Delaware Court Allows Buyer to Walk due to Material Adverse Change
In a recent high-profile decision, Akorn, Inc. v. Fresenius Kabi AG, et al. C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018), the Delaware Court of Chancery ruled that German healthcare company Fresenius properly terminated the merger agreement relating to the acquisition of Akorn, a U.S.-listed generic drug manufacturer, as a result of, among other things, Akorn having suffered a material adverse change (also known as a “material adverse effect”, “MAC” or “MAE”). The Akorn decision is receiving significant attention in both the U.S. and Canada because it is the first time Delaware Courts – considered the leading commercial courts in the United States and also influential in Canada – allowed a buyer to refuse to close an M&A transaction on the basis of a MAC, and also because Vice Chancellor Travis Laster’s detailed analysis helps better explain the risk allocation buyers and sellers assume when they utilize a typical MAC framework.
Background
It is common practice in Canada and the United States for acquisition agreements to contain provisions that permit the buyer to “walk away” from a transaction without liability if the target suffers a MAC between signing and closing, or if breaches of the target’s representations in the acquisition agreement (which generally must be “brought down” at closing) amount to a MAC (when compared to the “as represented” condition of the target). For a variety of reasons discussed in the Akorn decision, contracting parties tend to not define the concept of “material adverse change” in acquisition agreements, focusing instead on prescribing changes or events that should not be considered a MAC (i.e., risks that are allocated to the buyer). As a result, the question of when a MAC occurs has largely been left to the courts to determine. Before Akorn, the limited case law considering alleged MACs (virtually all of which comes from U.S. courts) left some legal practitioners and other market participants in both Canada and the U.S. questioning whether (and, if so, when) a MAC could ever occur or if a MAC is simply a tool that invites parties back to the table to renegotiate the deal if the business sours after an agreement is signed.
The Akorn Decision
In considering whether a MAC had arisen, Vice Chancellor Laster found the substantial deterioration in Akorn’s financial performance that started almost immediately after the merger agreement was signed – primarily resulting from an unexpected increase in competition for Akorn’s products – amounted to a MAC, primarily because:
- the magnitude of the deterioration met the high threshold of materiality required for a MAC (e.g., by the fourth full quarter following execution of the merger agreement, year-over-year- declines in revenue, operating income and earnings per share were 27%, 134% and 170%, respectively),
- the deterioration resulted from “company specific problems” and/or industry headwinds that disproportionately affected Akorn relative to other industry participants (which, based on Laster’s interpretation of the MAC clause, were risks allocated to Akorn), and
- Akorn’s problems were not merely short-term fluctuations (i.e., they were “measured in years”).
The latter two factors in particular distinguish the Akorn case from previous Delaware cases that have held that even double-digit declines in quarterly performance did not constitute a MAC.
Notably, separate and apart from Akorn’s deteriorating financial performance, the Vice Chancellor also found that significant undisclosed “systemic” quality control problems at Akorn constituted a MAC when compared to Akorn’s representations about its regulatory compliance, which also allowed Fresenius to terminate the merger agreement. To put the magnitude of these issues into perspective, Laster found that it would cost approximately $1 billion to rectify Akorn’s quality control issues, whereas the total purchase price for the transaction was $4.5 billion. Once again, these were found to be company-specific problems expected to take years to rectify.
Conclusion
The Akorn case does not lower the threshold for a MAC or fundamentally change the test for determining when a MAC has occurred. Courts will remain skeptical of buyers seeking to terminate a deal, not wanting to empower buyer’s remorse. Buyers looking to invoke a MAC bear a heavy burden to show the downturn is material and expected to be long lasting. It does, however, show that the terms of a contract will be honoured and the burden on the buyer is not so high that it is impossible to establish a MAC. Stay tuned, as the case is being appealed to the Delaware Supreme Court, which could overturn the trial decision or alter the analytical framework for determining when a MAC has occurred.
