Client Alert

Delaware Supreme Court Upholds Lower Court’s Material Adverse Effect Finding

10 Dec 2018

As discussed in a prior client alert, on October 1, 2018, the Delaware Court of Chancery upheld a buyer’s termination of a merger agreement and found that the target had suffered a material adverse effect (“MAE”). Following the decision by the Court of Chancery, the parties engaged in an expedited appeal to the Delaware Supreme Court with oral arguments held on December 5, 2018. Two days later, the Delaware Supreme Court issued a brief order affirming the trial court’s decision.

The case, Akorn, Inc. v. Fresenius Kabi AG,is the first time Delaware courts have found that an MAE occurred, thereby permitting termination of a merger agreement.[1]


On April 24, 2017, Fresenius Kabi AG signed a merger agreement to acquire generic pharmaceutical company Akorn, Inc.  Soon after signing, Akorn’s year-over-year quarterly revenue, operating income, and earnings per share declined precipitously.  Akorn’s business continued to underperform by significant margins for each of the following three quarters.

Compounding these business declines were whistleblower letters Fresenius received in the fall of 2017 drawing attention to FDA compliance issues at Akorn.  An investigation by Fresenius uncovered serious data integrity issues that called into question Akorn’s overall regulatory compliance.

Fresenius terminated the merger agreement, citing Akorn’s representations and warranties related to regulatory compliance; Akorn’s covenants to operate in the ordinary course of business; and the existence of a general MAE based on the sharp decline in Akorn’s business. Akorn filed suit seeking specific performance.

The Chancery Court’s Ruling

The Delaware Court of Chancery issued a 246-page opinion in which it concluded, among other things, that (i) Fresenius satisfied its “heavy” burden in proving that Akorn’s business decline was unexpected, material, specific to Akorn, and durationally significant (i.e., that it would persist significantly into the future); (ii) Fresenius proved that Akorn’s regulatory-compliance representation was not true; and (iii) Akorn had materially breached its covenant to use commercially reasonable efforts to operate in the ordinary course of business between signing and closing.

The Delaware Supreme Court’s Ruling

In its decision affirming the Court of Chancery, the Delaware Supreme Court focused on two primary issues: (i) whether the trial court properly found that Akorn had suffered a general MAE that excused Fresenius’s obligation to close; and (ii) whether the trial court properly found that Fresenius could terminate the merger agreement because Akorn’s breach of its regulatory representations and warranties gave rise to an MAE.

The Delaware Supreme Court upheld the Court of Chancery’s finding that an MAE had occurred under the terms of the merger agreement thereby “excus[ing] any obligation on Fresenius’s part to close.” Although the order is brief, the court noted that the Chancery Court’s decision was supported by the factual record and the lower court’s correct “application of precedent” from prior Delaware decisions, including In re IBP, Inc. Shareholders Litigation and Hexion Specialty Chemicals, Inc. v. Huntsman Corp. The Supreme Court did not view this case as representing a change or expansion of existing law, as Akorn argued on appeal.

The Supreme Court also affirmed the lower court’s judgment that Fresenius was within its rights in terminating the merger agreement because Akorn’s “breach of its regulatory representations and warranties gave rise to an MAE.” On appeal, Akorn focused much of its argument for reversal of the trial court’s regulatory MAE ruling on its position that the trial court’s calculation of the estimated cost to remediate regulatory issues was not a figure advanced by either party, and labeled the remediation cost a “failure of proof” by Fresenius. While not addressed in the order affirming, at oral argument the Supreme Court was skeptical of Akorn’s position that the trial court could not come to its own factual finding about the cost to remediate different from any specific figure advanced by either side after considering all testimony about cost to remediate. 

The court also rejected Akorn’s claims that Fresenius had engaged in a prior material breach that would disallow Fresenius from terminating the agreement. In a footnote, the court explained that the record supported the lower court’s decision that Akorn’s breach “could reasonably be expected to cause an MAE” and agreed with the Chancery Court’s determination that Fresenius had not breached its reasonable best efforts covenants and that any breach of the Hell-or-High-Water Covenant was temporary and immaterial.

Notably, the court affirmed the two independent bases for Fresenius’ termination of the merger agreement noted above, but it specifically declined to address the Court of Chancery’s finding that Akorn also breached its covenant to operate in the ordinary course, which provided a third independent basis for Fresenius to terminate.  The court reasoned that there was no need for it to comment upon this and many other issues presented to the trial court, noting the expedited nature of the appeal.


In reaching its decision, the court noted the “extensive reasoning” the lower court issued on all issues, but it declined to address all of those issues because doing so was unnecessary to resolve the expedited appeal. Because of the unique facts presented here, it remains to be seen whether this case will be an outlier in Delaware jurisprudence or if it will pave the way for more companies to exercise an MAE clause in Delaware.

[1] The Delaware Supreme Court decision is available here.



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