Delaware Supreme Court Upholds Merger Termination Under Material Adverse Effect Provision

For apparently the first time, a Delaware court has found that a material adverse effect occurred in a merger transaction and affirmed the unilateral termination of the agreement. In 2008, the Delaware Chancery Court in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., recognizing material adverse effect clauses as a “backstop” against the occurrence of unknown events substantially threatening the long-term profitability of the target, stated “(m)any commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement.” 965 A.2d 715, 738 (Del. Ch. 2008). On Dec. 7, the Supreme Court of Delaware, in the expedited appeal of Akorn, Inc. v. Fresenius Kabi AG, upheld the chancery court’s opinion finding, among other things, the acquisition target “had suffered a material adverse effect” under the merger agreement “that excused any obligation on (the acquirer’s) part to close.” Notably, the case was submitted to the chancery court on Sept. 25, with a 246-page opinion issued on Oct. 1.

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