Delaware Court Of Chancery Largely Dismisses Post-Merger Earnout Claims

On May 1, 2026, Vice Chancellor Bonnie W. David of the Delaware Court of Chancery largely granted a motion to dismiss claims for fraud, breach of contract, and breach of the implied covenant of good faith and fair dealing, arising out of a buyer’s alleged failure to use commercially reasonable efforts and achieve certain earnout milestones following its acquisition of a medical device company.  Meyers v. Zimmer Biomet Holdings, Inc., 2026 WL 1194997 (Del. Ch. May 1, 2026).  Plaintiff alleged that defendant made misrepresentations concerning its plans for the company during negotiations and failed to use the requisite “commercially reasonable efforts” after closing to achieve specific milestones tied to the earnout.

Defendant acquired the target company for $155 million in up-front consideration plus a possible earnout of up to $120 million, of which $72.5 million was achieved.  The transaction agreement required defendant to use commercially reasonable efforts to achieve the milestones but otherwise afforded it sole discretion over production, marketing, and commercialization of the acquired products.  Plaintiff asserted that, during negotiations, defendant represented that it was “comfortable” with the target’s future development plans, would hire more sales representatives, and “already had budget approval” to hire those representatives.  Plaintiff averred that, after closing, defendant did not hire the promised representatives, failed to advance certain clinical trials, and did not adequately increase R&D funding for the company.  Plaintiff asserted that these failures amounted to fraud and breached both defendant’s obligation to use commercially reasonable efforts and the implied covenant of good faith and fair dealing.

The Court dismissed all but one of the claims.  Vice Chancellor David found that the claims based on defendant’s statements concerning the development plans and future hiring were, at most, promises of future conduct barred by the merger agreement’s integration clause.  The Court sustained the fraud claim based on the budget approval representation, however, construing it as a statement of present fact that, if false, would not be barred by the integration clause.  The Court found plaintiff failed to plead a claim for breach of either “commercially reasonable efforts” or the implied covenant.  Importantly, the Court emphasized that neither the agreement nor plaintiff defined commercially reasonable efforts or identified a standard—whether the target’s historical practices, the buyer’s practices, or industry norms—by which the buyer’s conduct should be measured.  It did not follow, however, that the standard left a gap that the implied covenant could fill because the agreement awarded full discretion to the buyer.  In those circumstances, the Court observed that while the implied covenant might prohibit a buyer from intentionally undermining a business to avoid earnout payments, it “does not require a buyer to do everything it can to increase the earn-out payments.”