The choice-of-law clause in a Florida-target M&A agreement is one of those provisions that almost never gets negotiated. The buyer’s first draft says Delaware. The seller’s counsel reads it, thinks “Delaware is the M&A jurisdiction, no controversy there,” and moves on. The clause closes without comment. Eight months later, when the earnout dispute has surfaced and the buyer has taken the position that nothing in the purchase agreement prohibited the strategic reorganization that destroyed the earnout, the choice-of-law provision turns out to have been one of the most consequential paragraphs in the deal.
I had a case last year — Florida-based services target, Florida-based selling shareholder, Florida-based buyer’s operating subsidiary, three-year earnout tied to EBITDA of the acquired business unit. Delaware choice of law. Twenty-two months after closing, the buyer reorganized its operating divisions, folded the acquired business into a larger national division, and reported that the standalone-EBITDA earnout metric had become “indeterminable” and that therefore no earnout was payable. The selling shareholder sued. The case settled on the courthouse steps for less than thirty percent of what the earnout would have paid if the buyer had left the acquired business alone. The buyer’s lawyers spent the entire pre-trial period arguing that under Delaware law, the implied covenant of good faith and fair dealing did not constrain the buyer’s right to make legitimate business decisions about how to organize its own operations, even if those decisions had the foreseeable effect of zeroing out the earnout. They were largely right about the law. The settlement reflected that.
Had the choice-of-law clause said Florida instead of Delaware, the analytical posture would have been different. Not necessarily different enough to change the settlement number, but different enough that the buyer’s litigation risk profile would have looked materially worse from day one. The difference between the two jurisdictions’ implied-covenant doctrines in the earnout context is the kind of thing that gets ignored at the term sheet and becomes the entire dispute three years later.
Delaware’s narrow implied covenant in earnouts
Delaware’s implied covenant of good faith and fair dealing in commercial contracts is a real doctrine, but a constrained one. The Chancery Court has spent the past fifteen years narrowing the doctrine’s reach in earnout disputes specifically, and the line that has emerged is that the implied covenant does not impose substantive duties beyond what the express terms of the contract contemplate. If the parties did not negotiate an express commitment by the buyer to maximize the earnout payment, the implied covenant will not retroactively create one. The buyer is generally free to operate the acquired business in the manner it deems best for its own commercial interests, even where that operation has the foreseeable effect of suppressing the earnout — provided the operation is not specifically prohibited by an express covenant.
The bar the Delaware plaintiff has to clear is high. The plaintiff must identify a “gap” in the contract that the parties would have filled, had they thought to address it, with the term the plaintiff is asking the court to imply. The plaintiff must then show that the buyer’s conduct violated that implied term — not just that the conduct hurt the earnout. The standard is closer to the doctrine of frustration than to a substantive duty of fair dealing. Recent Chancery and Supreme Court opinions in the earnout space have repeatedly held that buyers’ business judgments about operating the acquired business — including reorganizations, consolidations, and changes in product or pricing strategy — do not give rise to implied-covenant claims absent specific contractual language to the contrary.
What Delaware does protect against, under the implied covenant, is buyer conduct that has no legitimate business justification and appears designed specifically to deprive the seller of the contractual benefit. That is a narrow category. Most real-world earnout disputes do not fit it, because the buyer can almost always articulate some business reason for the conduct in question, and the Delaware courts are not going to second-guess the buyer’s reasoning if a reason exists.
Florida’s broader implied covenant in commercial contracts
Florida’s implied covenant of good faith and fair dealing is also a real doctrine. It is also a constrained one. But the line Florida courts have drawn is different from the line Delaware courts have drawn, and the difference matters in the earnout context.
The Florida appellate courts have held that the implied covenant imposes a duty on a party not to act in a manner that destroys or injures the right of the other party to receive the fruits of the contract. The doctrine is sometimes traced to the Florida Supreme Court’s older commercial-law decisions, and has been applied in a series of more recent appellate opinions in contexts ranging from franchise agreements to commercial-lease percentage-rent clauses to insurance bad-faith claims. The Florida courts have been somewhat more receptive than Delaware to implied-covenant arguments where the express contract is silent but the alleged conduct strikes at the central economic bargain.
The earnout case is exactly the kind of case Florida’s broader formulation is designed to address. The selling shareholder bargained for a contingent payment tied to the performance of an identifiable business unit. The buyer took control of that business unit at closing. The buyer subsequently took actions — reorganizations, consolidations, pricing changes — that had the effect of making the contingent payment unmeasurable or de minimis. The Florida implied-covenant framework asks whether those actions deprived the seller of the fruits of the contract. If they did, and if the buyer cannot articulate a justification rooted in the express terms of the agreement, the buyer has a problem under Florida law that it would not necessarily have under Delaware law.
The Florida cases are not uniform on this. Some Florida appellate decisions have rejected implied-covenant claims on facts that would have produced the same outcome in Delaware. But the doctrinal architecture leaves more room for the seller’s argument in Florida than in Delaware, and the practical effect at the litigation-risk-assessment stage is significant. A Florida-law earnout claim is a claim the buyer’s counsel has to take more seriously at the demand-letter stage. A Delaware-law claim on the same facts is a claim the buyer’s counsel can often deflect with a motion to dismiss.
