One of the great truisms of M&A law has been that “Delaware has never found a MAC.” Well, that’s no longer the case. Yesterday, for the first time, the Delaware Chancery Court held that deterioration in a seller’s business resulted in a “Material Adverse Effect” entitling the buyer to terminate its merger agreement.
In his 246-page opinion in Akorn v. Fresenius (Del. Ch.;10/18) – you didn’t seriously think Delaware could do something like this in less than 200 pages, did you? – Vice Chancellor Laster held that Fresenius had established that Akorn had experienced a Material Adverse Effect entitling Fresenius to back out of its 2017 merger agreement. As this excerpt from the opinion demonstrates, Fresenius won just about every way it could have:
First, Fresenius validly terminated the Merger Agreement because Akorn’s representations regarding its compliance with regulatory requirements were not true and correct, and the magnitude of the inaccuracies would reasonably be expected to result in a Material Adverse Effect. Second, Fresenius validly terminated because Akorn materially breached its obligation to continue operating in the ordinary course of business between signing and closing. Third, Fresenius properly relied on the fact that Akorn has suffered a Material Adverse Effect as a basis for refusing to close.
That’s pretty much the ultimate MAC Trifecta – breach of a rep and a covenant & failure to satisfy a stand-alone MAC closing condition – but an appeal to the Delaware Supreme Court seems likely. That means that Chief Justice Strine, who authored the decidedly MAC-skeptical opinion in In re IBP Shareholders Litigation, (Del. Ch.; 6/01), would have an opportunity to weigh-in. We’re posting memos in our “MAC Clauses” Practice Area.
– John Jenkins