Earnouts have become increasingly important tools for bridging valuation gaps between sellers and buyers, particularly in life sciences deals, but the number of disputes seems to prove the adage that earnouts are “agreements to litigate in the future.” Earnouts generally are matters of contract, involving descriptions of the earnout trigger, the obligations of the buyer to pursue the earnout, and related matters. The rise in earnouts over the past several years, and accompanying rise in earnout disputes, resulted in multiple court decisions in 2024, which show how courts approach earnout-related provisions in acquisition agreements. We highlight below two disputes over whether the buyer used appropriate efforts to pursue earnout milestones. Sellers Prevail on “Outward Facing” Buyer Efforts Standard Alexion acquired Syntimmune in 2018, pursuant to an agreement that required Alexion to use “commercially reasonable efforts,” defined as “such efforts and resources typically used by biopharmaceutical companies similar in size and scope to” Alexion. Later, due to an internal initiative to launch a certain number of products by 2023, Alexion prioritized other programs, as it did 23 Shareholder Representative Services v. Alexion Pharmaceuticals (Del. Ch. Sep. 5, 2024). 24 Himawan. v. Cephalon, Inc. (Del. Ch. Apr. 30, 2024) not believe the Syntimmune products would be ready by then. Then, in 2021, Alexion itself was acquired by another company, following which the development of the Syntimmune products was paused after the acquiror promised significant synergies as part of the acquisition. The court determined that Alexion breached the efforts covenant, finding that Alexion’s decision to discontinue development of the products was driven by the pursuit of acquisition synergies, and so peculiar to Alexion, and not a decision that a hypothetical similarly situated company would have made.23 The court noted, among other things, that the definition of commercially reasonable efforts did not explicitly allow Alexion to consider its own efforts and cost. Buyer Satisfies Efforts Covenant That Permitted “Due Regard of the Costs” Cephalon acquired Ception in 2010, pursuant to an agreement that required Cephalon to exercise “commercially reasonable efforts,” defined as “the exercise of 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 cost required for the undertaking at stake,” but otherwise provided Cephalon “complete discretion” with respect to the business. The earnout milestone was achieved for one therapy, but after itself being acquired by another company and several discussions with regulators, Cephalon halted development of another therapy that could have triggered another earnout payment. The court determined that Cephalon satisfied its efforts covenant, finding that it was commercially reasonable for Cephalon to halt production given the costs and the likelihood of the therapy becoming a commercial success.24 The court found that allowing “due regard” for “efforts and costs” meant that the buyer could cease development “where the circumstances reasonably indicate, as a business decision, [and] [t]his includes all the costs and risks involved, including the milestone payments and the opportunity costs faced by” the buyer. The sellers complained that such an application of the efforts provision would only restrict actions that were against the buyer’s self-interest anyways, the court emphasized that that was “all that the sellers bargained for.” The sellers had previously claimed that Cephalon breached the implied covenant of good faith and fair dealing, which the court dismissed on 5. Surge in Court Opinions on Earnouts Provides Lessons 12 Morrison Foerster
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