Akorn, Inc. v. Fresenius Kabi AG

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
AKORN, INC., )
)
Plaintiff and Counterclaim Defendant, )
)
v. ) C.A. No. 2018–0300–JTL
)
FRESENIUS KABI AG, )
QUERCUS ACQUISITION, INC., and )
FRESENIUS SE & CO. KGAA, )
)
Defendants and Counterclaim Plaintiffs. )
MEMORANDUM OPINION
Date Submitted: September 25, 2018
Date Decided: October 1, 2018
William M. Lafferty, Thomas W. Briggs, Jr., John P. DiTomo, Richard Li, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Robert H. Baron, Daniel
Slifkin, Michael A. Paskin, Justin C. Clarke, CRAVATH, SWAINE & MOORE LLP, New
York, New York; Counsel for Plaintiff and Counterclaim Defendant.
Donald J. Wolfe, Jr., Michael A. Pittenger, T. Brad Davey, Matthew F. Davis, Jacob R.
Kirkham, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Stephen P.
Lamb, Daniel A. Mason, Brendan W. Sullivan, PAUL, WEISS, RIFKIND, WHARTON
& GARRISON LLP, Wilmington, Delaware; Lewis R. Clayton, Andrew G. Gordon,
Susanna M. Buergel, Jonathan H. Hurwitz, Daniel H. Levi, Paul A. Paterson, PAUL,
WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Counsel for
Defendants and Counterclaim Plaintiffs.
LASTER, V.C.
Pursuant to an agreement and plan of merger dated April 24, 2017 (the “Merger
Agreement”), Fresenius Kabi AG agreed to acquire Akorn, Inc. In the Merger Agreement,
Akorn made extensive representations about its compliance with applicable regulatory
requirements and committed to use commercially reasonable efforts to operate in the
ordinary course of business between signing and closing. Both Fresenius and Akorn
committed to use their reasonable best efforts to complete the merger, and Fresenius
committed to take all actions necessary to secure antitrust approval, without any efforts-
based qualification. The parties agreed to a contractually defined “Outside Date” for
closing, set initially at April 24, 2018. If the need for antitrust approval was the only
condition to closing that had still not been met at that point, then the Outside Date would
extend automatically to July 24, 2018.
If the merger closed, then each share of Akorn common stock would be converted
into the right to receive $34 per share. Closing, however, was not a foregone conclusion.
First, Fresenius’s obligation to close was conditioned on Akorn’s representations having
been true and correct both at signing and at closing, except where the failure to be true and
correct would not reasonably be expected to have a contractually defined “Material
Adverse Effect.” If this condition was not met and could not be cured by the Outside Date,
then Fresenius could terminate the Merger Agreement. Fresenius could not exercise this
termination right, however, if Fresenius was in material breach of its own obligations under
the Merger Agreement.
Second, Fresenius’s obligation to close was conditioned on Akorn having complied
in all material respects with its obligations under the Merger Agreement. Once again, if
1
this condition was not met and could not be cured by the Outside Date, then Fresenius
could terminate the Merger Agreement. Here too, Fresenius could not exercise the
termination right if Fresenius was in material breach of its own obligations under the
Merger Agreement.
Third, Fresenius’s obligation to close was conditioned on Akorn not having suffered
a Material Adverse Effect. The failure of this condition did not give Fresenius a right to
terminate. Once the Outside Date passed, however, either Fresenius or Akorn could
terminate, as long as the terminating party’s own breach of the Merger Agreement had not
been a principal cause of or resulted in the parties’ failure to close before the Outside Date.
Akorn and Fresenius entered into the Merger Agreement shortly after announcing
their results for the first quarter of 2017. During the second quarter of 2017, Akorn’s
business performance fell off a cliff, delivering results that fell materially below Akorn’s
prior-year performance on a year-over-year basis. The dismal results shocked Fresenius,
because on the same date that the parties signed the Merger Agreement, Akorn had
reaffirmed its full-year guidance for 2018 at Fresenius’s request. Akorn’s performance fell
well below the guidance, forcing management to adjust Akorn’s full-year guidance
downward. Fresenius consulted with Akorn about the reasons for the sudden decline, which
Akorn attributed to unexpected competition and the loss of a key contract.
Akorn’s CEO reassured Fresenius that the downturn was temporary, but Akorn’s
performance continued to slide in July and again in August 2018. By September,
Fresenius’s management team had become concerned that Akorn had suffered a Material
2
Adverse Effect, although its legal counsel was not certain at that point that Fresenius could
satisfy the high burden imposed by Delaware law.
In October 2017, Fresenius received a letter from an anonymous whistleblower who
made disturbing allegations about Akorn’s product development process failing to comply
with regulatory requirements. In November 2017, Fresenius received a longer version of
the letter that provided additional details and made equally disturbing allegations about
Akorn’s quality compliance programs. The letters called into question whether Akorn’s
representations regarding regulatory compliance were accurate and whether Akorn had
been operating in the ordinary course of business.
Fresenius provided the letters to Akorn. Although Fresenius understood that Akorn
would have to investigate the allegations in the ordinary course of business, Fresenius
informed Akorn that Fresenius also needed to conduct its own investigation into the
allegations. Under the Merger Agreement, Fresenius had bargained for a right of
reasonable access to Akorn’s officers, employees, and information so that Fresenius could
evaluate Akorn’s contractual compliance and determine whether the conditions to closing
were met. Invoking this right, Fresenius had expert attorneys and advisors investigate the
issues raised by the whistleblower letters.
Fresenius’s investigation uncovered serious and pervasive data integrity problems
that rendered Akorn’s representations about its regulatory compliance sufficiently
inaccurate that the deviation between Akorn’s actual condition and its as-represented
condition would reasonably be expected to result in a Material Adverse Effect. During the
course of the investigation, tensions escalated between the parties. Matters came to a head
3
after Akorn downplayed its problems and oversold its remedial efforts in a presentation to
its primary regulator, the United States Food and Drug Administration (“FDA”). As one of
Akorn’s own experts recognized at trial, Akorn was not fully transparent with the FDA.
Put more bluntly, the presentation was misleading. From Fresenius’s standpoint, Akorn
was not conducting its operations in the ordinary course of business, providing an
additional basis for termination.
During this same period, Akorn’s business performance continued to deteriorate. In
mid-April 2018, Fresenius sent Akorn a letter explaining why conditions to closing could
not be met and identifying contractual bases for terminating the Merger Agreement.
Fresenius nevertheless offered to extend the Outside Date if Akorn believed that further
investigation would enable Akorn to resolve its difficulties. Akorn declined.
On April 22, 2018, Fresenius gave notice that it was terminating the Merger
Agreement. Fresenius asserted that Akorn’s representations regarding regulatory
compliance were so incorrect that the deviation would reasonably be expected to result in
a Material Adverse Effect. Fresenius also cited Akorn’s failure to comply in all material
respects with its contractual obligations under the Merger Agreement, including Akorn’s
obligation to use commercially reasonable efforts to operate in the ordinary course of
business in all material respects. Fresenius also cited the section in the Merger Agreement
that conditioned Fresenius’s obligation to close on Akorn not having suffered a Material
Adverse Effect.
Akorn responded by filing this action, which seeks a declaration that Fresenius’s
attempt to terminate the Merger Agreement was invalid and a decree of specific
4
performance compelling Fresenius to close. Fresenius answered and filed counterclaims,
contending it validly terminated the Merger Agreement and is not required to close.
This post-trial decision rules in favor of Fresenius and against Akorn. First,
Fresenius validly terminated the Merger Agreement because Akorn’s representations
regarding its compliance with regulatory requirements were not true and correct, and the
magnitude of the inaccuracies would reasonably be expected to result in a Material Adverse
Effect. Second, Fresenius validly terminated because Akorn materially breached its
obligation to continue operating in the ordinary course of business between signing and
closing. Third, Fresenius properly relied on the fact that Akorn has suffered a Material
Adverse Effect as a basis for refusing to close.
If Fresenius had been in material breach of its own obligations under the Merger
Agreement, then Fresenius could not have exercised either of the termination rights on
which it relied. Akorn tried to prove that Fresenius failed to use its reasonable best efforts
to complete the merger and breached its obligation to take all actions necessary to obtain
antitrust approval. By piecing together bits of documents and testimony, Akorn’s skilled
counsel weaved a tale of buyer’s remorse. I have taken this theory seriously, and there is
some evidence to support it.
Having weighed the evidence and evaluated the credibility of the witnesses, I find
that Fresenius fulfilled its contractual obligations. In prior cases, this court has correctly
criticized buyers who agreed to acquisitions, only to have second thoughts after cyclical
trends or industrywide effects negatively impacted their own businesses, and who then
filed litigation in an effort to escape their agreements without consulting with the sellers.
5
In these cases, the buyers claimed that the sellers had suffered contractually defined
material adverse effects under circumstances where the buyers themselves did not seem to
believe their assertions.
This case is markedly different. Fresenius responded to a dramatic, unexpected, and
company-specific downturn in Akorn’s business that began in the quarter after signing.
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. While doing so, Fresenius continued to move forward with the transaction.
Later, Fresenius received whistleblower letters that made alarming allegations about data
integrity issues at Akorn. Once again, Fresenius consulted with Akorn, then relied on an
informational access covenant in the Merger Agreement to conduct an investigation. That
too was proper, because buyers obtain informational rights so they can continue to evaluate
the seller after signing and determine whether to close.
Akorn did prove that for approximately a one-week period during February 2018,
Fresenius embarked on a strategy for achieving antitrust approval that would have breached
its contractual obligation to take all steps necessary to satisfy that condition to closing.
Fresenius promptly reversed course, and the parties were on the cusp of receiving antitrust
approval when Fresenius terminated the Merger Agreement. If all other conditions to
closing had been met on the initial Outside Date such that it would have extended
automatically to June 24, 2018, then the parties easily would have obtained antitrust
approval. Fresenius technically breached its contractual obligation, but it was not a material
6
breach sufficient to deprive Fresenius of its ability to exercise the termination rights on
which it relied.
Any second thoughts that Fresenius had about the Merger Agreement were justified
by unexpected events at Akorn. The parties agreed to provisions in the Merger Agreement
that addressed those events, and Fresenius properly exercised its rights under those
provisions. As a result, the Merger Agreement terminated on April 22, 2018.
I. FACTUAL BACKGROUND
A five-day trial took place on July 9–13, 2018. The parties introduced 1,892 exhibits
into evidence and lodged fifty-four deposition transcripts—forty from fact witnesses and
fourteen from experts. Nine fact witnesses and seven experts testified live at trial.
The parties prepared for trial during eleven weeks of highly expedited litigation.
Despite the massive effort this entailed, the parties required assistance with only one
significant discovery dispute, which involved contentious privilege issues. This case
exemplifies how professionals can simultaneously advocate for their clients while
cooperating as officers of the court. The parties were aided in this effort by a discovery
facilitator who helped them craft and live by a detailed discovery plan.
My task is to make factual findings based on the record the parties generated. For
that purpose, Fresenius bore the burden of proving by a preponderance of the evidence the
facts supporting the exercise of its termination rights. Akorn bore the burden of proving by
a preponderance of the evidence the facts necessary to establish its claim that Fresenius
could not exercise those rights because Fresenius was in material breach of its own
7
obligations. Akorn bore the burden of proving by clear and convincing evidence the facts
necessary to justify a decree of specific performance.
Fresenius would have borne the burden of proving the facts necessary to establish
its affirmative defense of unclean hands. In this case, however, there was no meaningful
distinction between its contractual arguments and its unclean hands defense. Fresenius
simply repackaged its contractual arguments as an equitable theory. In my view, the Merger
Agreement governs the parties’ relationship. If there were issues or actions that could
support a defense of unclean hands and which did not come within the analytical
framework of the Merger Agreement, then I would have analyzed that defense. In this case,
however, the facts fit neatly within the analytical framework of the Merger Agreement and
point to a contract-based outcome. Under those circumstances, applying the doctrine of
unclean hands would either duplicate the contractual outcome or create uncertainty by
departing from the result that the parties sought to achieve for themselves. This decision
therefore does not address the defense of unclean hands.
Based on these allocations of the burden of proof, the evidence supported the
following findings of fact.
A. Fresenius
Defendant Fresenius Kabi AG is a pharmaceutical company headquartered in
Germany.1 It employs approximately 37,000 people worldwide, has seventy manufacturing
1
PTO ¶ B.2. Citations in this form refer to stipulated facts in the pre-trial order. See
Dkt. 165. Citations in the form “[Name] Tr.” refer to witness testimony from the trial
transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a
8
sites around the world, and is worth about €6.5 billion.2 Its particular areas of focus lie in
clinical nutrition, injectable drugs, IV solutions, and medical devices.3 Fresenius Kabi is a
signatory to the Merger Agreement.
Fresenius Kabi is the parent corporation of defendant Quercus Acquisition, Inc., a
wholly owned acquisition subsidiary. Under the Merger Agreement, Quercus would merge
with and into Akorn in a reverse triangular merger (the “Merger”). Although a necessary
party for purposes of Akorn’s request for specific performance, Quercus does not play a
meaningful role in the dispute.
Fresenius Kabi is also the parent corporation of non-party Fresenius Kabi USA,
LLC (“Fresenius USA”), another wholly owned subsidiary.4 In the United States, Fresenius
Kabi operates through Fresenius USA. Fresenius Kabi viewed the Merger as a way to
expand its business in the United States, and personnel from Fresenius USA figure
prominently in the record.
Fresenius Kabi is itself a wholly owned subsidiary of defendant Fresenius SE & Co.
KGaA (“Fresenius Parent”), a German company whose shares trade publicly on the
deposition transcript. Citations in the form “JX –– at ––” refer to a trial exhibit with the
page designated by the last three digits of the control or JX number or, if the document
lacked a control or JX number, by the internal page number. If a trial exhibit used paragraph
numbers, then references are by paragraph.
2
Henriksson Tr. 933, 1027; see PTO ¶ B.2.
3
Henriksson Tr. 933–34.
4
PTO ¶ C.2.
9
Frankfurt Stock Exchange.5 Through various business segments, Fresenius Parent offers
products and services for hospitals, dialysis, and outpatient treatment.6 Fresenius Parent
has been in existence for more than a century, operates in more than 100 countries, and
employs approximately 277,000 people worldwide.7 For its fiscal year 2017, Fresenius
Parent had sales of approximately €34 billion and an operating profit of nearly €5 billion.8
Fresenius Parent is a signatory to the Merger Agreement for the purpose of causing
Fresenius Kabi to comply with its obligations.9
The resulting three-tiered corporate structure puts Fresenius Parent at the top, then
Fresenius Kabi, then Fresenius USA. The corresponding human hierarchy starts with the
Supervisory Board of Fresenius Parent, which plays the same role as the board of directors
of a Delaware corporation. Because it is a German company, Fresenius Parent also has a
Management Board, consisting of the senior executives of that entity. Since July 2016,
Stephan Sturm has served as the top executive at Fresenius Parent and Chairman of the
Management Board.10 Since 2013, Mats Henriksson has served as CEO of Fresenius
5
Id. ¶¶ B.2–3.
6
Id. ¶ B.3.
7
Sturm Tr. 1171, 1195.
8
Id. at 1171.
9
JX 1 § 8.16.
10
Sturm Tr. 1169–71.
10
Kabi.11 He also serves as a member of the Management Board of Fresenius Parent.12 For
many years, John Ducker has served as President and CEO of Fresenius USA.13
Although critically important for many purposes, distinguishing among the
Fresenius entities is generally not necessary in this decision. It therefore refers only to
Fresenius, unless context requires a more specific referent.
B. Akorn
Plaintiff Akorn is a specialty generic pharmaceuticals company organized under the
laws of the State of Louisiana and headquartered in Lake Forest, Illinois.14 Akorn’s stock
trades publicly on NASDAQ under the symbol “AKRX.”15 Akorn is defined as the
“Company” in the Merger Agreement, and this decision sometimes uses that term. During
the events giving rise to this litigation, Raj Rai was its President and CEO.
Akorn’s business model focuses on selectively targeting products with complex
manufacturing processes or that are deliverable in alternative dose forms, such as
11
Henriksson Tr. 933–34.
12
Sturm Tr. 1172.
13
Henriksson Tr. 935–36; Bauersmith Tr. 575–76.
14
PTO ¶ B.1. Attentive readers will have noted that none of the parties to the Merger
Agreement is a Delaware entity. Even Quercus, the acquisition subsidiary, is a Louisiana
corporation. The parties nevertheless chose Delaware law to govern the Merger Agreement
(excluding internal affairs matters governed by Louisiana law) and selected the courts of
this state as their exclusive forum for litigation. See JX 1 §§ 8.06 & 8.07.
15
PTO ¶ B.1.
11
injectables, eye drops, oral liquids, inhalants, and nasal sprays.16 Akorn’s management
team believes this strategy carries less risk and generates more consistent profit margins
than other generic drug company strategies.17 Akorn has manufacturing facilities in
Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland;
and Paonta Sahib, India. Akorn has research and development centers in Vernon Hills,
Illinois, and Cranbury, New Jersey.18
Akorn’s primary regulator is the FDA.19 Akorn’s quality operations function is
responsible for ensuring that Akorn’s plants and R&D centers meet FDA requirements.20
To carry out this function, Akorn’s Global Quality Compliance (“GQC”) team conducts
periodic audits; Akorn also retains consultants who evaluate its sites and processes.21
Akorn’s quality operations function is also responsible for ensuring that Akorn
complies with FDA requirements when making submissions to the FDA, such as when
filing an Abbreviated New Drug Application (“ANDA”) to seek approval for a new generic
16
See Rai Tr. 455–56; PTO ¶ B.1.
