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Delaware’s Implied Covenant of Good Faith and Fair Dealing Can’t Save $400 Million Regulatory Earnout Milestone When Government Changed Approval Pathway

Posted on June 3, 2026 by mklaw_admin

M&A Stories

June 3, 2026

The Delaware Supreme Court reminded us of its strong contractarian philosophy. In a reversal of a Delaware Court of Chancery decision, the high court held that the implied covenant of good faith and fair dealing could not save the sellers’ $400 million milestone earnout by requiring the buyer to pursue a government approval pathway that was not the earnout milestone pathway specified in the merger agreement.

The case involved the sale of a surgical robot startup. The sellers would receive a $400 million earnout if one of its surgical robots received a 510(k) clearance from the FDA by the end of 2021.

After the acquisition, the FDA shifted the approval process for the startup’s robot to a De Novo review, a more complex pathway requiring clinical data due to its novel design. What makes this particularly striking is that the buyer’s own internal analysts initially concluded the switch would cause only about a sixty-day delay for this specific robot — meaning the alternate pathway was not dramatically more burdensome. Yet the buyer chose to abandon the earnout entirely, arguing that the milestones were tied to the easier pathway, which was no longer available.

The sellers sued the buyer in the Delaware Court of Chancery and convinced the court that the buyer had breached its implied duty of good faith and fair dealing. The court held that although the FDA closed the 510(k) regulatory pathway that the milestones referred to, the implied covenant required the buyer to pursue the alternate De Novo pathway for this regulatory milestone and to treat that approval as the functional equivalent of the 510(k) clearance specified in the contract.

The buyer appealed to the Delaware Supreme Court, and the high court reversed. It held that the implied covenant of good faith and fair dealing is reserved for developments that could not be anticipated, not developments that the parties simply failed to consider, and it cannot be invoked as an equitable remedy for rebalancing economic interests after events that could have been anticipated but were not. The court noted that the possibility of the FDA switching pathways was foreseeable — the parties were sophisticated, the FDA had publicly signaled it was modernizing its approval process before the deal was signed, and the sellers had even received direct feedback from the FDA raising doubts about the 510(k) pathway for this specific robot before closing. The sellers could have negotiated contract language providing that any equivalent government approval would trigger the earnout. They did not.

If your earnout depends on a government approval, make sure the contract accounts for what happens if that approval comes through a different door than expected. Once again, the Delaware Supreme Court reminds sophisticated buyers and sellers that you must live with the contract you negotiated.

Case: Johnson & Johnson v. Fortis Advisors LLC, 352 A.3d 229 No. 490, 2024, Supreme Court of Delaware, (January 12, 2026)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in implied covenant of good faith and fair dealing, problems with earnouts Tagged with: 510(k) clearance, Commercially reasonable efforts, contractarian philosophy, De Novo pathway, Delaware, earnout dispute, earnouts based upon FDA/EC milestones, FDA approval, implied covenant of good faith and fair dealing, lower middle market M&A, Medical device acquisition, merger agreement, post-closing litigation, Private Equity, problems with earnouts, problems with regulatory industry acquisitions, regulatory milestones, Sell Side M&A, strategic acquisition, surgical robots

What Your Anti-Reliance Clause Cannot Do

Posted on June 1, 2026 by mklaw_admin

M&A Stories

June 1, 2026

Under Delaware law M&A sellers can avoid extracontractual fraud claims — which are not subject to the agreement’s indemnification cap — if there is a robust anti-reliance clause where the buyer explicitly disclaims reliance on any extracontractual seller representations. However, the seller is still subject to uncapped liability if the seller lies in its written representations and warranties.

But seller lies told to the buyer before closing may still come back to haunt the seller, even with a robust anti-reliance clause. A recent federal Delaware court permitted a buyer to use an extracontractual seller lie to support its contractual fraud claim.

The case involved the sale of a franchisor’s business involving a chain of 50 franchised yogurt stores. During due diligence, the seller told the buyer that an airport frozen yogurt kiosk was “a concept idea.” No airport kiosk contracts were disclosed on the material contract representation and warranty. However, the buyer discovered after closing that the seller was operating a kiosk at the Denver airport and collecting royalties.

