In Fortis Advisors v. Stillfront (Feb. 13, 2026), the Delaware Supreme Court held that an alternative dispute resolution (ADR) provision in a merger agreement, which called for an independent accounting firm to resolve disputes relating to “calculation of the earnout amount” payable by the buyer, permitted resolution by the accounting firm of claims that the buyer had breached earnout-related operational covenants and acted in bad faith—even though the claims involved no “calculation.” Having decided that the ADR provision called for an “arbitration” rather than an “expert determination,” the Supreme Court concluded that the accounting firm had broad authority to resolve all issues (including legal issues) relating to the earnout amount that was owed. Therefore, the Supreme Court upheld the Court of Chancery’s decision that enforced the accounting firm’s conclusions that no change was required to the buyer’s calculations and the buyer was not entitled to any earnout or other recovery.

Key Points

  • ADR provisions are frequently the subject of dispute. Given the prevalence of post-closing earnout disputes, ADR provisions can be useful in discouraging litigation over such disputes. However, these provisions often are drafted with insufficient clarity as to the nature of the process and scope of authority granted to the expert engaged as the decision-maker, leading to disputes over the ADR provisions themselves.   
  • The decision highlights the critical importance of clear drafting as to whether an ADR provision calls for an “arbitration” or, instead, an “expert determination.” Generally, except to the extent the parties have clearly provided otherwise, if the court determines that an ADR provision calls for an arbitration, the court will presume that the intention was to grant broad authority to the expert—to resolve disputes fully, including by determining legal issues; while if the court determines the provision calls for an expert determination, it will presume that the intention was to grant narrow authority to the expert—to resolve only issues within the expert’s specific area of expertise. 
  • In other recent cases. Delaware courts have interpreted ADR provisions similar to the Stillfront ADR at issue in Stillfront as calling for an expert determination, not an arbitration. The Stillfront opinion, which notes these decisions, suggests that the Supreme Court also would have found that the Stillfront ADR called for an expert determination, if not for the unique fact that the plaintiff, in oral argument at the Court of Chancery, had conceded (indeed, had been “emphatic”) that the parties had agreed to arbitrate their earnout disputes. The plaintiff changed this view only after the accounting firm arbitrator determined that no earnout amount was owed.   
  • The decision underscores the potential ambiguity of ADR provisions calling for resolution of “calculation” disputes (whether for earnouts or other post-closing adjustments). Notably, the Supreme Court viewed disputes about compliance with earnout-related operational covenants and good faith requirements as coming within the ambit of the ADR provision governing resolution of disputes over “calculation” of the earnout, as such compliance affected what the amount of the earnout would be. When providing an ADR process for resolution of calculation disputes, the parties should be specific as to whether, and the extent to which, the expert (say, an accounting firm) will have authority only to make accounting-based computational-type determinations or also to make legal determinations. (See “Practice Points” below.)

Background. In 2019, Stillfront Midco AB acquired Kixeye, an online video game company. Pursuant to the Merger Agreement, Stillfront paid a purchase price of $90 million at closing and agreed to pay an earnout of up to $30 million if it was determined, post-closing, that Kixeye’s “2019 Adjusted EBITDA” exceeded $15 million. After closing, Stillfront determined that 2019 Adjusted EBITDA was just $6 million and no earnout amount was owed.

In 2021, Fortis Advisors, as the Seller Representative under the Merger Agreement, brought suit in the Court of Chancery, claiming that Stillfront (i) breached operational covenants in the Merger Agreement, and acted in bad faith (i.e., for the purpose of reducing Adjusted EBITDA “so that no earnout payment would be owed”), when it (a) slashed Kixeye’s marketing expenditures, and (b) retroactively, materially increased Kixeye’s operating expenses attributable to the pre-merger 2019 period (although the Merger Agreement required that 2019 Adjusted EBITDA be calculated “in accordance with Schedule 1.1(a)” to the Agreement) (the “Bad Faith Claims”); and (ii) breached the Information Covenant when it refused to provide information Fortis had reasonably requested in order to prepare its Earnout Disagreement Notice (the “Information Claim”).