17
See Rai Tr. 456–57; see also Bauersmith Tr. 614; Bauersmith Dep. 111–12.
18
Wasserkrug Tr. 7–8.
19
Id. at 18–19.
20
Id. at 8–9, 15–16.
21
See id. at 14–15, 18; Pramik Tr. 219–220; Kaufman Tr. 272; Chesney Tr. 1240–
41.
12
drug.22 When reviewing an ANDA, the FDA relies on data submitted by the applicant. To
ensure that data is reliable, the FDA imposes rigorous data integrity requirements on
pharmaceutical companies.23 From the FDA’s standpoint, “ensuring data integrity is an
important component of [the pharmaceutical] industry’s responsibility to ensure the safety,
efficacy, and quality of drugs, and of [the] FDA’s ability to protect the public health.”24
The FDA’s data integrity requirements place the burden on the pharmaceutical
company to “prove the origin, transmission, and content of the company’s data and that
data is what it is purported to be.”25 “A properly designed and managed data integrity
program strives to mitigate the risk of purposeful data manipulation or fraud by putting
controls in place that limit to the greatest extent possible the opportunities to manipulate
data . . . .”26 To minimize those risks, the FDA’s data integrity requirements impose strict
requirements that data regarding testing and manufacturing be attributable, legible,
contemporaneously recorded, original or a true copy, and accurate (“ALCOA”), as well as
complete, consistent, enduring, and available.27 The FDA’s data integrity requirements are
part of its current Good Manufacturing Practices (“cGMP”), which are designed to ensure
22
See Wasserkrug Tr. 22.
23
JX 1251 ¶¶ 17–20.
24
JX 112 at 1.
25
JX 143 at 1; accord Kaufman Tr. 323; Kaufman Dep. 196; see Wasserkrug Tr. 9.
26
JX 1252 ¶ 2.1.
27
See JX 1247 ¶ 35; Wasserkrug Tr. 8–9, 22; Franke Dep. 33–36.
13
the systematic safety, quality, and reliability of drug products.28 These requirements are set
out in federal regulations and clarified by FDA guidance.29
A critical component of a modern data integrity system is the company’s IT
infrastructure.30 The FDA requires that computer systems have adequate “access controls”
that restrict who may access electronic data, as well as “change controls” designed to
“ensure that no unnecessary changes are made, that all changes are documented, and that
the possible effect of a change is evaluated prior to its implementation.”31 The FDA also
requires that lab equipment have “audit trails” to document who uses the equipment, when,
and for what purpose.32
Data integrity also requires ensuring the authenticity of entries in laboratory
notebooks.33 Notebooks contain original source data that should be contemporaneously
recorded by chemists. Notebooks must be preserved, and missing notebooks are “an
important data integrity issue” because “that data is no longer available” and cannot be
28
Wasserkrug Tr. 8, 12; JX 1251 ¶ 22; JX 1249 ¶ 26.
29
See, e.g., 21 C.F.R. Pt. 211. See generally Wasserkrug Tr. 12–13; JX 934 at 3; JX
1247 ¶¶ 34–35; JX 1251 ¶¶ 22–23.
JX 439 at ‘436 (IT is a “core component of a 21st century quality control
30
management structure”); see Pramik Dep. 26.
31
JX 1249 ¶ 96 n.141; see 12 C.F.R. § 211.68(b); Pramik Dep. 27; JX 934 at 3.
32
JX 1247 ¶ 36; see 12 C.F.R. § 211.192; Franke Dep. 56; JX 934 at 3.
33
See 21 C.F.R. §§ 211.68(b) & 211.194(a); JX 934 at 3; JX 1251 ¶ 83; see also JX
1247 ¶¶ 39–40; Wasserkrug Tr. 22 (describing FDA site visits to inspect notebooks and
batch records “to assure the ALCOA principles of that data”).
14
verified.34 At Akorn, each notebook is assigned to a particular individual; making unsigned
entries in another analyst’s notebook violates fundamental principles of data integrity.35
The FDA’s data integrity rules require that all test data—both failing results and
passing ones—be properly recorded.36 The FDA forbids the practice of “testing into
compliance,” or running tests again and again until passing results are secured and
recording only the passing results.37
FDA regulations require that potential data integrity violations be promptly
investigated and remediated. FDA guidance calls for “potential data falsification” to be
“fully investigated” by the firm’s “quality system to determine the effect of the event on
patient safety, product quality, and data reliability; to determine the root cause; and to
ensure the necessary corrective actions are taken.”38
The FDA is required to inspect manufacturing facilities on a risk-based schedule39
and typically inspects Akorn’s sites at least once a year.40 The FDA may also conduct
34
Franke Dep. 51–52.
35
Sherwani Dep. 54–57; Silverberg Dep. 54–55.
36
Wasserkrug Dep. 86–87; see 21 C.F.R. § 211.194(a); JX 934 at 3.
37
Wasserkrug Dep. 52–53, 86–87; JX 1252 at 3.
38
JX 112 at 9–10 (citing 21 C.F.R. §§ 211.22(a), 211.125(c), 211.192, 211.198,
211.204); see Rai Dep. 26 (acknowledging that Akorn “absolutely” has “responsibilities to
investigate and remediate data integrity problems”).
39
21 U.S.C. § 360(h)(3).
40
See Wasserkrug Tr. 20.
15
directed “for cause” inspections.41 At the conclusion of an inspection, the FDA holds a
close-out meeting and shares its observations.42 The FDA may provide only oral
observations, or it may document observations in a Form 483, which is a written report
from the FDA documenting “observations [that] are intended to denote significant
conditions that constitute violations of cGMPs.”43 The company has an obligation to
respond to the FDA’s observations within fifteen business days with a root cause analysis,
impact assessment, and a set of corrective and preventative actions (“CAPAs”).44 If the
FDA determines that the company has proposed adequate CAPAs, it will typically classify
the inspection as voluntary action indicated (“VAI”).45 If the FDA determines that the
remedial measures are insufficient, it may classify the inspection as official action indicated
(“OAI”).46 An OAI classification can lead to further regulatory action, such as follow-up
inspections or the issuance of a Warning Letter.47 After the issuance of a Warning Letter,
the FDA typically will not approve new product applications from the facility until the
41
JX 934 at 4; JX 1249 ¶ 55; Wasserkrug Tr. 23.
42
Wasserkrug Tr. 24.
43
JX 1249 ¶ 56; see JX 1247 ¶ 48; Wasserkrug Tr. 24.
44
Wasserkrug Tr. 24–25; see JX 1249 ¶ 58.
45
JX 1247 ¶ 52; Wasserkrug Tr. 25–26.
46
JX 1247 ¶ 53; Wasserkrug Tr. 26.
47
Wasserkrug Tr. 13, 25–28, 72; JX 1247 ¶ 53.
16
observations are remediated.48 If the FDA has concerns about a company’s data or a
submission, it may send the company a Complete Response Letter (“CRL”) which, as its
name indicates, requires a complete response.49
Data integrity violations are particularly serious because they “break trust” between
the offending company and the FDA.50 The FDA may require the withdrawal of an ANDA
if the FDA finds that it contains an untrue statement of material fact.51 In cases of repeated,
intentional submission of inaccurate data, the FDA may invoke its Application Integrity
Policy (“AIP”), which “halts all ongoing scientific review of pending applications to the
agency until specific milestones are accomplished by the company.”52 Exiting from the
AIP is a time-consuming and expensive process that involves an independent investigation,
corrective action plan, recall or retesting of products, and withdrawal and resubmission of
applications.53 If systemic issues remain uncorrected, the FDA may seek a court-enforced
permanent injunction. In extreme cases, the FDA may bar a company from making
48
JX 1249 ¶ 61; Wasserkrug Tr. 28; see also JX 1247 ¶ 53; Chesney Dep. 149.
49
Chesney Dep. 148–49.
50
JX 1251 ¶ 19.
51
See 21 U.S.C. § 355(e); JX 934 at 4.
52
JX 1251 ¶ 33; see JX 1247 ¶ 53; JX 1355.
53
JX 1251 ¶ 34.
17
submissions, exclude it from other federal programs, or refer matters for criminal
prosecution.54
At the time the Merger Agreement was signed, Mark Silverberg was the head of
Akorn’s quality function, holding the title of Executive Vice President, Global Quality
Affairs.55 Silverberg had been Akorn’s most senior quality official for over ten years. In
that role, he reported directly to Rai, Akorn’s CEO.
The record demonstrated that Silverberg was not a suitable individual to be
responsible for Akorn’s quality efforts. One year before the Merger Agreement was signed,
Akorn’s board of directors and Rai concluded that Silverberg was not up to task of carrying
out his duties and needed to retire.56 Silverberg nevertheless remained at his post until
nearly one year after the signing of the Merger Agreement, on March 1, 2018, when Kim
Wasserkrug, previously the head of quality at Akorn’s Decatur site, took over the quality
function. Silverberg was shifted to the role of “Quality Advisor.”57 His new role had no
substantive responsibilities (other than to help with this litigation), came with a 20%
54
See JX 934 at 5; JX 1249 ¶ 61.
55
See JX 204 at ‘056; Rai Tr. 498–99.
56
See JX 115; JX 132; JX 137; see also JX 121; JX 890 at ‘274.
57
JX 955 at ‘702.
18
diminution in pay, and was originally to last for the lesser of 90 days or until the Merger
closed. It was a constructive termination for cause.58
Akorn took employment action against Silverberg only after learning that in August
2017, during the period between signing and closing, Silverberg submitted a response to a
CRL that he had been told—and I believe knew—would result in the submission of
fabricated data to the FDA.59 If he had not signed off on the CRL, Akorn would have had
to withdraw the ANDA, which would have been a red flag for Fresenius that could have
put the Merger in jeopardy. In my judgment, Silverberg submitted the false CRL in an
effort to avoid inviting any scrutiny of Akorn’s data integrity deficiencies until after the
Merger closed, when it would be Fresenius’s problem.60 Akorn ultimately withdrew the
ANDA in March 2018.61 But for an investigation that Fresenius was conducting into two
whistleblower letters it received, Akorn would not have withdrawn the ANDA or taken
See Rai Tr. 496 (“Q. And, of course, as we all know, [Silverberg] was fired, right,
58
by Akorn? A. Yes.”); Wasserkrug Tr. 105 (“In my mind, he was fired, but yes.”).
59
See Wasserkrug Tr. 105 (agreeing that Silverberg was fired “because he failed to
direct the withdrawal of an ANDA submitted to the FDA for the drug azithromycin after
being told that the submission contained likely false or fabricated data” and “for knowingly
resubmitting that inaccurate data, or highly likely inaccurate data, to the FDA in a CRL
response back in August of 2017”).
60
In a submission made after post-trial argument, Akorn informed the court that the
database of a stand-alone high accuracy liquid particle counter had been deleted at the
Somerset site on August 22, 2018. Dkt 201 at 1. In a moment of brazen candor, Akorn
argued that if Fresenius had not “repudiated the Merger Agreement itself, the deal would
have closed months earlier and the risk of such an event would have fallen on Fresenius.”
Dkt. 209 at 7; see also Wasserkrug Dep. 157; Wasserkrug Tr. 139; JX 590 at ‘472.
61
See JX 1070 at ‘771; Wasserkrug Tr. 43–44.
19
any action against Silverberg. After constructively firing Silverberg, Akorn did not use the
opportunity to deliver any type of message to its employees about the importance of data
integrity or its intolerance for inaccurate submissions to the FDA.62
During his ten years heading up the quality compliance function, Silverberg placed
“a lot of pressure” on employees “to just get things done and get products out [the] door.”63
In an employee survey conducted in January 2016 that went to Rai and other members of
senior management, a whistleblower submitted the following comment:
Our current Executive Vice President of Quality Assurance is not fostering a
willingness to change the current Akorn culture. Instead of acknowledging
and embracing our compliance gaps and working collaboratively with other
groups to change and mature our quality systems, he actively works to
prevent collaboration and transparency. He has actually counselled his staff
to not speak to Global Quality Compliance staff and to not share information
with GQC. This is not in line with our new mission and values statement. He
has also provided misleading information to regulatory bodies including the
US FDA.64
The comment was exceptional both in its content and its source: it came from someone
who worked in Akorn’s headquarters in Lake Forest, where Silverberg himself worked
along with Rai and the executive team. Yet Akorn did not investigate it. During the same
period when the problems with the azithromycin CRL were unfolding, Silverberg
instructed the head of quality at Akorn’s Swiss site not to open an investigation into a
62
Rai Tr. 497, 502–03.
63
JX 870 at ‘895 (“[T]here was a lot of pressure from Mark S to just get things done
and get products out [the] door.”).
64
JX 246 at ‘573.
20
quality issue he reported, not to put Silverberg’s response in any file relating to the matter,
and not to put FDA-sensitive subjects in emails.65
On Silverberg’s watch, Akorn did very little to address data integrity issues. In June
2016, Ron Johnson, an Akorn board member with FDA experience,66 wrote to Silverberg
to express concerns about Akorn’s state of compliance:
I continue to be concerned that our position always seems to be that FDA got
it wrong and we are just fine. I do not think we are fine, I think there are
signals that we are missing. As the leader of the quality function, I do not
understand how you can tolerate the continued non-compliance by
employees, supervisors and quality assurance staff. . . . We have dogged [sic]
a bullet a number of times, but at some point, our number will be up unless
we, once and for all, fix the underlying reasons why our people do not adhere
to procedures. Why do we not see an effort to do this?67
Silverberg’s initial response was “I think we should communicate live (on the phone).” 68
In December 2016, during a meeting of the board of directors’ Quality Oversight
65
See JX 623 (Silverberg stating, “Please do not incorporate this correspondence
into any related complaint investigations or files[,]” and instructing, “Please do not put
FDA sensitive subjects into emails as such.”); JX 667 (Silverberg: “Let’s discuss by phone
please at your earlier convenience.”); JX 778 at ‘557 (Silverberg instructing Sherwani in
connection with the azithromycin investigation, “No more emails.”). Stuart testified that
during Cravath’s investigation into the azithromycin problems, discussed below, they
determined that Silverberg subsequently ordered an investigation into the issue. Stuart Tr.
868–69.
66
See, e.g., JX 470 at 14 (April 2017 consultant report quoting unnamed FDA
official: “Ron Johnson [a board member at Oak] is ex-FDA and highly respected. He gives
the company excellent credibility.”) (alteration in original).
67
JX 1403 at ‘004.
68
Id.
21
Committee, Johnson again “expressed his concern around the repetitiveness of issues
between sites and across sites identified during audits & external inspections.”69
Also in December 2016, Akorn received a “Compliance Gap Analysis Summary
and Recommendation Report” for its Decatur facility from John Avellanet of Cerulean
Associates LLC, who had inspected the facility during a four-day visit in September
2016.70 The report was blunt: “Overall, the review found that the data integrity controls at
. . . Akorn’s Decatur, Illinois site . . . are insufficient to support compliance with current
data integrity expectations and [FDA] regulatory requirements.”71 The report warned that
“[a]s a result, Akorn currently shoulders significant regulatory and negative public
perception risk.”72
Cerulean identified seven critical, seven major, and at least five minor
nonconformities at the Decatur site.73 The report defined a critical nonconformity as one
that is “reasonably likely to directly impact (e.g., either immediately cause, enable, or be a
non-compliance) the regulatory compliance status of the organization.”74 The report
warned that “[h]istorically, these findings have consistently resulted in public enforcement
69
JX 235 at ‘598; see Rai Tr. 515–16.
70
See JX 231; Wasserkrug Tr. 31–32.
71
JX 231 at ‘062.
72
Id.
73
Id. at ‘062, ‘067.
74
Id. at ‘067.
22
actions (e.g. FDA Warning Letter, product recall, etc.) and have been significant factors in
product liability litigation.”75 The report also warned that “[r]epeat non-conformities . . .
pose an increased risk because they are indicators that an organization did not take adequate
corrective actions and thus may not treat its responsibilities as seriously as appropriate.”76
The seven critical findings were:
 “Failure to exercise sufficient controls to prevent data loss.”77
 “Insufficient data integrity controls (both procedural and technical) to prevent
unauthorized changes to electronic data.”78
 “Insufficient registered record archival controls and retention for records involved
in drug product manufacture, testing and release, and quality records.”79
 “Failure to have sufficient controls over computerized equipment used in regulated
processes and used to create, manipulate, edit, [and] store . . . regulated data for drug
product safety and quality testing and release.”80
 “Inadequate validation of computerized systems to ensure the ongoing suitability of
systems for Akorn processes, data, and personnel.”81
75
Id.
76
Id.
77
Id. at ‘068.
78
Id. at ‘069.
79
Id. at ‘071.
80
Id. at ‘072.
81
Id. at ‘074.
23
 “Inadequate control over approved specifications for drug product and raw
materials, and failure to ensure that product testing data is derived from compliance
with established specifications and standards.”82
 “Inadequate corrective action and preventative action and out-of-specification
investigations, explanations, and corrective actions.”83
Specific deficiencies included that any Akorn employee could add, delete, or modify
electronic data, which undermined “all of the test data [and] all of the production data” at
the Decatur site,84 thereby “call[ing] into serious question the identity, strength, quality,
safety, purity, and sterility of Akorn’s drug products.”85 Cerulean also found that Akorn
had failed to use an audit trail function that would have enabled Akorn to determine
whether employees had exploited their unlimited access, which also “rais[ed] questions
over the integrity of the laboratory’s data since initial usage of the instruments.”86
In January 2017, Cerulean conducted a similar assessment at the Somerset site.
