Relevant Document:Demonstrative ExhibitTakeaways
- Today, Dec. 5, the Delaware Supreme Court heard oral arguments en banc in Akorn’s appeal of the Court of Chancery’s Oct. 1 decision in favor of Fresenius.
- Akorn’s counsel, Daniel Slifkin, argued chiefly that Fresenius knew it was buying a generic pharmaceutical company with “some regulatory issues” and that Akorn is that same company today. Fresenius’ counsel, Lewis Clayton, argued that the Court of Chancery correctly held that Fresenius was entitled to terminate the merger agreement in light of the unprecedented intentional conduct and compliance issues that have devastated Akorn’s value since signing.
- Both sides’ counsels addressed pressing questions from the justices on their respective positions.
- At the conclusion of arguments, Chief Justice Leo Strine notified the parties that the court would take the matter “under advisement.”
Today, Dec. 5, the Delaware Supreme Court heard oral arguments
en banc in Akorn’s appeal of the Court of Chancery’s Oct. 1 decision in favor of Fresenius.
As Reorg M&A
analyzed previously, it could take the Delaware Supreme Court approximately one month to issue a written decision, meaning a decision could come in early to mid-January 2019.
The main arguments from today’s oral hearing, which largely mirrored the companies written briefs, are summarized below.
Known Versus Unknown Risks
At the oral hearing today, the Delaware Supreme Court expressed unease with Akorn’s broader argument that since Fresenius “knew” of data integrity issues at Akorn and potential new competition to its flagship product ephedrine, these associated impacts should be excluded from a potential MAE analysis.
Chief Justice Leo Strine questioned Akorn’s counsel, Daniel Slifkin, about the usefulness of representations and warranties in merger contracts if companies were going to just rely on the “known vs unknown” aspect to prevent an acquirer from walking away in light of a potential breach.
Slifkin made clear to the court that they were not arguing that the court completely overlook Akorn’s regulatory failings, but instead assess whether the alleged breaches rise up the level of an MAE since the representations and warranties in the merger agreement are MAE-qualified.
In a noteworthy exchange between Chief Justice Strine and Slifkin, the former inquired if Akorn conceded that the merger agreement does not contain language that the MAE has to be “unknown” and that the company was essentially relying on background law to argue on that point. Slifkin concurred with Chief Justice Strine’s assessment and informed the court that Akorn was specifically relying on
Mrs. Field v. Interbake and
IBP v. Tyson - the latter of which was decided by Chief Justice Strine.
Regulatory MAE
Akorn challenged the lower court’s analysis of the quantitative aspect of the Regulatory MAE.
Slifkin argued that the fact that the lower court rejected Fresenius’ $1.9 billion remediation cost figure should have represented the end of the analysis. Instead, according to Akorn, the lower court engaged in a speculative exercise to arrive at the $900M figure.
Slifkin reiterated that not only does the $900M figure lack a scientific foundation, but to use that number against just the “cash portion” of the deal is incorrect. If indeed the Court of Chancery had compared the $900M figure against the total value of the deal, taking into account Fresenius’ assumption of Akorn’s debt, then the 20% impact as a result of Akorn’s regulatory issues would be much lower.
Rebutting Akorn’s argument, Fresenius’ counsel Lewis Clayton sought to focus the court’s attention on the importance of the qualitative aspect of the Regulatory MAE. Clayton argued that the data integrity issues at Akorn are unprecedented for a company in the generic pharmaceutical space and that Fresenius found during discovery that Akorn favored expedited proceedings because Akorn feared more compliance issues would be uncovered over time. Clayton cited various case law, including
Frontier Oil v. Holly Corp., to argue that qualitative aspects can be taken into account for determining an MAE.
