January 6, 2020

MACs: Even After Akorn, They Still Don’t Come Easy

It used to be one of corporate law’s great truisms that the Delaware courts had never endorsed an attempt to terminate a merger based on a “Material Adverse Change” or “Material Adverse Effect” provision.  But that changed in 2018 when Delaware upheld Fresenius’ termination of its deal to acquire Akorn based on the agreement’s MAC clause.

One of the questions raised by Akorn v. Fresenius was whether – having crossed the MAC Rubicon – Delaware courts would become more lenient in their treatment of MAC-based termination attempts.  In his recent 119-page opinion in Channel Medsystems v. Boston Scientific, (Del. Ch.; 12/18), Chancellor Bouchard made it clear that when it comes to trying to use a MAC clause to terminate a deal, buyers still have a mountain to climb.

To make a long story short, after the deal was signed, Channel determined that one of its executives had engaged in fraudulent conduct that implicated a pending application for FDA approval of its only product. However, it also moved quickly to address the fraud, notifying regulators and the buyer, and took remedial action.

While the FDA approved Channel’s remedial action plan (and subsequently approved the product), Boston Scientific nevertheless attempted to terminate the agreement.  As this Fenwick & West memo notes, Chancellor Bouchard said “no dice” & granted Channel’s motion for specific performance. Here’s an except:

In granting Channel specific performance, the court found that even though a number of Channel’s signing date representations in the merger agreement were breached, there was no reasonable expectation that those breaches would result in an MAE.

Consistent with past decisions, including Akorn, the court considered both quantitative and qualitative factors in evaluating the existence of an MAE, noting that “a mere risk of an MAE cannot be enough” and “[t]he important consideration… is whether there has been an adverse change in the target’s business that is consequential to the company’s long-term earnings power over a reasonable period, which one would expect to be measured in years rather than months” (quoting Akorn).

The court also examined the interplay of the closing condition and termination provisions of the merger agreement, determining that Boston Scientific bore the burden of showing that, as of the date of termination, the inaccurate Channel representations would reasonably be expected to have an MAE as of the expected closing date of the merger.

The memo says that the case illustrates that Delaware courts believe that there is a”meaningful difference” between a theoretical risk and a determined MAE – and that a party attempting to get out of a deal on that basise has to do a lot more than just provide “unsubstantiated speculation” to establish an MAE.

It’s also worth noting that Boston Scientific’s case wasn’t helped by evidence that it exhibited “buyer’s remorse” shortly after signing the deal, which called into question whether it was acting in good faith in its efforts to terminate the agreement.

John Jenkins