December 10, 2018

Delaware Supreme Court Affirms Merger Termination After Target Suffers Material Adverse Effect

Goodwin’s recent client alert – “A First: Delaware Court of Chancery Holds that Merger Target Suffered Material Adverse Effect” – discussed the Court of Chancery’s finding, in Akorn Inc. v. Fresenius Kabi AG, et al., that a target company in a merger had suffered a material adverse effect (MAE) sufficient for the acquiror to validly exercise its contractual right to terminate a merger agreement and walk away from a deal without cost. 

Less than 24 hours after hearing oral arguments in the appeal of the case, the Delaware Supreme Court, in a three-page opinion by Chief Justice Strine, upheld the Delaware Court of Chancery’s findings that (1) Fresenius was under no obligation to close its merger with Akorn and (2) Fresenius validly terminated the merger agreement – in each instance because Akorn had suffered a material adverse effect under the merger agreement. In its concise opinion, the Delaware Supreme Court held that the record supported the lower court’s findings that Akorn suffered both a regulatory MAE and a general MAE, and that Fresenius was itself not in material breach of its covenants under the merger agreement. The Delaware Supreme Court also determined that it was not necessary to address all of the lower court’s findings in the expedited appeal, including that Akorn had breached its covenant to operate in the ordinary course of business following the signing of the merger agreement. 

Accordingly, it is now settled law that Delaware has, in one instance, found that a target suffered an MAE under a merger agreement, giving rise to a right of termination by the potential buyer.

Note: Goodwin did not represent Fresenius Kabi AG in its merger negotiations with Akorn, nor in the resulting litigation. Goodwin does represent Fresenius Kabi USA LLC on other matters.