What's Happening?
As mergers and acquisitions are projected to increase in 2026, earnout provisions are becoming a focal point for dealmakers and the legal community. These provisions, which allow sellers to benefit from
post-closing success, are often contentious and lead to litigation. The Delaware Supreme Court is currently hearing the Fortis v. Johnson & Johnson case, which involves a dispute over earnout provisions related to the acquisition of Auris. The case highlights the challenges in balancing buyer and seller interests post-closing, with Johnson & Johnson arguing its actions were commercially reasonable despite breaching the earnout agreement.
Why It's Important?
Earnout provisions are crucial in bridging valuation gaps in M&A transactions, but they often lead to disputes due to differing post-closing interests. The outcome of the Fortis v. Johnson & Johnson case could set a precedent for how earnout provisions are interpreted and enforced, impacting future M&A deals. As earnouts become more prevalent across industries, understanding their risks and rewards is essential for dealmakers to navigate complex transactions and avoid litigation.
What's Next?
The Delaware Supreme Court's decision in the Fortis v. Johnson & Johnson case will be closely watched by the M&A community, as it could influence the use and enforcement of earnout provisions. Dealmakers may need to reassess their strategies and contractual terms to mitigate risks associated with earnouts. The case may also prompt legal reforms to provide clearer guidelines for earnout provisions in M&A transactions.
Beyond the Headlines
The increasing use of earnout provisions reflects a shift towards more flexible and performance-based transaction structures in M&A. This trend highlights the need for robust legal frameworks to address potential disputes and ensure fair outcomes for both buyers and sellers. As earnouts become more common, dealmakers must consider the implications for transaction dynamics and stakeholder relationships.
