Chancery Addresses When an Efforts Clause-Based Earnout Claim May Ripen
S’holder Representative Servs., LLC v. Alexion Pharm., Inc., C.A. No. 2020-1069-MTZ (Del. Ch. Sep. 1, 2021)
Mergers and sale agreements frequently include earn-out provisions that entitle one party to future compensation if certain business or financial goals are met within a defined period. In return, the other party often must use a defined level of effort—such as “commercially reasonable” efforts—to achieve the goals that trigger the earn-out. This case addresses a practical threshold question: If the party entitled to the earn-out believes that the other party has breached its duty to use commercially reasonable efforts, may that party sue immediately, or must that party wait until the earn-out period ends?
Through a 2018 merger, Alexion Pharmaceuticals, Inc. (“Alexion”) acquired Syntimmune, Inc., including rights to a developmental drug. Shareholder Representative Services, LLC (“SRS”) represented Syntimmune’s pre-merger stockholders and option holders and was a party to the merger agreement. That agreement provided SRS up to $800 million in earn-out payments based upon the drug’s development over eight contractually-defined milestones.
The agreement also required Alexion, for a period of seven years, to use commercially reasonable efforts to achieve the milestones that would trigger SRS’s earn-out payments. But, in 2020, Alexion’s public disclosures indicated that Alexion had terminated trials on the drug in the second quarter of 2019.
In December 2020, SRS filed a complaint alleging, among other things, that Alexion ceased to use commercially reasonable efforts to develop the drug as of October 2019. Alexion moved to dismiss, arguing that SRS’s claim was not ripe because the earn-out period had not expired and there was still time for it to achieve the milestones.
The Court denied Alexion’s motion based upon settled principles of ripeness and claim accrual. As the Court explained, a claim generally is ripe for adjudication if litigation appears unavoidable and if the material facts are static. Relatedly, under Delaware’s “occurrence rule,” a claim generally accrues at the time of the wrongful act, absent some basis for tolling.
Here, that meant SRS’s claim accrued as of October 2019, when SRS alleges Alexion breached the merger agreement by ceasing to use commercially reasonable efforts to achieve the earn-out milestones. In the Court’s view, Alexion’s motion improperly conflated Alexion’s obligation to use commercially reasonable efforts to achieve the milestones during the earn-out period with Alexion’s separate obligation to pay certain sums upon achievement of the milestones. Because SRS properly pleaded that Alexion breached the merger agreement by using substandard efforts, and because the surrounding facts are static regarding that alleged breach, the Court concluded that SRS’s claim was ripe, notwithstanding the unexpired earn-out period.Share