Monthly Archives: November 2021

Court Finds No “Material Adverse Effect” from Drastic Reduction in Medicare Reimbursement Rate for Company’s Sole Product—Bardy v. Hill-Rom

In Bardy Diagnostics, Inc. v. Hill-Rom, Inc. (July 9, 2021), the Delaware Court of Chancery found that a more than 50% reduction in the Medicare reimbursement rate payable for the target company’s sole product did not constitute a “Material Adverse Effect” (MAE) under the parties’ merger agreement, primarily because it did not have “durational significance.” Although the target’s revenues dramatically declined due to the rate decrease, the court emphasized that the company had continued to grow.

Background. After performing extensive due diligence, Hill-Rom, Inc. agreed to acquire Bardy Diagnostics, Inc. for $350 million plus additional compensation through an earnout based on 2021 and 2022 revenue. Hill-Rom believed that Bardy had significant growth potential, but did not expect that Bardy would be profitable for several years. Bardy’s sole product was a medical patch used to detect heart problems; and its largest source of revenue was Medicare reimbursements for the patch. The Medicare reimbursement rate for the patch was set by a private entity authorized by Medicare to fulfill this function. For almost a decade, the rate had been about $365 per patch. In late January 2021, two weeks after the merger agreement was signed, the rate was reduced by about 86%.

Hill-Rom claimed that Bardy had suffered an MAE as a result of the rate reduction and refused to close. Bardy brought suit seeking specific performance of the agreement and damages for Hill-Rom’s failure to close. By April 2021, the reimbursement rate for the patch was increased to $133 (about three times the January rate, but still less than half the historic rate). Vice Chancellor Joseph R. Slights III held that Bardy had not suffered an MAE. The court ordered Hill-Rom to close and awarded damages to Bardy in the form of prejudgment interest on the deal price.

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