The Court of Chancery granted Stillfront’s motion to compel arbitration of the dispute under the Merger Agreement’s ADR provision. The parties then engaged accounting firm BDO USA to resolve their dispute. About a year later, following a lengthy discovery process and a full-day hearing at which the parties presented their positions, BDO—without performing Adjusted EBITDA or earnout calculations of its own—concluded that no change was required to Stillfront’s calculations, there was insufficient evidence that Stillfront acted in bad faith, no earnout amount was owed, and Fortis was not entitled to any recovery.

The Court of Chancery then granted a motion by Stillfront to confirm BDO’s arbitral conclusions. Fortis appealed to the Delaware Supreme Court, arguing that BDO had exceeded its authority by determining legal issues, as the ADR provision called only for an expert determination, with the expert having narrow authority to resolve accounting-based calculation issues. The Supreme Court, in a decision issued by Justice Gary F. Traynor, affirmed the Court of Chancery’s rulings that the ADR provision required an arbitration and, therefore, BDO had broad authority, including to make earnout-related legal determinations.

Discussion 

The Merger Agreement. The Merger Agreement (as would be typical) provided as follows: 

  • “ADR Provision.” Delaware courts have exclusive jurisdiction over disputes arising out of the Merger Agreement, but either party can submit a dispute over “calculation of the earnout amount” to an “Arbitrator” (an independent accounting firm mutually selected by the parties) for resolution. 
  • ADR Process. (i) After receiving from the surviving corporation’s independent auditors the company’s 2019 financial statement, Stillfront must promptly deliver to Fortis an “Earnout Determination Statement” setting forth Stillfront’s calculation of the “Earnout Amount.” (ii) The Earnout Determination Statement will become final and binding on the parties 30 days after delivery of the Earnout Determination Statement, except with respect to any items as to which Fortis previously provided to Stillfront an “Earnout Disagreement Notice.” (iii) 45 days after delivery of an Earnout Disagreement Notice, either party can refer the dispute to the Arbitrator, and the Arbitrator’s determination will be final and binding.
  • “No-Bad-Faith Covenant.” Stillfront and the surviving corporation will not “take any action in bad faith to reduce any Earnout Amount.” If this covenant is breached, there will be a presumption that the maximum earnout amount ($30 million) will become due and payable.
  • “Information Covenant.” Fortis “will have reasonable access to information about the Surviving Corporation and the reasonable assistance of officers and employees…for the purpose of performing their duties and exercising their [contractual] rights.”

The Supreme Court concluded that the earnout dispute was to be resolved by arbitration, and therefore BDO had broad authority. Fortis argued that the ADR provision called for an expert determination of calculation disputes, and therefore BDO only had authority to resolve narrow accounting-based calculation disputes. Fortis asserted that “[t]he parties never agreed that claims for bad faith or breach of the Merger Agreement’s information access provisions—neither of which require any calculation—would be adjudicated by an accountant.” The Supreme Court, however, held that the dispute was to be resolved through arbitration; that BDO had authority to resolve the Bad Faith Claims, which related to what earnout amount would be owed; and that BDO had authority to resolve the Information Claim, which was as a matter of “procedural arbitrability.”  

The Supreme Court held that the dispute was to be resolved through arbitration. The Supreme Court emphasized that the plaintiff initially, in the Court of Chancery proceedings, had been emphatic that the parties had agreed to submit the earnout dispute to arbitration. It was only after the arbitrator determined that no earnout payment was owed that the plaintiff asserted that the ADR provision called for an expert determination, with the expert’s remit being narrow. The Supreme Court stated that it would “hold” the plaintiff to its initial position. 

The Supreme Court held that BDO had authority to resolve the Bad Faith Claims. The Supreme Court held that the Bad Faith Claims came within the ambit of the ADR provision. Citing Viacom v. Winshall (Del. 2013) (which addressed an ADR provision in the earnout context), the Supreme Court endorsed the reasoning the Court of Chancery set forth in its decision below that “the subject matter of the dispute is the calculation of the earnout and, because the alleged [bad faith] breaches concerned the calculation of the earnout, the breach claims were for ‘the Arbitrator’ to decide.” The Supreme Court viewed “calculation” disputes as subsuming disputes that related to “the accuracy of the buyer’s earnout determination” (i.e., the amount of the earnout owed). Stillfront’s conduct underlying the Bad Faith Claims “had a direct bearing on how the Earnout Amount should be determined,” and indeed “proffer[ed] [Fortis’s] explanation as to why Stillfront’s Earnout Determination Statement was flawed,” the Supreme Court wrote.