The buyer sued the seller for fraud based on the failure to include the airport kiosk in the material contract representation and warranty. The seller moved to dismiss the fraud claim, arguing that the buyer could not use the extracontractual concept idea statement to support the fraud claim because the asset purchase agreement included a robust anti-reliance clause.

The court disagreed. The buyer was not using the extracontractual statement to support an extracontractual fraud claim. It was using it to show scienter in its contractual material contract representation fraud claim. This ruling is consistent with the Delaware Superior Court’s 2023 decision in Cablemaster LLC v. Magnuson Group Corp., where the court applied the same analytical framework to a similarly robust anti-reliance clause.

Anti-reliance clauses protect sellers from extracontractual fraud claims based upon misrepresentations made during negotiations, pre-closing presentations, and in the data room.

But any of those same misrepresentations can be used by the buyer to prove scienter in an uncapped fraudulent written representation claim.

Case: U Swirl, LLC v. U-Swirl International, Inc., Civil Action No. 24-1243-GBW, United States District Court, D. Delaware, (May 18, 2026); Cablemaster LLC v. Magnuson Group Corp., C.A. No. N23C-05-185 PRW CCLD, Delaware Superior Court (December 5, 2023)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in anti-reliance clause, anti-reliance clause, extra-contractual fraud, fraud in business sale, fraudulent intent, Uncategorized Tagged with: anti-reliance clause, asset purchase agreement, Contractual Fraud, Delaware Contract Law, Delaware M&A law, fraud in the inducement, Fraudulent Misrepresentation, indemnification cap, lower middle market M&A, M&A fraud claims, M&A litigation, M&A Representations, M&A Risk Management, Pre-Closing Misrepresentation, representations and warranties, Scienter, Sell Side M&A, seller advisors, Seller liability, Uncapped Liability

Make the Transfer of the Digital Assets an APA Closing Condition

Posted on May 31, 2026 by mklaw_admin

M&A Stories

May 31, 2026

Digital assets of an M&A seller are crucial to the buyer post-closing. In an asset deal the parties need the cooperation of third parties to accomplish their transfer. Sellers often treat digital assets as an afterthought. They are not.

The importance of securing the transfer of the seller’s digital assets before closing is illustrated in the case of a sale of a franchisor’s business involving a chain of 50 franchised yogurt stores. The seller was owned by a public company. The buyer purchased all the assets including the Meta social media accounts.

Unfortunately, the social media accounts were not transferred at closing. Three years. That is how long the buyer and seller spent trying to work with Meta to accomplish what should have been completed before closing.

While they were still trying to resolve the transfer, someone posted notices on the social media pages announcing that every store was closed. The buyer could not remove the posts because it never had administrative access. Shortly after the pages were deleted entirely. This led to litigation filed in a Delaware federal court.

Before you close make sure every digital asset in your business has been identified, transferred, and verified. Then complete the transfer and confirm administrative access before the wire goes out. Not we’ll work on it after closing.

Case: U Swirl, LLC v. U-Swirl International, Inc., Civil Action No. 24-1243-GBW, United States District Court, D. Delaware, (May 18, 2026)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in APA closing conditions, asset purchase agreement, digital assets, lower middle market m&a, M&A closing conditions, sell side M&A, social media transfer Tagged with: APA Closing Conditions, asset purchase agreement, Digital Assets, lower middle market M&A, M&A Closing Conditions, Post-closing disputes, Sell Side M&A, Social Media Transfer

The Integration Clause Bars Seller Extracontractual Fraud Claims for Buyer Earnout Promises to Do Something in the Future

Posted on May 13, 2026 by mklaw_admin

M&A Stories

May 13, 2026

Sellers and their advisors should be wary of relying on buyer extracontractual earnout promises to do something in the future. Even without an anti-reliance clause, Delaware courts will use the integration clause to bar a seller’s fraud claim against a buyer for any earnout promise the buyer made outside the contract to do something in the future. A recent Delaware Court of Chancery case makes this painfully clear.

