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There must be some kind of end of summer clearance sale for earnout litigation going on in Delaware, because over the past month or so, the Chancery Court has addressed earnout issues on no fewer than four occasions. The Court’s latest earnout decision is Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch. 9/24), which arose out of Alexion’s 2018 acquisition of a company called Syntimmune. The merger agreement in that deal provided for a purchase price of $1.2 billion, of which only $400 million was paid at closing. The remaining $800 million would be paid in installments contingent upon the completion of each of eight milestones relating to the development and commercialization of a monoclonal antibody known as “ALXN1830”.

With a sexy product name like that, what could go wrong? Well, as Vice Chancellor Zurn lays out in her 139-page opinion, the answer to that is “plenty.”  During the course of its efforts to develop the antibody, Alexion encountered all sorts of hurdles, including contamination of its clinical drug supply that resulted in delays of its Phase 1 trials, further delays associated the onset of the COVID 19 pandemic, and the death of a primate in a toxicology study that called into question the drug’s safety in humans. What’s more, in the midst of all this, Alexion was acquired by Astra-Zeneca, which further complicated decisions surrounding the development process.

Ultimately, Alexion terminated the development program, citing the results of the Phase 1 study.  SRS, on behalf of the former Syntimmune stockholders, sued Alexion, claiming that it had failed to pay an initial $130 million milestone payment that had become payable under the terms of the merger agreement upon the completion of the Phase 1 study. It also claimed that Alexion had breached its obligation to use commercially reasonable efforts to achieve each milestone for a period of seven years following the closing.

In order to assess SRS’s claim that the first milestone had been satisfied, Vice Chancellor Zurn had to wade her way through the labyrinthine facts surrounding the development effort and interpret the ambiguous language of the contract using extrinsic evidence. She ultimately concluded that the first milestone had been achieved. With respect to the issue of whether Alexion had breached its obligations to use commercially reasonable efforts to achieve each of the milestones, the Vice Chancellor began her analysis with the agreement’s definition of that term, which obligated Alexion to:

[Use] such efforts and resources typically used by biopharmaceutical companies similar in size and scope to [Alexion] for the development and commercialization of similar products at similar developmental stages taking into account, as applicable, the Product’s advantages and disadvantages, efficacy, safety, regulatory authority-approved labeling and pricing, the competitiveness in the marketplace, the status as an orphan product, the patent coverage and proprietary position of the Product, the likelihood of development success or Regulatory Approval, the regulatory structure involved, the anticipated profitability of the Product, and other relevant scientific, technical and commercial factors typically considered by biopharmaceutical companies similar in size and scope to [Alexion] in connection with such similar products.

VC Zurn characterized this standard as “outward facing,” in that it did not require an assessment of Alexion’s subjective intent in determining whether it exercised commercially reasonable efforts.  Instead, it focused on what efforts other similarly situated biopharma companies would typically use, taking into account the various factors enumerated in the definition.

Unfortunately, she concluded that there weren’t any real-world examples of similarly situated companies, so the Vice Chancellor cited Himawan v. Celphalon (Del. Ch.; 12/18) and determined that Alexion’s efforts should be evaluated by reference to a hypothetical similarly situated company.  She proceeded to do that over the course of the final 30 or so pages of her opinion, and ultimately concluded that Alexion had breached its obligations under the commercially reasonable efforts clause.

If this case sounds familiar, that’s probably because this isn’t the first time the Chancery Court has addressed issues surrounding this deal’s earnout provisions.  In 2021, Vice Chancellor Zurn denied Alexion’s motion to dismiss the plaintiffs’ claims surrounding the commercially reasonable efforts clause.

– John Jenkins