pleadings.25 To be properly invoked, there must be a “gap” in the contract that must be filled, and here the sellers could not point to such a gap. Lessons for Dealmakers ▪ Words matter—courts review earnout provisions pursuant to contract principles, focusing on the language of the agreement. However, when called for (such as when the language is ambiguous), courts also look to external circumstances. ▪ Specificity can help—for example, some courts (particularly in Delaware) do not see significant legal difference between statements merely requiring “commercially reasonable efforts,” “reasonable best efforts,” and “reasonable efforts.” Specifying desired requirements makes them more likely to be understood and enforced. ▪ Courts generally see “outward facing” efforts covenants, which require the buyer to act in a manner typical of similarly situated companies in its industry, as more seller friendly than “inward facing” efforts covenants, which focus on the buyer’s own practices. However, the inward facing standard may be more helpful for sellers where the buyer has (or holds itself out as having) stronger development or other relevant processes or resources than “typical” 25 Himawan v. Cephalon, Inc. (Del. Ch. Dec. 28, 2018). or “similarly situated” companies in the industry. ▪ Like sellers in most deals, buyers, generally and especially in earnout deals where they may make out-ofcontract statements to sellers regarding the prospects of the earnout, should consider steps to reduce exposure to fraud claims. For example, the buyer could include in the acquisition agreement a disclaimer by the seller of reliance on out-of-contract statements by the buyer. A standard integration clause by itself generally will not preclude reliance by sellers on out-of-contract statements. ▪ The implied covenant of good faith and fair dealing applies only infrequently, where there are “gaps” in the parties’ agreement. These claims are rarely successful but may prevail in appropriate circumstances. The rise in earnouts over the past several years, and accompanying rise in earnout disputes, resulted in multiple court decisions in 2024, which show how courts approach earnout-related provisions in acquisition agreements. 2024 M&A Annual Review 13
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