There, the sellers sold their medical device company to a large strategic buyer, for $155 million cash, and a maximum earnout of $120 million. The medical device was complicated, and the business required capital to hire many direct medicine sales representatives to teach physicians, medical practices, and hospitals how to use its products. During negotiations, the buyer pitched how they could commercialize the target’s medical devices and would hire 94 direct medicine sales representatives, and had budgetary approval to do so.

However, in the merger agreement, the buyer did not represent that it had budget approval for the hiring of 94 direct medicine sales representatives, nor did it promise to hire them.

After the closing the buyer hired one rep, and the sellers earned about $72.5 million out of a potential $120 million in earnout payments. The sellers sued the buyer, accusing the buyer of extracontractual fraud in promising to hire 94 sales representatives and claiming that there was budgetary approval for the hiring of the sales representatives. The buyer moved to dismiss the fraud claim.

The court noted that there was no anti-reliance clause that would bar all extracontractual fraud claims. Nevertheless, the court held that the integration clause barred a fraud claim for promising to hire sales representatives, because that was a future promise, and to be enforceable would have had to be included in the merger agreement. On the other hand, the court permitted the fraud claim concerning budget authorization, because that was an alleged fraudulent statement of present fact.

The takeaway for sellers negotiating earnouts – don’t rely on extracontractual promises. Make the buyer back up those promises in the acquisition agreement: the sellers should have required the buyer to represent in the merger agreement that it had budget approval for the 94 reps, and to commit to a minimum hiring timeline tied to the earnout period. All too often sellers lose earnout lawsuits because they rely on aspirational buyer written promises to use commercially reasonable efforts, or something equally as ambiguous.

Case: Meyers v. Zimmer Biomet Holdings, Inc., C.A. No. 2025-0732-BWD, Court of Chancery of Delaware, (May 1, 2026)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in anti-reliance clause, extracontractual fraud, integration clause, integration clause bars extracontractual promises of future performance, problems with earnouts

Victorious M&A Large Strategic Buyer in Fraud Claim Should Have Had a Legal Fee Shifting Provision in APA to Recover Five Years of Litigation Fees

Posted on May 12, 2026 by mklaw_admin

M&A Stories

May 12, 2026

The American rule is that the winner of a contract dispute cannot recover its legal fees from the loser unless there is a fee shifting provision in the contract that mandates the loser to reimburse the winner for its reasonable legal fees and costs.

A large strategic buyer sued the seller for fraud and breach of contract and got a $55 million damage award. The buyer asked the Delaware Superior Court to order the seller to pay the buyer’s reasonable legal fees and costs.

The buyer pointed to the indemnification clause which says that the seller must indemnify the buyer for its losses for breach of the APA. The indemnification clause included recovery of reasonable legal fees.

The court denied the request. It said that this indemnity provision required the seller to reimburse the buyer for legal fees and costs the buyer spent in defending third party claims, not fees and costs spent in litigation with the seller, which it called first party claims, or often referred to as direct claims. Think of it this way — the indemnity clause was written to protect the buyer if a former employee sued after closing, not to reimburse the buyer’s lawyers for fighting the seller in court.

The buyer would have recovered millions of dollars from the seller under the APA if the agreement had contained a standalone attorney fee or fee shifting provision, which says that the prevailing party in any dispute between the buyer and the seller shall be awarded reasonable legal fees and costs.

Case: River Valley Ingredients, LLC v. American Proteins, C.A. No. N19C-12-160 PRW CCLD, Del. Super. Ct, (April 30, 2026)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in Attorney's Fee Provision Tagged with: attorney fee provision, direct part claim, fee shifting provision, first part claim, indemnification provision, loss definition, prevailing party, third party claim

LMM Sellers: Make the Buyer Commit in Writing to Fund Working Capital — or Lose Your Earnout

Posted on May 9, 2026 by mklaw_admin

M&A Stories

May 9, 2026

A strategic buyer acquired a food manufacturer whose customers included Walmart, Target, Costco, and Kroger. The deal included an earnout, and the founder agreed to stay on post-closing to run the business. As earnout protection, the buyer contractually agreed to fund the acquired company’s reasonable working capital requests.

