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Court Of Chancery Provides Definitive Explanation Of A Material Adverse Effect Clause

Posted In M&A

Akorn Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (October 1, 2018)

Merger agreements often permit the buyer to terminate items when a material adverse effect occurs. This 247 page opinion provides what may be the definitive analysis of such terms as “material adverse effect,” “reasonable best efforts” and “all actions necessary” that are often found in merger agreements. It is also a great source of the key reference materials that the Court of Chancery is increasingly turning to in interpreting what such terms mean in the real world. For example, it teaches that a MAE clause is focused on the target company’s own performance as different from the industry that it belongs to and explains the degree and length of a downturn needed to find an MAE.

The decision is also noteworthy for its deep thinking about who is responsible when a target’s performance does not measure up to expectations and the buyer has done due diligence that may indicate such a failure. Sellers should not count on that to get them off the hook for what they promised in the agreement.