DealLawyers.com Blog

This Sidley blog compares and contrasts two recent Chancery Court decisions — Shareholder Representative Services. LLC v. Alexion Pharmaceuticals, Inc. and Himawan v. Cephalon, Inc. — both involving acquisitions of development-stage biotech companies and both interpreting an earnout provision’s objective or outward-facing definition of “commercially reasonable efforts.” Interestingly, both buyers were later acquired by larger pharma companies. Both earnouts included a discretion clause, giving the acquiring company sole or complete discretion with respect to business decisions, with the CRE clause serving as a limitation on that discretion. As this excerpt describes, the two cases had different outcomes, and while factual differences mattered, so did the drafting of the CRE definition.

In Alexion, the stockholders prevailed:  The court found that the company had breached the CRE clause.  In Cephalon, the buyer prevailed:  The court found that the company had complied with the CRE clause. …

• In Alexion, the critical language was “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 development stages.” This language was followed by 11 factors to be “tak[en] into account,” related to, among other things, safety, efficacy, likelihood of approval, and commercial viability.
• In Cephalon, the critical language was “such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cephalon], with due regard to the nature of efforts and costs required for the undertaking at stake.”

In Alexion, the court took issue with an “idiosyncratic corporate initiative” to launch ten new drugs by 2023 and, following the acquisition of the buyer, with the parties’ pursuit of merger synergies, finding that the change in drug development efforts to accommodate this initiative and merger synergies didn’t satisfy an outward-facing efforts clause.

In Cephalon, the evidence suggested that Cephalon/Teva took the earnout’s milestone payment into account when determining whether it was a good business decision to continue on a certain development path. Focusing on the phrase “due regard to the nature of efforts and costs required,” the court found that “the CRE clause limited Cephalon’s discretion only insofar as it required the company to ‘go forward in its own self-interest.’”

The blog compares these two cases to highlight the importance of language in a CRE definition that either permits or prohibits considerations unique to the acquiring company.

The decisions suggest that for both sellers and buyers, language that includes—or excludes—considerations unique to the acquiring company can be critical, particularly as those factors may come into existence years after the acquisition.  The language in Cephalon was so permissive that the company was allowed to actively work against the seller’s interests in determining not to invest in drug development.

– Meredith Ervine