Cerulean was not able to complete its inspection because of inadequate IT support. 87 In
82
Id. at ‘075.
83
Id. at ‘076.
84
Avellanet Dep. 111–15.
85
JX 231 at ‘075.
86
Id. at ‘070. Avellanet also found that Akorn was claiming a clearly fraudulent
number of hours for training on quality issues. See id. at ‘077 (“The Akorn Decatur site
alone averages 7,000 trainings a month. Assuming each individual works 7 days a week,
with no vacations or sick leave, that’s 232 trainings a day.”); Avellanet Dep. 120–24.
87
Wasserkrug Tr. 131; Wasserkrug Dep. 156–57; Avellanet Dep. 142–45; see JX
439 at ‘430; JX 500; JX 504; JX 505; JX 509.
24
May 2017, Cerulean provided Akorn with a preliminary report on the Somerset facility,
which identified three additional critical findings and three major findings.88 This time,
Avellanet believed that some of the violations were so severe that Akorn’s senior
management should be concerned about potential criminal liability under the Park
doctrine.89 Cerulean found that senior management had failed “to ensure an effective
quality system” and that the IT department failed to “ensure the reliability of the controls
around data used to make, test, [and] release” sterile drug products.90 As at Decatur,
Cerulean determined that the latter deficiency raised “serious questions about the reliability
of any data integrity controls and thus the trustworthiness of any electronic information
used throughout Akorn to make safety, efficacy and quality decisions.”91 Cerulean also
identified additional “critical” computer access and audit trail deficiencies at Somerset
similar to those it found at Decatur.92
88
JX 439 at ‘430.
89
Id. at ‘435–36; see United States v. Park, 421 U.S. 658 (1975).
90
JX 439 at ‘435–36.
91
Id. at ‘436.
92
See id. at ‘437 (citing Akorn’s “[f]ailure to have sufficient controls over
computerized systems . . . used to create, manipulate, edit, [and] store” data used for
product testing); id. at ‘438 (“Audit trails appear to be inconsistently reviewed . . . .”); see
also JX 564 at ‘352 (Somerset employee complaining in August 2017 that quality-tracking
software’s audit trails showed she had completed investigations for matters to which she
was not even assigned: “It is alarming to me that in light of all the issues that we have
presented with the Trackwise System, we are being told by IT that these issues do not
warrant a re-validation of the system.”).
25
Akorn made “no effort” to schedule a date for Cerulean to complete the inspection
at the Somerset site.93 Akorn cancelled Cerulean’s previously scheduled assessment of its
Amityville site.94 Silverberg and other members of senior management identified the
Merger as the reason for not having Cerulean do any more work.95 I infer that they did not
want Cerulean to identify any more data integrity gaps that could jeopardize their efforts
to sell the Company. The only interest that Akorn’s executives showed in the Cerulean
report was a request by Joseph Bonaccorsi, Akorn’s Executive Vice President, General
Counsel, and Corporate Secretary, that Cerulean remove the reference to potential criminal
liability for Akorn’s executives.96
Avellanet testified that Akorn’s data integrity issues were among the “top three
worst” of the 120+ pharmaceutical companies that he has assessed,97 a notorious status
given that his practice only involves companies that “have problems.”98 Avellanet testified
that some of Akorn’s data integrity failures were so fundamental that he would not even
93
Wasserkrug Tr. 132; see Avellanet Dep. 139; see also JX 507 at ‘317 (“executive
leadership” decided “that IT resources would not be engaged in the third party data
integrity audit [Cerulean]”).
94
Avellanet Dep. 47; see JX 509 at ‘746.
95
Wasserkrug Tr. 132.
Avellanet Dep. 203–07. Gill voiced the request on Bonaccorsi’s behalf. See
96
Bonaccorsi Dep. 175–78, 196; Avellanet Dep. 203–05.
97
Avellanet Dep. 172–73.
98
Kaufman Tr. 317–19; accord Avellanet Dep. 301.
26
expect to see them “at a company that made Styrofoam cups,” let alone a pharmaceutical
company manufacturing sterile injectable drugs.99 He believed that the “FDA would get
extremely upset” about Akorn’s lack of data integrity “because this literally calls into
question every released product [Akorn has] done for however many years it’s been this
way.”100
Roughly contemporaneously, in June 2016, Akorn’s GQC team identified a critical
data integrity failure at the Vernon Hills site that paralleled the problems identified by
Cerulean: a failure to establish proper computer access controls and audit trials.101 In
December 2017 and January 2018, an investigation by Lachman Consulting Services, a
99
Avellanet Dep. 173; see also id. at 111–12 (testifying that he had never before
seen a company where any employee could make changes to electronic data “willy-nilly
with no traceability or accountability”).
100
Id. at 116–17. Avellanet’s first report concerned Decatur, but the record evidence
supports a finding that conditions at Decatur were representative of company-wide
problems at Akorn. See JX 411 (Wasserkrug sending gap assessment to Sherwani: “I
suspect you will have similar problems with your systems there.”). Witnesses for Akorn
also claimed that its IT problems did not matter because Akorn was a paper-based
company. See Wasserkrug Tr. 66. As one of Fresenius’s experts explained, that claim in
itself is an alarming red flag, because in the current age, a company cannot operate
compliantly using paper-based systems, and regardless, a company’s computerized
systems still must be in compliance. George Tr. 1146.
101
JX 655 at ‘479 (“The program . . . is unable to record audit trails and cannot
support accounts with unique user names and passwords for individual users. Analysts
routinely log in as ‘Admin’ without a password.”); id. at ‘472 (“[T]he audit observations
together with the areas of risk identified within Data Integrity; require Akorn to take
immediate action to mitigate said risk.”); see Wasserkrug Tr. 109–12; see also JX 242
(GQC audit report on Amityville from October 2016 identifying “critical” deficiency
related to data integrity).
27
consultant hired by Fresenius, identified similar issues at all of the sites that Lachman
visited. Beginning in March 2018, an investigation conducted by NSF International, a
consultant hired by Akorn, found extensive issues at the sites it examined.
Akorn did not do anything meaningful to address the issues raised by Cerulean until
March 2018, after the investigation that Fresenius conducted into the whistleblower letters
led to Akorn uncovering Silverberg’s false CRL response, self-reporting to the FDA, and
committing to address its data integrity problems. Until Fresenius’s investigation forced its
hand, Akorn was not devoting resources to data integrity. It is true that Silverberg
facilitated the preparation of a data integrity plan for Decatur in August 2017, but he made
clear in his contemporaneous communications that it was just so Akorn would have a
document to show the FDA. When Akorn’s IT department opposed the plan, Silverberg
reassured them that it was not meant to be implemented. In his jargon, it “serves to
represent to outside authorities our cognizance of the subject, without committing IT to
any near term work or responsibility.”102 In late 2017, Patty Franke, Decatur’s Quality
Assurance Manager for Data Integrity and Compliance, 103 told Cerulean that Akorn was
“making 0 progress on our DI remediation efforts” at Decatur, which she attributed to “the
102
JX 590 at ‘472; see Wasserkrug Tr. 136–38, 142–43.
103
Franke Dep. 25–26.
28
culture and the message from management.”104 Wasserkrug testified that she was told that
“a lot of this stuff would wait until the Fresenius merger occurred,” which was an excuse
“we heard . . . actually quite often” in late 2017.105
To reiterate, Akorn only started making a concerted effort to address its data
integrity issues in March 2018, after Fresenius had flagged Akorn’s data integrity problems
and prompted Akorn to uncover Silverberg’s false CRL response, and after Akorn felt it
had to try to get ahead of the problem by going to the FDA and committing to address its
data integrity issues. At that point, Akorn formed an executive steering committee on data
integrity remediation, which held its kickoff meeting on April 19, 2018.106 It took until
June 7, 2018 for Akorn to assemble a list of the hundreds of deficiencies it had
accumulated, many of which went back years.107 Over a year after receiving the Cerulean
report, the Somerset facility had not taken any action to address the deficiencies it
104
JX 754 at ‘740. Separate from the periodic audits conducted by GQC and the
consultant assessments, Akorn’s quality assurance personnel conduct ongoing site
monitoring and represent “the eyes and ears” for each facility. See Wasserkrug Tr. 14.
105
Wasserkrug Dep. 157–58.
106
JX 1155; see Rai. Tr. 530.
107
See JX 1885; Rai Tr. 531–34; Wasserkrug Dep. 27–28.
29
identified.108 Decatur had only completed “32% of the corrective actions thus far.”109 By
the time of trial, Akorn still did not have a remediation plan because it was still in the
process of figuring out all of the deficiencies that the Company needed to address.110
In its post-trial briefs, Akorn attempted to paint a picture of compliance at Akorn
that differed radically from what the evidence showed at trial. Notably absent from the
witness list at trial was any representative from Akorn’s quality function who could speak
to Company-wide conditions before March 2018. Wasserkrug testified, but she took over
the company-wide quality function from Silverberg in March 2018 and could not speak to
matters preceding her tenure, except at the Decatur site where she had been the site quality
director.111 Silverberg was the obvious candidate, but neither he nor Jaspreet Gill, the head
of Akorn’s GQC team, nor any other senior member of the quality function testified at trial.
Rai made claims about quality, but having considered his answers and evaluated his
demeanor while he was being cross-examined about his commitment to quality, I am forced
to conclude that he does not regard it as a priority.112 Bonaccorsi gave testimony about the
108
JX 1077 at ‘065–66; see JX 1885 at ‘754; Wasserkrug Tr. 153–54 (“[I]n 2017,
after getting the Somerset Cerulean report, no actions were taken in response.”).
109
JX 1094 at ‘623; see JX 1885 at ‘754; Wasserkrug Dep. 204–06; Franke Dep.
239. I do not credit Wasserkrug’s contrary claim at trial that Decatur had completed 70–
75% of the corrective actions. Wasserkrug Tr. 42, 148.
110
See Rai Tr. 533–34 (Akorn’s data remediation effort “does not have a
timetable”).
111
Wasserkrug Tr. 106–07.
112
See Rai Tr. 496–519. Another plausible and more alarming inference is that Rai
consciously disregarded Akorn’s quality issues, including its data integrity problems. Rai
30
overall structure of Akorn’s quality function, but he is not a quality expert, nor is he part
of the quality department.113
The evidence at trial demonstrated that Akorn took the steps necessary to establish
the formal structure of a quality function. The evidence also revealed a gulf between
appearance and reality.114 The extensive and recurring quality and data integrity problems
is the chair of Akorn’s Quality Oversight Committee and its executive steering committee
on data integrity remediation. Rai Dep. 33, 207. He receives Akorn’s internal audit reports,
but he does not read them. Rai Tr. 489; see Rai Dep. 201. Rai did not read the Cerulean
reports either. Rai Dep. 40–41, 67; Rai Tr. 486. After being asked about these documents
at his deposition, he made no effort to familiarize himself with them between his deposition
and trial. See Rai Tr. 486–87; see also id. at 474. At his deposition, Rai could not recall
whether he had ever seen the Decatur internal audit report that GQC sent him on March
23, 2018. Rai Dep. 200; see JX 1095. When asked for Akorn’s timetable to address the
critical findings in the Cerulean report and March 2018 GQC report, Rai said he would “go
back and ask” for one. Rai Dep. 207–08. Rai made that decision at his deposition and only
because opposing counsel showed him the GQC report. See id. at 208–09. At trial, Rai
asserted that Akorn was “still assessing” a timetable for data remediation. Rai Tr. 534.
113
See Bonaccorsi Tr. 872–77; see also id. at 923.
114
See, e.g., JX 50 at ‘885 (Akorn board’s Quality Oversight Committee minutes
from 2014 citing need for a “change of culture” around quality); JX 235 at ‘598 (December
2016 Quality Oversight Committee minutes in which director Ron Johnson “expressed his
concern about the repetitiveness of issues between sites and across sites identified during
audits & external inspections” and emphasized need for “corrective actions on a global
basis[,]” and director Brian Tambi noted that “it appears that the implementation of
corrective action is lacking or not timely”); Rai Tr. 514 (“Q. . . . [Y]ou were on a board
committee [in November 2016] that was aware of significant and repeat problems that
Akorn was having in its quality function; isn’t that right? A. Yes.”); id. at 518 (Rai agreeing
that Akorn was having problems across all sites); see also JX 67 at ‘923 (discussion of
problems with logbooks including use of post-it notes); JX 93 (discussion of missing
logbooks and data); JX 104 (email discussing changing data and reporting only one set so
that the FDA would not “point at the data for high impurities”); JX 105 (Franke being told
that lack of password control and data insecurity were longstanding issues; Franke
indicating that “[o]n all of the computerized systems within the [Amityville] lab, all users
have the ability to change the PC time/date while logged in, which is used as a stamp on
31
at Akorn convinced me that Akorn did not have a well-functioning quality system and
lacked a meaningful culture of compliance.
the data file”); JX 106 (Franke noting concerns about Amityville facility that would require
“a difficult explanation to any regulatory agency”); JX 107 (Franke expressing concern to
Silverberg about “[l]ab data system administration” and “[l]ack of [a]ccountability for
invalid or incomplete data sequences”); JX 116 (Gill calling it “too much to be a
coincidence” where FDA’s 2016 investigation of Somerset yielded multiple observations
identical to those made in 2014); JX 126 (Franke noting data integrity problem with piece
of equipment); JX 133 (“The Somerset findings suggest a step back to focus on remedial
improvements before true quality advancement to current industry practices can be
made.”); JX 203 (email regarding investigation into “Falsification/Backdating of
information”); JX 209 (Pramik emailing about competitor’s Form 483 regarding computer
controls and remarking, “From discussions with IT, I have the impression this is an area
we haven’t stayed on top of . . . . Impression is we also have instrumentation that is not
validated.”); JX 216 (“I wanted to make you aware of another documentation (back dating
/ falsification) issue identified this week. . . . Obviously, very concerning given this is the
second issue in as many weeks.”); JX 234 (Franke noting that the absence of a password
for an Akorn backup server “does not meet industry data integrity and protection
standards”); JX 241 at ‘113 (December 2016 Executive Leadership Overview on R&D /
Quality / Compliance IT Systems: “There is FDA compliance risk & likely large
remediation efforts, but not collective visibility to what we’re dealing with”); JX 328
(Wasserkrug informing Silverberg and Franke about “a very serious data integrity issue”
because of lack of access controls in TrackWise); JX 864 (Franke weighing in on quality
issues from audit that remained unresolved); JX 377 at ‘206 (March 2017 presentation to
Akorn Board Quality Committee: “Observations revealed a systemic breakdown in Quality
system across functions, which included management responsibility, training, procedural
deficiencies, qualification program weaknesses and 21 CFR Part 11 deficiencies.”); JX 499
(“We have noticed multiple late entries/incomplete information in the log books in the
lab.”); JX 518; JX 526; JX 565; JX 566; JX 569; JX 870 at ‘895 (“If certain FDA inspectors
come to Somerset, there will be problems there.”); cf. Rai Tr. 484, 496 (Rai backing
Silverberg and crediting his explanation for the false submission to the FDA); id. at 486–
88 (Rai admitting that he never read the Cerulean reports and did not attend the training
Cerulean was hired to give).
32
C. Akorn Explores Strategic Alternatives.
In February 2016, Akorn’s board of directors consulted with management and J.P.
Morgan Securities LLC about strategic opportunities.115 The board decided that Akorn
should explore strategic alternatives once it completed a restatement of its 2014 financial
information and became current with its financial reporting.116
In July 2016, Akorn’s then-Chairman of the Board and largest stockholder, John N.
Kapoor, met with Rai and J.P. Morgan to develop a preliminary list of potential buyers.117
During a meeting later in July, the board decided to “commence a process to solicit
proposals to acquire the Company from potential strategic and financial counterparties.”118
In August 2016, J.P. Morgan approached Alexander Dettmer, Head of Corporate
Business Development/M&A and Senior Vice President of Fresenius Parent, to explore
whether Akorn would be a good fit for Fresenius Kabi.119 In early October 2016, Rai and
J.P. Morgan met with Ducker and gave him a presentation about Akorn.120 During the same
115
See JX 520 at ‘823.
116
Id.
117
Id. at ‘824.
118
Id.
119
JX 520 at ‘824; see PTO ¶ C.1; Rai Tr. 460.
120
PTO ¶ C.2; JX 520 at ‘824.
33
period, J.P. Morgan approached other potential strategic acquirers and private equity
funds.121 At later points, other potential acquirers dipped in and out of the process.122
D. Fresenius’s Initial Evaluation Of Akorn
After being approached by Akorn, Fresenius evaluated Akorn with assistance from
Moelis & Company. A Moelis presentation identified positive attributes, including:
 “Attractive portfolio of niche, high-value generics focused primarily on ophthalmic
and sterile injective products”123
 “[P]roduction expertise across difficult-to-manufacture alternative dosage forms
(i.e., other than oral solid dose)”124
 “Deep pipeline of 85% filed ANDAs representing ~$9bn in brand revenue”125
 “Management expects 25 approvals (~$1bn in brand revenue) by March 2017”126
 “Management expects to file at least 20 ANDAs during 2017”127
At the same time, the Moelis presentation highlighted risks:
121
See JX 520 at ‘824–25.
