Chancery Court Permits Buyer to Terminate Merger Agreement Due to Material Adverse Effect

In Akorn, Inc. v. Fresenius Kabi AG (October 1, 2018), the Delaware Court of Chancery held that Fresenius met the “high burden imposed by Delaware law” in proving a material adverse effect occurred that entitled it to terminate its merger agreement with Akorn. In April 2017, Fresenius agreed to acquire Akorn, but Akorn’s business performance plummeted shortly after the two companies entered into a merger agreement. Fresenius also received numerous letters from anonymous whistleblowers who made “disturbing allegations” about Akorn’s noncompliance with regulatory requirements and conducted its own investigation, which revealed inaccuracies in Akorn’s representations about its business practices and compliance with regulations. Fresenius terminated the agreement in April 2018, alleging that Akorn’s misrepresentations constituted a material adverse effect that relieved Fresenius of its obligation to consummate the deal. The court held that Fresenius was entitled to terminate the merger agreement, reasoning that the serious regulatory compliance issues resulted in a material adverse effect. As might be expected in a 246-page opinion, the Akorn decision provides an encyclopedic review of the legal principles implicated by an attempt to terminate a merger agreement, with expositions on a wide range of legal subjects related to materiality, burdens of proof, breach of contract claims and defenses, and interpretation of information access covenants, efforts covenants, and other customary merger agreement provisions.