The Supreme Court was unpersuaded by Fortis’s arguments that the “Earnout Amount” was tied to Adjusted EBITDA (and not to any breach of the operational covenants), and that breach of the operational covenants in bad faith carried a particularly dire consequence (the rebuttable presumption that the maximum earnout payment was owed). The Supreme Court wrote: “We are not swayed by the fine distinction Fortis draws between a calculation of the earnout amount linked to Kixeye’s Adjusted EBITDA and a determination that, because Stillfront manipulated the EBITDA figure in bad faith, it must pay the presumptive earnout amount…. In both cases, the Arbitrator is determining the earnout amount to which Fortis is actually entitled. The Court of Chancery correctly stepped aside so that the arbitrator could perform that task.”

The Supreme Court held that BDO had authority to decide the Information Claim. The Supreme Court explained that, where an agreement calls for arbitration, presumptively, the court decides whether arbitration applies to the plaintiff’s claims (i.e., the gateway issue of “substantive arbitrability”); and, if it does, the arbitrator decides whether the requirements for the arbitration have been met (i.e., the “procedural arbitrability” issues). Citing Viacom,  the Supreme Court stated: “If the subject matter to be arbitrated is the calculation of an earn-out,…all issues as to what financial or other information should be considered in performing the calculation are decided by the arbitrator.”

The Supreme Court rejected Fortis’s argument that its ability to enforce the Information Covenant had been “critical because that access was necessary before submitting [the] Earnout Determination Notice, not afterward—when it would be too late.” The Supreme Court wrote: “This argument, in our view, substantiates the Court of Chancery’s perception that the claim implicates what information the arbitrator must consider”—and, under Viacom, that issue is to be decided by the arbitrator. The Supreme Court noted that what actually had transpired was that Fortis had invoked its information rights in the arbitration, BDO had granted Fortis’s expansive request for production, Stillfront had produced over 10,000 pages of documents in response to BDO’s order, and Fortis had not claimed that its rights in arbitration were prejudiced by an inadequate production.

The Supreme Court noted the following recent decisions in which Delaware courts have held that ADR provisions similar to the one in Stillfront called for expert determination, not arbitration. These decisions indicate that Delaware courts may be likely to conclude that an ADR provision calls for an expert determination unless it clearly calls for arbitration.

  • Terrell v. Kiromic Biopharma (Del. 2023). The Delaware Supreme Court concluded that an ADR provision providing for resolution by a board committee of disputes over interpretation of the parties’ stock option agreement did not call for arbitration, even though it provided that the committee had authority to interpret the agreement (i.e., to reach a legal conclusion). The Court noted that the provision: “[did] not include procedural rules affording each side the opportunity to present their case—a defining characteristic of arbitration provisions”; “lack[ed] the broad scope of an arbitration—[as] it only authorize[d] the Committee to make a limited, albeit critical, legal determination”; and “[did] not empower the Committee to award relief, as one would expect in an arbitration.” The Court noted that the provision did not squarely call for a classic expert determination either—but held that, as it did not call for an arbitration, the Court of Chancery did not err by treating it as calling for an expert determination.
  • ArchKey v. Mona (Del. Ch. 2023). The Court of Chancery concluded that an ADR provision providing for resolution by an independent accountant of disputes over a post-closing price adjustment mechanism in an acquisition agreement did not call for an arbitration, even though it referred to the accountant as an “arbitrator.” The court stressed that an accounting true-up generally calls for an expert determination, and that the ADR provision, “read as a whole,” did not appear to call for an arbitration. The court noted that the provision granted the accountant a narrow scope of authority—only to resolve the items specified in a post-closing objection notice (and not the parties’ dispute more generally) and only on the basis of the parties’ written submissions (without a hearing). Therefore, the court concluded it was for the court to interpret what the agreement meant by the requirement that the balance sheet had to be prepared in good faith, consistent with past practices, and in accordance with GAAP, while it as up to the accountant then to “apply” the standards and determine whether they were met. 
  • Sapp v. Industrial Action Services (3d Cir. 2023). The Third Circuit Court of Appeals, overturning the district court, concluded that an ADR provision providing for resolution by an independent accountant of disputes over an earnout (a provision “remarkably similar to” the Stillfront provision) did not call for arbitration The Circuit Court concluded that the provision called for an “expert determination of narrow accounting-related questions” (and mediation and litigation of all other disputes). The Circuit Court noted that the ADR provision provided the accountant with “limited authority, a narrow scope of duty, a short deadline, and no procedures for conducting discovery or accepting legal arguments.”   

