When asked by clients to explain what constitutes a “Material Adverse Change”, M&A practitioners, after giving a brief synopsis of the law, often impart the difficulty of reaching that standard by explaining that no Delaware court has ever actually found that a target company suffered a MAC allowing for termination of the transaction agreement. Deal participants will need to adjust their scripts. In a post-trial opinion issued earlier this week, Vice Chancellor Laster of the Delaware Court of Chancery ruled in Akorn, Inc. v. Fresenius Kabi AG that German pharmaceutical company Fresenius Kabi AG validly terminated its merger agreement with U.S.-based generic pharmaceuticals company Akorn, Inc. due to: (1) Akorn having suffered a MAC between signing and closing and (2) the inaccuracy of Akorn’s representations and warranties regarding its compliance with health regulatory laws and regulations being of sufficient magnitude that it would reasonably be expected to result in a MAC.
The circumstances under which Akorn and Fresenius ended up in front of the Court of Chancery represent M&A parties’ worst nightmare. Fresenius agreed to acquire Akorn in April 2017 for $4.75 billion. By July 2017, Akorn’s business—to use Vice Chancellor Laster’s words—“fell off a cliff”. Akorn’s CEO attributed the downturn to price erosion resulting from unexpected new market entrants that competed with Akorn’s top products and to lost revenue stemming from an unexpectedly lost key contract. At the same time Akorn’s financial results were in a tailspin, Fresenius received whistleblower letters from Akorn employees alleging serious data integrity problems and violations of FDA regulations. Two days prior to the outside date, Fresenius terminated the merger agreement. Akorn then sought an injunction to force Fresenius to close.
To read more about the Akorn case, and our important takeaways, please click here to see our client briefing.