DELAWARE / M&A LEGAL UPDATE By Stephanie Hosler and Curtis - PowerPoint PPT Presentation

DELAWARE / M&A LEGAL UPDATE By Stephanie Hosler and Curtis Tiffany

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MAC – Akorn, Inc. v. Fresenius • How many times has a Delaware court found a Material Adverse Change to have occurred with respect to an acquisition target? • 0 • 1 • 2 • 3

MAC – Akorn, Inc. v. Fresenius • How many times has a Delaware court found a Material Adverse Change to have occurred with respect to an acquisition target? • 0 • 1 • 2 • 3

MAC – Akorn, Inc. v. Fresenius Facts of Akorn • “Material Adverse Effect” means any effect, change, event or occurrence that, individually or in the aggregate (i) would prevent or • materially delay, interfere with, impair or hinder the consummation of the [Merger] or the compliance by the Company with its obligations under this Agreement or (ii) has a material adverse effect on the business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole; provided, however, that none of the following, and no effect, change, event or occurrence arising out of, or resulting from, the following, shall constitute or be taken into account in determining whether a Material Adverse Effect has occurred, is continuing or would reasonably be expected to occur: any effect, change, event or occurrence (A) generally affecting (1) the industry in which the Company and its Subsidiaries operate or (2) the economy, credit or financial or capital markets, in the United States or elsewhere in the world, including changes in interest or exchange rates, monetary policy or inflation, or (B) to the extent arising out of, resulting from or attributable to (1) changes or prospective changes in Law or in GAAP or in accounting standards, or any changes or prospective changes in the interpretation or enforcement of any of the foregoing, or any changes or prospective changes in general legal, regulatory, political or social conditions, (2) the negotiation, execution, announcement or performance of this Agreement or the consummation of the [Merger] (other than for purposes of any representation or warranty contained in Sections 3.03(c) and 3.04), including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, partners, employees or regulators, or any litigation arising from allegations of breach of fiduciary duty or violation of Law relating to this Agreement or the [Merger], (3) acts of war (whether or not declared), military activity, sabotage, civil disobedience or terrorism, or any escalation or worsening of any such acts of war (whether or not declared), military activity, sabotage, civil disobedience or terrorism, (4) pandemics, earthquakes, floods, hurricanes, tornados or other natural disasters, weather-related events, force majeure events or other comparable events, (5) any action taken by the Company or its Subsidiaries that is required by this Agreement or at [Fresenius Kabi’s] written request, (6) any change or prospective change in the Company’s credit ratings, (7) any decline in the market price, or change in trading volume, of the shares of the Company or (8) any failure to meet any internal or public projections, forecasts, guidance, estimates, milestones, budgets or internal or published financial or operating predictions of revenue, earnings, cash flow or cash position (it being understood that the exceptions in clauses (6), (7) and (8) shall not prevent or otherwise affect a determination that the underlying cause of any such change, decline or failure referred to therein (if not otherwise falling within any of the exceptions provided by clause (A) and clauses (B)(1) through (8) hereof) is a Material Adverse Effect); provided further, however, that any effect, change, event or occurrence referred to in clause (A) or clauses (B)(3) or (4) may be taken into account in determining whether there has been, or would reasonably be expected to be, a Material Adverse Effect to the extent such effect, change, event or occurrence has a disproportionate adverse affect [sic] on the Company and its Subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and its Subsidiaries operate (in which case the incremental disproportionate impact or impacts may be taken into account in determining whether there has been, or would reasonably be expected to be, a Material Adverse Effect) .

MAC – Akorn, Inc. v. Fresenius • Facts of Akorn • While “industry headwinds” applicable to the generic pharmaceuticals market did not help Akorn, the events giving rise to the MAC were specific to Akorn. • new market entrants causing downward price pressure on key products • loss of a major contract • major regulatory compliance issues • Just before signing the merger agreement, Akorn reaffirmed its earnings guidance . • Almost immediately after signing, Akorn’s financial performance “fell off a cliff”, including a 55% drop in annual EBITDA in 2017 (following years of consistent growth). • Regulatory compliance issues that would take at least 3-4 years to remedy. Cost to remediate approximately 20% ($900M) of Akorn’s value .

MAC – Akorn, Inc. v. Fresenius • Facts of Akorn

MAC – Akorn, Inc. v. Fresenius • Facts of Akorn

MAC – Akorn, Inc. v. Fresenius • Court’s analysis • “The important consideration therefore is whether there has been an adverse change to the target’s business that is consequential to the company’s long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months.” ( Hexion Specialty Chemicals v Huntsman, 2008) • Put differently, the effect should “substantially threaten the overall earnings potential of the target in a durationally-significant manner”” ( In re IBP, Inc. Shareholders Litigation, 2001)

MAC – Akorn, Inc. v. Fresenius • Court’s analysis • Causes behind decreased performance (new market entrants causing downward price pressure on key products, loss of a major contract and regulatory compliance issues) were not short-term issues facing Akorn. • Analyst valuations on the date of termination valued Akorn in the range of $5 - $12 per share, which was a significant decline from the pre-deal announcement market price of $22 and the per share transaction price of $34.

MAC – Akorn, Inc. v. Fresenius • Court’s analysis • The Court rejected the claim that the commonly negotiated exception to MAE clauses for “events that generally effect the industry in which the company operates” was applicable and attributed the major drivers of the MAE to Akorn specific events. • Even if the causes of the declines were industry-wide, they had a disproportionate impact on Akorn, which was a carve-out from the “industry-wide impact” MAE exception.

NEW MAC – Akorn, Inc. v. Fresenius • Court’s analysis • Actual EBITDA relative to analysts estimates for 2017

MAC – Akorn, Inc. v. Fresenius • Court’s analysis • In prior rulings, the Delaware courts had stated that MACs were intended to protect a buyer from unknown events, which led some to believe that an anti-sandbagging limitation was implied with respect to MACs. • The Court clarified that, in most cases, a seller will not be able to overcome a finding that a MAC occurred on the basis that the buyer should have known about the risks. • The Court suggested that the parties could have: • Agreed to a MAC definition that excluded specific matters the seller believed would, or were likely to, occur during the interim period, or matters disclosed during due diligence, or risks identified in public filings. • Agreed to define a MAC to include only unforeseeable effects, changes, events, or occurrences .

MAC – Akorn, Inc. v. Fresenius • MACs going forward • Establishing that a MAC has occurred is still very difficult. • A MAC still requires that there be events that would result in a significant decline in performance that would be durationally-significant.

MAC – Akorn, Inc. v. Fresenius • Termination • Akorn could not make accurate representations and warranties that were qualified by a MAC standard and therefore, Fresenius was permitted to not consummate the acquisition. • Termination of Agreement was conditioned upon Fresenius’ compliance with the terms of the agreement (including consultation obligations when concerns about closing arose).

MAC – Akorn, Inc. v. Fresenius • Other Notes from Akorn • Use Restrictions • The Court also held that the Confidentiality Agreement provision that permitted the use of diligence materials “solely for the purpose of evaluating, negotiating and executing a transaction” permitted Fresenius to use diligence materials in litigation as part of executing the transaction • “Commercially reasonable efforts” vs “reasonable best efforts” • The court stated that these phrases effectively impose the same requirement to “take all reasonable steps”

Mandatory Indemnification – Brown v. Rite-Aid • Which of the following sections of the DGCL provides for the mandatory indemnification of directors and officers for expenses incurred in connection with the successful defense of a claim? • 141(b) • 242(c) • 145(c) • 212(a)