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Channel Medsystems, Inc. v. Boston Sci. Corp.

Court of Chancery of Delaware

September 6, 2019, Submitted; December 18, 2019, Decided

C.A. No. 2018-0673-AGB

Opinion

MEMORANDUM OPINION

BOUCHARD, C.

This post-trial opinion resolves claims arising from Boston Scientific Corporation's decision to terminate a merger agreement it entered into on November 1, 2017 (the "Agreement") to acquire Channel Medsystems, Inc., an early stage medical device company with one product—a global endometrial ablation device named Cerene. Under the Agreement, Boston Scientific could only be required to close the transaction [*2]  if Cerene received FDA approval by September 30, 2019.

In late December 2017, Channel discovered that its Vice President of Quality, Dinesh Shankar, had falsified expense reports and other documents as part of a fraudulent scheme by which he stole approximately $2.6 million from the company. Unbeknownst to Channel, some of the documents Shankar falsified were contained in Channel's submissions to the FDA seeking approval of the Cerene device.

Promptly after discovering Shankar's fraud, Channel notified Boston Scientific and the FDA. Channel interacted with both of them in a fully transparent manner over the next few months as it thoroughly investigated and took actions to remediate the effects of Shankar's fraud. On April 18, 2018, the FDA accepted Channel's remediation plan, which strongly signaled that Shankar's fraud would not be the cause of any failure of the FDA to approve the Cerene device and which made the FDA's approval a distinct possibility. Despite this positive development, Boston Scientific terminated the Agreement on May 11, 2018.

On March 28, 2019, consistent with the timeframe for receiving FDA approval the parties expected when they entered into the Agreement, the FDA [*3]  approved the Cerene device. Trial of this action commenced the next month.

The primary issue in this case is whether Boston Scientific was entitled to terminate the Agreement because (i) certain representations in the Agreement were inaccurate as of the date it entered into the Agreement and (ii) the failure of such representations to be true and correct has or reasonably would be expected to have a "Material Adverse Effect" on Channel. For the reasons discussed below, the court finds that although Shankar's fraud caused a number of representations to be inaccurate as of the date of the Agreement, Boston Scientific failed to prove that the failure of such representations to be true and accurate reasonably would be expected to have a Material Adverse Effect. The court thus concludes that Boston Scientific was not entitled to terminate the Agreement and that Channel is entitled to an order of specific performance requiring Boston Scientific to close the merger.

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2019 Del. Ch. LEXIS 1394 *; 2019 WL 6896462

CHANNEL MEDSYSTEMS, INC., a Delaware corporation, Plaintiff and Counterclaim Defendant, v. BOSTON SCIENTIFIC CORPORATION, a Delaware corporation, and NXT MERGER CORP., a Delaware corporation, Defendants and Counterclaim Plaintiffs.

Notice: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

CORE TERMS

Scientific, terminate, representations, remediation, records, adverse effect, documents, inaccurate, manufacturing, falsified, certification, inspection, merger, warranties, regulations, updates, compliance, Effective, breached, CLARITY, reasons, clinical trial, fraudulent, argues, transparent, validation, products, parties, Notice, sterility

Business & Corporate Compliance, Contracts Law, Types of Contracts, Covenants, Standards of Performance, Discharge & Termination, Evidence, Burdens of Proof, Preponderance of Evidence, Mergers & Acquisitions Law, Mergers, Duties & Liabilities of Directors & Officers, Mergers, Governments, Agriculture & Food, Federal Food, Drug & Cosmetic Act, Healthcare Law, Medical Treatment, Medical Devices, Premarket Approval, Classification & Regulation, Contract Conditions & Provisions, Contract Conditions & Provisions, Breach, Material Breach, Contracts Law, Remedies, Specific Performance, Clear & Convincing Proof, Allocation, Torts, Fraud & Misrepresentation, Actual Fraud, Elements, Business & Corporate Law, Duties & Liabilities, Unlawful Acts of Agents, Fraud & Misrepresentation, Management Duties & Liabilities, Causes of Action