Date: Feb 15, 2026

Earnout “Arbitration” Framing Controls and Earnout-Related Bad-Faith/Information Claims Are for the Arbitrator

Introduction

Fortis Advisors, LLC (acting solely as seller representative) appealed two Court of Chancery orders arising from a post-closing earnout dispute under a 2019 merger agreement by which Stillfront Midco AB acquired Kixeye, an online video-game company. The agreement coupled (i) a Delaware forum-selection clause for “any action or proceeding arising out of or related to” the contract with (ii) a specialized earnout dispute mechanism in § 2.14, which referred disputes about the earnout calculation to an accounting-firm “Arbitrator.”

Fortis sued in Chancery asserting: (a) breach based on allegedly improper EBITDA/earnout calculations; (b) breach of “operational covenants” (including a covenant not to act in bad faith to reduce the earnout); (c) breach of information-access provisions that Fortis said were needed to formulate an Earnout Disagreement Notice; and (d) an implied-covenant claim in the alternative. Stillfront moved to compel arbitration under § 2.14, and Chancery compelled arbitration and dismissed the complaint.

After an accounting-firm arbitrator (BDO) rejected Fortis’s claims and found insufficient evidence of bad faith, Chancery confirmed the award and declined to vacate for “evident partiality” based on alleged undisclosed relationships between BDO and Stillfront’s counsel (DLA Piper). The Delaware Supreme Court affirmed across the board.

Summary of the Opinion

Characterization/waiver: Although later-decided cases drew sharper lines between “arbitration” and “expert determination,” the Court held Fortis to the way it litigated the motion to compel—Fortis had repeatedly acknowledged § 2.14 was an arbitration provision and conceded there was “No dispute” the parties agreed to arbitrate the earnout.
Scope: Applying Viacom Int'l Inc. v. Winshall, the Court held Fortis’s bad-faith operational-covenant claims and related challenges were, at their core, disputes about the earnout determination and therefore within § 2.14’s ambit.
Information-rights claim: The claim that Stillfront failed to provide information/access needed to dispute the earnout presented an issue of procedural arbitrability for the arbitrator, not the court.
Evident partiality: The alleged undisclosed connections between BDO and DLA Piper were not “direct, definite, and capable of demonstration” or “powerfully suggestive of bias” under Del. Transit Corp. v. Amalgamated Transit Union Loc. 842; Beebe Medical Center, Inc. v. InSight Health Servs. Corp. was distinguishable. The Court also declined to treat AICPA professional standards as the equivalent of arbitral disclosure rules for vacatur purposes.

Analysis

Precedents Cited

1) Classifying ADR: arbitration vs. expert determination

Terrell v. Kiromic Biopharma, Inc. — Cited for the modern Delaware framework distinguishing arbitration from expert determination and affirming that some clauses calling for a specialized decider are not “arbitration” at all. The Supreme Court acknowledged the relevance of this line of authority but did not reach the classification merits because Fortis had litigated the case on the premise § 2.14 was arbitration.
ArchKey Intermediate Hldgs. Inc. v. Mona — Cited as a detailed Court of Chancery treatment of “the ADR spectrum” for accountant-led post-closing disputes, finding a mechanism not to be arbitration. The Court again treated it as potentially relevant, but not outcome-determinative given Fortis’s positions below.
Sapp v. Indus. Action Servs., LLC — A Third Circuit earnout case concluding a similar clause created a narrow expert determination plus litigation/mediation for other disputes. The Delaware Supreme Court noted the resemblance, but enforced Fortis’s earlier concession.
Penton Bus. Media Hldgs., LLC v. Informa PLC — Referenced as pre-existing Chancery authority (discussed in Terrell) posing and answering whether Delaware recognizes the arbitration/expert-determination distinction. The Court used it to underscore that Fortis could have raised the distinction earlier.

Doctrinal takeaway: Whatever the correct classification of accountant-led earnout clauses in the abstract, this decision establishes a practical litigation rule: a party that affirmatively frames the clause as arbitration in the trial court risks being held to that framing on appeal, even if later decisions provide new analytical tools.

