Akorn-Fresenius Fight Over Canceled Deal Is Argued in Court

(Bloomberg) -- Akorn Inc., still trying to salvage its multibillion-dollar sale to German drugmaker Fresenius SE, argued that a trial judge improperly rewrote state law and used “guesswork” in allowing Fresenius to scrap the deal.

The case marks the first time the Delaware Supreme Court has weighed the thorny question of when a company can cancel a purchase because the target’s business took a sharp downturn before a deal closed. The five justices said they’d deliver their decision later.

“Since it’s the first, people will compare their cases to this one to see if they have enough to walk away,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

The decision is eagerly anticipated by arbitragers who bet on merger-and-acquisition deals, and will shed light on what amounts to a “material adverse change” in a firm’s business under Delaware law. Many high-profile disputes over merger and buyout deals are heard in Delaware, corporate home to more than half the U.S.’s public companies and more than 60 percent of Fortune 500 firms. Its chancery court specializes in quickly hearing big-dollar business cases.

Judge Travis Laster erred in allowing Fresenius to renege on its agreement to pay $4.3 billion for Akorn because it knew the risks of acquiring the maker of generic injectable drugs, Daniel Slifkin, one of the company’s lawyers, told the state’s highest court Wednesday.

Laster ignored evidence showing that Fresenius’s executives “set out to tank the deal” and used his own “personal intuition and guesswork,” rather than solid legal reasoning, to ratify the German drugmaker’s move to scuttle the buyout, Slifkin said.

Fresenius’s lawyer countered that Laster relied on stacks of evidence showing a laundry list of problems at Akorn that went unaddressed as its revenues plummeted, in finding that the company’s business had radically declined prior to the closing deadlines.

“Every time somebody picked up a rock at Akorn, they found more problems, each worse than the last,” Lewis Clayton, the German company’s lawyer, told the court. While Laster found multiple reasons to conclude Akorn’s business suffered a material change, Fresenius needed only one reason to win, he added.

Akorn sued in April after Fresenius pulled out of the deal, citing the U.S. company’s plunging revenues and operational problems. As the deal was being finalized, Fresenius officials discovered Akorn wouldn’t meet profit projections. An anonymous whistleblower also tipped off Fresenius executives about a longstanding pattern of problems in Akorn’s drug-development and manufacturing systems.

Akorn officials claimed Fresenius focused on minor regulatory and manufacturing miscues as a pretext for canceling the buyout after suffering “buyer’s remorse.” Fresenius had suffered some of the same kinds of operational problems, they said.

After a weeklong trial, Laster ruled in October that the deterioration of Akorn’s business was severe enough to create a “material adverse event” allowing Fresenius to walk away. That caused Akorn’s stock to plunge almost 60 percent in New York.

While other chancery judges have found that such double-digit declines didn’t amount to a material change, Laster said Akorn’s nosedive was attributable to “company-specific problems” rather than industrywide trends. Those problems included phony test results presented to the U.S. Food and Drug Administration, a computer system with inadequate security and a history of manufacturing problems that drew a slew of regulatory warnings.

Salvage Deal

In briefs filed with the appellate court, Akorn contends Laster didn’t give it sufficient credit for quickly moving to address the problems uncovered during the dispute in hopes of salvaging the deal. It also said Fresenius Chief Executive Officer Stephan Sturm ordered underlings to find a way to extricate the company from the transaction.

In its own filings, the German company pointed to Laster’s comment that Akorn’s business “fell off a cliff” before the deal was consummated. He also found “overwhelming evidence of widespread regulatory problems and compliance problems.” That was enough to create a material adverse change under Delaware law, Fresenius’s lawyers argue.

Fresenius also rejected Akorn’s claims it quickly addressed data and operational problems, noting the generic drugmaker ignored manufacturing miscues and took “extraordinary steps to conceal its violations in the hope Fresenius would not discover them until after the transaction closed.”

The case is Akorn Inc. v. Fresenius Kabi AG, No. 535-2018, Delaware Supreme Court (Dover).

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