122
See id. at ‘828–29, ‘832. See also JX 224 at ‘339 (March 2017 draft J.P. Morgan
presentation observing that “[s]ince May 2016, J.P. Morgan and [Akorn] have held
discussions with 8 strategics and 5 financial sponsors”).
123
JX 180 at ‘879.
124
Id.
125
Id.
126
Id.
127
Id.
34
 “Ephedrine challenges – Akorn is the sole supplier for an unapproved product that
drives ~20% of revenues; however, Flamel has launched the first FDA-approved
version and other entrants (e.g., Endo/Par) could emerge”128
 “Akorn’s Ephedrine NDA has been impacted by Form 483 deficiencies at its
Decatur, IL facility”129
 “However, 483 issues do not impact products outside of Ephedrine”130
An internal Fresenius assessment identified similar pros and cons.131
On November 4, 2016, Akorn announced its financial results for the third quarter.132
Akorn management spoke about the threat of competition for ephedrine and said their
market share and revenue remained stable.133 Moelis sent Fresenius an updated
presentation that provided additional detail on ephedrine, including by modeling base,
downside, and upside cases for that product.134 Fresenius also obtained and reviewed a
128
Id.
129
Id.
130
Id.
131
See JX 188 at ‘007 (citing “[l]arge pipeline of pending ANDAs” but noting risk
of “competition to Ephedrine” and “[c]ompliance status of manufacturing assets”). The
Fresenius team also identified the risk posed by Kapoor’s involvement with Akorn as
Chairman of the Board and its largest stockholder. Kapoor previously had sold a company
he took public, LyphoMed Inc., in a transaction that resulted in the buyer suing for fraud.
See JX 183; see also JX 453 at ‘163; JX 470.
132
See JX 194.
133
Id. at ‘246.
134
See id. at ‘246–47.
35
redacted version of a Form 483 for Decatur.135 James Bauersmith, a Fresenius employee
charged with evaluating Akorn’s pipeline,136 expressed concern about the Form 483, noting
that it was the site where Akorn manufactured ephedrine.137
On November 8, 2016, Akorn and Fresenius USA entered into two confidentiality
agreements, one covering due diligence generally and the second permitting a “clean team”
to review competitively sensitive information that might have antitrust implications.138 On
November 11, Akorn management gave a lengthy presentation to representatives of
Fresenius and provided them with a forecast.139 Among other things, the presentation
addressed Akorn’s developmental pipeline,140 the steps Akorn was taking to improve
quality control at Decatur,141 and the actions Akorn had taken to remediate its financial
reporting and controls after its financial restatement.142
135
See JX 199.
136
See JX 296 at ‘991.
137
JX 202; see Bauersmith Tr. 591–94.
138
PTO ¶ C.3; Bonaccorsi Tr. 878–79.
139
PTO ¶ C.4; see JX 224 at ‘339; JX 204.
140
See JX 204 at ‘073–79.
141
See id. at ‘058–69.
142
See id. at ‘082.
36
After the presentation, Fresenius looked more closely at the Form 483 for Decatur
and two earlier Form 483’s that Decatur received in 2013 and 2014.143 A Fresenius
executive reported that “[t]he 483 shows weaknesses in the quality system but it does not
look [like] a not working quality system. . . . In summary the 483 does not indicate any
topic which should lead to further regulatory measures.”144
E. Fresenius’s Initial Proposal
On November 23, 2016, Fresenius proposed to acquire Akorn for $30.00 per share
plus a contingent value right (“CVR”) that would pay up to $5.00 per share based on
cumulative ephedrine sales over the next three years.145 The proposal was conditioned on
satisfactory due diligence and acceptable deal documents. On the day Fresenius made its
proposal, Akorn’s stock closed at $22.40 per share.146
On December 5, 2016, Rai met with Ducker, stressed the value of Akorn’s pipeline
and pending ANDAs, and told him that Fresenius’s proposal was too low.147 He said
Fresenius would need to improve its bid to gain access to the data room.148
143
JX 207.
144
Id. at ‘280.
145
JX 222; PTO ¶ C.5.
146
See JX 520 at ‘826.
147
JX 230 at ‘809; see Rai Tr. 461.
148
See JX 520 at ‘827.
37
F. Fresenius Improves Its Bid.
On January 9, 2017, Rai met with Sturm and reiterated the message about improving
Fresenius’s bid.149 Ducker wanted to improve the bid,150 but he encountered resistance
internally: Bauersmith was heading up a group that was analyzing Akorn’s pipeline,151 and
they questioned Akorn’s ability to obtain FDA approval for as many new products as they
planned, then launch those products as scheduled.152 Bauersmith regarded Akorn’s
schedule for launching new products as “the definition of insanity.”153 Bauersmith and his
team wanted to use more conservative assumptions.154 Ducker disagreed, describing the
more conservative assumptions as “a sure way to kill this project.”155
On January 30, 2017, the FDA granted approval for a third competitor to sell
ephedrine.156 Akorn’s stock price fell on the news, closing at $18.40 per share.157 After this
149
JX 520 at ‘828; see PTO ¶ C.7.
150
Bauersmith Tr. 621–23; see id. at 583–84.
151
See JX 296 at ‘991; Bauersmith Tr. 574–75, 581.
152
JX 245 at ‘314; Bauersmith Tr. 577, 581–82.
See JX 261 at ‘424 (criticizing assumption of 113 launches over three years); see
153
also JX 268 (Fresenius employee expressing view Akorn’s “stated plan of about 25
products per year is unrealistic and not doable” and that a more realistic goal would be
“10–12 products per year”); see also JX 278; JX 279; JX 280.
154
See Bauersmith Tr. 584–85, 624; JX 260.
155
JX 278 at ‘948; see JX 245 at ‘315–16.
156
JX 264 at ‘690.
157
JX 263; see JX 264.
38
development, Fresenius considered restructuring the proposed CVR to focus on revenue
growth.158 As Bauersmith explained, “We were buying an ephedrine company with a
pipeline, now we are buying a pipeline company.”159 Bauersmith suggested a CVR that
paid out if Akorn achieved its projections for FDA approvals in 2017.160 Ducker agreed
with a CVR tied to revenue, but wanted to base the improved bid on more optimistic
assumptions than Bauersmith’s group would endorse.161 Over the years, Ducker had
developed a high level of credibility with his superiors because he consistently beat his
forecasts.162 When push came to shove, the Management Board supported Ducker.
On February 3, 2017, Fresenius increased the cash component of its bid to $32.00
per share and modified the CVR to pay up to $4.00 per share based on Akorn’s sales in
2018.163 Ducker told Rai that the CVR would “mitigate the risk inherent in the ambitious
158
JX 281.
159
Id. at ‘517–18; see Bauersmith Tr. 619–20, 627–28.
160
JX 281 at ‘518 (“Specifically, something like a $5/share CVR based on achieving
25 approvals by the end of 2017.”); see also JX 284 at ‘887 (Ducker agreeing with the idea
of a “CVR link[ed] to approvals”).
161
See JX 283; JX 284; Bauersmith Tr. 586–87.
162
See Sturm Tr. 1194; Henriksson Tr. 936 (“Internally in Fresenius Kabi, Mr. John
Ducker is known as Mr. Sandbag. He is a person who has never made a budget or a forecast
which has not overachieved.”); see, e.g., Sturm Tr. 1185 (“John ‘Freight Train’ Ducker had
overdelivered relative to the expectations of ours and of the market.”).
163
PTO ¶ C.8; see JX 285.
39
product launch projections contained in [Akorn’s] business plan.”164 On the day Fresenius
made its proposal, Akorn’s stock closed at $20.08 per share.165
After receiving guidance from Akorn’s directors, Rai told Ducker on February 4,
2017 that Akorn would give Fresenius access to the data room, but with the expectation
that Fresenius would improve its bid and drop the CVR.166 Ducker agreed to proceed on
those conditions.167
On February 13, 2017, Akorn gave Fresenius access to its data room.168 Fresenius
conducted detailed due diligence that included an examination of Akorn’s product portfolio
and regulatory issues.169
On March 1, 2017, Akorn announced its financial results for the quarter and fiscal
year that ended on December 31, 2016.170 Akorn also issued annual guidance for 2017.171
On March 2, Akorn announced that it had received approval from the FDA for a new drug
164
JX 1601 at ‘759; see Rai Tr. 463.
165
JX 520 at ‘828.
166
Id. at ‘829; see JX 1601 at ‘760; Rai Tr. 460–62; JX 286 at ‘360.
167
JX 1601 at ‘759; JX 520 at ‘829; see Rai Tr. 463; PTO ¶¶ C.9–10.
168
PTO ¶ C.12.
169
See, e.g., JX 301; JX 303; JX 304; JX 313; JX 314; JX 319; JX 323; JX 325; JX
326; JX 327; JX 331; JX 332.
170
JX 520 at ‘830.
171
See JX 341; JX 342.
40
application involving ephedrine.172 Later that day, Rai spoke with Ducker about the
product, Akorn’s guidance, and the regulatory and tax environment.173
By March 2, 2017, the Fresenius due diligence team had been working for just over
two weeks. A presentation prepared as of that date identified a “preliminary red flag DD
finding” under the heading of “Sales & Marketing”: “Risk to achieve forecasts due to
stronger competition, especially for Ephedrine, Lidocaine ointment, clobetasol,
Fluticasone.”174 The presentation identified two “Preliminary red flag DD findings” under
the heading of “I&D Regulatory”: (i) “Regulatory Affairs organization appears to be under-
resourced” and (ii) “2016 and 2017 R&D budgets do not substantiate the ambitious
pipeline.”175 The presentation did not identify any data integrity issues. The presentation
concluded: “So far, no deal breakers identified.”176 A Fresenius management presentation
reported that “[t]he level of access being given/promised by [Akorn] is above average for
a public company target.”177 Subsequent versions of the presentations largely offered the
same assessments.178
172
JX 520 at ‘830.
173
See id.
174
JX 339 at 6.
175
Id. at 6.
176
Id. at 7.
177
JX 343 at ‘073; accord JX 339 at 5.
178
See JX 353; JX 357.
41
During this period, Fresenius developed its own projections for Akorn’s product
portfolio and pipeline. Once again, Ducker’s team was more optimistic;179 Bauersmith’s
group was more conservative.180 Fresenius’s final numbers were a mix of their views.181
Fresenius had largely finalized its due diligence by March 17, 2017.182 During a
meeting that same day, Ducker told Rai that Fresenius would increase its bid.183 On March
20 and 21, Rai and Ducker had further discussions about Fresenius’s due diligence and
Akorn’s financial results for the quarter ending March 31.184 Fresenius reported that Akorn
personnel indicated that “it was a ‘solid’ quarter; and they are on track to meet their full
year expectations.”185
On March 23, 2017, Fresenius increased its bid to $33 per share and eliminated the
CVR. In its offer letter, Fresenius stated that it had largely completed its due diligence and
was prepared to begin negotiating a merger agreement, but that senior management wanted
to conduct site visits and that Fresenius would need additional information about the
179
See, e.g., JX 350; JX 354.
180
See JX 365; JX 366; JX 367.
181
See JX 385; see also JX 395; Bauersmith Tr. 579–90.
182
See JX 379; JX 390.
183
JX 520 at ‘830.
184
Id. at ‘830; see generally JX 433.
185
See JX 433 at ‘619.
42
Company’s efforts to comply with FDA serialization requirements.186 On the day when
Fresenius made its proposal, Akorn’s stock closed at $22.30 per share.187
On March 25, 2017, Akorn’s advisors posted a proposed merger agreement to the
data room.188 On March 30, Rai, Kapoor, Ducker, Henriksson, and Sturm met in person.189
Rai said that the Akorn board needed Fresenius to increase its proposal. On March 31,
Kapoor spoke with Sturm and reiterated the need for an improved proposal.190
On April 2, 2017, Fresenius increased its price to $34 per share and said this was
the highest it would go.191 On the day Fresenius made its proposal, Akorn’s stock closed at
$23.69 per share.192 The Akorn board accepted the $34 per share price.193
186
PTO ¶ C.15; JX 403; see also JX 422 at ‘001 (“Implementation of serialization
may not be performed in time at all [Akorn] sites, specifically Amityville and Decatur,
resulting in the risk to not being able to sell prescription drugs until they are serialized. . .
. However, Raj Rai assured John Ducker that Decatur facility status is NAI following
December 2016 audit.”).
187
JX 520 at ‘830.
188
See JX 413.
189
JX 520 at ‘831.
190
Id.
191
See JX 520 at ‘831; see also JX 477 (Moelis analysis supporting offer of $34 per
share); id. at ‘730 (finding price “in-line with the DCF [even] without synergies”).
192
JX 520 at ‘831.
193
JX 441; see Rai Tr. 466.
43
When the Supervisory Board of Fresenius Parent formally approved the bid, the
final presentation they received from management cited Akorn’s strengths as including “92
ANDAs under FDA review and over 75 additional ANDAs in various stages of
development.”194 Management noted that Fresenius would need to integrate and modernize
Akorn’s production network, which would involve closing two Akorn plants and providing
“supplementary capex investment to bring [Akorn] up to [Fresenius] standards while
minimizing compliance risks.”195 In the “Key DD items summary,” the presentation
identified a high risk of a potential exposure of $100+ million from the postponement of
product launches.196 The presentation also cited high risk of a potential exposure of $100+
million from cGMP “deficiencies related to premises and equipment” in the Amityville
and Decatur facilities.197 The presentation projected a need for capital expenditures of $127
million for Amityville and $21 million for Decatur, with the Decatur facility to be closed
194
JX 428 at ‘643.
195
Id.
196
Id. at ‘673 (categorizing potential exposure as a “[o]ne-time effect”); see JX 422
at ‘001 (“Akorn has an aggressive product launch plan, which leads to risk of postponement
for several products . . . and an estimated exposure above $100m. [Fresenius] prepared a
bottom-up model for each molecule and adjusted the launch plan, R&D costs and revenues
accordingly in the business plan.”).
197
JX 428 at ‘673; see JX 422 at ‘001 (“Site visit at Amityville and Decatur revealed
[good manufacturing practice] deficiencies related to premises and equipment, which could
result in negative outcome of regulator inspections and a mix of gross profit loss and capex
need amounting to a maximum exposure over $100m. This finding is mitigated via the
business plan.”).
44
once products were transitioned to other sites.198 The presentation did not identify a risk
from data integrity issues.
G. The Merger Agreement
After the agreement on price, the parties negotiated the terms of the transaction
documents.199 On April 24, 2017, they executed the Merger Agreement.200
In the Merger Agreement, the parties allocated risks through detailed
representations, warranties, covenants, and conditions:
 Akorn made extensive representations about its compliance with FDA regulations,
including (i) “compliance with . . . all applicable Laws . . . relating to or promulgated
by the” FDA,201 (ii) “compliance with current good manufacturing practices[,]”202
(iii) that all studies or tests had “been conducted in compliance with standard
medical and scientific research procedures and applicable Law,”203 (iv) that Akorn
had not “made an untrue statement of a material fact or a fraudulent statement to the
FDA,”204 and (v) that all “ANDAs submitted by [Akorn] . . . are true, complete and
correct,”205 in each case except where failure of the representation to be true and
correct would not reasonably be expected to have a Material Adverse Effect.
198
JX 428 at ‘712.
199
See JX 520 at ‘831–32.
200
PTO ¶ D.1.
201
JX 1 § 3.18(a).
202
Id. § 3.18(b).
203
Id. § 3.18(c).
204
Id. § 3.18(d).
205
Id. § 3.18(g).
45
 Akorn committed to “use . . . commercially reasonable efforts to carry on its
business in all material respects in the ordinary course of business” between signing
and closing.206
 Akorn agreed to “afford to [Fresenius and Fresenius’s representatives] reasonable
access” to information about its business.207
 Fresenius agreed to take “all actions necessary” to secure antitrust clearance.208
 Fresenius had the right to terminate the Merger Agreement if any of Akorn’s
representations or warranties were not true and correct at signing or at closing,
except, in the case of certain representations and warranties (including those at issue
in this case), where “the failure to be true and correct would not individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.”209
 Fresenius had the right to terminate the Merger Agreement if Akorn “failed to
perform any of its covenant or agreements” “in all material respects” and the breach
was “incapable of being cured . . . .”210
 Fresenius could refuse to close the Merger if Akorn had suffered “any effect,
change, event or occurrence that, individually or in the aggregate, has had or would
reasonably be expected to have a Material Adverse Effect.”211
 Fresenius could not exercise its termination right for an inaccurate representation or
breach of covenant if Fresenius was “then in material breach of any of its
representations, warranties, covenants or agreements” under the Merger
Agreement.212
206
Id. § 5.01(a).
207
Id. § 5.05.
208
Id. § 5.03(c).
209
Id. §§ 6.02(a) & 7.01(c)(i).
210
Id. §§ 6.02(b) & 7.01(c)(i).
211
Id. § 6.02(c).
212
Id. § 7.01(c)(i).
46
 Both sides had the ability to terminate if the Merger was not completed by the
Outside Date, defined initially as April 24, 2018, but if antitrust approval had not
been received by April 24 and all other conditions to closing were met, then the
Outside Date would extend automatically to July 24.213
This decision addresses the pertinent provisions in greater detail in the Legal Analysis.
