Johnson and Johnson ('J&J') is claiming a huge
US$7.2 billion in damages for breach of contract from pace-maker
manufacturer Guidant Corporation ('Guidant') in an ongoing
case in the US. This claim has brought into the news the thorny
issue faced by forensic accountants of whether hindsight can be
used in the calculation of damages.
In 2004, J&J signed a merger agreement to buy Guidant for
$21.5 billion. The merger agreement contained a no-solicitation
clause that allowed Guidant to consider a higher offer if one was
provided, but not to proactively seek one out. Guidant later
accepted a higher offer of $25 billion from another company, Boston
Scientific Corporation ('Boston Scientific'). Boston
Scientific then announced that it would sell part of the Guidant
business to Abbott Laboratories ('Abbott') to avoid
J&J allege that Guidant breached their contract by allowing
Abbott to conduct due diligence on its business, therefore allowing
the offer from Boston Scientific to be made.
Usually any amount paid in damages is meant to put the party
back in the position they would have been in had the breach of
contract not occurred. In this case, that is the position that
J&J would have been in had they been able to buy Guidant in
However, this case is complicated by the fact that the
acquisition of Guidant by Boston Scientific was not a success. In
fact, it has been called "arguably the second-worst ever
"(to be clear – this was not the second-worst ever by
Boston Scientific; It was the second-worst ever by anyone). Within
months of completion of the deal, Boston Scientific had to issue
safety recalls relating to Guidant cardiac devices, and also faced
a number of expensive product liability lawsuits . Boston
Scientific quickly issued a profit warning, and within a year,
Boston Scientific's stock had dropped by 46 percent, wiping out
$18 billion in shareholder value. Ouch.
So, given the difficulties faced by Guidant after 2006, it is
conceivable that J&J were in fact better off as a result of the
alleged breach of contract. However, J&J have asked the Court
to turn a blind eye to this possibility. Initial filings in this
case show that J&J argue that using hindsight should not be
used in the calculation of damages, and are attempting to exclude
from the case any information which arose after the alleged date of
breach. J&J's damages figure of $7.2 billion is therefore
based on what they expected from Guidant in 2006 (plus court
Not surprisingly, Guidant disagree with this approach, saying
instead that the Court should take into account the (poor)
performance of Guidant after its purchase. Such an approach would
no doubt result in a much lower damages figure than $7.2 billion
(or perhaps even no damages at all).
This is a phenomenally valuable issue, and our team can't
wait to see what the Court decides, as hindsight is an issue that
forensic accountants have to consider regularly when calculating
damages in breach of contract matters.
In our experience, the circumstances of each case must be
carefully considered as to whether using hindsight is appropriate -
one approach may be to consider the valuation both with and without
hindsight to wholly appreciate the impact of subsequent events.
The global economic slowdown is having an adverse impact on many businesses, often resulting in lower cash flows.
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