DealLawyers.com Blog

As this Cooley M&A blog notes, earnouts are a much more common — and high-stakes — feature of life sciences M&A deals than non-life sciences deals, which only included an earnout 21% of the time according to SRS Acquiom’s 2023 Life Sciences M&A Study. They also lend themselves to interpretive disagreements. Vice Chancellor Laster once observed in Airborne Health Inc. v. Squid Soap, that “an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome.” Inevitably, this is especially true in life sciences M&A, where the earnout is more likely to comprise a very significant portion of the total deal consideration.

Not surprisingly, then, life sciences earnouts have been keeping the Delaware Chancery Court very busy in recent months. The blog walks through some recent decisions, including Fortis Advisors v. Medtronic Minimed (Del. Ch.; 7/24), Fortis Advisors v. Johnson & Johnson (Del. Ch.; 9/24) and Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch. 9/24), and then shares key takeaways, with some practical steps practitioners can take to avoid unnecessary heartburn with a negotiated earnout down the road. Here are a few:

– Consider specifying post-closing plans – If the parties are contemplating an inward-facing commercially reasonable efforts standard, the parties may want to consider whether to include more specific requirements, rather than relying on a typical reference to how the buyer develops, launches and commercializes products with similar market potential and all of the factors the buyer can take into account in making those decisions. Further, the parties should consider whether the economic impact of the potential milestone payments can be taken into account by the buyer in making decisions.

– Access to earnout information – Sellers should keep in mind that following a closing, the stockholder representatives’ insights into the buyer’s actions or omissions may be limited to the buyer’s sanitized periodic reports on their efforts to achieve the milestones. The plaintiffs in the J&J case had the advantage of a carryover workforce that had knowledge of the actions taken by J&J, but often the buyer does not retain the target’s employees to complete the product development or commercialization of products.

– Impact of acquisition on earnout obligations – Buyers that acquire targets that have outstanding earnout obligations from prior acquisitions need to consider how to conduct due diligence on the target’s compliance (or lack thereof) with commercially reasonable efforts obligations and should not assume that, post-closing, they can eliminate the target’s encumbered programs based on their own standard decision-making process.

– Meredith Ervine