Compass Lexecon Client Prevails in Historic Delaware MAE Trial

Court Relies on Testimony of Compass Lexecon Expert Professor Daniel R. Fischel

On October 1, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery, relying on Compass Lexecon President Daniel Fischel's expert testimony on behalf of Compass Lexecon's client Fresenius, found that Akorn, Inc., a company Fresenius had agreed to acquire more than a year before, had suffered a material adverse effect (MAE), the first such ruling ever by the Delaware Court. The Court also ruled that Akorn had breached its representations regarding its compliance with regulatory requirements in a manner that would reasonably be expected to result in a MAE and Fresenius validly terminated because Akorn materially breached its obligation to continue operating in the ordinary course of business between signing and closing. As a result the Court held that Fresenius was not legally obligated to close the previously agreed upon transaction with Akorn.

The case relates to Fresenius' announcement on April 24, 2017, that it had agreed to acquire Akorn, Inc. for $34 per share, or $4.75 billion. Subsequent to the announcement, Akorn's financial and operating performance declined and in February 2018, Fresenius announced that it was conducting an investigation of possible breaches of its merger agreement. Almost one year after the acquisition was announced, on April 22, 2018, Fresenius terminated the merger agreement relying on Akorn's failure to fulfill a number of closing conditions including issues relating to Akorn's compliance with FDA data integrity requirements, among other things. At the time, Akorn responded publicly claiming that nothing identified in the investigation would be expected to have a material adverse effect.

In late April 2018, Akorn filed a lawsuit in Delaware Chancery Court seeking specific performance compelling Fresenius to close based on its allegation that Fresenius's attempt to terminate the merger agreement was invalid. Fresenius filed an answer and counterclaim responding that Akorn's misrepresentations regarding its regulatory compliance would reasonably be expected to result in a material adverse effect, that Akorn failed to operate in the ordinary course of business in all material respects since the merger agreement was signed, and pointing to the section in the merger agreement that conditioned Fresenius's obligation to close the acquisition on Akorn not having suffered a MAE.

Compass Lexecon and its President Professor Daniel R. Fischel were retained by Fresenius to respond to Akorn's experts who purported to show that Akorn had not suffered a MAE and to opine on whether the economic evidence supported the existence of a MAE. Professor Fischel filed two expert reports and testified at trial, opining that Plaintiff's experts' claims that the company had not suffered a MAE were flawed and incorrect and pointing to Akorn's disproportionate underperformance relative to historical experience, company guidance, analysts' expectations, and its industry peers as strong evidence that the company had indeed suffered a MAE. Professor Fischel further opined that the significant underperformance was not a "hiccup" and that, in fact, the disproportionate underperformance was expected to continue through at least 2020 and thus was durationally significant.

Compass Lexecon Executive Vice President Rajiv Gokhale also submitted an expert report quantifying the effects of regulatory delay attributable to data integrity problems. Professor Ernst Berndt of MIT, supported by a team at Compass Lexecon, submitted two expert reports analyzing the dynamics of generic drug competition and describing the implications of these dynamics for quantifying the effects of regulatory delay.

In July 2018, Vice Chancellor Laster held a five-day trial and on October 1, 2018, in a 246-page opinion rejected Akorn's claims in their entirety and ruled in favor of Compass Lexecon client Fresenius on all claims. The trial was closely watched by hedge funds, analysts, and the press as the Delaware Court had never ruled in favor of a company seeking not to close a transaction based on a MAE. The Court agreed with Professor Fischel's conclusions that Akorn's financial performance had declined disproportionately since the time of the merger agreement and that such underperformance was expected to continue. In particular, Vice Chancellor Laster stated that "[a]t trial, Professor Daniel Fischel testified credibly and persuasively that Akorn's financial performance has declined materially since the signing of the Merger Agreement and that the underlying causes of the decline were durationally significant."

Professor Fischel was assisted by a team in Compass Lexecon's Chicago office that included Jessica Mandel, Tim McAnally, Avisheh Mohsenin, Andrew Lin and Heather Freilich Farby. The consulting team was led by Compass Lexecon expert Dr. Adel Turki. Mr. Gokhale was supported by a team in our New York office led by Adel Turki that included Michael Kwak, Christopher Fiore and Monica Xie. Professor Berndt was supported by a team in our Oakland office led by Bret Dickey, Mark Rodini and Tully Lillis.

Compass Lexecon worked closely with counsel from Paul, Weiss, Rifkind, Wharton & Garrison LLP including Lewis R. Clayton, Moses Silverman, Andrew G. Gordon, Jonathan Hurwitz, Daniel Mason, Paul A. Paterson, Altin H. Sila and Abel McDonnell who successfully represented Fresenius.