Cadwalader attorneys examined the Delaware Court of Chancery rejection in Channel Medsystems, Inc. v. Boston Scientific Corporation of an attempt by Boston Scientific Corporation ("Boston Scientific") to avoid consummating a merger agreement with Channel Medsystems, Inc. ("Channel").

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. Prior to that time, in 2013, Boston Scientific had acquired approximately 15 percent of Channel's equity and had an observer on Channel's board of directors. Upon executing the Agreement, an observer (Christopher Kaster, Boston Scientific's Vice President of Business Development and Venture Capital) became a full board member. During the pre-merger agreement period, Boston Scientific received periodic updates about Channel from Kaster and from Channel itself.

Takeaways

According to Cadwalader attorneys, Boston Scientific claimed that a material adverse effect, as defined in the parties' agreement, had occurred. Following a thorough analysis, the Court found that Boston Scientific had breached its obligation to use commercially reasonable efforts to consummate the transaction, and that Boston Scientific was not entitled to terminate the Agreement based on Channel's breaches of representations and warranties because those breaches did not constitute a Material Adverse Effect ("MAE"). The Court granted specific performance requiring Boston Scientific to consummate the transaction. Cadwalader attorneys concluded from the decision that:

  • materiality is not defined by bright-line quantitative measures;

  • the Court applied different standards to assess materiality for purposes of a breach of a representation versus to determine whether an MAE had occurred;

  • the time to assess whether an MAE could "reasonably be expected" in the future was the date Boston Scientific provided notice of termination;

  • to justify termination, the Court concluded that there had to be a reasonable expectation of an MAE occurring by the anticipated date to close the transaction;

  • changing positions during the course of litigation without an adequate explanation is highly likely to negatively impact that party's overall credibility and is unlikely to be successful;

  • time should be of the essence for a terminating party in delivering its termination notice;

  • litigation positions or arguments that are contrary to common sense or contradicted by contemporaneous documents or actions are likely to be rejected by the Court and will not suffice to demonstrate an MAE on a "qualitative" basis;

  • a party seeking to claim an MAE should thoroughly evaluate the impact of the underlying event and clearly document its findings;

  • parties having an obligation to use commercially reasonable efforts to consummate a transaction should meaningfully confer with the other side before terminating an agreement and consider potentially damaging evidence that a party had reasons unrelated to an MAE to seek to exit the transaction; and

  • while there is no rigid rule for demonstrating an MAE on a quantitative basis, sufficient evidence of a material adverse quantitative impact is required and, if such evidence is offered through an expert, the expert needs to present a credible analysis consistent with applicable legal principles utilizing assumptions that are reasonable.

Commentary

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.