Delaware Business Litigation Report

Chancery Finds Change in Product’s Medicare Reimbursement Rate Was Not A Material Adverse Effect Excusing Buyer From Closing

Bardy Diagnostics, Inc. v. Hill-Rom, Inc. C.A. No. 2021-0175-JRS (Del. Ch. Jul. 9, 2021)
Bardy manufactures a patch that measures heart rate. Its reimbursement rate for the patch had for years been set around $365 per patch. When Hill-Rom acquired Bardy in early January 2021, the parties understood that this reimbursement rate might change, and prior to closing had built an earnout provision into their merger agreement to address this risk. The parties also included a Material Adverse Effect clause, giving Hill-Rom the ability to walk from the deal for any development that could “reasonably be expected to have a material adverse effect on … the Business of [Bardy] taken as a whole.” Yet any industry-wide change in the industries or markets in which Bardy operated, or any change in any “Health Care Law” would not constitute an MAE, unless such development had a “materially disproportionate impact on [Bardy] as compared to other similarly situated companies ….”

Shortly after signing the merger agreement, in January 2021, a private contractor for the Medicare system, to which CMS had delegated authority to set reimbursement levels, set the price for the patch at a drastically lower level. In April of 2021, that private contractor increased those rates, but to a level still less than half the historical rates. Bardy continued to grow throughout this turbulent period, yet Hill-Rom nonetheless notified Bardy that it did not intend to close on the merger.

In this post-trial decision, the Court of Chancery concluded that the April reduction in rates was not an MAE, for among other reasons because Hill-Rom failed to establish that the April rates would remain in effect for a “commercially reasonable period.” Prior decisions have not prescribed any specific time period when assessing “durational significance,” yet those cases do note that a “short-term hiccup in earnings” is not an MAE, and that “one would expect [a] commercially reasonable period to be measured in years rather than months.” The Court found that Hill-Rom’s expert had failed to convincingly establish when rates might be reset, whereas Bardy’s expert had convincingly testified that the rate would be reset by 2023 at the latest. Further, addressing the MAE carveout for healthcare laws, the Court found that the close competitor to Bardy was “similarly situated,” and also negatively impacted by the lower rates, meaning the rate changes were excluded from the definition of an MAE. Accordingly, the Court granted Bardy’s request for specific performance of the merger agreement.

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