The Delaware Supreme Court on Friday upheld a landmark Chancery Court decision allowing Fresenius SE & Co. to walk away from its $4.3 billion deal to buy generic drugmaker Akorn Inc. based on a “material adverse change” in Akorn’s business.
The ruling was a win for Fresenius’ Paul, Weiss, Rifkind, Wharton & Garrison attorneys, who had argued that a raft of regulatory issues at Akorn had justified their client’s decision to scrap the merger.
Paul Weiss partner Lewis R. Clayton on Wednesday defended the ruling before all five justices of the state’s high court, saying that Akorn had “collapsed” under the weight of its regulatory compliance problems after agreeing to the $34-per-share buyout in early 2017.
In Delaware, the bar for proving a material adverse change is high, and judges have historically been inclined to hold buyers to their deals. The Chancery Court’s Oct. 1 decision was the first in the state to allow a potential buyer to escape its merger obligations based on a finding that one had occurred.
Akorn’s counsel from Cravath, Swaine & Moore countered on appeal that Fresenius had simply suffered a typical case of buyers remorse, and that Vice Chancellor J. Travis Laster’s ruling essentially “rewrote” Delaware law by loosening the materiality standard to permit known risks to constitute a material adverse change and adopting a “less onerous” standard for material breach of a covenant.
Delaware Supreme Court Chief Justice Leo E. Strine Jr., however, sided with Fresenius in a 3-page order Friday, just two days after appellate arguments in Dover.
“We conclude that the record adequately supports the Court of Chancery’s declaration that Fresenius properly terminated the merger … because Akorn’s breach of its regulatory representations and warranties gave rise to an [material adverse effect] and Fresenius had not itself engaged in a prior, material breach of a covenant that would have prevented Fresenius from exercising its immediate termination right under the merger agreement,” Strine wrote.
The order did not expound on the justices’ thinking behind what exactly amounts to a material adverse change in a firm’s business under Delaware law.
An attorney for Akorn did not immediately return a call Friday seeking comment on the ruling.
Fresenius had pulled out of the deal in April, after receiving letters from anonymous whistleblowers last year raising major concerns about Akorn’s quality compliance programs and its failure to meet regulatory requirements. Fresenius conducted its own investigation of the whistleblower allegations, revealing that Akorn executives, including its head of quality control either altered data or provided false test data to the U.S. Food and Drug Administration in applications for new generic drugs.
A later probe by the FDA resulted in Akorn recalling its sterile eye drop after they failed quality testing.
Alster said in his October opinion that Akorn’s performance has since fallen “off a cliff,” with revenue down 29 percent in July 2017 and operating income down 84 percent from the year prior.
As of 1 p.m. Friday, Akorn’s stock was trading at $4.32 per share, down 22 percent from the start of the session.