Practice Points

  • ADR provisions must be clear and unambiguous as to the nature and scope of the ADR process. Most critically, the parties should specify whether the ADR expert will act as an arbitrator or as an expert. Parties should consider whether to identify specific issues, or types of issues, as to which the expert will act as an arbitrator, others as to which it will act as an expert, and others as to which it will not act and the court will decide. The issues specified might be those that typically require consideration of both expert and legal issues to resolve (such as whether financial statements were prepared consistent with past practice, whether an earnout statement contained sufficient detail, or whether a milestone was met); or those that are most likely to occur or to be significant in the particular factual context. Parties may want to consider a default provision that states that an arbitration, or instead an expert determination, will be utilized where it is otherwise uncertain which would apply.
  • Parties should understand that the substantive provisions of an ADR provision, rather than the labels the parties provide, will govern the court’s interpretation. Merely labelling a process as an arbitration or expert determination, or characterizing the decision-maker as an arbitrator or  expert, will not be definitive for a court’s conclusion as to which process is called for. The court will look to the substantive provisions, read as a whole. Provisions calling for the decision-maker to resolve “all” disputes, or “any” dispute, or to “interpret” the parties’ agreement, often are viewed as indicating an arbitration process. Provisions calling for limited authority of the decision-maker, no specific procedures for the process, a short or informal process, no discovery or hearing, no authority to award relief, and/or a determination that is not final and binding on the parties, are often viewed as indicating an expert determination process.
  • Parties should consider using general statements of intention and/or hypothetical examples to provide greater clarity. Providing clarifying statements in the agreement as to the parties’ intentions, or providing hypothetical examples of specific issues and how the parties intend that they would be resolved, may be helpful in guiding the court’s interpretation of an ADR provision.
  • Parties should consider clarifying the expert’s scope of authority to resolve “calculation” disputes. Based on Stillfront, a provision calling for resolution of disputes over “calculation” of an earnout (or other post-closing adjustment) may be interpreted as conferring broad authority to resolve disputes that do not involve actual calculations but relate to what the earnout amount will be. Parties should consider specifying that the decision-maker will have authority to determine only  financial- or accounting-related metrics, principles and calculations, and not broader legal issues that may relate to the earnout amount owed (such as determining whether a milestone was met, or a party complied with operational, good faith, or efforts covenants).
  • Generally, the party not doing the calculation will want to negotiate for the broadest possible expert review of the calculation. Thus, a seller often will want an arbitration process, with broad authority granted to the expert, while a buyer will want an expert determination, with limited authority for the expert. Parties also may consider that, generally, arbitration (i) takes longer and is more expensive; and (ii) may offer a better process where there are multiple issues, the evidence is complex, and/or legal issues are involved.
  • A seller should seek broad informational rights. Given that, in an arbitration process, the expert has authority to resolve disputes over what information has to be provided, a seller should considering seeking to include in the parties’ agreement, in addition to a general statement about reasonable access to information, specified information that the seller will be entitled to receive before it has to provide a notice of disagreement to the buyer’s earnout statement. A seller may wish to negotiate for an extension of the deadline for providing an earnout disagreement notice in the event that all, or specified, information has not been provided before then.