On February 7, 2025, the NAM moved for leave to file an amicus brief asking the Delaware Supreme Court to restore predicable contract interpretation to Delaware courts. In this case, J&J, through its subsidiary Ethicon, purchased surgical robot developer Auris Health for $3.4 billion. The parties’ merger agreement required J&J to pay up to $2.35 billion more if the acquired technology achieved certain milestones through the FDA’s 510(k) premarket approval pathway. However, the FDA later informed J&J that that technology was ineligible for 510(k) regulatory approval, requiring J&J to use the De Novo pathway—a more onerous and resource intensive pathway—to obtain approval, which was not contemplated by the merger agreement. Plaintiff Fortis Advisors—in its capacity as the representative of former Auris Health stockholders—sued J&J in Delaware Chancery Court alleging that J&J breached the merger agreement. The Delaware Chancery Court agreed with the plaintiff and entered a judgment for the plaintiff in the amount of $5 billion. J&J has appealed that decision to the Delaware Supreme Court.
We explain in our amicus brief that earnout provisions in merger agreements are ubiquitous. They help align incentives by carefully allocating risk—buyers can hedge by paying less up front, and sellers get extra if all goes according to plan. The Delaware Chancery Court’s decision disregarded the express terms of the merger agreement and, if allowed to stand, could undermine confidence and certainty in Delaware law. This confidence is critical given that 2 million companies are incorporated in Delaware, including 67.7% of the Fortune 500.
Unfortunately, on February 27, 2025, the Delaware Supreme Court denied the NAM’s request to file an amicus brief in the case.