of the decision‑maker, the scope of disputes, and any carve‑outs can prevent costly threshold litigation and preserve the efficiency that arbitration promises. As more high‑profile deals adopt similar earn‑out structures, this decision will likely shape the standard template for ADR provisions across the industry.