2) Determining scope and “procedural arbitrability” in earnout disputes

Parfi Hldg. AB v. Mirror Image Internet, Inc. — Cited for the broad/narrow arbitration clause framework and how courts decide whether claims fall within the clause’s scope.
Viacom Int'l Inc. v. Winshall — The opinion’s central analog. The Court emphasized Viacom’s instruction that branding a clause “narrow” or “broad” is less important than whether the “subject matter in dispute” falls within the clause, and that if the subject is the “calculation of an earn-out,” then “all issues as to what financial or other information should be considered” are for the arbitrator as procedural arbitrability.

3) Judicial review and evident partiality

SPX Corp. v. Garda USA, Inc. and TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Sec., Inc. — Cited for the proposition that review of arbitration awards is among the narrowest in American jurisprudence, setting the backdrop for Fortis’s heavy vacatur burden.
Del. Transit Corp. v. Amalgamated Transit Union Loc. 842 — Provided the controlling evident-partiality standard: vacatur requires an undisclosed “substantial” relationship such that a reasonable person would find it “powerfully suggestive of bias,” and the moving party bears the burden; the relationship must be “direct, definite, and capable of demonstration rather than remote, uncertain, or speculative.”
Beebe Medical Center, Inc. v. InSight Health Servs. Corp. — Distinguished: the arbitrator there was simultaneously represented by the same attorney appearing in the arbitration, a far more direct conflict than the large-entity, arms-length contacts alleged here.
Health Servs. Mgmt. Corp. v. Hughes — Quoted (via Del. Transit) for the “so intimate” relationship formulation.
Commonwealth Coatings Corp. v. Cont'l Cas. Co. — Invoked by Fortis to argue professional-standard disclosure violations should matter similarly to arbitral disclosure rules; the Court acknowledged the “significance” of recognized arbitral rules in that context but refused to extend the principle to AICPA standards.
Sutter v. Oxford Health Plans LLC, First Options of Chi., Inc. v. Kaplan, and CCSB Fin. Corp. v. Totta — Cited for de novo appellate review of legal conclusions in confirmation/vacatur settings and for Delaware’s approach to reviewing alleged bias.

Legal Reasoning

1) Fortis was held to its “arbitration” framing

The Court treated Fortis’s new “expert determination” characterization as foreclosed by the record: Fortis repeatedly described § 2.14 as arbitration in Chancery and conceded there was “No dispute” the parties agreed to arbitrate the earnout. The Court acknowledged that Terrell v. Kiromic Biopharma, Inc., ArchKey Intermediate Hldgs. Inc. v. Mona, and Sapp v. Indus. Action Servs., LLC—all decided after Chancery compelled arbitration—might have supported a more nuanced classification debate, but it enforced the posture Fortis had adopted when litigating the motion to compel.

2) The bad-faith operational-covenant claims fell within the earnout clause

Section 2.14(c) empowers the accounting-firm Arbitrator to “determine the actual Earnout Amount,” and that determination is “final and binding.” Fortis argued its bad-faith claim sought the § 2.14(g) presumption (maximum earnout) and was therefore distinct from “actual” EBITDA-based calculation disputes. The Court rejected that as a “fine distinction,” reasoning that in both scenarios the decider is still determining the earnout amount Fortis is actually entitled to under the contract. In the Court’s view, Fortis’s bad-faith allegations were functionally explanations for why Stillfront’s Earnout Determination Statement was wrong; separating the “why” from the calculation would improperly “slice” the dispute.

3) The information-rights claim was procedural arbitrability for the arbitrator

Fortis asserted Stillfront’s denial of access to documents/personnel prevented Fortis from timely identifying disputed line items in the Earnout Disagreement Notice (because undisputed items become final under § 2.14(b)). The Court treated that contention as an argument about what information must be considered and how the earnout process should function—precisely the kind of procedural arbitrability question Viacom Int'l Inc. v. Winshall allocates to the arbitrator when the subject matter is an earnout calculation. The Court also noted that in arbitration Fortis obtained broad document production, and Fortis did not show prejudice from any alleged earlier limitations.