Expertise
Authors
Insights
-
Litigation and Dispute Resolution
No “Magic Words” Required: Supreme Court of Canada Holds Exclusion Clauses Released Seller From Implied Statutory Conditions
On May 31, 2024, the Supreme Court of Canada released its decision in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, which clarifies how contractual exclusion clauses are to… -
Capital Markets
Public Safety Canada Releases Updated Guidance on Modern Slavery Reporting Obligations
The Fighting Against Forced Labour and Child Labour in Supply Chains Act (the “Act”) came into force on January 1, 2024, implementing enhanced reporting requirements for certain entities to… -
Capital Markets
Ontario Court of Appeal Enforces Contractual Waiver of Statutory Dissent Rights
Ontario’s Court of Appeal concluded in a recent decision that, subject to limited exceptions, shareholders can contractually waive statutory “dissent rights”, which allow shareholders to dissent in… -
Capital Markets
CSA Provides Further Updated Guidance on Virtual Shareholder Meetings
On February 22, 2024, the Canadian Securities Administrators (CSA) recently published updated guidance on virtual shareholder meetings following initial guidance provided in February 2022. See… -
Mergers and Acquisitions
Neill May featured in "Deal Diary: Five Law Firms Work Chord Energy-Enerplus", The Deal
Goodmans partner Neill May has been featured by The Deal for his work as Canadian Counsel to Chord Energy Corp. (CHRD) in their acquisition of Enerplus Corp. (ERF). Read the full deal description… -
Capital Markets
Access Model for prospectuses: Final amendments announced, Law360 Canada
Bill Gorman and Randy McAuley co-authored Access Model for prospectuses: Final amendments announced in Law360 Canada. Excerpt from Access Model for prospectuses: Final amendments…
Featured Work
-
Mergers and Acquisitions
Scholastic closes investment in 9 Story Media Group
Goodmans LLP advised 9 Story Media Inc. in the acquisition by Scholastic Corp. of 100% of the economic interest and a minority of voting rights in 9 Story for C$250 million from ZMC and other sellers… -
Mergers and Acquisitions
Primo Water and BlueTriton agree to merge
Goodmans LLP is advising Primo Water Corporation in its definitive agreement to merge with an affiliate of BlueTriton Brands, Inc., to create a leading North American pure-play healthy hydration… -
Restructuring
Contract Pharmaceuticals CCAA proceedings and sale to Aterian Investment Partners
Goodmans LLP acted as counsel to Contract Pharmaceuticals Limited and its affiliates in connection with their CCAA proceedings and other restructuring… -
Mergers and Acquisitions
Apotex Inc. acquires Searchlight Pharma Inc.
Goodmans LLP advised Apotex Inc. in connection with its acquisition of Searchlight Pharma Inc… -
Mergers and Acquisitions
Chord Energy and Enerplus combine in $11 billion transaction
Goodmans LLP acted as Canadian counsel for Chord Energy Corporation in connection with its acquisition of Enerplus Corporation for US$3.7 billion in stock and cash, creating a leading producer in the… -
Cannabis
Organigram Holdings Inc. to receive $124 million investment from BT DE Investments Inc.
Goodmans LLP is acting for Organigram Holdings Inc., the parent company of Organigram Inc., a leading licensed producer of cannabis, in connection with its C$124.6 million follow-on strategic equity…
News & Events
-
Shareholder Activism
Jon Feldman at IMN‘s Corporate Dealmakers Forum
Join Jon Feldman at IMN‘s Corporate Dealmakers Forum for the Shareholder Activism Update session, taking place on June 4th in New York City.Expert-led discussions will cover a range of topics… -
Shareholder Activism
Jon Feldman featured in Fireside Chat "Browning West's Victory in Gildan Proxy Campaign" with CorpGov
On June 6th, Jon Feldman joined CorpGov Editor-at-Large Jarrett Banks for a fireside chat to discuss activist investor Browning West’s landmark victory in its proxy campaign against Gildan… -
Restructuring
Goodmans Wins at the Canadian Law Awards 2024
We are pleased to share multiple Goodmans deals were honoured at the 2024 Canadian Law Awards.Insolvency and Restructuring Deal of the Year - Bank of Montreal’s acquisition of LoyaltyOne’s AIR…