Akorn Plunges After Judge Backs Fresenius Exit From Deal
(Bloomberg) -- Fresenius SE had proper grounds for canceling a $4.3 billion buyout of rival drugmaker Akorn Inc. and doesn’t need to consummate the deal, a judge said in a ruling that comes as a blow to Akorn investors.
Delaware Chancery Court Judge Travis Laster backed claims by Fresenius that Akorn executives hid a litany of miscues that cast doubt on the validity of its data and the profitability of its operations. Fresenius cited those issues in pulling out of the $34-per-share buyout in April. The ruling is the first time a Delaware judge has found a series of events amounted to a clear “material adverse change” in a deal that justified its cancellation.
Akorn’s shares fell a record 59 percent at the close of trading in New York. Fresenius rose 8.5 percent in Frankfurt, its biggest gain in almost a decade.
Akorn argued at a trial that Fresenius wrongfully focused on minor mistakes as a pretext for nixing the combination because of buyer’s remorse and that the U.S. drugmaker quickly moved to address the problems uncovered during the corporate wresting match over the buyout.
Laster said in his 246-page opinion that Fresenius “properly exercised its rights” to withdraw from the deal. “Fresenius validly terminated the merger agreement because Akorn’s regulatory compliance representations were untrue,’’ the judge said.
“The ruling is a watershed moment in Delaware law, and will be a seminal case for those seeking to get out of M&A agreements,” Holly Froum, an analyst with Bloomberg Intelligence, said in an emailed statement.
Akorn plans to appeal judge’s ruling. “We are disappointed by the ruling by the Delaware Chancery Court determining not to force Fresenius to close and we continue to believe Fresenius’ attempt to terminate the transaction is in breach of our binding merger agreement,” Akorn said in a statement. “We intend to appeal, in an effort to vigorously enforce our rights and continue to protect the interests of our Company and our shareholders.”
Fresenius confirmed judge’s decision in a statement.
“Fresenius terminated the merger agreement due to Akorn’s failure to fulfill several closing conditions,” Fresenius commented in statement.
Stephan Sturm, the German drugmaker’s chief executive officer, testified that going ahead with the deal would have required him to pay more than $250 million to clean up operational snafus at Akorn’s plants. Strum also estimated that Akorn’s mistakes caused $1.9 billion in damage to its business.
“Fresenius responded to a dramatic, unexpected, and company-specific downturn in Akorn’s business that began in the quarter after signing,” Laster wrote in the ruling. “After consulting with Akorn about the reasons for the decline and receiving unconvincing
answers, Fresenius appropriately began evaluating its contractual rights under the Merger Agreement.”
Fresenius alleged that Akorn’s computer system security was so poor that anyone on the premises could alter test data. That raised questions about the validity of the company’s testing regime.
The German company contends four executives from Akorn, including its former head of quality control, either altered data or provided phony test data to the U.S. Food and Drug Administration as part of new-drug applications.
FDA inspectors also found an anesthetic produced at Akorn’s plant in Somerset, New Jersey, was tainted with metal shavings. In addition, sterile eye drops had to be recalled after failing quality testing.
During the five-day trial in July in Wilmington, Akorn executives argued that Fresenius had similar testing issues at some of its plants. They questioned the motivation for Fresenius to cancel the buyout soon after agreeing to the combination.
Akorn’s lawyers produced internal emails showing German executives were pondering how to pull out of the merger in 2017 after Akorn had two quarters of disappointing sales. A senior Fresenius manager suggested the company “build a legal case’’ to withdraw from the combination, according to one of the emails.
The case is Akorn Inc. v. Fresenius Kabi AG, 2018-0300, Delaware Chancery Court (Wilmington).
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