Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article.

 A  Delaware Supreme Court panel recently upheld the Court of Chancery’s decision that breach-of-good-faith and conflict-of-interest claims that arose from a post-closing merger earnout dispute after the acquisition of online video game developer Kixeye were properly left to an arbitrator to resolve as part of the merger pact’s alternate dispute resolution provision in Fortis  Advisors LLC v. Stillfront Midco AB, C.A. No. 2021-0870 ( Del. Feb. 13, 2026).

Justice Gary Traynor, on behalf a three-justice panel, rejected the seller’s appeal of Chancery’s approval decision, finding that the merger parties had agreed to submit earnout calculation disputes to arbitration and viewed the bad faith and conflict claims essentially as contesting the accuracy of the deal’s earnout determination.  The panel also found no error in Chancery’s decision to take no action regarding an allegedly undisclosed relationship between the arbitrator’s firm and the buyer’s counsel.

The decision should be of interest to merger and acquisition specialists because Delaware’s Supreme and Chancery Courts appeared to concur on how broadly  a common ADR provision may be applied in claims that could affect post-sale earnout calculations,

Background

Under the merger agreement, Stillfront agreed to pay a base price of $90,000,000 and provided for an earnout bonus if Kixeye’s “Adjusted EBITDA” for the year ending December 31, 2019, exceeded $15,000,000.  According to court records, the maximum possible earnout amount was $30,000,000.  The parties consented to “the exclusive jurisdiction of any court of the State of Delaware.”   But the merger parties also included a contractual ADR provision that provided an expedited mechanism for the resolution of a dispute over the calculation of the earnout amount.

On October 8, 2021, Fortis filed suit against Stillfront in the Court of Chancery, alleging two breach of contract claims and, in the alternative, a claim for breach of the implied covenant of good faith and fair dealing. In one count, Fortisalleged that Stillfront violated the operational covenants by slashing Kixeye’s marketing expenditures in bad faith.

Fortis alleged that Stillfront “unilaterally and retroactively readjusted”Kixeye’s operating expenses for the Pre-Merger 2019 Period to amounts materially in excess of the average monthly amounts presented on Schedule 1.1(a) of the Merger Agreement.

Chancery’s decision and the appeal

Because the Court of Chancery’s order compelling arbitration and dismissing Fortis’s complaint hinged upon its interpretation of § 2.14 of the merger agreement, our review of that order is de novo,” Justice Traynor wrote.  “The Court of Chancery denied vacatur of the arbitration award under the narrow evident partiality standard….however, we review that determination de novo.”

Justice Traynor noted that, “In its lead argument on appeal, Fortis contends that the Court of Chancery erred by treating § 2.14’s ADR mechanism as an arbitration clause. According to Fortis, the court should have instead viewed § 2.14 as calling for a “narrow accounting-based expert determination” and thus not subject to the principles that govern arbitration.”

But he pointed out that, ‘’ In pressing this argument, Fortis relies heavily on three decisions—one from our Court, another from the Court of Chancery, and a third from the Third Circuit Court of Appeals—each of which addresses how courts should classify contractual ADR provisions similar to § 2.14 and how that classification affects the decision-making process” … and that all three “were all announced in the year following the court’s granting of Stillfront’s motion to compel arbitration. Without the benefit of the analyses found in these opinions, Fortis framed—and the court resolved—the questions regarding the scope of § 2.14 under the assumption that it was an arbitration provision and not one calling for an expert determination.”

Justice Traynor concluded that it was important that during oral argument on Stillfront’s motion to compel arbitration in the Court of Chancery, Fortis’s counsel repeatedly referred to § 2.14 as an arbitration provision and even asked himself rhetorically whether “the parties agree[d] to arbitrate something?” His answer: “No dispute here on that issue.”