In the recent decision of Akorn Inc. v. Fresenius Kabi AG, et. al., C.A. No. 2018–0300–JTL (Del. Ch. Oct 1, 2018), Delaware’s Chancery Court held, for the first time, that, because a corporation violated a “material adverse effect” clause of a merger contract, the purchasing company could forgo its obligation to buy the target company.1 In Akorn, the material adverse effect began just after the signing of the merger agreement at issue, when Akorn’s earnings took a nose dive, and whistleblowers from within Akorn approached Fresenius management about serious FDA compliance issues and representations made by Akorn’s management to Fresenius.2 The opinion, handed down in October, has divided commentators over its interpretation and implications.
Opinions vary because the decision, which is 247 pages long, covers a number of varying and alternative grounds for its holding. The Chancery court first held that “Fresenius validly terminated the Merger Agreement because Akorn’s representations regarding its compliance with regulatory requirements were not true and correct, and the magnitude of the inaccuracies would reasonably be expected to result in a Material Adverse Effect.”3 This holding alone would be a departure from previous Delaware Chancery case law. Coupled with the alternative grounds for finding a violation of the MAE clause, namely that, “Akorn materially breached its obligation to continue operating in the ordinary course of business between signing and closing,”4 and that, “Fresenius properly relied on the fact that Akorn has suffered a Material Adverse Effect as a basis for refusing to close,”5 the broader implication of the decision is apparent. Finding these alternative methods of violating an MAE increases the number of justifications for invoking an MAE clause to thwart a merger which is no longer desirable. Vice Chancellor Laster’s opinion regarding the decision to terminate the merger contract on these various grounds is significant in developing this area of law because, “[p]rior to Vice Chancellor Laster’s ruling, no Delaware court had found a material adverse effect to have occurred in the context of a merger agreement.”6
Vice Chancellor Laster’s opinion delineated several factors which informed his decision on whether the MAE clause had been violated. Commenters applauded the Vice Chancellor’s restraint—in this area—noting that:
Not surprisingly, the vice chancellor was careful not to draw a hard-and-fast line as to how much value must be lost. He considered, among other factors, the magnitude of the effect both qualitatively and quantitatively — as measured against the target company’s historical results, recent earnings guidance and pricing expectations — viewed from the perspective of a reasonable acquirer.7
One striking aspect of the factors Vice Chancellor Laster used in evaluating the violation of the MAE clause is the lack of disclosure on Akorn’s part regarding its regulatory violations. Laster’s opinion at least partially implies that mere disclosure by Akorn of its regulatory violations to Fresenius could have prevented Fresenius’s invocation of the MAE clause to stop the merger.8
The decision has been appealed.9 On appeal, one area of focus will likely be Vice Chancellor Laster’s reasoning with respect to the MAE clause breach. Commentators have suggested such a focus because Laster’s holding that known risks which eventually manifest as sufficient reason for invoking an MAE clause is novel. 10 Previous opinions had pointed only to unknown risks as a reason to invoke an MAE clause.11
The Delaware Supreme Court’s opportunity to use this characterization issue—known versus unknown risks—to reverse Vice Chancellor Laster’s holding will have to be solved on appeal. Perhaps the Delaware Supreme Court will view this departure negatively, but until that time, the importance that Akorn puts on MAE clauses as a method to cancel mergers counsels careful drafting in merger agreements.
J.B. Heaton, Akorn Could Alter ‘Material Adverse Effect’ Law in Delaware, Law360 (Oct. 4, 2018, 6:00pm), https://www.law360.com/articles/1089589/akorn-could-alter-material-adverse-effect-law-in-delaware. ↩
Vince Sullivan, Chancery Let’s Fresenius Ditch $4.3B Akorn Deal, Law360 (Oct. 1, 2018, 3:38pm), https://www.law360.com/articles/1087808/chancery-lets-fresenius-ditch-4-3b-akorn-deal. ↩
Akorn Inc. v. Fresenius Kabi AG, No. 2018–0300–JTL, at 5 (Del. Ch. 2018). ↩
See, Heaton, supra note 1. ↩
David Leiwand, James Langston & Mark McDonald, What Akorn Teaches Us About Delaware MAC Clauses, Law360 (Oct. 12, 2018, 1:23pm), https://www.law360.com/articles/1091566/what-akorn-teaches-us-about-delaware-mac-clauses. ↩
See id. ↩
Sullivan, supra note 2. ↩
Heaton, supra note 1. ↩