DealLawyers.com Blog

For an M&A blogger, the earnout litigation following Alexion Pharmaceuticals’ 2018 acquisition of Syntimmune is one of those gifts that keep on giving.  We’ve already blogged about Vice Chancellor Zurn’s 2021 decision to deny Alexion’s motion to dismiss the case and her 2024 post-trial opinion finding that Alexion had breached its obligations under the earnout provisions of the merger agreement. Last week, in Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch.; 6/25), the Vice Chancellor turned her attention to the issue of damages.

If you decide to tackle this opinion, bring your calculator, because it’s as math-heavy a piece of work product as I’ve seen this side of NASA.  A lot of that math was necessary to lay out and assess both sides’ arguments concerning the probability that specific earnout payment milestones would be achieved. Vice Chancellor Zurn concluded that the strongest probability evidence was derived from Alexion’s own estimates of the probability of technical and regulatory success of Syntimmune’s experimental drug made shortly before the breach.

Vice Chancellor Zurn then calculated each earnout milestone’s expected payment by weighting the amount of the milestone payment by its probability of achievement. Regrettably, more math ensued. When it was finally “pens down,” the Vice Chancellor determined the present value of expected milestone payments based on their expected payment dates and then applied an annual discount rate to certain milestone payments.  Adding it all up, she concluded that Syntimmune’s stockholders were entitled to pre-interest damages in the amount of $180,944,915.32.

Yeah, I’m sorry that the preceding paragraph isn’t exactly a model of clarity.  I’m doing the best I can here, but complex mathematical calculations aren’t exactly in my wheelhouse – the “C” I got in Calculus my freshman year in college remains my proudest academic achievement!  So maybe the best way for me to exit from this blog is to say that I think the most important takeaway from Vice Chancellor Zurn’s opinion is her view of how the customary “expectation damages” measure for breach of contract claims should be approached when dealing with earnout milestones.

Citing the Chancery Court’s recent decision in Fortis Advisors v. Johnson & Johnson, (Del. Ch.; 9/24), the Vice Chancellor concluded that when a buyer’s breach of its efforts obligation made earnout milestones impossible to achieve, the expected value of those milestone payments at the time of the breach should be calculated by weighting each milestone by the proven likelihood it would be achieved:

SRS’s injury is best understood as the lost expected value of each milestone as compared before and after Alexion’s breach of its CRE Obligation.  As in Fortis, an expected value approach reflects the theory behind expectation damages, which aim to put “the nonbreaching party in as good a position as he would have been in had the contract been performed, and no better.”

Compensating for lost expected value, rather than with full value whenever earnout payments are likely and zero value whenever earnout payments are unlikely, strives to hit the mark on the parties’ reasonable expectations, rather than award windfalls for some promisees and goose eggs for others.

– John Jenkins