During rebuttal, Chief Justice Strine questioned Slifkin on whether Fresenius’ allegations regarding Akorn’s intentionally misleading conduct before the FDA has a bearing on the materiality analysis for an MAE determination. Slifkin responded that none of Fresenius’ four experts were willing to testify that the FDA would “shut down” Akorn based on the data integrity issues and that any intentional conduct was only limited to one employee, out of over 2,000 employees at Akorn. Moreover, Akorn withdrew the noted abbreviated new drug application, or ANDA, which had a minimal revenue impact on the company. The FDA has approved eight of Akorn’s new ANDA applications this year, with four having been approved after the Court of Chancery’s Oct. 1 opinion. Slifkin cautioned the court that it cannot set a precedent where it takes just one “rogue” employee to scuttle an entire deal.
On the quantitative aspect, Clayton informed the court that Fresenius’ $1.9 billion estimate was derived from the company’s experience addressing similar issues with its India facility and that the lower court actually took a more conservative stance by determining a $900M impact, and not $1.9 billion as the records indicated.
Financial MAE
At the hearing today, Akorn essentially focused on the merger agreement to challenge the lower court’s opinion and counter Fresenius’ arguments on Financial MAE. Akorn’s counsel Slifkin argued that the lower court ignored the contractual language stating that financial guidance and analyst estimates may not be taken into account for determining MAE.
In this context, Fresenius’ counsel Clayton noted that
IBP and
Hexion v. Huntsman favored the seller because it determined that the business would turn around. In contrast, Clayton argued that there is no sign of a turnaround at Akorn.
According to Clayton, Akorn’s EBITDA for 2018 is down approximately 80% compared to 2017, and Akorn either conceded or did not contest how its financial metrics met the standards for an MAE set forth in
Hexion and
IBP. Clayton also added that Akorn’s ephedrine argument was a misstatement of the record and that the numbers Akorn has provided since trial are misleading.
Justice Valihura questioned Slifkin on how Akorn would square the Court of Chancery’s factual findings with Akorn having reaffirmed its lowered revenue guidance for 2018. Slifkin responded that Akorn’s financial advisors had contemplated that Akorn would do worse than it actually did in their own downside analyses and that Fresenius was advised of these risks during due diligence.
The court, led by Chief Justice Strine, appeared to be wrestling with Akorn’s argument that since ephedrine was a “known risk,” negative effects associated with loss in ephedrine sales should be excluded from any analysis comparing Akorn to its peers.
Fresenius’ counsel Clayton rebutted Akorn’s argument around ephedrine by questioning Akorn’s expert report on various counts. Clayton argued that Akorn’s expert report focused on revenues, not profit, and compared Akorn’s financials to other companies’ generic segments instead of the whole company. Importantly, Clayton highlighted that by excluding the effects associated with ephedrine on Akorn and not accounting for similar company-specific impacts on other companies, Akorn’s expert applied different standards for comparison purposes.
Clayton said that even if the court were to add back $11 million of EBITDA lost due to new competition in the ephedrine market, Akorn’s hypothetical $77 million ($64 million actual plus $11 million ephedrine add-back) would still compare quite unfavorably to the company’s guidance of $300 million in 2017.
Chief Justice Strine also asked whether multiple MAE findings were necessary to support Fresenius’ right to terminate under the merger agreement. Clayton responded that only one MAE finding was necessary to support termination and that if the Supreme Court were to affirm on any one of the MAE findings, then the analysis would be complete.
Ordinary Course
With regards to ordinary course obligations, Clayton argued that the Court of Chancery correctly interpreted that the “materiality” standard should be akin to what a reasonable investor would deem important information. Clayton disputed Akorn’s contention that “materiality” should be evaluated according to common law contractual interpretation. Clayton added that the merger agreement provides for the proper remedy for an ordinary course breach, and that any remedy short of termination would impermissibly excuse Akorn’s intentionally misleading conduct under Delaware law.
At the conclusion of arguments, Chief Justice Strine notified the parties that the court would take the matter “under advisement.”
--Shrey Verma and Patrick Flavin