The Delaware Supreme Court’s Jan. 12, 2026, decision in Johnson & Johnson v. Fortis Advisors provides important insights for buyers who use earnouts in structuring their acquisitions, a common approach in life sciences M&A. In this case, the court provided guidance on the scope of “commercially reasonable efforts” obligations and certain limitations thereon.
The background
The case related to the acquisition by J&J of the medical robotics company, Auris Health. The merger agreement provided for payment of up to $2.35 billion in earnouts tied to FDA 510(k) clearances for Auris’s surgical robots. It also included a commercially reasonable efforts obligation requiring J&J to use efforts toward such clearances consistent with those used for its own priority products.
After the transaction closed, the FDA eliminated the 510(k) pathway for first-generation devices, such as Auris’s product, for the general surgery indication. J&J determined that this regulatory change relieved it of the requirement to pursue the future milestones, since the merger agreement expressly required 510(k) approval. J&J did not pursue the De Novo route to approval and ceased its efforts on all the milestones.
Fortis Advisors, representing Auris Health’s former stockholders, sued J&J, claiming it failed to honor its contractual obligations.
The Delaware Court of Chancery found that the implied covenant of good faith and fair dealing applied in this scenario, requiring J&J to pursue the alternative De Novo route to approval when the expressly required route became unavailable. That court awarded over $1 billion in damages to the plaintiffs.
The Delaware Supreme Court decision
The supreme court reversed the decision as it related to the first milestone, holding that the merger agreement was anchored to 510(k) approval and the implied covenant could not be used to rewrite the bargained-for deal. The supreme court emphasized that the implied covenant is a narrow gap-filler that applies only when parties could not have anticipated a development, not when they failed to draft for a foreseeable, even if unlikely, risk.
Because the parties expressly tied the first milestone to 510(k) approval and were aware of the possibility of FDA changes, the court determined that the implied covenant could not be used to supply a substitution for that milestone. However, the court further concluded that J&J’s failure to pursue De Novo approval of the Auris product did amount to a breach as to the later milestones, on the basis that De Novo clearance could have provided the predicate device needed for subsequent 510(k)s. The court affirmed that J&J breached its commercially reasonable efforts obligations as they related to the remaining milestones.
The court also upheld the Chancery Court’s reading of the merger agreement’s efforts requirement as allowing J&J room to calibrate its efforts within the defined “priority device” standard based on factors it was permitted to take into account. But it did not go so far as to displace that standard or permit decisions inconsistent with achieving the earnout milestones.
Why this matters for parties using earnouts
First, the decision underscores a principle that has been fundamental to judicial review of earnout provisions: Words matter. If a milestone specifies a particular regulatory pathway, courts may enforce that specificity and reject the use of an implied covenant to pursue a different approval pathway as an alteration of the originally bargained-for terms. Deal parties should carefully consider the triggers for earnout payments and provide (or not) for flexibility on achievement based on the expectations of the parties. Parties may not be able to count on post-signing flexibility for changes to milestone provisions via implied covenants when the agreement is explicit on a regulatory requirement.
Second, the ruling confirms that commercially reasonable efforts obligations do have bite and will be enforced. Even when a contract allows discretion based on enumerated business factors, the buyer must act within the agreed efforts standard. And when subsequent milestones remain achievable, even if the initial milestone is not met, commercially reasonable steps still can be required.
Finally, the opinion aligns with a broader set of Delaware decisions on earnouts that demonstrate the courts will scrutinize the specific facts applicable to a determination of compliance with efforts standards, looking to the standard set by the parties (e.g., inward as to what the buyer would do with its own products or outward with reference to other companies in the industry). Buyers should carefully consider the standard they choose and consider post-closing activities in that light.
Drafting points parties should consider
Milestone triggers should be carefully drafted, with a focus on the level of specificity the parties desire for achievement and the efforts required to do so. Where a milestone requires a certain approval or pathway, consider potential changes in regime and whether a successor or alternative pathway must or must not be pursued. Also, consider effects of initial efforts requirements on achievement of later milestones.
The efforts standard should be precisely defined, with clarity on any factors that may allow the buyer to exercise discretion. If buyer self-interest or synergy considerations are intended to be weighed, say so; if they are not, say that. Consider identifying specific comparison efforts to reduce ambiguity.
Finally, consider alternatives to general commercially reasonable efforts covenants when possible. Buyers should consider limiting the commitment to specific and clear obligations, such as a requirement to “not take any action with the primary purpose of frustrating the earnout.” On either side, tailored “do’s and don’ts” (for example, permitted deprioritizations or express requirements for funding) can reduce litigation risk by converting fuzzy standards into clear rules.
Operational takeaways
To the extent practicable, buyers who have committed to post-closing efforts obligations should monitor and document post-closing decisions and how they align with the agreed standard, especially when the buyer has competing product development or commercialization programs. Courts will test whether the buyer’s efforts matched the required benchmark, which may be without regard to general corporate priorities. Buyers should try to align governance, budgeting, incentives and reporting for the earnout business with the promised level of efforts.
The J&J/Auris decision may impact the role of the implied covenant when parties anchor milestones to specific approval pathways, but it also confirms that commercially reasonable efforts still obligate buyers to take enabling steps for later milestones. Parties to deals with earnouts should update their drafting and post-closing playbooks accordingly.
McGuireWoods continues to monitor developments affecting life sciences M&A. For questions about related topics, contact the author or a member of the Life Sciences Industry Team.