Akorn, Inc. v. Fresenius Kabi AG
MEMORANDUM OPINION (2018)
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Rule of Law:
A buyer may validly terminate a merger agreement due to a Material Adverse Effect (MAE) or material breach of a seller's covenants if the adverse effects are durationally significant, disproportionately impact the seller, and are company-specific rather than industry-wide. The buyer's prior knowledge of general risks does not preclude reliance on specific contractual representations and conditions that allocate those risks, especially when actual adverse events occur.
Facts:
- On April 24, 2017, Fresenius Kabi AG (Fresenius) agreed to acquire Akorn, Inc. (Akorn) for $34 per share through a Merger Agreement.
- In the Merger Agreement, Akorn made extensive representations about its compliance with regulatory requirements and committed to use commercially reasonable efforts to operate its business in the ordinary course between signing and closing.
- During the second quarter of 2017 (after signing), Akorn's business performance dramatically declined, falling materially below prior-year performance, and forcing Akorn to adjust its full-year guidance downward.
- In October 2017, Fresenius received an anonymous whistleblower letter alleging serious regulatory non-compliance and data integrity problems within Akorn's product development processes, leading Fresenius to initiate its own investigation.
- Fresenius's investigation uncovered serious and pervasive data integrity issues at Akorn, including evidence that Akorn's senior quality officer, Mark Silverberg, authorized the submission of fabricated data to the FDA in August 2017 for an azithromycin drug application.
- Akorn's management, after the merger agreement was signed, changed its quality and IT functions' approach, deferring data integrity projects and replacing regular internal audits with 'verification' audits, citing the pending Fresenius transaction.
- In March 2018, Akorn made a misleading presentation to the FDA regarding its data integrity issues and the scope of its investigations, including endorsing Silverberg's unsatisfactory explanation for the fabricated data.
- By April 2018, Akorn's business performance continued to deteriorate, and multiple external and internal audits confirmed widespread, serious data integrity deficiencies across its facilities.
Procedural Posture:
- On April 23, 2018, Akorn, Inc. filed an action in the Delaware Court of Chancery against Fresenius Kabi AG, seeking a declaration that Fresenius's termination was invalid and specific performance to compel closing.
- Fresenius Kabi AG answered Akorn's complaint and filed counterclaims, asserting it validly terminated the Merger Agreement and was not required to close.
- The Delaware Court of Chancery granted Akorn's request for an expedited trial, which took place over five days from July 9-13, 2018.
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Issue:
Did Fresenius Kabi AG validly terminate the Merger Agreement with Akorn, Inc. based on Akorn having suffered a Material Adverse Effect (MAE) or materially breaching its covenants to operate in the ordinary course of business and maintain regulatory compliance?
Opinions:
Majority - Laster, V.C.
Yes, Fresenius Kabi AG validly terminated the Merger Agreement because Akorn suffered a Material Adverse Effect (MAE), materially breached its obligation to operate in the ordinary course of business, and its regulatory compliance representations were untrue to an extent that would reasonably be expected to result in an MAE. The court found that Akorn's business performance suffered a dramatic and durationally significant decline after signing, which constituted a General MAE not caused by industry-wide effects or, if so, disproportionately affected Akorn. The court rejected Akorn's argument that Fresenius assumed these risks because the events causing the decline were unexpected and not known to Fresenius at the time of signing. Additionally, Akorn's regulatory compliance representations were inaccurate, and the deviation was expected to result in a Regulatory MAE due to widespread data integrity problems, including fabricated data submissions to the FDA, and a pervasive culture of non-compliance. These breaches were found to be material and incurable by the contractual Outside Date of April 24, 2018. The court also determined that Akorn materially breached its Ordinary Course Covenant by suspending regular audits, failing to allocate resources to data integrity, submitting fabricated data to the FDA, and providing a misleading presentation to the FDA. Fresenius's brief, temporary exploration of an antitrust divestiture strategy that would have delayed approval was deemed a technical breach of the Hell-or-High-Water Covenant but not a material one, thus not preventing Fresenius from exercising its termination rights. The court emphasized freedom of contract, stating that parties allocate risks through precise contractual language, and a buyer's knowledge of general risks does not negate reliance on specific representations that are later breached by actual, unforeseen adverse events.
Analysis:
This case sets a significant precedent in Delaware for the enforcement of Material Adverse Effect (MAE) clauses and covenants in merger agreements. It clarifies the high bar for proving an MAE, emphasizing durationally significant, company-specific adverse changes, but also affirms that a buyer's pre-contractual knowledge of risks does not waive its right to enforce contractual representations and covenants against actual adverse events or breaches. The ruling underscores the importance of stringent compliance with representations, warranties, and interim operating covenants, particularly in regulated industries like pharmaceuticals, and provides a framework for evaluating materiality and curability in termination disputes. This decision signals that Delaware courts will enforce merger agreement provisions as written, even when a buyer has 'buyer's remorse,' provided there are legitimate, material, and company-specific contractual breaches or MAEs.
