August 19, 2021

MAE Clauses: Drafting Lessons From Bardy Diagnostics v. Hill-Rom

Last month, I blogged about the Chancery Court’s decision in Bardy Diagnostics v. Hill-Rom, (Del. Ch.; 7/21), in which Vice Chancellor Slights declined to find that a contractual MAE had occurred despite Medicare’s decision to impose an 86% reduction in the price it would pay for the seller’s only product.

This recent Sidley blog focuses on some of the lessons to be drawn from that decision. Here’s an excerpt that offers up some drafting tips based on how the Court approached the issue of determining the appropriate peer group by which to assess whether the target had been “disproportionately affected” by the price reduction:

Bardy suggests that MAE clause drafters should pay careful attention to defining the target’s peer group of companies for purposes of expanding the MAE definition to include disproportionate effects on the target. In Bardy, the parties used the term “similarly situated” to define the universe of comparable companies. By contrast, other litigated MAE cases involved broader language, such as “comparable entities operating in the same industry.”

As the Bardy Court emphasized, the specific language chosen by the parties is critical, and the use of the limiting phrase “similarly situated” here called for a “more granular parsing of a company’s situation than mere participation in the [relevant] market.” That meant, as a practical matter, the impact of the regulatory changes on Bardy would be measured against only one other company that, unsurprisingly, was also significantly impacted by those changes. Narrowly defining the peer group means that many adverse effects, particularly regulatory changes, may never be disproportionate enough to qualify for an MAE disproportionately clause.

John Jenkins