Jason Halper, William Mills, and Joshua Apfelroth are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Messrs. Halper, Mills, Apfelroth, and Sara Bussiere, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here); and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.
In Channel Medsystems, Inc. v. Boston Scientific Corporation, the Delaware Court of Chancery rejected an attempt by Boston Scientific to terminate and thus avoid consummating a merger agreement with Channel on the grounds that a material adverse effect as defined in the parties’ agreement had occurred. In so holding, Chancellor Andre Bouchard signaled that last year’s Court of Chancery decision in Akorn, Inc. v. Fresenius Kabi AG, in which the Court of Chancery for the first time found the existence of a material adverse effect permitting merger agreement termination, was not necessarily a watershed moment that would make such findings more common. The decision also provides important guidance on merger agreement drafting and litigation strategy and pitfalls.
Background
Channel was a privately held medical technology company and developer of a single product, Cerene. Boston Scientific, a publicly traded medical technology company, agreed to acquire Channel pursuant to the merger agreement, dated November 1, 2017 (“Agreement”). Prior to that time, in 2013, Boston Scientific had acquired approximately 15% of Channel’s equity and had an “observer” on Channel’s board of directors. Upon executing the Agreement, this observer (Christopher Kaster, Boston Scientific’s Vice President of Business Development and Venture Capital), became a “full board member.” In this pre-merger agreement period, Boston Scientific received periodic updates about Channel from Kaster and from Channel itself.