Channel Medsystems, Inc. v. Boston Scientific Corporation (Dec. 18, 2019) is the Delaware Court of Chancery’s first decision issued since the Delaware Supreme Court’s 2018 Akorn decision to evaluate whether an acquiror had a right, under a merger agreement, to terminate a pending acquisition on the grounds that there was a “Material Adverse Effect” or “Material Adverse Change” in the target company. (We use “MAE” and “MAC” interchangeably in this memorandum.) Akorn was the first case in which the Court of Chancery, post-trial, found the existence of an MAE and the first post-trial Delaware decision to find that an acquiror had the right to terminate a merger agreement based on an MAE. In Channel, by contrast, Chancellor Bouchard ruled, after trial, that there was not an MAE and that the acquiror was required to close the merger.
Both Akorn and Channel involved the discovery, between signing and closing of a merger agreement, that a target company executive, without knowledge of the target, had submitted fraudulent reports to the Food and Drug Administration relating to the company’s products (in Akorn, the target’s key products, and in Channel, the target’s sole product). In Akorn, there was a dramatic decline in the target company’s financial performance and a severe and “durationally significant” loss of its potential future earnings due to the regulatory noncompliance. In Channel, however, before the acquiror sought to terminate the transaction, the FDA had accepted the target’s remediation plan (which indicated that FDA approval of the target’s product was likely); the remediation plan did not appear to involve significant ongoing costs or other effects on the target; and, prior to trial, the FDA approved the product. The Chancellor held that the acquiror had failed to prove, on a quantitative or qualitative basis, that an MAE would be reasonably expected to occur, and thus it did not have a right to terminate the agreement.
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