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Law School Case Brief

Akorn, Inc. v. Fresenius Kabi AG - No. 2018-0300-JTL, 2018 Del. Ch. LEXIS 325 (Ch. Oct. 1, 2018)

Rule:

As a matter of common law, a breach is material if it goes to the root or essence of the agreement between the parties, or touches the fundamental purpose of the contract and defeats the object of the parties in entering into the contract. Under this doctrine, whether a breach is material is determined by weighing the consequences in the light of the actual custom of men in the performance of contracts similar to the one that is involved in the specific case using five guiding factors: (i) the extent to which the injured party will be deprived of the benefit which he reasonably expected, (ii) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived, (iii) the extent to which the party failing to perform or to offer to perform will suffer forfeiture, (iv) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances, and (v) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Nonperformance will attain this level of materiality when the covenant not performed is of such importance that the contract would not have been made without it.

Facts:

Pursuant to an agreement and plan of merger dated April 24, 2017 (Merger Agreement), Fresenius Kabi AG agreed to acquire Akorn, Inc. In the Merger Agreement, Akorn made extensive representations about its compliance with applicable regulatory requirements and committed to use commercially reasonable efforts to operate in the ordinary course of business between signing and closing. Akorn and Fresenius entered into the Merger Agreement shortly after announcing their results for the first quarter of 2017. During the second quarter of 2017, Akorn's business performance fell off a cliff, delivering results that fell materially below Akorn's prior-year performance on a year-over-year basis. The dismal results shocked Fresenius because, on the same date that the parties signed the Merger Agreement, Akorn had reaffirmed its full-year guidance for 2018 at Fresenius's request. Fresenius consulted with Akorn about the reasons for the sudden decline, which Akorn attributed to unexpected competition and the loss of a key contract. In October 2017, Fresenius received a letter which called into question whether Akorn's representations regarding regulatory compliance were accurate and whether Akorn had been operating in the ordinary course of business. Fresenius's investigation uncovered serious and pervasive data integrity problems that rendered Akorn's representations about its regulatory compliance sufficiently inaccurate that the deviation between Akorn's actual condition and its as-represented condition would reasonably be expected to result in a Material Adverse Effect. On April 22, 2018, Fresenius gave notice that it was terminating the Merger Agreement. Fresenius asserted that Akorn's representations regarding regulatory compliance were so incorrect that the deviation would reasonably be expected to result in a Material Adverse Effect. Akorn responded by filing a complaint, which sought a declaration that Fresenius's attempt to terminate the Merger Agreement was invalid and a decree of specific performance compelling Fresenius to close.

Issue:

  1. Was Fresenius’s attempt to terminate the Merger Agreement with Akron valid?
  2. Can Fresenius be compelled to close the Merger Agreement?

Answer:

1) Yes. 2) No.

Conclusion:

The Court held that Fresenius validly terminated the Merger Agreement with Akorn because Akorn’s regulatory compliance representations were untrue, and the magnitude of the inaccuracies resulted in a material adverse effect (MAE) evidenced by the collapse in Akorn’s financial performance that could not be cured by the outside date in the contract, which caused the bring-down condition to incurably fail. The Court further averred that Fresenius validly terminated the Agreement because Akorn materially breached the ordinary course covenant with regard to data integrity, and significant FDA compliance conditions could not be cured by the contract's outside date. As such, Fresenius cannot be compelled to close the transaction since it properly relied on the fact that Akorn had suffered an MAE as a basis for refusing to close.

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