Earnouts have become increasingly popular as tools for bridging valuation gaps. That popularity rose further in 2025, with a significant increase in the use of contingent value rights in acquisitions of public companies, particularly life sciences companies. Earnouts, though, often lead to disputes, particularly as to whether buyers provided any post-closing business support required by acquisition agreements, as we discussed in last year’s alert. Similar litigation in 2025 provided further lessons for parties considering earnouts. Questions in Determining Damages Last year, we discussed a court’s finding that a buyer had failed to use “commercially reasonable efforts,” as defined in an acquisition agreement, and had terminated a product program that could have provided $800 million in earnouts.24 In 2025, the court determined damages that reflected the “expected value” of the earnout payments by weighting each milestone amount by its probability of 24 SRS v. Alexion Pharmaceuticals (Del. Ch. Sep. 5, 2024). 25 SRS v. Alexion Pharmaceuticals (Del. Ch. June 11, 2025). 26 Arthur J. Gallagher v. Agiato (Del. Ch. July 31, 2025). success.25 The court reviewed probabilities from several sources, including expert witnesses and stockholder estimates, and found that the buyer’s own early estimates provided the strongest evidence of probabilities. The court awarded damages of about $180 million, on top of the $130 million it had awarded previously for the first milestone. Parties considering transactions with earnouts should keep a court’s potential retrospective review in mind when creating records of expected values. Judicial Reluctance to Imply Conditions In a dispute over an earnout payment tied to a milestone that the parties agreed had been met, the buyer argued that it nonetheless was excused from paying, because the purchase agreement stated that the business shall be conducted after closing in accordance with the buyer’s practices, but the seller’s founder, who was employed by the buyer to manage the business, had failed to so conduct the business.26 The court, however, found that the relevant statement addressed how the buyer will run the business after closing and did not impose obligations on the seller’s founder, noting that the statement was included in the purchase agreement along with protections for sellers requiring the buyer to operate the business in a manner not intentionally designed to avoid or reduce earnout payments. The court likewise declined to condition the earnout on compliance by the seller’s founder with his employment agreement with the buyer, since the purchase agreement was conditioned only on the execution of the employment agreement. While it undoubtedly is difficult to anticipate all future contingencies, buyers and sellers should specify their desired terms as fully as possible and not count on a court to imply further conditions. 7. Continuing Popularity of Earnouts — and Earnout Litigation “Earnouts, though, often lead to disputes...” 52 Morrison Foerster
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