Event Driven Takeaways
- In addition to winning the argument on the merits, Akorn will have to convince the Delaware Court that awarding specific performance is “practicable” and a “workable remedy.”
- Under Delaware law, specific performance has to be proved by "clear and convincing" evidence, which is a tougher standard than mere preponderance of the evidence.
- Any ambiguity or contradictory language around specific performance can provide an opening to Fresenius. Fortunately for Akorn, the language around specific performance in the merger agreement appears to be clear and unambiguous.
- However, Delaware case law suggests that the court would also want to satisfy itself that awarding specific performance would not create additional problems in the future.
- The fact that Fresenius’ own model concluded that Akorn was worth $37.67 per share to Fresenius as recently as April 2018 (which exceeds the $34 per share deal price), and that the deal still offered Fresenius a net present value in excess of $400 million, could eventually lead Judge Travis Laster to conclude that the transaction still makes strategic sense. Thus, awarding specific performance would not necessarily lead to an unworkable situation in the future.
Akorn’s fight against Fresenius in the Delaware Court is ultimately aimed at forcing the latter to close the transaction. For Akorn, not only will the company have to win the case on the merits, but also convince the court that awarding specific performance is “practicable” and a “workable remedy”.
Towards the end of the recently-concluded trial, Judge Travis Laster shared his “high-level thinking” on burden allocation between the parties. From the brief exchange between Judge Laster and the counsels for both parties, it appears that Fresenius will have to meet the burden to prove that Akorn has violated the “ordinary course” covenant and that a material adverse effect, or MAE, has occurred. On the other hand, Akorn would have the burden to show why the court must award specific performance, if it is proved that Fresenius wrongfully terminated the merger.
In an earlier analysis, Event Driven
concluded that Akorn mounted a strong defense to Fresenius’ arguments related to the former’s violations of the “ordinary course” covenant, while making compelling arguments before the court on the issue of MAE.
However, in addition to winning the argument on the merits, Akorn must show the court that not only does the contractual language in the merger agreement, specifically Section 8.08, support awarding specific performance, but also that such a decision would indeed be workable.
Under Delaware law, specific performance must be proven by "clear and convincing" evidence - a tougher standard than mere preponderance of the evidence. In its assessment whether to grant specific performance, the court will first scrutinize the contractual language around specific performance in the merger agreement.
Any ambiguity or contradictory language around specific performance can provide an opening to Fresenius to extricate itself from the transaction. Indeed, in
United Rentals v. Ram (Cerberus), the court concluded that the language around specific performance was qualified by another provision in the agreement, which gave rise to two contradictory but reasonable interpretations. The court ultimately ruled against United Rentals' request for specific performance to force Cerberus to complete its $7 billion all-cash acquisition of United Rentals.
Fortunately for Akorn, the language in the merger agreement appears to be watertight. “The language of Section 8.08 of the merger agreement seems clear and unambiguous regarding irreparable harm and specific performance in the event of an underlying breach,” according to Peter Flocos, co-head of the securities and transactional litigation practice at K&L Gates.
Importantly, in addition to the clarity of the provision, Section 8.08 also states that “the parties hereto agree not to assert that a remedy of specific enforcement is unenforceable, invalid, contrary to law or inequitable for any reason,
and not to assert that a remedy of monetary damages would provide an adequate remedy or that the parties otherwise have an adequate remedy at law” (emphasis added).
The fact that Section 8.08 explicitly mentions the inadequacy of monetary damages vis-a-vis specific performance is significant. In the seminal case
IBP v. Tyson, Judge Leo Strine wrestled with the idea whether a cash damages award would offset the need for specific performance. Such a possibility exists in this case, especially because the Akorn/Fresenius deal is an all-cash transaction. Fresenius can be expected to argue that this is not a stock-for-stock deal, in which expected synergies can be difficult to quantify, but rather an all-cash deal that can be remedied with money.
However, the language around monetary damages in Section 8.08 and the fact that the parties stipulate to the existence of irreparable harm in the event of a breach will work in Akorn’s favor, assuming it is found that Fresenius wrongfully terminated the merger. “Delaware courts typically give such stipulations at least a lot of evidentiary weight,” noted Flocos.
Therefore, assuming Akorn wins the arguments on the merits, the language in the merger agreement suggests that the court, theoretically, would be compelled to award specific performance.
But Delaware case law adds a level of complexity to the situation than what appears to be the case based on a plain reading of the merger agreement. “Delaware case law suggests that although remedy provisions like Section 8.08 are theoretically enforceable, the court will want to satisfy itself that specific performance is a workable remedy and would not create bigger problems in the future,” according to Flocos.
Judge Strine’s opinion in
IBP v. Tyson offers a particularly instructive framework to determine the practicality and workability of a specific performance award. Judge Strine determined that a cash damages award would be difficult to assess, and the amount could be “staggeringly large.” Second, he concluded that testimony from Tyson’s executives and a report from Tyson’s own investment banker indicated that the transaction still made strategic sense. Third, despite the acrimony resulting from litigation which could prevent the management teams from working together, Judge Strine opined that Tyson had the authority to hand-pick its own management team post-merger. These three conclusions helped persuade Judge Strine to award specific performance.
In the Akorn/Fresenius case, the clarity of the contractual language is definitely a positive for Akorn. Since both parties have stipulated that “irreparable harm” would occur if any of them breached the merger agreement, a showing that Fresenius wrongfully terminated the merger would automatically allow Akorn to show “irreparable harm” - a condition that Delaware courts usually seek before awarding specific performance.
Second, the fact that Fresenius’ own model concluded that Akorn was worth $37.67 per share to Fresenius as recently as April 2018 (which exceeds the $34 per share deal price) and that the deal still offered Fresenius a net present value in excess of $400 million could eventually lead Judge Laster to conclude that the transaction still makes strategic sense for Fresenius. Moreover, at the time of merger announcement, one of the reasons
cited by Fresenius for acquiring Akorn was the latter’s pipeline of abbreviated new drug applications, or ANDAs. Considering there is no conclusive evidence that FDA action canceling Akorn’s ANDA pipeline is certain and imminent, the strategic rationale for the merger has not changed. Thus, awarding specific performance would not necessarily lead to an unworkable situation in the future.
Third, the testimony of Akorn’s expert Anil Shivdasani may aid Akorn in arguing that calculation of a cash damage award is infeasible. Shivdasani, during the trial, made an interesting point that Akorn’s historical growth had come against the backdrop of new product acquisitions through M&A activity - something that Akorn was prevented from executing after it entered into a merger agreement with Fresenius. The opportunity cost of lost acquisitions during the period could, therefore, make the calculation of monetary damages an imprecise exercise. Moreover, the language in Section 8.08 around the inadequacy of monetary damages vis-a-vis specific performance is likely to further persuade Judge Laster to determine that specific performance is an appropriate remedy.
Lastly, there is no doubt that there has been considerable acrimony between senior management at Akorn and Fresenius in the past several months. Judge Laster is likely to ask himself the question, “Are the personal animosities so deep that the merger is now unworkable?” However, the fact that the merger agreement does not constrain Fresenius, in any way, from making employment-related changes means that it can hand-pick a new management team at Akorn post merger.
By July 26, per the
scheduling order, Fresenius and Akorn are to file their first post-trial briefs.
Event Driven’s coverage of this transaction can be found
HERE.
-- Shrey Verma