United States: How Do You Get A Big "Mac" In Delaware

 In a recent high-profile decision, the Delaware Court of Chancery excused a buyer from its obligation to purchase a public company target on the basis that, among other things, the target company had suffered a material adverse effect (otherwise known as an "MAE" or "MAC"). Vice Chancellor Laster's decision in Akorn, Inc. v. Fresenius Kabi AG, et al. C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018) is certain to resonate with practitioners and dealmakers alike, many of whom have often speculated about the circumstances required to properly invoke an MAE termination right. We expect savvy practitioners may revisit certain time-worn provisions of acquisition agreements in light of the Court's decision.

BACKGROUND

The merger agreement between Fresenius Kabi AG and Akorn, Inc. contained usual and customary closing conditions. Specifically, Fresenius was not required to consummate its acquisition of Akorn if, among other things: (i) Akorn suffered an MAE, (ii) Akorn breached its representations and warranties and the magnitude of such breach would reasonably be expected to result in an MAE, or (iii) Akorn failed to comply with its covenants in any material respect. Fresenius alleged that Akorn failed to satisfy each of these three closing conditions and terminated the merger agreement. The Court agreed with Fresenius that none of the three closing conditions had been satisfied in holding that:

  • The precipitous, significant decline in Akorn's business performance constituted an MAE;
  • Akorn's representations with respect to regulatory compliance were not true and correct, could not be cured within the time frames set forth in the agreement and the difference between Akorn's as-represented financial condition and its actual condition would reasonably be expected to result in an MAE; and
  • Akorn materially breached its covenant to use "commercially reasonable efforts" to operate its business in the ordinary course in all material respects during the period between signing and closing.

The Court's finding that Akorn suffered an MAE was based on the "sudden and sustained drop in Akorn's business performance". The definition of Material Adverse Effect in the merger agreement referred to any "effect, change, event or occurrence that, individually or in the aggregate ... has a material adverse effect on the business, results of operations or financial condition" of Akorn (subject to customary exceptions). Following execution of the merger agreement, Akorn's EBITDA and EBIT fell by 55% and 62%, respectively, after growing each year from 2012 to 2016. The court found that Akorn's decline in financial performance since the parties signed the merger agreement was material, and that the underlying causes of this decline posed a "durationally significant" threat to Akorn's overall earnings potential. Notably, Vice Chancellor Laster found that the customary laundry list of exceptions in determining whether an MAE has occurred, including for changes affecting Akorn's industry as a whole, did not preclude a finding that an MAE had occurred.

The Court also found that Fresenius had validly terminated the merger agreement on the basis of a breach by Akorn of its representations and warranties related to regulatory and compliance. In the merger agreement, Akorn had represented that it was in compliance with all applicable laws and FDA regulatory requirements and that it had not made any untrue statements to the FDA. The Court found "overwhelming evidence of widespread regulatory violations and pervasive compliance problems at Akorn". It was estimated that remediation related to the regulatory issues would cost approximately $900 million. Based upon the transaction's implied equity value of $4.3 billion, the estimated remediation costs would represent a reduction in value of 21%. After engaging in a discussion about the difficulty in determining "materiality" for these purposes, the Court concluded that "an expense amounting to 20% of Akorn's value would be material to a reasonable acquiror". The Court concluded that Akorn's breach of its regulatory compliance representations and warranties would reasonably be expected to result in an MAE, thus the closing condition was not satisfied.

Third, the Court found that Akorn had breached the covenant requiring it to use commercially reasonable efforts to operate its business in the ordinary course in all material respects during the period between signing and closing. The Court interpreted the requirement to use "commercially reasonable efforts" to mean that Akorn must "take all reasonable steps" to ensure that its operations were maintained in the ordinary course of business. Akorn failed to meet this standard by cancelling its regular audits, failing to continue to search for deficiencies, calling off third-party assessments of certain sites, failing to maintain an adequate data integrity system and, notably, not conducting its own investigation into whistleblower allegations. The Court speculated that Fresenius would not have agreed to buy Akorn had it known that Akorn would take these actions and therefore concluded the breach was "material". Thus, Akorn failed to satisfy the closing condition requiring it to comply with its covenants in all material respects.

OUR VIEW

We think Akorn should serve as a cautionary fact pattern for sellers and buyers and as an instructive decision for all M&A professionals. The Court's decision confirms that a MAC does exist in Delaware and it provides helpful guidance as to the quantitative analysis of what constitutes a MAC. We suspect the Court's analysis will be instructive for many parties as they attempt to quantify risk in the period between signing and closing. As such, practitioners may consider revisiting the MAE definition with a view to identifying any particular subject areas of risk where the definition can or should be tightened. Moreover, as a practical matter, Vice Chancellor Laster's comprehensive recitation of Delaware case law regarding contractual, damages, and MAE claims will also serve as a handy (albeit heavy) guide to the Chancery Court's views and holdings on such matters.

Finally, we also think it noteworthy that a meaningful portion of the decision was devoted to a discussion of Akorn's behavior in the context of the regulatory issues that were uncovered. One can only wonder whether the Court would have found a MAC in respect of the deterioration of the business had Akorn comported itself differently during the executory period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions