M&A bar gleans lessons from blowup of $4.75B pharma deal.

Byline: Pat Murphy

When Delaware courts speak, business attorneys listen, and a recent ruling allowing a German drug company to pull out of $4.75 billion deal to acquire a U.S. competitor has local M&A lawyers buzzing.

On Oct. 1, 2018, the Delaware Chancery Court handed down a 247-page decision recognizing that Fresenius Kabi AG had a contractual right to terminate its acquisition of generic pharmaceutical manufacturer Akorn pursuant to two separate "material adverse effect" clauses in the parties' merger agreement.

The Chancery Court ruling in Akorn, Inc. v. Fresenius Kabi AG is the first time that a Delaware court upheld the termination of a merger agreement pursuant to an MAE clause. Judge J. Travis Laster found two adverse developments occurred between the parties' execution of the merger agreement on April 24, 2017, and the scheduled closing date of April 24, 2018.

First, Akorn's business performance "fell off a cliff" beginning in the second quarter of 2017. The judge noted that when Akorn announced its financial results later that year, the company reported a 29 percent decline in revenue and an 89 percent drop in operating income.

Second, the cratering of Akorn's business fortunes coincided with Fresenius uncovering evidence that Akorn was misrepresenting its compliance with Food & Drug Administration regulatory requirements, a condition of closing.

Those developments justified Fresenius invoking its contractual right to terminate, Laster concluded.

The Delaware Supreme Court affirmed Laster's landmark decision in a three-page order issued Dec. 7.

Boston mergers and acquisitions attorney Matthew W. Tikonoff said the language used in the parties' merger agreement was critical to the outcome in Akorn.

"The case really reminds us that the court is going to respect the parties' contractual allocation of risk in the [representations] and warranties in the definition [of MAE]," Tikonoff said. "So it's placing a renewed focus on how the parties draft that definition and allocate that risk as between the buyer and the seller."

Andrew Spacone called Akorn the "perfect storm" for enforcing an MAE clause. But he did not see the case as opening the door to more buyers being allowed to walk away from M&A deals in Delaware courts.

"You had misrepresentation on the part of Akorn, you had breach of the regulatory M&A, and then you had this really precipitous and significantly durational decline in business," said Spacone, who teaches business law...