After the close of trading on April 24, 2017, Akorn and Fresenius announced the
Merger.214 The total purchase price was $4.75 billion, comprising $4.3 billion in cash plus
assumption of approximately $450 million in debt.215 Fresenius stated in a press release
that “Akorn brings to Fresenius Kabi specialized expertise in development, manufacturing
and marketing of alternate dosage forms, as well as access to new customer segments like
retail, ophthalmology and veterinary practices. Its pipeline is also impressive, with
approximately 85 ANDAs filed and pending with the FDA and dozens more in
development.”216
When committing Fresenius to the transaction, Sturm asked Akorn to reaffirm its
guidance for 2017. Sturm viewed guidance as a promise to the markets, and he felt a public
reaffirmation would confirm that Akorn management had committed to its numbers and
213
Id. § 7.01(b)(i).
214
JX 520 at ‘833.
215
JX 481 at 1.
216
Id.
47
would continue to perform post-signing.217 As part of its announcement of the transaction,
Akorn reaffirmed its full-year guidance, projecting $1,010–$1,060 million for revenue and
$363–$401 million in EBITDA.218
Fresenius Parent held a conference call with its investors to discuss the Merger.
During the call, Sturm described the due diligence process as follows:
[W]e performed a detailed due diligence [with] access to a comprehensive
data room, held countless expert sessions, and were able to address all our
questions and concerns. Have we overlooked anything material? Possible,
but unlikely. The due diligence also included plant visits, by me and much
better qualified experts, as well as a detailed review of Akorn’s product
portfolio. That led to us building a solid bottom-up business plan, which
formed then the basis of our decision to make a bid.219
Sturm stated that during due diligence, Fresenius found Akorn operating at a “generally
good regulatory standard.”220 He noted that while Akorn had received a Form 483 for
Decatur, Fresenius had “received quite a number of form 483s also in the past” and
therefore “should be humble and avoid any form of arrogance” regarding regulatory
issues.”221
See Sturm Tr. 1176–77; see also id. at 1178 (explaining that guidance “where
217
I’m coming from, is a promise”); id. at 1180 (“[A]t Fresenius, we consistently make our
numbers. We view a guidance as a promise. We tend to keep promises.”).
218
JX 341; JX 481 at 2; Rai Tr. 538.
219
JX 490 at ‘907.
220
Id. at ‘918.
221
Id. at ‘919; see Sturm Tr. 1199–1200.
48
During a special meeting on July 19, 2017, Akorn’s stockholders approved the
Merger by a wide margin.
H. Akorn Management Makes Changes In Response To The Merger.
Under the Merger Agreement, Akorn was required to continue operating in the
ordinary course of business between signing and closing.222 This obligation included,
among other things, investigating and remediating quality issues and data integrity
violations as they were identified.223
Instead of operating in the ordinary course, Akorn changed how its quality function
and IT function approached their jobs.224 Employees in these groups were told that
“[p]riorities have been revised, and some 2017 initiatives will be stopped[,]” with the cited
reason being the “implications of the pending Fresenius Kabi transaction.”225
For the quality function, Akorn replaced certain regular internal audits scheduled
for the end of 2017 with “verification” audits that would only assess Akorn’s progress in
222
JX 1 § 5.01(a); see JX 488 at ‘574 (presentation to Akorn senior executives on
interim operating covenants highlighting Akorn’s obligation to “[c]arry on in the ordinary
course”); Rai Tr. 521 (agreeing that Akorn was obligated “to operate as an independent
business between the signing of the acquisition agreement and any closing of the deal”);
see also JX 551 at ‘999 (announcement to all Akorn employees: “Until the transaction
closes, it is business as usual and Akorn and Fresnius Kabi will continue to operate as two
independent companies.”).
223
Rai Tr. 525; Kaufman Tr. 371.
224
See JX 538; JX 539.
225
JX 539 at ‘105; see id. at ‘106 (“2017 initiatives to be stopped” including
“Quality Assurance overview” and “IT overview”); id. at ‘107 (“STOP - the identified
2017 projects and associated activities / spend”); JX 538 at ‘471 (“Reset 2017 Priorities”).
49
addressing prior audit findings.226 One of the sites that switched to verification audits was
Decatur, the site Cerulean had visited.227 The shift to verification audits meant that Akorn
would not be identifying any new problems at those sites that might cause difficulties for
the Merger. Akorn also used the Merger as grounds for stopping Cerulean’s engagement.228
Fresenius never gave approval for Akorn to change its audit and investigatory practices
pending closing.229
226
Wasserkrug Tr. 17 (“[A]fter the merger was announced, it was decided that we
would only do verification audits in the remaining facilities, which meant we were just
going to look at the previous audits and the corrective actions that were applied from those
previous audits to make sure that they were closed.”); accord id. at 156–58; JX 532 at ‘276;
JX 692; see Gill Dep. 60; Rai Dep. 42–43; JX 692; see also JX 1026 (“[T]he two are very
different activities (audits vs. verifications). Verification is the last step in an audit
lifecycle.”); Rai Tr. 480–81 (explaining why certain audits “were not done deliberately”);
id. at 525–26 (agreeing that Akorn only conducted verification audits for certain facilities
because of the Merger). Wasserkrug recognized that Akorn had “a responsibility to
continue with our audits[,]” and when the Merger did not close, Akorn resumed them.
Wasserkrug Tr. 18.
227
See Rai Tr. 551.
228
See Wasserkrug Tr. 132.
229
See Rai Tr. 527–28, 554–55. Wasserkrug suggested at trial that Fresenius
supported the decision to move from regular audits to verification audits, but her testimony
on this subject consisted of hearsay and was not reliable. Wasserkrug Tr. 165–67. The more
persuasive evidence is that Akorn did not mention this change to Fresenius. See Gill Dep.
61–63; Rai Tr. 527–29. Rai asserted at trial that Akorn made the switch so that Akorn could
give Fresenius a short document summarizing open audit findings. Rai Tr. 526; Rai Dep.
42–43; see Gill Dep. 63. Rai did not know whether Akorn ever prepared (or started) a
report, and during discovery Akorn did not produce one. See Rai Tr. 526–27.
50
For the IT function, Wasserkrug testified at trial that “[a]ny [IT] projects that we
wanted to put in place were deferred by the merger or had to be approved.” 230 In light of
the freeze, Akorn’s IT department could not provide resources for data integrity projects.231
In July 2017, Tammy Froberg, Executive Director of R&D and Quality Compliance
Systems, told a quality manager at Vernon Hills that “we are not actioning any Data
Integrity activities in 2017.”232 In August, Misbah Sherwani, the head of quality at
Somerset, reported to Silverberg that even though Akorn was “on the cusp of the FK”
merger, Somerset was “in a state of jeopardy as it relates to data integrity[,]” and IT was
refusing to provide resources.233 Also in August, Kathy Pramik, Akorn’s acting Chief
Information Officer, told Silverberg and other executives that she was “not authorizing” IT
resources for Decatur’s Data Integrity Site Master Compliance Plan, the first plan Akorn
ever developed.234 She admonished that it was “not appropriate” to “establish[] Data
230
Wasserkrug Tr. 141–42.
231
See Pramik Tr. 223–24; see also JX 957 at ‘921 (“In July, we . . . reset 2017
priorities. . . . We also communicated that some 2017 priorities were being adjusted, per
implications of the pending Fresenius Kabi transaction.”). Ostensibly these projects were
only put on hold until Silverberg assembled “an overall roadmap for data integrity,” but
the roadmap was never finalized. Pramik Tr. 234–36, 248.
232
JX 891; see Kaster Dep. 118–20.
233
JX 564 at ‘352.
234
JX 589 at ‘192. Pramik is not an Akorn employee, but rather a consultant. She
was retained in August 2016 to fill the CIO role while Akorn searched for a permanent
hire. They never found one. See Pramik Tr. 191–92; JX 149. When she took the role,
Pramik had no prior experience in how pharmaceutical companies handle data integrity
issues. See id. at 242–45. To be fair to Pramik, it also appears that she inherited a bad
situation. When she arrived, she found that “[t]here were foundational processes not in
51
Integrity Plans” because “Fresenius Kabi Quality & IT Leaders will drive any actions in
this area.”235 That same month, Froberg refused a data integrity project, stating bluntly that
“[e]xecutive leadership have discussed and aligned that data integrity changes are not
actionable in 2017 in regards to adding responsibilities to cross functional teams.”236 In
December 2017, Franke complained to another employee that “DI remediation activities
place at Akorn[,]” including “no project governance” for IT. Id. at 196–97; see JX 150 (list
of “IT Key Risks Identified By IA”); JX 223 (Rai in November 2016: “It seems like IT is
a disaster across the company and out of control.”). A significant motive for shutting down
data integrity projects appears to have been her desire to focus her under-resourced
department on senior management’s priorities, which did not include data integrity. It
nevertheless remains true that Pramik and her staff prevented any data integrity work that
required IT resources from getting off the ground in 2017 and early 2018. This did not
change until March 2018, when in response to Fresenius’s investigation, Pramik rebranded
an existing but dormant committee that had not met since early 2017. See Pramik Dep. 76–
77 (formerly “R&D quality and compliance IT counsel”); Pramik Tr. 230–32 (now “data
integrity steering committee”); JX 1082 (also referring to a “DI Oversight Committee”);
see also Pramik Dep. 254–58 (agreeing that the rebranded committee is largely “the same
governing body” as the executive steering committee Rai chaired a month later). Pramik
gave much of her testimony in response to leading questions based on a demonstrative
exhibit, resulting in my giving it diminished weight. See Pramik Tr. 199–224.
235
JX 589 at ‘192–93.
236
JX 596; accord JX 769 (Froberg writing in December 2017 that “[b]ased on a
previous executive leadership directive, data integrity is not a 2017 approved project for
cross functional teams [such as IT]. I wanted to . . . confirm IT resources will not be
involved in [Franke’s visit to the Cranbury site to discuss data integrity].”); JX 950
(Froberg reminding Pramik in February 2018 to draft an email from “executive leadership
. . . to align all sites that we are not launching data integrity remediation initiatives at the
sites at this time”); JX 957 at ‘921–22 (Pramik’s draft email with Silverberg’s comments:
“With . . . the close of the acquisition transaction not occurring in fiscal 2017, unapproved
project requests related to such things as Data Integrity are starting to arise again from the
sites, and we need to alignment [sic] and focus on our priority initiatives, which are
continuing in 2018 (e.g., Serialization, Somerset and Decatur lab modernizations /
expansions, etc.).”).
52
are not something that we are resourced to address at the moment.”237 There is no evidence
that Fresenius ever gave approval for Akorn to stop working on data integrity projects.238
I. The Downturn In Akorn’s Business
After the signing of the Merger Agreement, Akorn’s business performance fell
dramatically. On July 21, 2017, two days after Akorn’s stockholders approved the Merger,
Akorn gave Fresenius a preview of their second quarter results. The headline was revenue
of $199 million, compared to a business plan of $243 million.239 Management attributed
$12 million of the miss to competition for ephedrine, but told Fresenius that “[m]arket
share in Q2 is meeting expectations.”240 Management lowered its revenue forecast for the
year from $1 billion to $930 million.241 Management also reduced expectations for revenue
from Akorn’s pipeline, which fell to $24 million, down from the $80 million projected
earlier in 2017.242
On July 31, 2017, Akorn publicly announced its results. The reported revenue
number of $199 million represented a year-over-year decline of 29%. Akorn’s reported
237
JX 832.
238
See Pramik Tr. 249; Bowles Dep. 152–158.
239
JX 547 at 1.
240
Id. at 2.
241
Id. at 15.
242
JX 554.
53
operating income of $15 million represented a year-over-year decline of 84%. Akorn’s
reported earnings of $0.02 per share represented a year-over-year decline of 96%.243
Rai attributed the bad results to unexpected new market entrants who competed with
Akorn’s three top products—ephedrine, clobetasol, and lidocaine.244 Akorn also faced a
new competitor for Nembutal, another important product, which Akorn management had
not foreseen.245 As Rai testified, “There were way more than what [Akorn] had potentially
projected in [its] forecast for 2017.”246 The new competition resulted in unexpected price
erosion.247 Akorn also unexpectedly lost a key contract to sell progesterone, resulting in a
loss of revenue where Akorn had been forecasting growth.248
243
JX 1250 ¶ 8.
244
Rai Tr. 542–44; Rai Dep. 237.
245
Rai Tr. 545; Rai Dep. 238–39.
246
Rai Tr. 545; Rai Dep. 238.
Rai Tr. 542; see JX 693 at 35 (attributing poor performance to “more significant
247
than expected declines in net revenue”).
248
Rai Tr. 546–47.
54
Ducker described the results bluntly, “Not very pretty I’m afraid.”249 Sturm was
“very unhappy.”250 He asked his executive team whether they thought Fresenius “had been
defrauded.”251 They did not think so. Sturm “also asked if there was a way to cancel the
deal.”252 His team said “not at this point.”253
Sturm and Henriksson flew to Lake Forest, Illinois to meet in person with Ducker
and the Akorn executives.254 Sturm told Rai that the “complete drop” in Akorn’s business
post-signing was “the most embarrassing personal or professional thing” that had happened
to him.255 Sturm could not understand how the parties had signed up a deal, only to have
Akorn’s results fall “off the cliff.”256 Rai told Sturm that “[m]any, if not most” of the
249
JX 547 at 1; see Sturm Tr. 1177 (describing performance as “dismal” and “well
below our expectations and theirs”); Henriksson Tr. 952 (describing results as “very, very
disappointing” with “a big miss, both on sales and profit, compared to the estimates that
had been provided to us before”); Bauersmith Tr. 595 (describing Akorn’s performance in
the quarter after signing compared to is projections as “[a]bysmal”); id. at 596 (testifying
that Akorn’s performance was “even worse than what I thought, as the pessimist”).
250
Sturm Tr. at 1202; see Henriksson Tr. 952 (“Stephan was, rightfully, very, very
upset.”).
251
JX 550 at ‘924.
252
Id.
253
Id.
254
Sturm Tr. 1178.
255
JX 554.
256
Rai Tr. 468.
55
reasons for the poor performance were “temporary in nature.”257 Sturm was not satisfied.
He felt that Akorn management exhibited “a complete lack of commitment” and that the
guidance for 2017 “had been forgotten and was a thing of the very long past.”258 He did
not perceive any sense of urgency to rectify the underperformance.259
After the meeting in Lake Forest, Sturm had his team analyze Fresenius’s options.
He tasked Henriksson and Ducker with finding new synergies and developing a business
plan that would offset Akorn’s problems.260 Sturm also had his legal department look into
whether Akorn’s terrible financial performance qualified as a Material Adverse Effect.261
Although Akorn has asserted that Fresenius decided at this point to find a way to terminate
257
Sturm Tr. 1178.
258
Id.
259
Id. at 1178–79.
260
See Henriksson Tr. 956–58; Sturm Tr. 1179–80; JX 554 (“Our marching orders
are to find a way so we can hold to guidance on EBITA and Top line for 2018.”).
Bauersmith, the primary skeptic about the deal, believed Fresenius needed to close the
transaction quickly so that they could take control of Akorn and try to right the ship. See
JX 554 (“The need to close fast is even more pressing as we can’t really steer this wayward
vessel until we are aboard.”). Bauersmith couldn’t resist an I-told-you-so, noting that “it is
looking more and more like we should have pushed for a CVR on 2017 approvals as [I]
suggested back in February.” JX 549; see Bauersmith Tr. 600; see also JX 602; JX 603;
JX 674. Other contemporaneous documents support the finding that closing remained a
high priority within Fresenius. See JX 568 (Pramik reporting on Ducker making it a “very
high priority” to plan IT integration); JX 572 (Fresenius executives exploring whether they
could mitigate negative reactions by Fresenius Parent’s stockholders by closing and then
immediately stopping the reporting of separate results for Akorn); JX 575 (August 2017
Fresenius presentation regarding financial integration).
261
See JX 581; JX 587.
56
the deal, I do not agree. Sturm testified credibly that he wanted “to get myself
knowledgeable about my options under the merger agreement, but also my responsibility,
my fiduciary duties in serving my shareholders, and hence I was asking my colleagues on
the legal side to get us appropriate legal advice.”262
As part of this process, the Fresenius team looked at precedent deals gone bad. One
involved Abbott Laboratories’s attempt to terminate its acquisition of Alere Inc. Paul,
Weiss, Rifkind, Wharton & Garrison LLP had represented Alere, and Fresenius began
consulting with Paul Weiss.263
Fresenius also began looking closely at Akorn’s monthly results to determine
whether the second quarter performance was an isolated occurrence, as Rai maintained, or
the harbinger of deeper problems. Akorn’s preliminary results for July did not show any
improvement, but Rai claimed that Akorn was on track to deliver $80 million in sales in
August.264 If Akorn hit that figure and repeated the performance in September, then Akorn
would meet its lowered forecast for the third quarter.265
Sturm Tr. 1183; see id. at 1209 (Sturm testifying that Paul Weiss was hired “[t]o
262
make me acquainted with my rights and obligations”).
263
See id. at 1183–84.
264
JX 592 at ‘100.
265
Id.
