The deposition is the part nobody warns the founder about. Two years after the closing dinner, the wire is still short by fifteen million dollars, and the founder is in a windowless conference room being walked through her own emails by a partner she has never met. The questions are surgical. Why did you cut the sales rep in Atlanta in Q3? Why did the price of the new SKU come down by eight percent? Was the integration plan you presented to the board the same plan that was actually executed? Each answer is a brick in a wall the buyer is building — a wall that says the earnout target was missed because of the seller’s choices, not the market’s.
I have watched a version of this scene more times than I would like. The fight is almost never about the math. The math is settled in the third meeting. The fight is about a single phrase in the purchase agreement: commercially reasonable efforts. That phrase, or some lightly edited cousin of it — best efforts, reasonable best efforts, ordinary course consistent with past practice — is the contractual switch that decides whether the buyer was obligated to run the acquired business in a way that gave the earnout a fair shot at hitting, or whether the buyer was free to optimize the combined enterprise and let the milestone die on the vine.
If you are a deal lawyer reading this, you already know that Delaware courts have spent the last several years writing the most expensive case law in the M&A canon on this exact phrase. If you are a founder reading this, you should know that the language your lawyer treats as boilerplate at 2 a.m. on signing night is the single most consequential paragraph in the document for what happens to the back end of your sale price. This post is for both audiences.
Why “commercially reasonable efforts” became a battleground
Earnouts are a structural compromise. The buyer cannot pay the seller’s price today because the buyer does not believe the seller’s projections. The seller cannot accept the buyer’s price today because the seller does believe the projections. So the parties split the difference: a portion of the price is paid at closing, and a portion is contingent on the business hitting milestones in the year or two after the deal. On paper, this aligns incentives. In practice, it creates a problem that takes Chancery five years to work out — the buyer now controls the levers that move the milestones, and the seller is no longer in the building.
The contract tries to bridge this with a covenant. The buyer agrees to operate the acquired business in a particular way during the earnout period — sometimes “consistent with past practice,” sometimes “in good faith,” and almost always “using commercially reasonable efforts” to achieve the milestones. That covenant is the seller’s only meaningful protection. And it is the covenant the buyer’s deal lawyers spend the most time softening on the way to signing.
The Delaware case law: Snow Phipps and Himawan
Two cases anchor the modern Delaware approach. The first is Snow Phipps Group v. KCAKE Acquisition, a 2021 Chancery decision arising not from an earnout but from a buyer’s “reasonable best efforts” obligation to close a deal during the COVID disruption. Vice Chancellor Laster’s analysis there has been imported wholesale into earnout disputes. The lesson — and it is a lesson buyers do not love — is that a “reasonable best efforts” or “commercially reasonable efforts” clause is not a passive non-sabotage promise. It requires the obligated party to take affirmative steps that a similarly situated, reasonable participant in the relevant industry would take to achieve the contractual objective. The standard is objective. The buyer’s subjective business judgment is given weight, but not infinite deference.
The second is Himawan v. Cephalon, a long-running earnout battle that produced multiple opinions and ultimately a substantial award against the buyer. The takeaway from Himawan is that documentary evidence kills earnout defenses. Internal emails in which the buyer’s executives weigh whether to fund the acquired product line versus a competing internal product line — and choose the internal product line because the earnout payment is “due to the legacy holders” — are fatal to a “we did our best” narrative at trial. Courts read those emails the way juries read smoking guns.
The two cases together draw a line. On one side, a buyer who genuinely operated the business as the industry would, made decisions on objective business merits, and documented its reasoning is going to win even if the milestones are missed. On the other side, a buyer whose internal communications reveal that the earnout was treated as a cost to be minimized rather than a target to be hit is going to lose, and the damages will be measured against the milestone the seller was meant to hit, not against some haircut of it. Recent Delaware awards in this category have crossed the billion-dollar mark.
