A Material Adverse Effect clause (MAE) is a standard part of acquisition agreements; it permits the buyer to terminate the agreement upon the occurrence of contractually defined adverse changes in the target’s business between the signing of the agreement and closing. Few decisions have interpreted this risk allocation provision because most disputes about the significance of post-signing adverse changes to the target are resolved without litigation through price renegotiation or agreed termination of the merger. But the general understanding from the case law has been that buyers asserting a Material Adverse Effect face a steep burden to terminate the merger.

Last week, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued a 246-page post-trial opinion finding that a buyer validly terminated a merger agreement where “overwhelming evidence of widespread regulatory violations and pervasive compliance problems” constituted breaches of multiple seller representations, and the extensive compliance failures and dramatic post-signing declines in financial performance were reasonably expected to have a “Material Adverse Effect.” Akorn v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018). Akorn has drawn considerable interest as the first decision applying Delaware law that found an MAE warranting a buyer’s exercise of merger termination rights. While Akorn may embolden future parties to test the breadth of their own MAE provisions, the decision appears driven by extraordinary facts and now awaits review in the Delaware Supreme Court.

Background