57
In mid-September 2017, Fresenius heard that Akorn would fall short of its August
revenue target.266 Akorn later confirmed that it had achieved only $70 million.267 Sturm
was furious: “10m less within a few days? Without any sense of embarrassment? . . . These
guys are shameless. I’m afraid we’ve got to build our legal case.”268 At trial, Sturm noted
that over the same period, Fresenius USA exceeded expectations.269
Nor was the revenue miss Akorn’s only bad news. The FDA issued a CRL for
Difluprednate, a key pipeline product, and Akorn had to push back its launch from 2017
until 2019.270
Fixating on Sturm’s email about “build[ing] our legal case,” Akorn argues that
Fresenius set out to manufacture a basis for termination. At trial, Sturm testified credibly
to a more nuanced and responsible view. He candidly admitted that at this point, he
personally wanted to terminate the transaction. He was “very unhappy” with Akorn’s
performance, believed that “the underperformance was more likely to be longer-lasting,”
and felt that Fresenius had overpaid.271 At the same time, he knew that Fresenius had signed
266
See JX 636 at ‘891.
267
See JX 646 at ‘654.
268
JX 647 at ‘657.
269
Sturm Tr. 1185.
270
JX 610; JX 611 at 2; Sturm Tr. 1185; see JX 615 (“[A]korn got a deficiency letter
from FDA regarding Difluprednate which is the biggest launch in 2018. The effect from
this is 57 M.”).
271
Sturm Tr. 1186–88.
58
a contract, and “[t]he last thing [he] wanted to do was to . . . to go to court . . . without a
valid case.”272 He also recognized that if Akorn had a stronger performance in the fourth
quarter, then the situation would be different, although he was “not very optimistic.”273
Sturm is a sophisticated international businessman. He speaks English fluently, but
it is not his native language, and I therefore do not draw the inference that by “build our
legal case,” he meant to manufacture one. At trial, his testimony was direct and credible. I
accept his explanation that in September 2017, he was “in an exploratory phase.” 274 He no
longer liked the deal, and he would seek to terminate it if Akorn’s performance continued
to deteriorate, but Fresenius also would live up to its obligations.
Consistent with this testimony, the contemporaneous evidence shows that Fresenius
continued to assess how it could close the Merger and make the numbers work.275 Fresenius
also tasked a team with reviewing Akorn’s most significant product launches to determine
whether any of them could be accelerated to replace lost pipeline revenue.276 Instead,
Fresenius learned that three other launches would be delayed.277 At the same time,
272
Id. at 1189.
273
See id.
Id.; see id. at 1206 (“Q. Okay. And you started looking for a way to get out of
274
the transaction, did you not? A. No. I did not.”).
275
See JX 627 at ‘498; JX 657; JX 658; JX 661; JX 664; JX 670 at 20; JX 684 at
‘911.
276
See JX 605; JX 619; JX 620.
277
See JX 624.
59
Fresenius began examining whether there were grounds to assert a Material Adverse
Effect.278 Based on advice from Paul Weiss, Fresenius concluded that it did not have clear
grounds for termination.279 Given the Delaware precedent, this was hardly surprising.
J. Akorn’s Third Quarter Results
On October 30, 2017, Akorn provided Fresenius with a presentation describing the
quarterly results that Akorn expected to announce the next day.280 Akorn would report
revenue of $202 million, representing a miss from its reduced forecast of $225 million.281
Akorn described the results as “[d]riven mostly by unanticipated supply interruptions and
unfavorable impact from competition across [the] portfolio (Ephedrine, lack of new
awards, unfavorable customer contract mix . . .).”282 Akorn also noted that its “[a]verage
product pricing [was] lower than expected due to [an] unfavorable customer/contract mix
and price erosion [that was] not considered in our forecast.”283
278
See JX 634; JX 635; JX 637.
279
See Sturm Tr. 1211–12; Empey Dep. 106–08. In her deposition, the CFO of
Fresenius Parent testified from memory about her understanding of these discussions, in
which she did not personally participate. She stated the outcome in absolute terms: “[W]e
concluded that there was no basis for a termination of the transaction.” Empey Dep. 107.
Based on Sturm’s testimony, my knowledge about how rarely lawyers frame their legal
advice in absolute terms, and the CFO’s distance from the discussions, I am confident that
this testimony oversimplifies matters and states the outcome too strongly.
280
JX 688; cf. JX 732 (Ducker describing October 2016 results as “awful”).
281
JX 688 at ‘605.
282
Id. at ‘606.
283
Id. at ‘607.
60
On October 31, 2017, Akorn informed Fresenius that Kapoor had resigned from the
Akorn board.284 Five days earlier, federal law enforcement had arrested Kapoor and
charged him with criminal fraud in connection with his leadership of another
pharmaceutical company.285
On November 1, 2017, Akorn announced its financial results.286 Akorn’s reported
revenue of $202 million represented a year-over-year decline of 29%. Akorn’s operating
income of $9 million represented a year-over-year decline of 89%. Akorn reported a loss
of $0.02 per share, a year-over-year decline of 105%.287
In addition to another poor quarter, Akorn fell further behind in its product launches.
Akorn had anticipated thirty-four launches in 2017; by mid-November it had launched only
fourteen, with another six planned by year end. The fourteen launches netted only $3.3
million in sales. Akorn originally had projected $60 million from new product launches in
2017.288 These results were far worse than what even Bauersmith, the biggest critic of
284
See JX 689.
285
See JX 696 at ‘041; Press Release, District of Massachusetts, U.S. Attorney’s
Office, Department of Justice, Founder and Owner of Pharmaceutical Company Insys
Arrested and Charged with Racketeering (Oct. 26, 2017), https://www.justice.gov/usao-
ma/pr/founder-and-owner-pharmaceutical-company-insys-arrested-and-charged-
racketeering.
286
JX 693.
287
JX 1250 ¶ 9.
288
See JX 707 at ‘505.
61
Akorn’s pipeline, had anticipated.289 He viewed the performance of Akorn’s launches as
“almost comical,” because it did not make commercial sense to launch a drug if that was
the expected return.290
In spite of the bad news from Akorn, Sturm maintained a positive outlook about the
Merger when speaking with Fresenius Parent’s investors. He described Akorn’s results as
“for sure not what we had hoped for, but at least a sequential stabilization.”291 He also
stated that “the reasons for the disappointing financial performance are broadly unchanged
from the second quarter,” citing three factors:
A, more pronounced competition. Akorn continues to experience price
pressure and market share losses on some of its key molecules. And while
increased competition was generally anticipated, the impact has was [sic]
unfortunately been greater than expected. . . .
B, supply disruptions. And while some supply issues from the second quarter
were resolved, new constraints have occurred, leading again to higher than
normal backorders and inability to supply charges. Frankly, [we] can’t wait
to assume management control, so we can help with our expertise and our
financial power.
C, new product launches. And even though Akorn has launched a respectable
13 new products year-to-date, it had even higher expectations. So launch
delays, including to some significant molecules, contributed to the shortfall
versus projected revenues. We have reviewed these delays with Akorn’s
management, and we believe that the opportunities are essentially postponed
rather than significantly diminished.292
289
Bauersmith Tr. 596.
290
Id. at 598.
291
JX 699 at ‘669.
292
Id.
62
Notwithstanding these problems, Sturm said that Fresnius Parent would not revise its
expectations for Akorn’s performance in 2018, explaining:
First, let me remind you that our 2018 expectations came[,] by our
standards[,] extremely early and were based on the comprehensive but still
outside[-]in due diligence process. Couple that with injectable generics,
arguably Fresenius’ most volatile business, and so we called it very
consciously an expectation rather than a guidance. Now, in light of Akorn’s
year-to-date performance, it appears likely the 2017 base will be lower than
assumed. And as a consequence, the stretch required to reach our 2018
expectations is clearly larger.
But as I just said, this is a highly volatile business with limited visibility,
notoriously hard to predict, and where you just cannot extrapolate from a
quarterly run rate, where individual drugs and launches can make and have
made a major difference. So I’m not ready to revise those expectations for
next year. Please bear with us until February. By then, we will be Akorn’s
controlling owner and we’ll provide you with a guidance of a reliability level
that you’re used to.293
My impression is that Sturm knew that expectations would have to be lowered, but he did
not have numbers that he trusted and would not have them until his own people were
running the Company.
After Akorn and Fresenius announced their third quarter results, Fresenius updated
its business plan for Akorn. During a teleconference on November 12, 2017, Ducker
presented the plan to the Management Board.294
293
Id.
294
See JX 714 (Ducker circulating presentation to senior Fresenius Parent
executives in advance of call).
63
Ducker’s presentation noted that the “[s]trategic rationale for the Akorn acquisition
remains compelling.”295 The compelling strategic rationale was Fresenius Kabi’s desire to
expand its North American footprint, which acquiring Akorn facilitated.296
The Akorn deal, by contrast, had become far from compelling. The presentation
observed that Akorn’s “2017 business performance has been disappointing and has fallen
well short of guidance”297 To partially address the shortfall, “[c]ost reduction opportunities
well in excess of the deal model are now planned.”298 Even with these additions, the
changes in the 2018 business plan were striking:
Original Plan299 November Update % Change
Revenue $1,061 $783 (26%)
Gross Profit $612 $414 (32%)
EBITDA $397 $241 (39%)
EBIT $239 $125 (47%)
Net Income $33 $(38) (215%)
295
Id. at 2; see JX 730 at ‘832 (“The strategic rationale for the acquisition remains
sound.”). Fresenius made this same point in other presentations and in a call with its
investors. See JX 743 at ‘306; JX 781 at ‘398; JX 874 at ‘779; JX 994 at 5, 15.
296
See JX 994 at 5.
297
JX 714 at 2.
298
Id.
299
In millions of dollars.
64
Akorn’s performance was so bad, and the situation in such flux, that the
Management Board excluded Akorn from their 2018 budget, which they presented to the
Supervisory Board in December 2017.300 The presentation explained the omission:
Akorn is not included in the budget. We see some deviations to the original
business plan and we are working on counter measures to mitigate these
effects. This process will be ongoing until early February 2018. Until then
we will also have better clarity about when closing will happen and we will
only then seek for approval for the Akorn budget.301
This explanation is consistent with Sturm’s earlier refusal to change his Akorn-related
guidance to the market: the Management Board did not have any numbers they trusted for
Akorn. I believe they also considered the possibility that Fresenius would terminate the
Merger Agreement and either never own Akorn at all, or at least not own it during 2018,
while the litigation over a broken deal would be ongoing.
Despite the senior management team’s powerful internal misgivings, Fresenius did
not change its public stance on the Merger. In roadshow materials dated November 27,
2017, Fresenius told investors the following:
 “[Akorn] Q3 performance below expectations.”302
 “Achievement of 2018 expectation challenging.”303
300
JX 716; see JX 744 at 4.
301
JX 744 at 4.
302
JX 743 at ‘306.
303
Id.
65
 “Strategic rationale unchanged: Deal offers offensive and defensive merits.”304
 “Substantial cost and growth synergies paired with limited integration
complexity.”305
 “Accretive to Group net income from 2018.”306
Fresenius described the Merger in similar terms in a presentation to investors at
conferences in December 2017 and January 2018.307
K. The Whistleblower Letters
On October 5, 2017, Fresenius received an anonymous letter from a whistleblower
who raised allegations about Akorn’s product development processes at Vernon Hills,
Decatur, and Somerset.308 On November 2, Fresenius received a longer version of the letter
that added more detail about the problems and included assertions about flaws in Akorn’s
quality control processes.309
During a teleconference on November 12, 2017, the senior executives of Fresenius
Parent discussed the November letter. When circulating his presentation, Ducker noted that
he had asked Jack Silhavy, the general counsel of Fresenius USA, “to join us for the first
304
Id.
305
Id. at ‘307.
Id.; accord id. at ‘308 (“Accretive [to EPS] in 2018 (excluding integration costs),
306
from 2019 (including integration costs)”).
307
See JX 781 at ‘398–400; JX 874 at ‘779–81.
308
See JX 789; see also JX 934 at 11.
309
See JX 788; see also JX 934 at 11.
66
part of the call to brie[f] everyone on the letter just received from an Akorn employee, and
the possible implications and next steps.”310 On November 13, the Fresenius executives
had a call with Paul Weiss.311 After the call, Fresenius personnel began looking into the
information Akorn provided during due diligence about its R&D facilities and past FDA
inspections.312
Having considered the evidence, I believe that during the teleconference on
November 12, 2017, the Fresenius executives decided that they did not want to proceed
with the Merger as negotiated and would seek to terminate the Merger Agreement if they
had a valid contractual basis for doing so. They had ample grounds to reach this conclusion.
My sense is that they regarded Akorn’s disastrous performance as falling within a
businessperson’s understanding of what should qualify as a material adverse effect, but
their legal advisors were not confident that they could prove to the satisfaction of a court
applying Delaware law that Akorn had suffered a Material Adverse Effect within the
meaning of the Merger Agreement.
The whistleblower allegations about regulatory problems were yet another blow to
the deal. The letters called into question the accuracy of Akorn’s representations regarding
regulatory compliance. They also called into question whether Akorn was operating in the
310
JX 714.
311
JX 717.
312
See JX 718; JX 720; JX 721.
67
ordinary course of business.313 It was not clear yet whether the allegations were true, but
the whistleblower letters gave Fresenius good cause to investigate.
In the Merger Agreement, Fresenius had bargained for a customary right of
reasonable access to Akorn’s “officers, employees, agents, properties, books, Contracts,
and records.”314 The purpose of that covenant is to enable a buyer to investigate issues that
arise between signing and closing. The Fresenius executives decided to use their
information right for its intended purpose.
L. Fresenius Notifies Akorn.
On November 16, 2017, Ducker and Henriksson called Rai, informed him about the
whistleblower letters, and conveyed Fresenius’s view that both companies needed to
investigate the allegations.315 Ducker followed up with a formal notice letter, which stated:
[P]ursuant to Section 5.05 of the [Merger Agreement] and for other reasons,
Fresenius Kabi will be providing Akorn with requests for documents,
information and access to potentially knowledgeable individuals regarding
the allegations in these letters and related issues. We are in the process of
identifying and retaining a team of third party experts with the skills and
experience to properly investigate these matters expeditiously, and we ask
that Akorn immediately take steps to begin to gather all related documentary
material.316
313
See JX 1 §§ 6.02(a)(ii) & (b), 7.01(c)(i).
314
See id. § 5.05.
315
See JX 723 at ‘800–01.
316
JX 724 at ‘204.
68
The letter closed by noting that Fresenius “reserve[d] all of our rights under the merger
agreement.”317
After receiving the whistleblower letters from Fresenius, Akorn shared them with
its board members. Johnson, a director with substantial FDA experience, described them
as “very worrisome,” noting that “[i]f they were to get to FDA, we should expect an
intensive investigation” and that “[m]ost data integrity issues are surfaced through
whistleblowers going to FDA.”318 He advised that Akorn needed to conduct a “responsive
and credible” investigation that “would require a review of named applications including
product development files and lab notebooks” as well as “[i]nterviews of those involved,
in any way, with the named submissions . . . .”319 He advised that if the investigation
uncovered problems, then “a much broader investigation following FDA guidance would
be necessary.”320
On November 17, 2017, Silhavy told Bonaccorsi that Fresenius could not simply
rely on the investigation that he expected Akorn to conduct, but rather Fresenius would
have to do its own investigation as well.321 As it turned out, Akorn decided not to conduct
317
Id. at ‘205.
318
JX 761.
319
Id.
320
Id.
321
JX 726 at ‘084 (Silhavy reporting to Ducker about call with Bonaccorsi: “We
then discussed how to proceed . . . . I told him I needed to be very clear that we needed to
do our own investigation, not just rely on the one they needed also to do.”); see also JX
723 at ‘801 (Fresenius anticipating that both companies would conduct investigations). In
69
its own investigation into the whistleblower letters because Akorn did not want to uncover
anything that would jeopardize the Merger.
In the ordinary course of business, an FDA-regulated company confronted with a
detailed whistleblower letter would conduct an investigation using counsel experienced in
data integrity issues and knowledgeable about FDA compliance. Akorn chose to rely on its
deal counsel, Cravath, Swaine & Moore LLP. Cravath’s job was not to conduct an
investigation, but rather to monitor Fresenius’s investigation and head off any problems.322
David M. Stuart, a litigation partner, led the Cravath team.323 Stuart previously
worked for the SEC and had experience conducting internal investigations.324 He is clearly
a skilled and careful attorney, but he had never conducted a data integrity investigation for
response to Fresenius’s argument that Akorn breached its obligation to operate its business
in the ordinary course by failing to conduct its own investigation, Bonaccorsi testified at
trial that Silhavy instructed him over the phone that Akorn should not investigate.
Bonaccorsi Tr. 887–88. Given the seriousness of the whistleblower allegations, that would
not have been a viable position for Silhavy to take, and it would have contravened the
ordinary course covenant in the Merger Agreement. The contemporaneous documents
convince me that Bonaccorsi misremembered this conversation. Silhavy instead conveyed
that Fresenius could not rely on Akorn’s investigation and would also have to conduct its
own investigation. See JX 723 at ‘801; JX 726 at ‘084.
322
See Stuart Tr. 673 (“Q. So were you actually asked at that time to conduct an
internal investigation for Akorn? A. I was asked to coordinate with Fresenius’ counsel in
conducting an investigation but not to do an independent investigation on my own.”);
accord id. at 728.
323
See id. at 671.
324
See id. at 671–72.