The buyer never funded those requests. The business lost its major retail customers, and the earnout became unachievable. The founder sued on behalf of his shareholders in New York Supreme Court. The buyer moved to dismiss. The court denied the motion.

The outcome here is unsurprising. A covenant to fund working capital is objective and measurable — either the buyer funded or it didn’t. Courts have little trouble evaluating that kind of breach. Compare that to a softer covenant requiring a buyer to use “commercially reasonable efforts,” which invites far more interpretive dispute. Sellers negotiating earnouts should push for concrete, funded obligations wherever possible.

Case: Openhagen v. DDC Enters. LTD., 2026 NY Slip Op 31745(U), Supreme Court, New York County, (April 20, 2026)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in buyer earnout working capital funding covenant, problems with earnouts

Managing Earnout Risks Based Upon Sales When Selling to a Competitor

Posted on April 30, 2026 by mklaw_admin

M&A Stories

April 30, 2026

If your deal includes an earnout based on sales, and your buyer is already in your business, you have a problem that most sellers never see coming.

This recent Delaware Superior Court case is a good illustration of this common risk.

The seller ran a software business. Its software product helped companies who make and sell consumer products manage how their product information appears on retail websites — making sure descriptions, images, and specs show up correctly when shoppers are browsing online. The buyer is a larger company in the same general business, helping brands and retailers keep their product information consistent and accurate across the internet.

The seller sold its assets to the buyer. The deal included an earnout based upon post-closing software revenue growth.

The buyer initially confirmed the seller had earned $1.36 million, then reversed course. The buyer claimed that sales where the seller’s software was bundled with the buyer’s other products, and sales where the buyer gave the software away at no extra charge to attract new customers, should not have counted toward the earnout.

The seller sued the buyer in the Delaware Superior Court. The buyer tried to get the case thrown out. The court sided with the seller and ruled the case could proceed.

Here is what the seller should have locked down before closing. Make sure you get credit for both bundled sales and freebies. Your agreement should include a worked example showing exactly how each type of transaction counts. The example should specify the dollar credit for a bundled sale and the imputed value for a freebie, so there is nothing left to argue about after closing. Without that specificity, the buyer gets to define the rules after closing — and you have already seen how that ends.

Case: Second Run, LLC v. 1Worldsync, INC., C.A. No. N25C-08-068 KMM CCLD, Superior Court of Delaware, (April 24, 2026)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in bundled sales, Calculating Earnout Metrics, problems with earnouts Tagged with: asset purchase agreement, bundled sales, bundled software, Business Sale, Competitor Acquisition, Delaware Superior Court, earnout, Earnout Calculation, earnout credit, earnout dispute, earnout risk, free inclusion, freebie, lower middle market, M&A dispute, M&A Storie, no charge sales, PE platform, Post-Closing Dispute, Private Equity, product bundling, revenue definition, sell side, Seller Protection, software acquisition, Strategic buyer

They’re Already Shopping in Your Market — Are You Ready for the Call?

Posted on April 14, 2026 by mklaw_admin

Exit Planning · M&A

April 14, 2026

What a recent Wall Street Journal story about a PE firm’s acquisition hunt reveals about the deals your business could be part of.

A story recently crossed my desk that I couldn’t stop thinking about. A large private equity firm — one that manages billions — publicly announced they are actively hunting for companies to buy in the U.S., Canada, and the U.K. Specifically, well-run, founder-owned businesses in a niche they’re trying to expand into.

That’s unusual. PE firms don’t typically announce their shopping lists. When they do, it’s worth paying attention — because that announcement tells you exactly how these deals are built, and who’s on the other side of the table when they come for you.

You’re not their first deal. You’ll be their next one.

Here’s how this particular deal is structured: the PE firm paid roughly $500 million for a large company overseas — their anchor investment, what the industry calls a “platform.” Now they need to bolt smaller regional businesses onto it to make the original investment pay off.

