Landmark Decision Affirms MAC Clause

The Supreme Court of the State of Delaware issued an order sustaining the lower court’s finding that Fresenius Kabi AG (Fresenius) had no obligation to close its proposed merger with Akorn, Inc. (Akorn) and that Fresenius had properly terminated the merger agreement between the parties largely on the basis that Akorn had suffered a material adverse effect (MAC).

Merger and similar agreements generally allow the buyer to terminate if the target suffers a MAC before closing or if the target’s representations are not true at closing subject to a MAC qualifier. Prior to the Akorn decision, the Delaware courts have been very reluctant to find a MAC as they try to balance respect for the written terms of an agreement while not promoting buyer’s regret.

The decision is notable in part because it is understood to represent the first time a Delaware court has allowed a buyer to terminate a public company merger on the basis of a contractual MAC provision.

The Court described the question of whether Akorn had experienced a MAC as a “straightforward issue” of contractual interpretation. The facts were in favour of Fresenius, as Akorn’s financial performance had basically fallen off a cliff shortly after signing the agreement. In reaching its decision, the Court confirmed prior guidance that a MAC must be both “material when viewed from the longer-term perspective of a reasonable acquirer” and “durationally significant”.

Although not binding on courts in Canada, the decision is highly significant given the lack of jurisprudence in Canada on this point. The case confirms that it is possible to find a MAC and provides a factual point of reference that others will turn to when a MAC is asserted in the future.

DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.