Tag: Material Adverse Effect

COURT OF CHANCERY ORDERS SPECIFIC PERFORMANCE OF MERGER AGREEMENT, FINDING THAT FRAUD CONTAINED IN FDA FILINGS FOR APPROVAL OF TARGET PRODUCT DID NOT RISE TO A “MATERIAL ADVERSE EFFECT”

By: Annette Becker and Teresa Teng

In Channel Medsystems, Inc. v. Boston Scientific Corporation, C.A. No. 2018-0673-AGB (Del. Ch. December 18, 2019), the Delaware Court of Chancery ordered specific performance of a merger agreement, finding that breaches of the representations and warranties arising from the fraud of a key employee of the seller did not rise to the level of a “Material Adverse Effect.” As a result, the buyer was not entitled to terminate the merger agreement and breached the further assurances provision of the merger agreement by failing to meaningfully engage with seller upon seller’s discovery of the fraud.

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Delaware Chancery Court Makes Groundbreaking “Material Adverse Effect” Finding Allowing Buyer to Terminate Merger Agreement

By: Peter Flocos, Lisa Stark, Rick Giovannelli and Mark Hammes

In a landmark decision, a Delaware court has, for what is widely believed to be the first time ever, found that a material adverse effect actually occurred in an acquisition transaction, giving the buyer a right to terminate the pending transaction.  In Akorn, Inc. v. Fresenius Kabi AG,[1] the Delaware Court of Chancery (the “Court”) held, following a trial, that the buyer properly terminated the parties’ merger agreement, due to such a material adverse effect between signing and closing, under the terms of the agreement and the pertinent Delaware case law.  Unlike prior decisions rejecting buyer material adverse effect claims,[2] the Court found that a pre-closing decline in the business of the target – Akorn – was not merely a “cyclical trend” and was likely to have a post-closing, durationally-significant effect that was “material when viewed from the longer-term perspective of a reasonable acquiror.”[3]  Although groundbreaking, the Akorn decision reflects that the Delaware courts will still approach the question of whether an MAE has occurred on a case-by-case basis and does not establish a particular “bright line” test.

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