Why this matters at the drafting table
The reflexive Delaware choice in the M&A choice-of-law clause has buyer-favorable consequences in earnout disputes that the seller is not generally pricing at signing. The seller assumes Delaware law is “neutral” or “standard.” It is not neutral in earnout litigation. It is meaningfully buyer-friendlier than Florida law, and the seller is giving that up — without compensating purchase-price consideration — when the choice-of-law clause is left at “Delaware” without negotiation.
The drafting fix is not necessarily to flip the choice-of-law clause to Florida. Delaware has real advantages in M&A litigation generally — the Chancery Court is sophisticated, the docket is fast, the opinions are predictable, and the corporate-law overlay is well-developed. For most provisions of the merger agreement, Delaware is the right choice. The earnout-specific risk is the implied-covenant doctrine, not the entire body of contract law.
The cleaner fix is to draft the earnout covenant so that the substantive duty of the buyer is express in the contract rather than left to the implied covenant of whatever jurisdiction. The provision I push for in seller-side earnout drafting reads roughly as follows: the buyer covenants that it will operate the acquired business in good faith in a manner consistent with the seller’s pre-closing operation, will not take action with the primary purpose of reducing the earnout, will not reorganize, consolidate, or restructure the acquired business in any manner that materially impairs the calculability or amount of the earnout without the seller’s prior written consent, and will preserve the books and records and accounting practices necessary to calculate the earnout for the duration of the earnout period. If the seller has that paragraph, the Delaware-versus-Florida question becomes much less consequential, because the substantive protections are express rather than implied.
If the seller does not have that paragraph — and most sellers do not, because the buyer’s first draft will not contain it and the seller’s counsel does not always know to ask — then the choice-of-law clause is doing more work than either side realizes. Where the deal sits on the seller-friendly to buyer-friendly spectrum in any given provision is partly a function of the express language and partly a function of the gap-filling doctrine that the choice-of-law clause selects. The choice-of-law clause is rarely treated as a substantive provision in M&A negotiation. In the earnout context, it is one.
The forum-selection clause is a separate question
A point that often gets confused: the choice-of-law clause is not the same as the forum-selection clause. The choice-of-law clause says which jurisdiction’s substantive law governs the interpretation and enforcement of the contract. The forum-selection clause says which courts hear the dispute. A Florida-target deal might have a Delaware choice-of-law clause and a Florida forum-selection clause — meaning the dispute gets litigated in Florida courts applying Delaware law. That is a workable structure and is common in Florida deals where the seller insists on being able to litigate at home but the buyer wants the predictability of Delaware substantive law.
The Florida Complex Business Litigation sections that have been operating in several of the larger Florida circuits over the past couple of years have become a serious option for M&A dispute resolution. The judges on those dockets are increasingly experienced with commercial deal disputes, the case-management timelines are aggressive, and the rulings are starting to develop a body of practice that compares reasonably to what one would expect in Delaware. For a Florida-based seller, a forum-selection clause that picks the Complex Business Litigation section in the seller’s home circuit is a meaningful seller-friendly provision. It is also one that buyers are surprisingly willing to concede in concentrated negotiation, because the alternative is litigating a Florida dispute in Delaware Chancery, where the buyer is just as far from home as the seller.
The combination that I push for in seller-side Florida M&A — Florida law for the earnout-related provisions, Delaware law for the corporate-governance provisions, Florida forum selection in the Complex Business Litigation section — is achievable in most deals where the seller has any meaningful negotiating leverage. It requires the seller’s counsel to actually read the choice-of-law and forum-selection clauses as substantive deal terms rather than as boilerplate, and to be willing to spend negotiating capital on them. The capital is well spent. The provisions are doing work the parties did not realize they were doing, and the work is not symmetric.
What I would tell a Florida founder before they sign
Three things to do before the LOI is countersigned, in order of priority. First, draft the earnout covenants as expressly as possible. If the protections you want are in the four corners of the document, the choice-of-law fight becomes second-order. Second, do not concede Delaware law for the entire agreement without thinking about it specifically in the earnout context. A bifurcated choice — Florida law for the earnout provisions, Delaware for the rest — is unusual but defensible. Third, push for a Florida forum-selection clause that pins disputes in the Complex Business Litigation section of an appropriate Florida circuit. The seller’s home-court advantage is real, and the buyer is not going to give it up unless the seller asks.
None of this is buyer-hostile in any meaningful sense. The express earnout covenants protect both sides by reducing the scope for post-closing dispute. The bifurcated choice-of-law clause is administratively manageable. The Florida forum-selection clause may even be acceptable to the buyer if the buyer’s litigation counsel has any familiarity with the Florida bench. The negotiations are usually quick. The omission is what creates the dispute three years later. Florida-targeted M&A representation is increasingly about translating the assumed Delaware defaults into provisions that actually fit the Florida seller’s risk profile, and the choice-of-law clause is one of the cleanest examples.
If you are a Florida founder negotiating a deal where the buyer has proposed Delaware law and you are trying to figure out whether the choice-of-law clause is worth fighting over, 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.
