The MAC Is Back

William Savitt and Ryan A. McLeod are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Savitt and Mr. McLeod, and is part of the Delaware law series; links to other posts in the series are available here.

In a 246-page post-trial opinion issued today [October 1, 2018], the Delaware Court of Chancery ruled that Fresenius Kabi AG, a German pharmaceutical company, properly terminated its agreement to purchase US-based drug maker Akorn, Inc. Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018). Most notable in the sweeping decision is the Court of Chancery’s determination that Akorn suffered a material adverse change that supported Fresenius’s right to terminate. Until today, common M&A wisdom has been that the Court of Chancery had never recognized a MAC—at least, never one sufficient to provide a buyer the right to walk. That wisdom must be updated in light of today’s ruling.

The parties signed the merger agreement in April 2017. But within months, the court found, “Akorn’s business performance fell off a cliff,” even though “Akorn had reaffirmed its full year guidance” on the “same date the parties signed the Merger Agreement.” And while Akorn’s management told Fresenius that things would get better, the court found that they only got worse. Fresenius received letters from anonymous whistleblowers accusing Akorn of regulatory breaches and, in the course of follow-up investigations, uncovered what the court found were “serious and pervasive data integrity problems.” Akorn’s business continued to deteriorate, and Fresenius terminated the agreement. Akorn then brought suit to compel Fresenius to close.

After an expedited trial, the court held that Fresenius validly terminated on multiple grounds, holding that Akorn had breached numerous representations and that Akorn “ha[d] suffered a Material Adverse Effect.” The court considered Akorn’s claim that Fresenius, stung by “buyer’s remorse,” failed to use the required best efforts to close the transaction and agreed that, by late 2017, senior Fresenius executives had concluded they did not wish to proceed with the merger as negotiated. But, distinguishing previous decisions in which buyers sought to use MAE clauses to escape deals that turned unattractive post-signing, the court found that Fresenius responded to a company-specific collapse in Akorn’s business and complied with its contractual obligations—including the obligation to consult with Akorn—throughout the pendency of the merger.

Today’s decision reaffirms the rigorously contractarian character of Delaware’s M&A jurisprudence. In doing so, it confirms that all contract provisions—including MAE provisions—will be enforced by their terms upon an appropriate evidentiary record.

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