70
a pharmaceutical company, had never appeared before the FDA, and had no familiarity
with FDA rules, regulations, or administrative guidance.325
Fresenius, by contrast, conducted a real investigation. Fresenius turned to the FDA
Enforcement and Compliance Group at Sidley Austin LLP.326 Nathan Sheers, a Sidley
partner who specializes in FDA enforcement and compliance, led the team.327 The Sidley
325
Id. at 688, 703, 730–31 (“Q. And prior to this moment in time [when Stuart was
charged with leading the investigation], you weren’t even familiar with the FDA rules,
regulations, and guidance for the industry on data integrity and compliance. A. That’s
correct.”); Stuart Dep. 30–40.
326
See JX 719; Stuart Tr. 674 (testifying that Sidley “said that they had been hired
to do an investigation to assess the validity of the allegations in these anonymous
whistleblower letters”). Stuart claimed not to have known that Sidley’s work could be used
to evaluate whether Akorn was in compliance with its representations in the Merger
Agreement and that he would have acted differently if he had known. See Stuart Tr. 675. I
do not credit that testimony. Stuart is a sophisticated partner at one of the world’s most
sophisticated law firms. He certainly knew that if the whistleblower allegations were true,
then they posed problems under the Merger Agreement. He also certainly knew that
Fresenius would be assessing that issue when reviewing Sidley’s work. Cravath’s approach
to the common interest agreement, discussed below, evidences an understanding of the
dual implications of Sidley’s work and an unsuccessful attempt to secure the high ground
for Akorn by including contractual provisions that could trip up Sidley and Fresenius.
Stuart also testified that if he had known that Sidley’s work would be used to evaluate
Akorn’s compliance with the Merger Agreement, he would have prepared Akorn’s
witnesses before their interviews. Cravath did prepare Akorn’s witnesses, although it was
relatively “low-key prep.” See JX 1443 at ‘130 (Stuart: “Similar to what we did in
Somerset, I think a little low-key prep for each interviewer [sic] is important. We should
let them know that while we have no reason to think there are concerns about operations
in Decatur, Sidley will ask whether the interviewee is aware of any data integrity issues
and, if the interviewee is, we should address that before the Sidley interview.”); JX 1445
(Stuart directing Cravath associates on how to “instruct” Akorn employees during pre-
interview “screening”); Sheers Tr. 1039–41 (describing his observations regarding
Cravath’s preparation of witnesses).
327
Sheers Tr. 1029–30.
71
team also included Jeff Senger, the former acting chief counsel at the FDA.328 Fresenius
and Sidley determined that they needed technical expertise from a firm that could evaluate
the integrity of the data Akorn used to support its drug applications. 329 For that task, they
hired Lachman.330 The Lachman team was led by Ron George, a scientist with over 40
years of experience in the pharmaceutical industry and who now specializes in data
integrity audits and remediation.331 Having heard George testify at trial, I judge him to be
among the most credible witnesses I have seen in court.
Sidley started its investigation by examining the materials on regulatory compliance
that Akorn posted to the virtual data room.332 Before doing so, Sidley considered whether
328
Sheers Tr. 1035.
329
See JX 776 at ‘758 (describing Lachman’s role). Fresenius also needed a firm to
extract the data for Lachman to analyze and retained Ernst & Young LLP for that purpose.
See id.
330
See Sheers Tr. 1035–36. Formally retaining Lachman took some time. Lachman
told Fresenius that it had a conflict and would require waivers from both Fresenius and
Akorn, but Lachman declined to disclose whether or not Akorn was or had been a client or
to discuss the nature of any engagement. Silhavy worried about granting a blind waiver,
noting that although it was unlikely, “Lachman could have worked for Akorn on the very
topics that are at issue here.” JX 734 at ‘192. See id. at ‘191 (noting that in the most extreme
case, Lachman might have “evaluated the very data integrity issues that we want them to
investigate, and opined to Akorn [that] those are not of a type or magnitude that would
cause there to have been fraud on the FDA?”). After considerable effort, an agreement was
reached with Lachman in early December. See JX 772. Akorn contends that Silhavy wanted
an expert who would give him the answer he wanted, but I find that he correctly wanted a
consultant who would take a fresh look at the issues, not one who had worked on the same
issues for Akorn.
331
George Tr. 1115–17.
332
See JX 735.
72
anything in the confidentiality agreement between Fresenius and Akorn prevented them
from using the information. After reviewing the agreement, Sidley concluded that they
were “Representatives” of Fresenius who could receive the “Evaluation Material” in the
virtual data room without prior written consent from Akorn. The Sidley attorneys noted
that the Evaluation Material could be used “solely for the purpose of evaluating,
negotiating, and executing” a transaction. Sidley concluded that their investigation was part
of the process of executing (i.e., carrying out) the transaction, and hence they could use the
Evaluation Material in their investigation.333 I agree with that interpretation.
Next, Fresenius provided Akorn with a request for access, information, and
documents to conduct its investigation.334 Demonstrating the importance of the
investigation to Fresenius, Sturm and his fellow senior executives at Fresenius Parent were
personally involved in reviewing and revising the requests.335
333
See JX 747; Sheers Tr. 1106. Sidley also noted that the confidentiality agreement
foreclosed speaking with the FDA, or anyone else, about regulatory issues related to the
Akorn transaction. See JX 748. Akorn has argued that executing the agreement only meant
signing it, but the meanings of the verb include to carry out. Akorn also says that Fresenius
could not have been seeking to carry out the Merger Agreement if it was considering
terminating it, but carrying out the deal includes evaluating one’s rights and obligations
under the deal, including rights and obligations which turn on a counterparty’s compliance
with its obligations.
334
JX 771; JX 776.
335
See JX 767.
73
After receiving the requests, Cravath spoke with Sidley about how to proceed.336
During these discussions, Sidley learned that Cravath would not be conducting its own
investigation, but rather facilitating Fresenius’s investigation, sitting in on interviews, and
generally “shadowing” Sidley.337 The lawyers also discussed “whether the interviews
would be conducted under a ‘common interest privilege.’”338 Internally, Sidley expressed
concern that “the only common interest at this point is the solicitation of information from
the interviewees and to conduct a thorough investigation,” but that how the resulting
information was used “likely is outside the scope of any common interest.”339
To support the common interest privilege, Cravath proposed a draft agreement
which recited that Sidley and Cravath were conducting “a privileged joint investigation for
the purpose of assisting our clients close the acquisition.”340 The draft elaborated that the
mutual interest arises from the desire of both Fresenius and Akorn to
consummate the pending merger between the two companies and prepare a
defense for the surviving entity in anticipation of any litigation that might
arise, including by the FDA, another interested government entity or private
litigant, based on the substance or fact of the allegations in the anonymous
communications.341
336
See JX 784.
337
See Bonaccorsi Tr. 908; Stuart Tr. 728; Rai Tr. 509–11; JX 784; JX 793.
338
JX 784; see Sheers Tr. 1085–86 (“Before they would permit us to interview
anyone, they said we had to sign a common interest agreement.”).
339
JX 784.
340
JX 793.
341
JX 792 at ‘700.
74
Proposing this language was a clever way to try to box in Fresenius and prevent them from
using any information to evaluate Akorn’s compliance with its representations. For
precisely this reason, the Fresenius executives reacted negatively to this language.342
The parties ended up agreeing to a modified version of the common interest
agreement that struck the concept of a joint investigation and stated in its place that “[t]he
investigation may include joint interviews, document collection and review and sharing of
information related to Akorn’s processes, procedures and controls.”343 The final agreement
also changed the language on mutual interest to state that it “arises from and under the
Merger Agreement dated April 24, 2017 between Fresenius (and certain affiliates) and
Akorn, and additionally because of the possibility of claims made by third parties.”344 The
final agreement stated expressly that “either party shall be free to use or disclose the fact
of, and any and all information learned or obtained during, the referenced investigation,
including information exchanged hereunder, in any dispute between them.” 345 These
changes put Akorn on notice that Fresenius could use the fruits of the investigation to
342
See JX 794 (Silhavy emailing Sheers: “Cravath’s proposal has caused a stir in
Germany. They would like a call tomorrow . . . and do not want us signing anything until
after that call.”); see also JX 798 at ‘812 (Sidley attorney referring to Akorn as “our
adversary here”).
343
JX 804 at ‘988.
344
Id. at ‘988.
345
Id. at ‘989.
75
evaluate its rights and obligations under the Merger Agreement and not merely for the
purpose of closing the Merger.
M. The Site Visits Begin.
Between December 11 and December 15, 2017, the Fresenius team visited Vernon
Hills. Sidley interviewed nineteen employees, and Fresenius’s consultants toured the
laboratory and questioned employees about equipment, software, controls, processes, and
procedures. The Fresenius team identified serious data integrity issues.346
Between December 18 and December 21, 2017, the Fresenius team visited Somerset
and Cranbury. Sidley interviewed ten employees while the consultants toured the
laboratory. The Fresenius team again identified serious data integrity issues.347
From January 2 until January 5, 2018, the Fresenius team visited Decatur. They
interviewed eleven employees while the consultants toured the laboratory facilities. The
Fresenius team again identified serious data integrity issues.348
346
See JX 809; JX 856 at ‘872–77; JX 934 at 14; Sheers Tr. 1092. Sidley and
Lachman later had a follow-up visit at Vernon Hills. See Sheers Tr. 1094. Akorn has fixated
on a comment that George made when visiting the Vernon Hills site about looking for
“smoking gun[s].” Sheers Tr. 1090. The details and context of this statement are too vague
for me to draw any inferences from it.
347
See JX 828; JX 856 at ‘878–86; JX 934 at 14; Sheers Tr. 1093.
348
See JX 934 at 14; JX 856 at ‘887–94; Sheers Tr. 1093. Sidley and Lachman later
had a follow-up visit at Vernon Hills. See Sheers Tr. 1094–95.
76
On January 5, 2018, Fresenius received a third whistleblower letter, which alleged
that Vernon Hills personnel had concealed information from Fresenius.349 Fresenius sent
the letter to Akorn.350 Based on the letter’s allegations and its own concerns, Fresenius
questioned whether Akorn was providing Fresenius with reasonable access to information.
Akorn provided a pointed and detailed response.351
On December 18, 2017, while the Fresenius team was starting its visit at the
Somerset site, Cravath commenced the only investigatory work that it did on its own, in
contrast to simply shadowing Sidley.352 While preparing witnesses for their interviews,
Cravath learned about problems with the data supporting Akorn’s ANDA for azithromycin
and about Silverberg’s submission in August 2017 of a response to a CRL that relied on
false data.353 Cravath started investigating what had happened.354
Two days after Cravath started investigating, on December 20, 2017, Silverberg
went to Misbah Sherwani, Executive Director of Quality at Somerset, to try to coordinate
their stories. Sherwani immediately called an associate at Cravath, telling the associate that
349
JX 842 (alleging that personnel were instructed “not to cooperate with” Fresenius
and “not to disclose any information” to Sidley); see also JX 934 at 12.
350
See JX 848; JX 851.
351
See JX 853.
352
See Stuart Tr. 728.
353
See id. at 679–80.
354
See id. at 680–82; Sheers Tr. 1041–42.
77
she is uncomfortable being in the same room with Mark right now because
he is telling her to do things with respect to opening a [T]rackwise
investigation that she is seriously concerned about (including inaccurate
justifications for why an investigation was not opened earlier and telling her
he will “eat” the drafts of the language about that).355
The associate called Stuart, who spoke by phone with Silverberg and Sherwani.356
Stuart claimed at trial that the phrase “eat the draft” did not mean anything to him.357
It sounds to me like a fairly obvious reference to coordinating stories, documenting the
coordinated story in Trackwise, the software Akorn uses to track quality issues and
investigations, then concealing the evidence of the coordination. This is exactly how
Sherwani understood it.358 She said Silverberg told her that they should agree on a
description of the investigation and then Silverberg would “get rid of” what they had
drafted.359 Stuart “very quickly” dismissed this as a “fleeting issue” by deciding that
Silverberg and Sherwani simply had a miscommunication.360
Cravath’s investigation took approximately four weeks. The resulting record
supports the following findings:
355
JX 825.
356
Stuart Tr. 767, 769.
357
Id. at 690, 768.
358
See Sherwani Dep. 114–116.
359
Stuart Tr. 691, 718, 771.
360
Id. at 690, 693, 769, 773–74.
78
 In 2012, Akorn began developing a topical ophthalmic form of azithromycin, a
prescription antibiotic, at its Somerset site, but could not perform particulate matter
stability testing due to its viscosity.361
 In September 2012, an Akorn lab supervisor at Somerset named Jim Burkert entered
stability testing data into the lab notebook of an Akorn chemist. There is no evidence
that he had the data; he seems to have made it up.362
 In December 2012, Akorn submitted to the FDA an ANDA for azithromycin which
included the false data.363
 In fall 2014, the stability testing issue came up again, and the chemist discovered
the entries in her notebook. She also noticed other entries in the same notebook and
in two other notebooks that were not in her handwriting. She reported it to Burkert,
who did not ask any questions or follow up. The chemist next brought the issue to
the attention of a quality manager who instructed all scientists to review their
notebooks. The review discovered numerous instances of altered and missing data.
In addition, two of Burkert’s notebooks were missing.364
 On December 30, 2014, Burkert resigned voluntarily.365
 In July 2016, Silverberg visited Somerset. He interviewed the chemist and told her
to note in her notebooks where the writing was not hers. She identified six additional
products where the writing was not hers. After learning about the missing
notebooks, Silverberg instructed that going forward, all notebooks would be stored
361
See JX 890 at ‘268–69; JX 821 at ‘207; JX 1889 at 1; Stuart Tr. 682–83.
362
See JX 890 at ‘268–69; JX 821 at ‘207; JX 1889 at 1; see also JX 914 at ‘087
(“In brief, Stuart admitted that the company submitted to FDA ‘fabricated’ stability data—
i.e., data for which the company has no support—for the Azithromycin ANDA . . . .”); id.
at ‘088 (“[T]he data was in fact ‘fabricated.’”); Stuart Tr. 740–41 (“Q. . . . Cravath
concluded that there was a high likelihood that the data was false; correct? A. Yes.”).
363
JX 890 at ‘269; JX 1889 at 2.
364
JX 1889 at 2–4.
365
JX 890 at ‘273; JX 1889 at 4.
79
in the quality manager’s office and checked in and out. Employees expressed
concern that Silverberg was not addressing the issues properly. 366
 In August 2017, Somerset was attempting to respond to a CRL that asked questions
about the stability testing for azithromycin, albeit not specifically the fabricated test.
When preparing the response, Akorn personnel identified the problems with the data
and brought them to Sherwani’s attention. She and a colleague, Michael Stehn,
concluded that Akorn would need to withdraw the ANDA, and they elevated the
issue to Silverberg.367
 During Silverberg’s discussion with Sherwani and Stehn, Silverberg was told that it
was highly likely that there was false or fabricated data in the initial ANDA
submitted to the FDA.368
 During a meeting on August 17, 2017, Silverberg told Sherwani and Stehn that
Akorn would not withdraw the ANDA and should instead pull samples and test
them to see if the samples passed the test.369 Silverberg subsequently instructed
Sherwani and Stehn to respond to the CRL, not to ask for an extension, and not to
open an investigation in the data issues.370
 Sherwani believed it was essential to conduct an investigation and to obtain an
extension from the FDA. Sherwani asked Silverberg whether he was “allowing
Regulatory Affairs to continue to submit inaccurate information” to the FDA.371
Silverberg argued that the FDA was asking about different data.372
366
See JX 821 at ‘208; JX 890 at ‘274–75; JX 1889 at 6–8; Stuart Tr. 683.
367
See JX 853 at ‘545; JX 579; JX 821 at ‘209–10; JX 890 at ‘278; JX 1889 at 8–
10; Stuart Tr. 683–84, 744–45.
368
Stuart Tr. 741.
369
See JX 591 (Silverberg describing request for extension as “stupid”); JX 821 at
‘210; JX 1889 at 10–11; Stuart Tr. 745.
370
See JX 607 at ‘105–06; JX 821 at ‘210–11; JX 1887 at 2; JX 1888 at 1–2; Stuart
Tr. 759–63.
371
JX 607 at ‘103; JX 821 at ‘211; JX 1889 at 11.
372
See JX 607 at ‘102–03; JX 821 at ‘211; JX 1889 at 11.
80
 Sherwani disagreed with Silverberg’s positon and declined to sign the CRL.373
 Silverberg instructed Sherwani that there should be “[n]o more emails.”374
 Silverberg signed the CRL on Sherwani’s behalf while she was out of the office.375
 By signing off on the CRL, Silverberg validated the attachments, which were not
yet attached to the form he signed. The attachments included the false stability
data.376 Sherwani had made clear to Silverberg that signing the CRL would
constitute a resubmission of the false data.377
N. Cravath Reports To Sidley On Its Investigation.
On January 12, 2018, Stuart gave Sidley a preliminary report on Cravath’s
investigation.378 At that point Cravath had interviewed twenty-four employees and
reviewed 6,000 emails. Stuart told Sidley that the investigation would take another three to
four weeks.379
373
See JX 777 at ‘221–22; id. at ‘216 (forwarding her exchange between Silverberg
and herself to a colleague, Sherwani comments, “I’m not going to be his scapegoat”); JX
890 at ‘279.
374
JX 778 at ‘557.
375
See JX 821 at ‘211; JX 1889 at 12.
376
See JX 873 at ‘320; Stuart Tr. 684–85, 786–89.
377
JX 1425 at ‘102; Stuart Dep. 153; Sherwani Dep. 99–103; JX 1891 at 1, 3–5, 7;
Stuart Tr. 802.
378
See JX 873 at ‘320; Stuart Tr. 695; Sheers Tr. 1042–43.