Those smaller acquisitions? That’s where founder-owned businesses come in. Good operators, loyal customers, strong local reputation — but without the resources of a PE-backed company. The sellers doing these deals have usually done one transaction in their life. The buyers have done hundreds.

The gap in experience is real. That doesn’t mean you can’t negotiate well — it means you have to prepare like the stakes are high, because they are.

“We love your team” is also due diligence.

The executive leading this expansion said they evaluate acquisitions based on “the quality of the team that could execute.” Sounds like a compliment. It is — but it’s also an assessment.

PE buyers need to know: will the founder stay? Will the key people stick around? Will the business actually perform post-close? That evaluation shapes everything from the offer price to how earn-outs and retention agreements get written into the deal. Sellers who walk in thinking they’re just cashing out are often surprised when the terms reflect that they’re also expected to keep working.

Know this before you sit down: you’re being evaluated as a future operator, not just as an owner selling an asset.

The buyer already has a number. They just haven’t shown you.

One detail in the story stood out: this firm is openly considering whether to expand by acquiring a business — or just hiring a team and building from scratch. If building is cheaper, they’ll do that. If buying gets them there faster because of your customers, your reputation, or your local market relationships, they’ll pay for it.

Every offer they make is benchmarked against that internal math. They won’t share it with you. But knowing it exists — and that your value is measured against a build-or-buy calculation — changes how you think about the negotiation.

Being the only game in town is leverage. Use it.

When a PE firm moves into a new geography, an established local operator has something they genuinely can’t manufacture overnight: existing customers, community trust, and the relationships that took years to build. That’s real leverage.

The problem is most sellers don’t recognize it as leverage — so they don’t use it. Walking into a deal thinking “they’re doing me a favor by buying me” is the most expensive mistake a seller can make.

The right frame: they need what you’ve built. Your job is to make sure the price reflects that.

If you’re a business owner thinking about what comes next — whether that’s five years or five months from now — this is the kind of buyer landscape worth understanding well before a conversation starts. Preparation isn’t paperwork. It’s negotiating power.

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in private equity, understanding private equity Tagged with: Business Valuation, deal strategy, earn-out, exit planning, founder exit, Mergers and Acquisitions, negotiation tips, Private Equity, selling your business, small business owner

M&A Sellers Survive Summary Judgment Challenge to $550 Million Earnout Claim that Target Founder Was Terminated Without Cause

Posted on April 9, 2026 by mklaw_admin

M&A Sellers Survive Summary Judgment Challenge to $550 Million Earnout Claim that Target Founder Was Terminated Without Cause

M&A Stories

April 9, 2026

A lower middle market seller’s probability of receiving an earnout is increased if the target’s key management team are retained during the earnout period. That is why a seller often asks for a provision that triggers payment of the earnout if the target founder, for example, is terminated by the buyer during the earnout period, without cause. The sellers in this case had a clause like that in the merger agreement’s earnout provisions.

The target operated a meal delivery service that was purchased by a large strategic buyer, for $950 million cash and up to $550 million in an earnout. There had been three rounds of target financing before the sale, and so the founder was but one of the owners of the target.

The post-closing relationship between the buyer and the founder did not go well. Food delivery business was good at first, during the pandemic, but fell dramatically after that. The founder wanted to improve business but was frustrated by upper buyer management.

The buyer did not terminate the founder but persuaded the founder to “voluntarily” resign with a $47 million severance payment, which included a statement that he voluntarily resigned from target, and that his leaving was not due to his termination (actual or constructive). At the same time the buyer bought out other target management for an additional $24 million.

The seller investor group sued the buyer in the Delaware Court of Chancery, claiming the $550 million earnout, arguing that the founder was terminated without cause (actual or constructive). After discovery the buyer asked the court to dismiss the termination without cause (actual or constructive) by summary judgment.

