DE Supreme: Accountant May Resolve Earnout Claim Involving No Calculation

Why It Matters

The ruling expands arbitrators' authority over earn‑out disputes, reshaping risk allocation in M&A contracts and prompting stricter drafting to control dispute‑resolution outcomes.

Key Takeaways

• Court treats “calculation” clause as arbitration scope
• Accounting firm can decide legal earn‑out disputes
• Parties must explicitly define arbitrator vs expert roles
• Broad ADR language may broaden decision‑maker authority
• Drafting tips include default mechanisms and issue segregation

Pulse Analysis

Earn‑out provisions are a frequent flashpoint in post‑closing M&A litigation, especially when parties rely on alternative dispute‑resolution (ADR) clauses to manage disagreements. The Delaware Supreme Court’s decision in Fortis Advisors v. Stillfront clarifies that language tying disputes to the “calculation of the earn‑out amount” can be interpreted broadly, granting an accounting firm full arbitrative authority. This interpretation goes beyond pure numerical disputes, encompassing legal questions such as bad‑faith conduct and covenant compliance, thereby elevating the arbitrator’s role from a technical expert to a quasi‑judicial decision‑maker.

The court’s analysis underscores a critical distinction between arbitration and expert determination. While expert determinations are typically limited to technical accounting issues and lack binding effect, arbitration carries finality and the power to resolve substantive legal matters. Practitioners now face heightened pressure to draft ADR provisions with crystal‑clear terminology, specifying whether the decision‑maker acts as an arbitrator or an expert, and delineating the categories of disputes each can address. Ambiguous clauses risk expanding the arbitrator’s remit, potentially leading to outcomes that parties did not anticipate, as demonstrated by the buyer’s favorable award in this case.

In response, M&A counsel should adopt a layered drafting strategy: define the decision‑maker’s role, enumerate the issues subject to arbitration versus expert determination, and include fallback mechanisms for ambiguous scenarios. Provisions that grant “all” or “any” dispute‑resolution authority tend to be read as arbitration, while limited‑scope language signals expert determination. By segmenting financial metrics from broader legal questions and embedding default arbitration or expert clauses, parties can better manage post‑closing risk and preserve strategic control over earn‑out outcomes. This nuanced approach will likely become standard practice as Delaware courts continue to refine ADR interpretations.