What the language should actually say
The drafting question, then, is how to translate the case law into the operative covenant. The default language — “Buyer shall use its commercially reasonable efforts to operate the Acquired Business in the ordinary course consistent with past practice and to maximize the Earnout Payments” — is fine, as far as it goes. It will get the seller the protection of the case law I just described. But sophisticated sellers should push for more specificity, and sophisticated buyers should push for less.
First — the standard itself. “Commercially reasonable efforts” is the floor. “Reasonable best efforts” is a step up. “Best efforts” is the ceiling, and Delaware courts read it the way the words sound: a near-fiduciary obligation to do what is necessary to achieve the result. If you are the seller and you can get “reasonable best efforts,” take it. If you are the buyer and you can hold the line at “commercially reasonable efforts,” do.
Second — affirmative obligations. The seller should ask for specific operational commitments tied to the milestones: minimum sales-and-marketing spend, retention of key personnel for a defined period, a prohibition on combining the acquired product line with the buyer’s existing offerings in ways that obscure attribution. The buyer will resist each one. The negotiation is which subset survives.
Third — the no-action restrictions. The covenant should prohibit the buyer from taking actions intended to reduce or avoid the earnout. That sounds tautological. It is not. Without it, the buyer can argue that all of its decisions were ordinary-course business judgments and that any earnout consequence was incidental. With it, the seller has a separate hook independent of the affirmative-efforts standard.
Fourth — the implied covenant of good faith and fair dealing. Delaware reads this into every contract, but in earnout disputes it is doing real work. The seller’s lawyer should be aware that the implied covenant cannot be waived, and the buyer’s lawyer should not pretend in negotiation that an integration clause makes it go away.
The litigation profile
Earnout disputes are slow, expensive, and document-heavy. Discovery typically pulls every email, Slack message, board deck, and integration plan generated by the buyer during the earnout period. Depositions of the buyer’s product, sales, and finance leadership take days. The seller’s counsel is looking for evidence that the buyer treated the earnout as a cost to be minimized rather than a target to be pursued. The buyer’s counsel is looking to establish a clean business record — decisions documented, alternatives considered, the acquired business given a fair allocation of resources.
The cost of running this fight to judgment is rarely below $2 million in legal fees and frequently above $5 million. Settlements at twenty to forty percent of the disputed earnout are common. Sellers who go to trial on strong documentary records have been collecting close to one hundred percent. Sellers who go to trial on weak records — meaning the buyer’s emails are clean and the buyer’s processes are documented — have been collecting nothing, plus paying their own litigation costs.
For the broader negotiating dynamic between sellers and buyers on terms like this, our post on seller-friendly versus buyer-friendly deal terms covers the larger trade-space. For the litigation side specifically, our business litigation page is where this work lives at the firm.
The practical advice
If you are negotiating an earnout right now, the single most important investment is in the operating covenant. Pay your lawyer to spend three hours on those two paragraphs. The price tag on that conversation is trivial relative to the swing on the back end. If you are already in an earnout period and you are starting to suspect that the buyer is steering away from the milestone, document everything in writing — meeting summaries, requests for resources, decisions you disagree with — and engage litigation counsel before the period closes, not after. The contemporaneous record is what wins these cases.
Recent Delaware awards in earnout disputes have crossed the billion-dollar threshold, and the trend line is up. The plaintiffs’ bar has gotten very good at this work, and the cases are increasingly being run on contingency by firms that have built dedicated earnout-litigation practices. Buyers who treat earnout covenants as boilerplate are writing checks they will not see for five years. Sellers who treat them the same way are writing themselves out of money they were promised. The phrase in the middle of all of it — commercially reasonable efforts — does more work, dollar for dollar, than any other set of words in the agreement.
For the broader doctrinal context, the leading practitioner treatment of this area sits on Westlaw’s Practical Law platform; an accessible Delaware-focused starting point is the Delaware Court of Chancery opinion archive, where both Snow Phipps and the Himawan series live in full.
If you are working through an earnout covenant right now — drafting, negotiating, or beginning to suspect the buyer is steering — feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
