Delaware's courts have long served as the final word on American corporate disputes. On January 12, 2026, the state's Supreme Court issued a ruling that will reshape how companies structure billion-dollar acquisitions: when a merger agreement specifies a particular path to an earnout payment, courts will not rescue sellers who failed to negotiate alternatives.
The case arose from Johnson & Johnson's $3.4 billion acquisition of surgical robotics company Auris Health. The deal promised up to $2.35 billion more if certain milestones were met—but when the Food and Drug Administration closed the agreed-upon regulatory pathway four months after closing, J&J refused to pursue alternatives. The question: could courts imply an obligation the contract never stated? Delaware's highest court said no.
13 events
Latest: February 4th, 2026 · 4 months ago
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February 2026
Law Firms Issue Comprehensive Earnout Drafting Guidance
LatestAnalysis
Sullivan & Cromwell, Paul Weiss, Fried Frank, and other major M&A practices publish detailed client alerts and practice guides analyzing the Supreme Court ruling's implications for earnout provisions. Consensus emerges that sellers must explicitly negotiate for buyer obligations to pursue alternative regulatory, commercial, and operational pathways.
M&A Market Reacts: Earnout Provisions Under Scrutiny
Market
Deal lawyers report increased seller pushback on earnout terms in active transactions. Buyers face pressure to accept more detailed pathway specifications and explicit alternative-pursuit obligations. The ruling accelerates a shift toward more granular earnout drafting across life sciences, technology, and growth-stage M&A.
Legal Commentary Analyzes Ruling
Analysis
Major law firms published analyses emphasizing the decision's implications for M&A drafting, warning that sellers must explicitly negotiate for alternative pathway obligations.
January 2026
Supreme Court Limits Implied Covenant
Legal
Justice LeGrow authored the opinion reversing the implied covenant finding while affirming most other rulings. The court held that foreseeable regulatory risks cannot be addressed through gap-filling doctrine.
October 2025
Supreme Court Hears Appeal
Legal
The Delaware Supreme Court heard oral arguments on J&J's appeal, focusing on whether the implied covenant could require pursuit of alternative regulatory pathways.
September 2024
Court Awards $1B+ in Damages
Legal
Vice Chancellor Will issued a 145-page opinion finding J&J liable for breach of contract, breach of implied covenant, and fraud. The award was the largest earnout-related damages judgment in Delaware history.
January 2024
Ten-Day Trial in Chancery Court
Legal
Vice Chancellor Lori Will presided over the trial examining whether J&J breached its efforts obligations and whether the implied covenant required pursuing alternative FDA pathways.
2020
Project Manhattan Competition
Business
J&J initiated 'Project Manhattan,' an internal competition pitting Auris's iPlatform against Verb's robot. Although iPlatform won, the competition deprioritized regulatory milestone work. J&J eventually abandoned the iPlatform design.
Fortis Files Lawsuit
Legal
Fortis Advisors, representing former Auris shareholders, sued J&J in Delaware Court of Chancery for breach of earnout obligations and fraudulent inducement.
December 2019
J&J Acquires Full Control of Verb Surgical
Deal
J&J bought out Verily's stake in Verb Surgical, their joint venture for surgical robotics, setting the stage for internal competition with Auris's iPlatform.
August 2019
FDA Closes 510(k) Pathway
Regulatory
Four months after closing, the FDA confirmed that first-generation robotic-assisted surgical devices would no longer qualify for 510(k) clearance and would require the more rigorous De Novo review process.
April 2019
Acquisition Closes
Deal
J&J completed the Auris acquisition. The merger agreement specified that earnout milestones required FDA approval through the 510(k) premarket notification pathway.
February 2019
J&J Announces Auris Acquisition
Deal
Johnson & Johnson announced it would acquire Auris Health for $3.4 billion upfront plus up to $2.35 billion in earnout payments tied to FDA regulatory milestones.
Historical Context
3 moments from history that rhyme with this story — and how they unfolded.
1 of 3
November 2011
Winshall v. Viacom (2011)
Shareholders of Harmonix, the Rock Band video game developer, sued Viacom after the company allegedly failed to renegotiate distribution fees with Electronic Arts—a move that would have increased earnout payments. The Delaware Court of Chancery dismissed the implied covenant claim.
Then
The court held that because the merger agreement did not require Viacom to renegotiate the fees, the implied covenant could not create that obligation.
Now
Established the principle that Delaware's implied covenant will not create affirmative obligations to maximize earnouts—it only prohibits deliberate sabotage.
Why this matters now
The J&J ruling builds directly on Winshall's reasoning, but goes further: even when a contractual pathway becomes unavailable, courts will not imply an obligation to pursue alternatives if the risk was foreseeable.
2 of 3
September 2008
Hexion v. Huntsman (2008)
During the 2008 financial crisis, Hexion Specialty Chemicals attempted to escape a $10 billion merger with Huntsman Corp. by claiming the combined company would be insolvent. Hexion also breached covenants requiring it to use reasonable best efforts to consummate the deal.
Then
Vice Chancellor Lamb rejected Hexion's Material Adverse Effect defense and found the company knowingly breached its efforts covenants.
Now
Established that 'commercially reasonable efforts' and 'reasonable best efforts' require parties to 'take all reasonable steps to solve problems and consummate the transaction.'
Why this matters now
The J&J case affirmed that efforts clauses have teeth—J&J's breach of its efforts obligations cost it over $800 million even after the implied covenant reversal—but distinguished between what express efforts clauses require versus what courts will imply.
3 of 3
September 2024
Alexion/Syntimmune Earnout Dispute (2024)
In a case decided one day after the Auris trial verdict, the Delaware Court of Chancery found Alexion Pharmaceuticals breached its 'commercially reasonable efforts' obligations in a $1.2 billion acquisition of Syntimmune. Former shareholders sought over $700 million in milestone payments.
Then
The court found Alexion liable but rejected full damages, applying probability analysis to determine likely milestone achievement.
Now
Reinforced that Delaware courts will rigorously enforce efforts standards in earnout provisions, comparing buyer conduct against objective industry benchmarks.
Why this matters now
Together with J&J/Auris, the Alexion decision signals a Delaware 'earnout eruption'—increased judicial scrutiny of buyer conduct post-closing, combined with clearer limits on gap-filling doctrines.
