Chancery Finds That Buyers Breached Their Efforts Obligation—Auris and Alexion
In the Court of Chancery’s two most recent earnout decisions—Fortis v. Johnson & Johnson (“Auris”) (Sept. 4, 2024) and SRS v. Alexion (Sept. 5, 2024)—the court concluded that a buyer breached its contractual obligation to use “commercially reasonable efforts” to achieve an earnout. In Auris, the parties had agreed to an “inward-facing” obligation, requiring that the buyer use efforts to […]
Gail Weinstein is a Senior Counsel, Philip Richter is a Partner, and Steven Epstein is a Managing Partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Steven Steinman, Maxwell Yim, and Colum J. Weiden, and is part of the Delaware law series; links to other posts in the series are available here.
In the Court of Chancery’s two most recent earnout decisions—Fortis v. Johnson & Johnson (“Auris”) (Sept. 4, 2024) and SRS v. Alexion (Sept. 5, 2024)—the court concluded that a buyer breached its contractual obligation to use “commercially reasonable efforts” to achieve an earnout.
In Auris, the parties had agreed to an “inward-facing” obligation, requiring that the buyer use efforts to develop the earnout product—a surgical robot—similar to the efforts it expended for its other “priority medical products.” The court held that the buyer breached this obligation when it caused the earnout product to compete head-to-head with, and then to combine with, one of the buyer’s competitive products. Those actions, the court found, were lesser than the efforts the buyer had made for the single comparator product and inconsistent with the priority status the buyer was required to accord to the earnout product.
In Alexion, the parties had agreed to an “outward-facing” obligation, requiring that the buyer use efforts to develop the earnout product—an antibody to treat disease—similar to the efforts of similar companies for similar products under similar circumstances. The court held that the buyer breached this obligation when it terminated the earnout product, purportedly due to concerns over new safety data and the resulting effect on the product’s order of entry to the market. The court, essentially rejecting the validity of the buyer’s purported business reasons for the termination, concluded that, under similar circumstances, another similar company would have gathered more safety data rather than terminating the product. The overlay to that conclusion was that the court viewed the buyer’s purported reasons for the termination as pretexts, with the real reason for the termination being that the buyer was acquired during the earnout period and its acquiror wanted the product terminated to help it secure the outsized merger synergies it had publicly promised.
