The Four-Corners Fundamentalism: Delaware Courts Crack Down on Earnout Overreach and Busted Deals

Valuation gaps in mergers and acquisitions are routinely bridged by a familiar, often dangerous tool: the earnout. When buyers and sellers cannot agree on what a target is worth, they kick the can down the road, conditioning future payouts on regulatory milestones or revenue targets. But when those deals inevitably sour, practitioners frequently run to Delaware courts, begging judges to imply obligations that were never drafted or to excuse willful breaches of closing conditions.

In a pair of major 2026 decisions, the Delaware judiciary delivered a brutal, much-needed reality check to M&A practitioners. The message is unmistakable: Delaware remains fiercely contractarian. If a protection is not written within the four corners of your merger agreement, the courts will not invent it for you—and if you intentionally sabotage a deal, the courts will force you to close it.

The J&J/Auris Reversal: The Implied Covenant is Not a Drafting Eraser

The most significant warning shot for dealmakers came on January 12, 2026, when the Delaware Supreme Court unanimously vacated part of a staggering $1 billion damages award against Johnson & Johnson. The dispute arose from J&J’s failed acquisition of Auris Health, a robotics company, where the sellers alleged J&J failed to support the acquired technology, thereby destroying the sellers' ability to achieve their earnout milestones.

The Court of Chancery had originally sided with the sellers, finding that J&J breached an implied obligation to obtain regulatory approval for the robotics technology by the end of 2021. The Delaware Supreme Court firmly rejected this reasoning, striking down the implied obligation finding while leaving most other liability findings intact and remanding for a recalculation of damages.

This reversal matters immensely for practicing lawyers because it reins in the trial court’s occasional temptation to use the implied covenant of good faith and fair dealing to save sympathetic plaintiffs from bad contracts. Under Delaware law, the implied covenant is a limited gap-filler, not a license to rewrite agreements. As the Delaware Supreme Court firmly established in Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010), courts will not imply terms to "rebalance economic interests after events that could have been anticipated, but were not, that later adversely affected one party to a contract."

The Supreme Court’s unanimous decision in the Auris Health dispute is a definitive victory for strict contractualism. If sell-side counsel wants a hard deadline for a buyer to obtain regulatory approval to trigger an earnout, they must draft it explicitly. Relying on the implied covenant to backfill unnegotiated milestones is professional malpractice.

Verisk and AccuLynx: The Prevention Doctrine Bites Back

While the Delaware Supreme Court protected buyers from unwritten obligations, the Court of Chancery demonstrated that it will ruthlessly enforce the obligations that are written, particularly when buyers try to walk away from a signed deal.

On August 8, 2026, Chancery Judge Bonnie David ordered specific performance in a busted-deal litigation, commanding Verisk to continue its efforts to close its $2.35 billion acquisition of AccuLynx. Verisk had attempted to terminate the transaction, presumably citing a failure of closing conditions. However, Judge David ruled the termination invalid because Verisk’s own "willful conduct" caused the failure of the closing conditions in the first place.

This ruling is a textbook application of the "prevention doctrine"—a principle holding that a party cannot rely on the failure of a condition precedent to excuse its performance if its own conduct caused that failure. See Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264, 273 (Del. 2017). By ordering Verisk to proceed with the multibillion-dollar deal, the Chancery Court reaffirmed that "reasonable best efforts" clauses have real teeth. Buyers suffering from buyer's remorse cannot actively torpedo regulatory approvals or financing and then innocently point to the calendar's drop-dead date as an escape hatch.

What This Means for M&A Practice

Taken together, the J&J/Auris and Verisk/AccuLynx decisions create a cohesive, demanding framework for corporate lawyers navigating M&A transactions in 2026 and beyond.

1. Stop Relying on "Commercially Reasonable Efforts" as a Catch-All: The J&J/Auris reversal proves that courts will not interpret general efforts clauses—or the implied covenant—as a mandate to achieve a specific result by a specific date. Sell-side attorneys negotiating earnouts must insist on objective, measurable covenants. If regulatory approval by 2021 is the linchpin of the valuation, make it an express covenant. Do not leave it to the mercy of judicial interpretation.

2. Clean Hands are Required to Terminate: The Verisk decision highlights the extreme risk of specific performance in broken deals. When a buyer decides it wants out, inside counsel and litigation teams must meticulously audit the buyer's own pre-termination conduct. If there is a paper trail suggesting the buyer dragged its feet, intentionally botched regulatory filings, or willfully breached interim operating covenants, termination will be deemed invalid. Delaware judges have no qualms about forcing a reluctant buyer to consummate a multi-billion dollar transaction.

Delaware's 2026 corporate jurisprudence is devoid of sentimentality. For lawyers drafting merger agreements, the lesson is clear: the law will not save you from your own drafting omissions, nor will it let you escape the obligations you explicitly assumed. You get exactly what is on the page.