Earnout Decision Highlights Difficulty of Drafting with Sufficient Clarity to Avoid Post-Closing Disputes—Philips

Summary

In WT Representative LLC v. Philips Holdings USA Inc., No. 2024-0170 PRW, 2024 Del. Ch. LEXIS 293 (Del. Ch. Aug. 16, 2024), the Delaware Court of Chancery, at the pleading stage of litigation, declined to dismiss claims that Philips Holdings USA Inc., which had acquired Vesper Medical, Inc., had breached the parties' merger agreement when it failed to make a post-closing earnout. The earnout was contingent on Philips' obtaining FDA approval of Vesper's "DUO Venous Stent Systems." Philips had sole discretion with respect to the FDA approval, subject to an "outward-looking" efforts standard and an express obligation not to act in bad faith. Although the earnout provisions included detailed definitions, the court found they were ambiguous as to whether the FDA approval that was obtained—which covered all of the numerous sizes of stents included in the definition of the Systems but one (the narrowest size, which Vesper had ceased to use before the deal with Philips)—was sufficient to ...