DealLawyers.com Blog

As I shared shortly after the decision, the Delaware Supreme Court recently affirmed in part and reversed in part the Chancery Court’s decision in Fortis Advisors v. Johnson & Johnson. In addition to sharing some thoughts about the Court’s decision regarding J&J’s successful implied covenant arguments, this Fried Frank alert also shares some tips for drafting earnouts — particularly for life sciences M&A.

When drafting a regulatory approval provision, consideration should be given to the possibility (even if remote) that the regulator might eliminate, replace or modify the specified regulatory approval. In J&J/Auris, the Supreme Court emphasized that the parties “anchored their milestones to a specific regulatory category and nothing more”—and that drafting choice “foreclose[d] any claim that the contract is silent about what form of FDA clearance would suffice.” The Supreme Court observed that Auris and J&J “neither defined the milestones by reference to ‘regulatory approval by 510(k) or any successor or alternative pathway (emphasis added)’ nor provided that the earnouts would adjust if the FDA closed the 510(k) route or extended its review.”

The Supreme Court’s decision also highlights certain drafting considerations with respect to (i) efforts obligations and (ii) anti-reliance provisions. With respect to efforts obligations, where the parties set a standard for the required efforts (such as, in this case, “commercially reasonable efforts comparable to J&J’s other priority medical products”), and they also preserve some discretion for the obligated party (in this case, a list of ten factors that J&J could “take into account” when determining what efforts to take), the drafting should be clear as to whether the discretionary factors are subject to, or instead independent of, the specified efforts standard. With respect to anti-reliance provisions, where the agreement includes an earnout, the buyer should consider seeking an express disclaimer from the seller as to its non-reliance on the buyer’s extra-contractual statements relating to the likelihood of achievement of all or any part of the earnout.

– Meredith Ervine