4) No evident partiality warranting vacatur or discovery

Fortis pointed to (i) emails about a contemplated (but unrealized) separate engagement between BDO and DLA Piper, (ii) a bankruptcy affidavit suggesting DLA represented other BDO-related entities in unrelated matters, and (iii) other agreements naming BDO in similar dispute-resolution roles. The Court held these allegations were too attenuated and not “powerfully suggestive of bias,” emphasizing the scale and repeat-player nature of the market participants, the arm’s-length character of the contacts, and the absence of evidence tying the alleged relationships to Arbitrator Katz personally in a direct, intimate, demonstrable way as required by Del. Transit Corp. v. Amalgamated Transit Union Loc. 842. It further declined to equate alleged AICPA disclosure lapses with arbitral rule violations for FAA evident-partiality purposes, particularly given the engagement letter’s statement that Katz was not required to follow audit procedures or issue an audit opinion.

Impact

Litigation strategy becomes dispositive: Parties disputing whether a clause is arbitration or expert determination must raise the classification issue early. This decision signals that Delaware appellate review may not rescue a party from a strategic or inadvertent concession made during motion practice—even when later cases sharpen the doctrinal lens.
Earnout disputes: broad gravitational pull toward arbitration: Allegations that the buyer acted in bad faith to depress performance metrics—when tied to the earnout calculation—are likely to be treated as within the earnout determination process rather than as standalone court claims, especially where the contract makes the accountant’s determination “final and binding.”
Information-access fights likely decided in the earnout forum: Where information rights are pleaded as necessary to formulate or litigate the earnout objection, Delaware courts may treat them as procedural arbitrability issues for the arbitrator, reducing opportunities to litigate access disputes in Chancery as separate merits actions.
High bar for “repeat-player” conflict theories: For large professional firms and large law firms, generalized or affiliate-level relationships and exploratory business discussions are unlikely to meet Delaware’s “direct, definite” and “powerfully suggestive of bias” threshold without concrete evidence of a substantial relationship bearing on the neutral decision-maker.
Drafting lessons for M&A practitioners: If parties want (a) court adjudication of bad-faith operational-covenant disputes, (b) a true expert determination limited to accounting line items, or (c) express pre-arbitration enforcement of information rights, they should say so explicitly, including clear severability and forum-allocation language and tailored disclosure/ethics requirements for the accountant.

Complex Concepts Simplified

Earnout: A post-closing contingent payment, usually tied to future financial performance (here, “Adjusted EBITDA” for 2019).
Adjusted EBITDA: A profitability metric (earnings before interest, taxes, depreciation, and amortization) modified by contractually specified adjustments; disputes often turn on which expenses or revenues are included.
Arbitration vs. expert determination: Arbitration is an adjudicative process typically governed by arbitration law (including limited judicial review of awards). Expert determination is often a narrower contractual mechanism for an expert to decide specific technical questions, sometimes with different review and process assumptions. This case did not decide the correct classification on the merits; it held Fortis to its prior “arbitration” framing.
Substantive arbitrability vs. procedural arbitrability: Substantive arbitrability asks whether the parties agreed to arbitrate the type of dispute at all (a gateway question for courts). Procedural arbitrability concerns steps and prerequisites within the agreed arbitration process (timing, notice, what information is considered), presumptively for the arbitrator—especially in earnout calculations under Viacom Int'l Inc. v. Winshall.
Implied covenant of good faith and fair dealing: A gap-filling doctrine that may imply terms necessary to fulfill the parties’ reasonable expectations where the contract is silent; Fortis pleaded it in the alternative if the express terms did not bar Stillfront’s adjustments.
Evident partiality: A narrow ground for vacating an award when an arbitrator fails to disclose a substantial relationship with a party or counsel such that a reasonable person would find it strongly suggestive of bias; remote or speculative connections are insufficient.

Conclusion

The Delaware Supreme Court’s decision delivers three practical rules for earnout litigation. First, parties may be bound on appeal by how they framed an ADR clause in the trial court, including concessions that the clause is “arbitration.” Second, when the subject matter submitted is an earnout calculation, claims alleging bad-faith conduct that allegedly distorted the earnout and disputes about access to information needed to prosecute the earnout objection are likely to be treated as within the arbitrator’s domain under Viacom Int'l Inc. v. Winshall. Third, vacatur for evident partiality requires concrete, direct, demonstrable relationships that are powerfully suggestive of bias; generalized professional ecosystem connections and affiliate-level representations are not enough, and professional accounting standards do not automatically substitute for arbitral disclosure rules.