Days ago, the Supreme Court of the State of Delaware issued an order succinctly affirming the Delaware Court of Chancery's judgment from October this year that found Fresenius Kabi AG had no obligation to close its proposed merger with Akorn, Inc. and Fresenius properly terminated the merger agreement on April 22, 2018 largely as a result of Akorn having suffered a material adverse effect (MAC).
The Court of Chancery's decision is notable for a number of reasons, but the main attraction is the fact that the decision is generally understood to represent the first time a Delaware court has allowed a buyer to walk away from a public company merger on the basis of a contractual MAC provision.
Why it Matters
Merger agreements almost always allow the buyer to "walk" if the target suffers a MAC before closing or if the target's representations are not true at closing subject to a MAC qualifier. As a result, the MAC definition is often hotly contested notwithstanding the fact that prior to Akorn nobody was successful in walking away on the basis that a MAC occurred. The Delaware courts have been very reluctant to find a MAC, trying to balance respect for the written terms of an agreement with an aversion to facilitating buyer's regret.
The Decision
In a 246 page document, the Court of Chancery described the question of whether Akorn had experienced a MAC as a "straightforward issue" of contractual interpretation. It helped that the facts were ugly: during each of the four quarters following signing, on a year-over-year basis, Akorn's revenues declined between 29% and 34%, its operating income declined between 84% and 124%, and its earnings per share declined between 96% and 300%. In reaching its decision, the Court of Chancery confirmed prior guidance that a MAC must be both "material when viewed from the longer-term perspective of a reasonable acquirer" and "durationally significant".
Conclusion
The case does not create new law, but it does confirm that it is possible to find a MAC and provides a factual point of reference that others will turn to when a MAC is inevitably asserted in the future. Although not binding on courts in Canada, the decision is expected to be highly influential given the lack of jurisprudence on the point in Canada and the fact that the Delaware Courts are considered the leading commercial courts in the United States.
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