In a first-of-its-kind ruling, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled post-trial that Fresenius SE & Co. KGaA (“Fresenius”) properly terminated its $4.3 billion agreement to acquire Akorn, Inc. (“Akorn”). Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc., and Fresenius SE & Co. KGaA, C.A. No. 2018–0300–JTL (Del. Ch. Oct. 1, 2018). Fresenius walked away from the deal after discovering various data integrity and regulatory compliance problems, asserting that the issues were so serious that they amounted to a material adverse effect (“MAE”). Akorn sued for specific performance, alleging that Fresenius was merely suffering from buyer’s remorse. Vice Chancellor Laster concluded that Akorn violated not only multiple representations and covenants in the merger agreement but also the general MAE provision, ruling that an MAE had occurred.

Vice Chancellor Laster’s ruling cited a significant volume of evidence that the Court described as indicative of intentional conduct by Akorn to hide the true condition of the company until after closing. For example, Vice Chancellor Laster concluded that the head of Akorn’s quality function knowingly submitted fabricated data to the FDA to avoid drawing toward Akorn’s data integrity issues. Akorn’s own trial expert testified that Akorn was not fully transparent with the FDA, and the Court found that Akorn had mischaracterized to the FDA the investigation into data integrity issues undertaken by Fresenius. Vice Chancellor Laster also noted that, notwithstanding Akorn’s agreement “to continue operating in the ordinary course,” the company made changes to certain quality and IT functions that seemed designed to avoid revealing potential issues prior to closing. The Court also concluded that Akorn’s financial performance had suffered a substantial and “durationally significant” downturn that was company-specific and showed no signs of abating.

Based on the specific language of the MAE provision, Vice Chancellor Laster rejected Akorn’s arguments that either (i) the materiality of its decline in performance should be measured against the value of Akorn to Fresenius as a strategic acquisition or (ii) the agreement precluded termination for an MAE so long as the deal remained profitable for Fresenius. The Court found that the agreement contemplated neither exception and further rejected Akorn’s assertion that no MAE had occurred because its decline was due to “industry headwinds” of which Fresenius (and the entire market) was aware. The Court found that the problems that caused Akorn’s decline were specific to Akorn—citing product mix and new entrants—not general to the industry, or at a minimum had a disproportionate effect on Akorn. Finally, the Court found that the MAE provision could have, but did not, exclude certain risks known or existing at the time of pre-signing diligence. Accordingly, under the specific terms of the MAE provision and in light of Akorn’s conduct, the Court found that a general MAE had occurred.

Akorn, Inc. V. Fresenius Kabi AG, Quercus Acquisition, Inc., and Fresenius SE & Co. KGaA