Current Month (January 2026)
Strategic Earnout Drafting Implications from Delaware Supreme Court in J&J/Auris
By Sachin V. Java, Walter Haverfield LLP
In Johnson & Johnson v. Fortis Advisors LLC (Del. Sup. Ct. Jan. 12, 2026), the Delaware Supreme Court reversed the Court of Chancery’s ruling that Johnson & Johnson (“J&J”) breached its efforts obligations, based on the implied covenant of good faith and fair dealing, with respect to the first earnout payment under the merger agreement through which it acquired Auris Health, Inc. (“Auris”), a medical robotics company, in 2019. In a 2024 decision, the Court of Chancery had awarded Auris more than $1 billion in damages, including $300 million related to the alleged breach concerning the first earnout payment.
The case arose from J&J’s 2019 acquisition of Auris for $3.4 billion upfront plus up to $2.35 billion in earnouts conditioned on certain Food and Drug Administration (“FDA”) 510(k) approvals. The first milestone required 510(k) approval for Auris’s iPlatform robot in general surgery, with subsequent milestones requiring 510(k) approvals for other devices using iPlatform as a predicate. Post-closing, the FDA eliminated the 510(k) approval pathway for first-generation devices like iPlatform in general surgery. J&J viewed the entire earnout as unachievable and ceased all efforts to obtain regulatory milestones. The Court of Chancery had held that J&J breached its efforts obligations for the first earnout by failing to pursue “De Novo approval,” an alternative pathway that would have achieved the same result without being significantly more burdensome, and awarded Auris over $1 billion in damages.
The Delaware Supreme Court reversed the first earnout ruling, holding that the Merger Agreement explicitly tied every regulatory milestone “to ‘510(k) premarket notification,’ and only to that pathway.” The Court stressed that the implied covenant cannot fill gaps for developments that “could have been anticipated, even if . . . unlikely to occur.” Here, the parties actually foresaw the risk: Auris had received FDA feedback questioning 510(k) availability, and FDA had publicly announced its 510(k) modernization efforts. By explicitly tying milestones to 510(k) and nothing more, the parties assumed this risk and could have drafted alternative provisions but chose not to. Standard provisions acknowledging regulatory uncertainties and granting J&J discretion to consider “guidance or developments from the FDA” further allocated this risk to Auris.
Notably, the Court affirmed breach findings for the remaining earnouts. While J&J had no standalone obligation to pursue De Novo approval for the first milestone, obtaining De Novo approval for iPlatform was necessary to create the predicate device required for the later 510(k) approvals that the contract expressly contemplated. By abandoning iPlatform entirely, the Court held, J&J breached its reasonable efforts obligation for the remaining milestones.
The decision reinforces Delaware’s strict textualist approach to earnouts and post-closing obligations. Where parties expressly condition earnout payments on specific regulatory outcomes, Delaware courts will enforce those conditions as written and will not use the implied covenant to reallocate regulatory risk that was foreseeable and addressed in the agreement. The case underscores the importance of precise drafting around regulatory milestones and alternative approval pathways, particularly in heavily regulated industries.
Delaware Chancery Court Analyzes Whether Plaintiff Was Entitled to Recovery Based on Merger Negotiation Representations Giving Rise to Fraud and Unjust Enrichment Claims Involving Exclusion of Intellectual Property
By Shawn Garrett, Garrett, PLLC
On January 15, 2026, the Delaware Court of Chancery issued its decision in CHP III, L.P. (“Plaintiff”) v. Benjamin F. Cravatt, et al. (“Defendants”). The Plaintiff alleged that Defendants breached their fiduciary duties by misrepresenting the value of certain intellectual property in an effort to exclude the IP (known as the “’444 Application”) from the merger, resulting in an alleged depressed merger price, harm to stockholders, and unjust enrichment post-closing.
Bayer Corporation merged with Vividion Therapeutics, Inc. (“Vividion”) for $2 billion. The Plaintiff owned stock in Vividion. Cravatt was listed as the founding chemist of Vividion, contributed to the creation of intellectual property owned by Vividion, and later used the IP in a separate venture, an allegation central to the Plaintiff’s unjust enrichment claim. Post-merger, Vividion was tasked with negotiating intellectual property licensing agreements in an effort to minimize liabilities by relinquishing interests in immaterial agreements, resulting in the IP being excluded. The Plaintiff filed suit alleging fraud and unjust enrichment, claiming that the Defendants’ actions to exclude the IP depressed the merger price and supported the Plaintiff bringing direct claims against the Defendants. The Defendants moved to dismiss the complaint, and the Court granted the motion. The Court held that the renegotiation of the license agreement took place after the parties fixed the merger consideration, and the agreement stated that the renegotiations would not affect the merger consideration.
In response to the Defendants’ motion to dismiss, the Plaintiff cites the decision in
Parnes v. Bally Entertainment Corp. (“Parnes”). The Court in Parnes held that a stockholder may challenge the validity of a merger, by charging the directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair price. In applying a variation of the Parnes three-part test, the Court in In re Primedia, Inc. Shareholders Litigation held that a plaintiff has properly pled their claim if they have pled an underlying derivative claim that could survive dismissal, that their claim is material to the merger, and that the complaint supports a reasonable inference at the pleading stage that the purchaser would not have the pursued derivative claim and did not pay value for it.
In CHP III the Court held the Plaintiff could not satisfy the second prong because the parties executed the merger agreement prior to negotiating the intellectual property licensing issues, and as such, the intellectual property was not material to the merger. Further, the Court held that the Plaintiff failed to allege that the Defendants interfered with the value of the intellectual property or the board members during the merger negotiations, facts that would have shown a more direct interference giving rise to the cause of action. As a result, the Plaintiff’s claims were dismissed.