The court said that based upon the evidence, including depositions, texts and emails, there was enough evidence to suggest that the buyer intentionally manipulated the founder to claim he voluntarily resigned. The Vice Chancellor noted after the founder and other management team members resigned, a group text “erupted” with celebratory GIFs. “A reasonable third party could easily infer that it was possible, or even probable, that … (the buyer) leadership were celebrating because they believed that they had just paid $71 million to avoid a $550 million earnout.”

Meaning that the constructive termination claim will be resolved by trial.

The seller investor groups could have strengthened their legal position if it had negotiated an additional provision that would trigger the earnout if the founder had terminated his employment for good reason. This could include material reduction in his authority or responsibilities, the buyer repeatedly refusing to approve budgets or strategic plans, and removal of resources necessary to do the job.

Separating for “good reason” concept was already built into the founder’s Restrictive Covenant Agreement and Employment Agreement. It included a provision that could have been in the earnout “good reason” provision: “a material diminution in the founder’s authority.”

Case: Shareholder Representative Services, LLC v. Nestle USA, Inc., C.A. No. 2023-0498-SKR, Court of Chancery of Delaware, (December 19, 2025)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in earnout payable upon constructive termination, earnout payable upon termination without cause, Key Employee Retention Requirement, problems with earnouts Tagged with: constructive termination, earnout, key employee retention, Shareholder Representative Services LLC v. Nestle USA Inc, termination without cause

M&A Seller May Breach LOI Good Faith Negotiation Covenant by Not Disclosing Deal Term in LOI

Posted on April 5, 2026 by mklaw_admin

M&A Stories

April 5, 2026

Letters of Intent (LOI) in lower middle market M&A ($5 million to $50 million) are common. Usually, the parties set out the terms of the deal but agree that they will only be binding upon the signing of a definitive acquisition agreement. Also in the LOI, the seller often gives the prospective buyer an exclusive period to negotiate a deal, with a seller promise to negotiate in good faith.

Many LOIs do not lead to closings. And it is all too common that some of these unsuccessful negotiations result in a lawsuit where the buyer accuses the seller of failure to negotiate in good faith. Here the seller signed a LOI, agreed to negotiate in good faith, but after the exclusivity period, terminated negotiations.

The seller in our deal had two businesses. One was a stevedore and storage business (the target business) operated out of the Port of New Haven, Connecticut. The other was a marine shipping business (the marine business). The buyer wanted the target business. It could not buy the marine business under federal law because it was a foreign buyer.

The parties signed an LOI for the target business for $110 million. The seller in the LOI promised that it would deal exclusively with the buyer for a month and promised that it would negotiate in good faith with the buyer.

The deal did not happen. The seller terminated the deal after expiration of the exclusivity term telling the buyer that it could not do the deal unless the seller could at the same time sell the marine business to another buyer, which it was unable to do.

The buyer sued the seller for breach of contract in a Manhattan federal district court. It accused the seller of negotiating in bad faith by failing to disclose to the buyer that it would only do the deal if it could find a buyer for the marine business.

The seller asked the court to dismiss the claim, arguing that the LOI was nonbinding. The court refused, finding that the seller had a binding obligation to negotiate in good faith, and that the seller would have violated that promise if it had known when entering the LOI that it would not do a deal with the buyer unless it found a buyer for the marine business. Thus, the court permitted the buyer to conduct discovery concerning when the marine business sale became a condition for the seller to do the deal with the buyer.

What is the lesson for seller? It depends upon whether in fact the seller decided upon this condition before or after signing the LOI. If before, the condition should have been mentioned in the LOI deal terms.

If after, the seller should immediately talk to the buyer and see if they can change the deal to accommodate this condition. If that does not work, the seller should in most cases stay with the original deal to avoid post-borrow-deal litigation.

Case: EQT Infrastructure Ltd. v. Smith, 861 F.Supp.2d 220 (2012) Case No. 11-CV-0462 (CS), United States District Court, S.D. New York, (March 20, 2012)

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone: 714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

Posted in letter of intent, LOI good faith negotiation covenant, undisclosed deal term Tagged with: EQT Infrastructure Ltd. v. Smith, LOI good faith negotiation covenant, Undisclosed LOI deal term

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