July 12, 2021

Busted Deals: “Tyson Right Uppercut” to Seller’s Business Isn’t a MAE

If you saw Mike Tyson in his prime, you know just how devastating an uppercut from him could be.  Yet in Bardy Diagnostics v. Hill-Rom, (Del. Ch.; 7/21), Vice Chancellor Slights declined to find that a contractual MAE had occurred despite characterizing an adverse development in a seller’s business as the equivalent of a “Tyson right uppercut.”

Just how adverse was the development in question? Try an 86% reduction in the price that the seller’s largest customer (Medicare) would pay for the only product the seller made. To make matters worse, when the parties entered into the merger agreement, both anticipated that Medicare would substantially increase the reimbursement rates for the seller’s ambulatory electrocardiogram device, known as a “long-term Holter” or LTH device.

In his opinion, Vice Chancellor Slights that this case didn’t involve the classic “buyer’s remorse” situation commonly found in MAE litigation.  Instead, he acknowledged that the buyer acted in good faith throughout the process, and supported the seller’s efforts to reverse the decision on the price reduction. However, when no change in the pricing had been made, the buyer advised the seller that it believed a MAE had occurred and attempted to terminate the agreement. The seller promptly sued for specific performance, and the buyer counterclaimed, alleging that a MAE had occurred.

Despite the devastating short-term impact of Medicare’s decision on the seller’s business, the Vice Chancellor concluded that it didn’t rise to the level of a MAE under the contract.  He found that the buyer hadn’t established that the impact was durationally significant. Moreover, he noted that an MAE resulting from a change in a “Healthcare Law,” was carved out of the MAE definition unless the change disproportionately impacted the seller’s business compared to “similarly situated” companies.

The agreement didn’t define the term “similarly situated,” and the buyer argued that it should encompass not only developmental stage, single product companies in the industry, but also more established businesses that competed in the cardiac ambulatory care market that were less reliant on LTH devices like the one marketed by the seller. In that regard, the buyer pointed out board documents demonstrating that it considered these companies to be competitive with the seller.

The Vice Chancellor disagreed. He concluded that where the “matter” or “event” that’s alleged to have triggered an MAE is a specific product’s Medicare reimbursement rate, the product mix is “patently the most important factor” in determining whether a company is in a similarly situated position with the seller:

Hillrom’s arguments show merely that each of these companies compete for customers and have a shared interest in getting paid as much as the market will bear for their products and services. The Agreement’s MAE clause, however, did not delimit the reach of its “disproportionate impact” exception to companies operating in the same “market.” Rather, it required an assessment of whether the impact caused by “such matter” was “materially disproportionate” relative to “similarly situated companies operating in the same industries.” In my view, that language calls for a more granular parsing of a company’s situation than mere participation in the LTH market.

VC Slights concluded that only one company – which also was a single LTH product business – was “similarly situated” with the seller. After analyzing the impact of the reimbursement change, the Vice Chancellor concluded that the buyer had failed to carry its burden to prove that the disproportionate-effect exception applies to the applicable MAE carve-out. As a result, the buyer’s refusal to close was a breach of the Agreement. While he rejected the seller’s claim for damages, VC Slights ordered the buyer to specifically perform its obligations under the agreement and awarded the seller prejudgment interest.

I’ve already entered tl;dr territory with this blog, but there are a couple of points I want to make before signing off. First, although I didn’t have room to address it here, be sure to check out the section of the Vice Chancellor’s opinion in which he marches through the disproportionate impact analysis. Second, I’m pretty sure that Marvis Frazier wishes that Vice Chancellor Slights was a ringside judge instead of just a Chancery Court judge.

John Jenkins