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Big MAC? Whopper? Or just a Nothing Burger?
Peter D. Lyons, Matthew F. Herman, Sebastian L. Fain and Paul K. Humphreys

When asked by clients to explain what constitutes a “Material Adverse Change”[1], 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.  And while Bobby Darin’s vision[2] may not be the new normal, 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[3] 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.[4]  Akorn stated it intends to appeal the decision, and we will provide an update as circumstances develop.

            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.

            The Court of Chancery analyzed: (1) the general MAC condition and (2) the breach of Akorn’s representations and warranties, in the context of their requirement to be repeated at closing. 

  • With respect to the standalone MAC condition, Fresenius was able to establish at trial that the sustained decline in Akorn’s business performance met the requirements of IBP/Tyson and Huntsman/Hexion that a MAC must substantially threaten the overall earnings potential of the target in a durationally-significant manner.  The Court of Chancery found Akorn’s “dramatic downturn” to be durationally significant as it had already persisted one year and showed no sign of stabilizing.[5]
  • Fresenius was also (separately) entitled to terminate the merger agreement if Akorn could not “bring down” its regulatory representations—i.e., if any inaccuracies in Akorn’s regulatory compliance representations at signing or at closing would be reasonably likely to result in a MAC and could not be cured by the outside date,[6] Fresenius could walk away.  Reviewing the claim that Akorn’s breach of its regulatory compliance representations gave rise to a termination right, the Court of Chancery also determined that Akorn’s breach would reasonably be expected to have a MAC.  The Court of Chancery found that remediating Akorn’s systemic violations—which would result in a valuation hit to Akorn’s standalone value of approximately 21%[7]—was of quantitative significance and would be material from the longer-term perspective of a reasonable acquirer, and therefore Akorn’s regulatory issues would reasonably be expected to result in a MAC.

As much ink will be spilled on Akorn in the coming days, we observe the following takeaways:

  • All of the facts matter, and, under the Court of Chancery’s factual findings, it is hard to imagine a less sympathetic plaintiff to an action to compel closing.  An industry consultant called Akorn’s practices as among the top three worst he had ever evaluated of over 120 pharmaceutical companies experiencing similar problems.  While Vice Chancellor Laster painstakingly (over his 246-page opinion) analyzes percentage declines in year-over-year performance, compares the performances of other industry participants, interprets the parties’ contractual intent and applies the existing law to determine that the MAC condition was not satisfied, we believe that M&A participants should be cautious before too broadly extrapolating the Court's conclusion.  Akorn’s egregious conduct, likewise recounted in shocking detail throughout the opinion, is not facially why the Court of Chancery found the MAC condition had not been satisfied, but the shadow cast by Akorn’s behavior in this case should not be overlooked as having had an extensive effect on the determination that a MAC had occurred.
  • This is no watershed moment for acquirors who catch buyer’s remorse.  The holdings of IBP and Hexion, broadly speaking, remain unchanged.  Post Akorn, the plaintiff’s burden to show a MAC giving rise to a walk-away right remains a high one.  Distinguishing Akorn from IPB and Hexion, the Court of Chancery notes “the difference between this case and its forebearers is that [in Akorn] the remorse  was justified.”
  • The “disproportionate effect as compared to other participants in the industry” exclusion from the standard exceptions in the MAC definition mattered here, and helped Fresenius prevail over an argument advanced by Akorn that the changes in Akorn’s business were due to “industry headwinds” more generally.  The Court of Chancery found that Akorn’s dismal performance—driven by new market entrants in Akorn’s top three products and the loss of a key contract—was endogenous risk specific to Akorn’s business based on its product mix, and the MAC definition allocated this risk to Akorn through the “disproportionate effect” language.
  • Targets should not rely on the idea that facts or circumstances that are known or potentially contemplated risks by an acquiror cannot give rise to a MAC.  While IBP makes clear that the MAC clause in that case (which lacked extensive carve-outs and exclusions that have developed in M&A practice over the years) was to protect the buyer from unknown systemic risks, Vice Chancellor Laster distinguishes Akorn noting that the “unknown” standard was not intended govern all MAC clauses, “regardless of what the parties specifically bargained for in the contract.”  Where the parties have carefully allocated risk using a MAC clause, absent specific language in the MAC definition to the contrary (i.e., carving out “matters disclosed during due diligence, or . . . risks identified in public filings”), the Court of Chancery should not add such a limitation.
  • Unrelated to the MAC analysis, but important to whether Akorn had breached its ordinary course operating covenant, the Court of Chancery opined that there is no distinction or hierarchy between “reasonable best efforts” and “commercially reasonable efforts”.  The two standards mean to “take all reasonable steps”.
  • The Court of Chancery did not find credible claims put forth by Akorn that Fresenius had acted in bad faith by trying to “manufacture” a walk away right by consulting its attorneys, and noted that Fresenius’ decision to “retain expert counsel [to understand its rights under the merger agreement so that it could exercise those rights if warranted] was prudent.”
  • The provision in the NDA between Fresenius and Akorn that permitted Fresenius’ advisors to use information in the data room for purposes of “executing” the transaction proved critical to Fresenius not being in breach of the NDA when its advisors engaged for purposes of the data integrity investigation review materials in the data room.

[1]   For purposes of this memo and the opinion discussed herein, this term is treated as synonymous with the term “Material Adverse Effect”.

[2]   That is, MAC is not quite “back in town” rather just passing through some particularly bad facts.

[3]   C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018).

[4]   The Court of Chancery also ruled that Akorn’s breach of its obligation to use commercially reasonable efforts to operate its business in the ordinary course between signing and closing was another proper reason for Fresenius to terminate the merger.

[5]   Akorn does not address how long the decline in a target’s business has to endure to meet the durational significance test, noting on these facts “[t]here is every reason to think that the additional competition [Akorn faced by new market entrants] will persist and no reason to believe that Akorn will recapture its lost contract.”

[6]   The MAC should not be curable in that window based on case law.

[7]   While Vice Chancellor Laster noted that “[i]t is not possible to define with precision the financial impact of Akorn’s data integrity issues,” we can easily imagine unnuanced deal professionals citing “Akorn’s 20% Rule” in the future.


Peter D. Lyons
US Managing Partner
+1 212 284 4965

Matthew F. Herman
Co-Head of Global M&A
+1 212 277 4037

Sebastian L. Fain
Counsel, New York
+1 212 508 8806

Paul Humphreys
Senior Associate
+1 212 284 4927
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