JX 873 at ‘323. But see Stuart Tr. 681 (“We were substantially complete by the
379
middle of January”); id. at 697 (Stuart testifying that the investigation was “substantially
complete” by January 22, 2018).
81
After receiving the preliminary report, Fresenius sent Akorn a letter identifying
“extremely serious data integrity concerns.”380 Internally, Fresenius started a project to
determine what it would cost to remediate the data integrity issues at Akorn so they could
evaluate whether the issues constituted a Material Adverse Effect.381
On January 22, 2018, Stuart, Bonaccorsi, and members of the Cravath team gave a
follow-up report to Silhavy and Sidley.382 Stuart stated that Silverberg’s explanations
“were not satisfactory, they didn’t hang together.”383 He also said that he would not be
380
JX 866; see Sheers Tr. 1037–39 (summarizing concerns). There is evidence that
Fresenius executives wanted Sidley and Lachman to be even more critical of Akorn than
they were. See JX 900; Sheers Tr. 1099–01. I find that Sidley and Lachman properly
resisted this pressure and conducted appropriately professional investigations.
381
See JX 887; JX 889; see also JX 888. Bauersmith handled the initial modeling
and led the project team. In a bit of gallows humor, he labeled his draft presentations and
some communications with the faux code name “Project CERAFA.” See, e.g., JX 978.
Commonly known as oak rot, cerafa fagacearum is a fungus that kills oak trees.
Baeursmith Tr. 609. Fresenius’s code name for the Akorn acquisition was Project Oak, and
Akorn understandably infers from this name that Bauersmith had been instructed to come
up with a way to kill Project Oak. While this is one plausible interpretation of the evidence,
I credit Bauersmith’s testimony that he believed Akorn was already rotten, and that his job
was to determine the extent of the rot. Id. (“[W]e thought that the tree was rotted.”).
Consistent with his testimony, Bauersmith had questioned Akorn’s pipeline from the outset
and been skeptical of its value. Bauersmith resigned effective May 4, 2018, and had no
reason to shade his testimony to favor Fresenius. JX 1182; Bauersmith Tr. 573. In my
judgment, he was a credible witness.
382
JX 914.
383
Stuart Tr. 700; accord JX 914 at ‘093; JX 1128; see Stuart Tr. 697 (“My
assessment was that Mr. Silverberg’s conduct was wholly unacceptable, that his
explanations for his conduct were not satisfactory, and that we needed to take some action
with respect to Mr. Silverberg.”); id. at 748 (“Q. Okay. And in fact, you find [Silverberg’s]
explanation about this totally unsatisfactory. A. That’s true.”); Sheers Tr. 1044 (“[W]e
asked Mr. Stuart whether he found [Silverberg’s] statement credible, that explanation
82
relying on Silverberg’s explanation “in an attempt to defend the [C]ompany before the
FDA.”384 Although Stuart did not say this to the Fresenius team, he believed that there was
“a high likelihood that [the FDA] would conclude, given the document trail that they’ll
conclude [Silverberg] did act with intent.”385 Stuart did not report on (or ever tell Sidley
about) the incident between Silverberg and Sherwani in which Silverberg attempted to
coordinate their stories and suggested he would “eat the draft” if necessary.386
Bonaccorsi and other senior executives at Akorn thought the situation was serious,
and they worried that if they disclosed the azithromycin incident to the FDA and withdrew
credible, and he told us specifically that he did not find his story satisfactory; that it did not
hang together; and he told us that he wasn’t going to defend it.”). At trial, Stuart and his
counsel spent a lot of time attempting to distinguish between finding Silverberg’s
explanation “not satisfactory” and finding it not credible. They did so in an attempt to
justify the later presentation of Silverberg’s explanations to the FDA as findings from
Cravath’s investigation. Based on the evidence, I do not perceive a meaningful distinction.
Regardless of what adjective one uses, Akorn later presented the FDA with a finding from
its investigation that parroted an explanation that the lead investigator did not find
satisfactory.
384
Stuart Tr. 700–01.
385
JX 935 at ‘031.
386
Sheers Tr. 1045–46. Based on Cravath’s presentation, Silhavy did not initially
regard Silverberg’s findings as “earthshattering” or as providing a basis, standing alone, to
terminate the Merger Agreement. Silhavy Dep. 158–60; see JX 878. Sturm scolded Silhavy
for expressing this view before hearing from Fresenius’s subject-matter experts. Sturm Tr.
1190–91, 1216–17; see Silhavy Dep. 158–60. Given this exchange and Sturm’s candid
testimony about his view of the Merger after Akorn’s dismal performance, it is reasonable
to infer that Sturm hoped the investigation would support a decision by Fresenius to
terminate the Merger Agreement.
83
the ANDA, then the FDA would invoke the AIP.387 To help them navigate dangerous
waters, they decided to hire a law firm with specific FDA expertise. They selected Hyman,
Phelps & McNamara, P.C., although this firm had also done work for Fresenius and
therefore faced a potential conflict. They also decided to hire an outside consultant to
conduct a review of Akorn’s procedures and potentially tainted submissions. Akorn later
chose NSF to conduct the investigation.388
After consulting with Hyman Phelps, Akorn decided that they should go to the FDA
relatively soon, disclose the problems they had discovered, and explain how the false CRL
came to be submitted.389 Akorn also decided that Silverberg should no longer head up its
quality function.390 Effective March 1, 2018, they removed him from his position of
Executive Vice President, Global Quality Affairs and placed him in the new role of
“Quality Advisor.”391 His new position paid $250,000 per year, a reduction from his prior
salary of $318,000, and he was not eligible for any bonus. The initial placement was for 90
days or until the Merger closed. He was “[n]ot to initiate any contact with Akorn employees
387
JX 884 at ‘068 (“They’re going to invoke the application integrity policy.”); see
Stuart Tr. 854; see also JX 908 at ‘831 (discussing AIP); JX 1127 (same).
388
JX 1078; see JX 932; JX 939; JX 951; JX 967; Stuart Tr. 707–08.
389
See Stuart Tr. 703.
390
Bonaccorsi Tr. 894–95.
391
See JX 955 at ‘702; JX 961; JX 984.
84
at any level except for inquiries to the CHRO or General Counsel.”392 He was “[n]ot to
have any contact with the U.S. FDA or other regulatory facilities.”393 He was “[n]ot to
physically report to any Akorn location unless specifically requested or directed by his
manager, CHRO or General Counsel.”394 Akorn took these steps with the understanding
that the FDA would expect to see this type of disciplinary outcome in a case of “deliberate
misconduct.”395 As of trial, Silverberg remained in his new role.
To fill the hole this created at the top of Akorn’s quality function, Akorn promoted
Wasserkrug to the position of Vice President, Quality Operations. Although historically
the head of quality reported directly to the CEO, she would report to the head of
pharmaceutical operations, where the entire quality assurance function would reside.396
Akorn also decided that it would be a good idea to start working on some data
integrity projects. Bonaccorsi had Pramik start planning for IT to address some projects in
this area.397 The IT department also began responding to the issues raised in the Cerulean
audits from December 2016 and May 2017.398
392
JX 955 at ‘702.
393
Id.
394
Id.
395
Stuart Tr. 705.
396
JX 955 at ‘703.
397
JX 957 at ‘921.
398
See JX 977.
85
O. Tensions Escalate.
By the second half of February 2018, tensions between the parties had escalated.399
On February 16, Sidley sent Cravath a letter attaching an extensive list of FDA submissions
where Lachman had not been able to locate the underlying data. Sidley asked for the data
or, alternatively, an explanation for why it was missing.400 Three days later, on February
19, Bonaccorsi sent Silhavy a lengthy email in which he accused Fresenius of foot-
dragging before the FTC and failing to use its reasonable best efforts to obtain antitrust
clearance.401 Four days later, on February 23, Silhavy sent Bonaccorsi an email informing
him that Fresenius would be making the following statement about the Merger on February
27, when Fresenius Parent held it earnings call:
Fresenius is conducting an independent investigation, using external experts,
into alleged breaches of FDA data integrity requirements relating to the
product development at Akorn, Inc.
In addition to FTC clearance, closing of the acquisition will now depend on
the outcome of this investigation and the assessment of such outcome by the
management and supervisory boards of Fresenius.402
Silhavy also sent Bonaccorsi an email complaining that Cravath had not yet provided
Sidley with the emails from Cravath’s investigation into the fabricated-data issues and
expressing concern that “Akorn has not been and is not acting in good faith to fulfill its
399
See Stuart Tr. 709, 866.
400
JX 970.
401
JX 972.
402
JX 983 at ‘002.
86
obligation to provide prompt and reasonable access to information under Section 5.05 of
the Merger Agreement.”403
The very next day, on February 24, 2018, a Cravath litigation partner sent a letter to
Fresenius’s outside deal counsel asserting that Fresenius had “made clear that it does not
intend to perform its obligations under the Merger Agreement.”404 The letter cited
Fresenius’s positions regarding antitrust clearance and its planned disclosure about closing
depending on the outcome of its investigation.405
Over the weekend, Cravath produced a portion of the emails to Sidley, and
Bonaccorsi promised that the balance would be coming soon.406 On February 26, 2018,
Akorn’s newly retained regulatory counsel at Hyman Phelps reached out to the FDA to
advise them about the potential data integrity issues involving fabricated data.407 The FDA
agreed to a “listening only meeting” on March 7.408
P. The Earnings Calls
On February 27, 2018, Fresenius held its quarterly earnings call. Sturm announced
that Fresenius was investigating “information which originated from an anonymous source
403
JX 991 at ‘948.
404
JX 986 at ‘186.
405
Id. at ‘187.
406
JX 991 at ‘946.
407
See JX 987; JX 988; Stuart Tr. 706.
408
JX 1000 at ‘031.
87
alleging deficiencies and misconduct regarding the product development process for new
drugs at Akorn.”409 He stated that during due diligence, Fresenius had “examined and
audited [Akorn] as intensively, carefully, and conscientiously as possible,” and he
described the due diligence as “the most intensive and comprehensive that I have
experienced during my time at Fresenius,” but he added that “when you wish to acquire a
competitor, there are restrictions,” and “[t]here are areas where you simply are not allowed
to look, including product development and drug approval processes.”410
So how do you protect yourself in these areas? You ask the seller for
assurances, representations [and] warranties, to use the legal term, on certain
key facts and issues. The task now is to verify whether these assurances
provided by the seller actually hold true. . . . [S]hould the allegations prove
to be of a nonmaterial nature, then we will complete the acquisition, as
planned, and together make it a success . . . .
If, however, the allegations are proved and prove to be so serious that we
must question the very basis of the takeover agreement, then in the interest
of our shareholders, we may use our rights to withdraw from the
transaction.411
Akorn’s stock price plummeted on the news.412
409
JX 994 at 5.
410
Id.
411
Id. Sturm “stress[ed] that the strategic rationale behind our offer for Akorn
remains absolutely sound,” and that Fresenius remained “determined to pursue the strategic
goal of expanding our liquid pharmaceutical product offering in North America.” Id.; see
also id. at 15.
412
See JX 992.
88
On February 29, 2018, Akorn reported its financial results for the final quarter of
2017, along with annual results for 2017.413 For the quarter, Akorn reported revenue of
$186 million, representing a year-over-year decline of 34%. Akorn reported operating
income of negative $116 million, representing a year-over-year decline of 292%. Akorn
reported a loss of $0.52 per share, representing a year-over-year decline of 300%.414
For 2017 as a whole, Akorn reported revenue of $841 million, representing a year-
over-year decline of 25%. Akorn reported operating income of $18 million, representing a
year-over-year decline of 105%. Akorn reported a loss of $0.20 per share, representing a
year-over-year decline of 113%.415 Akorn reported EBITDA of $64 million for 2017, down
86% from 2016, and adjusted EDBITA of $249 million, down 51% from 2016.416 Akorn’s
actual revenue declined by 17% from the low end of the guidance of $1,010–$1,060 million
that Akorn reaffirmed when announcing the Merger Agreement. Akorn’s adjusted
EBDITA declined by 31% from the low end of Akorn’s reaffirmed guidance of $363–$401
million.417
413
JX 998.
414
JX 1250 ¶ 11; see JX 941 at 5.
415
JX 1250 ¶ 11; see JX 941 at 5.
416
JX 1250 ¶ 11.
417
Id. ¶ 22.
89
Q. The FDA Meeting
During the weeks leading up to Akorn’s meeting with the FDA, Akorn withdrew
the ANDA for azithromycin,418 and the parties butted heads over several issues. When
Fresenius realized that Hyman Phelps would be attending the meeting, they asserted a
conflict based on Hyman Phelps’s contemporaneous representation of Fresenius.419 Akorn
complained that Fresenius was trying to harm its ability to present its case to the FDA, but
Fresenius had a legitimate concern that Akorn was going to whitewash its problems, and
Hyman Phelps was contemporaneously appearing for Fresenius in matters before the FDA.
Fresenius did not want any blowback from a misleading depiction to hurt its own counsel’s
credibility. Akorn replaced Hyman Phelps with Ropes & Gray LLP.420 The meeting was
rescheduled for March 16, and the change in counsel does not appear to have made any
difference.
Akorn took similar stances towards Fresenius. When Sidley asked to attend the
meeting, Akorn said no.421 When Sidley asked to interview Avellanet, the author of the
418
See JX 1091.
419
See JX 1003; JX 1006; JX 1017; Stuart Tr. 710; Bonaccorsi Tr. 901–02.
420
Stuart Tr. 710–11.
421
See JX 1013 at ‘486; Sheers Tr. 1049. At trial, Stuart cited three reasons. First,
by conflicting out Hyman Phelps, Fresenius had taken the position that Akorn and
Fresenius’s interests were not aligned regarding the meeting. Second, “by that time, the
relationship between Sidley and Cravath, as well as between Fresenius and Akorn, had
grown to be hostile.” Stuart Tr. 711. Third, Akorn feared that Sidley would try to sabotage
the meeting. Id. at 711–12. All three seem to be variants on a theme: both sides’ interests
were becoming adverse.
90
Cerulean reports, Akorn again said no.422 Akorn also instructed Sidley that they could not
interview any former Akorn employees without Akorn’s approval.423 Akorn also instructed
Sidley that no one other than Fresenius’s outside consultants could review the documents
Akorn was providing unless Akorn gave prior consent to provide specific documents to
specific individuals.424
In advance of the in-person meeting on March 16, 2018, a lawyer from Ropes &
Gray had a “sidebar” call with an FDA representative in which he denigrated Fresenius’s
motives and suggested that Fresenius would try to call Akorn’s presentation into
question.425 During the subsequent in-person meeting, eight Akorn representatives,
including Stuart and Bonaccorsi, met with sixteen FDA representatives, with four
participating by phone.426
422
See JX 1023; JX 1032.
423
JX 1037.
424
JX 1038 at ‘447.
425
JX 1066 at ‘893; see JX 1063 at ‘005; Stuart Tr. 840–44. Stuart failed to mention
the criticisms of Fresenius when he described the sidebar call for Sidley. See JX 1071 at
‘707; Stuart Tr. 845–46. At trial, Sheers identified statements in the talking points for the
sidebar call that did not accurately describe the state of the record. See Sheers Tr. 1055–
58. Based on the trial record, Sheers’s assessment appears correct. The sidebar call was
thus another means by which misleading information reached the FDA.
426
JX 1066 at ‘894.
91
As Akorn’s expert conceded at trial, Akorn was “not fully transparent” with the
FDA during the meeting.427 First, Akorn presented the overall investigation into the
whistleblower letters as one conducted jointly by Akorn and Fresenius.428 In reality, Akorn
did not conduct an investigation into the whistleblower letters. Fresenius expected Akorn
to conduct an investigation, but Akorn chose to have Cravath shadow the Sidley
investigation instead. Akorn’s presentation cited investigatory work that Sidley and
Lachman had performed in a manner that implied that Akorn had been responsible for it.429
Akorn also described its production of emails to Sidley in a manner that implied it had
happened months earlier, at the start of the investigation and as part of a joint effort,430
when in fact the emails had been provided only three weeks before in response to pressure
427
Kaufman Tr. 378. Kaufman claimed that Akorn later became transparent by
sending the FDA a letter containing Sidley’s criticisms and the Cerulean reports. Id. at 402,
414. In fact, Akorn has never sent the FDA the Cerulean reports. Wasserkrug Tr. 40.
Moreover, Akorn’s regulatory counsel undermined the curative efficacy of sending the
Sidley letter by priming the FDA not to give any credence to Sidley’s concerns.
428
See JX 1066 at ‘895 (“Dave Stuart presented briefly on . . . the whistleblower
letters sent to Fresenius and the investigation conducted by Akorn and Fresenius as a result
of those letters.”); JX 1068 at ‘009 (“In response to anonymous letters, Akorn and
Fresenius conduct investigation focused on data integrity controls.”); JX 1068 at ‘038
(“Akorn has extensively investigated the concerns raised by the anonymous letters . . . .”).
Stuart described the investigation differently when he reported on the meeting to Sidley.
See JX 1071 at ‘707 (Stuart telling Sidley that they had told the FDA that “Fresenius,
Sidley, Lachman, and EY had been given access to Akorn’s sites, raw data, audit trails,
emails and employees” and that “you were analyzing all of the information and data you
had obtained”).
See JX 1068 at ‘009 (citing site visits, “65+ interviews of current and former
429
Akorn personnel”; and “[l]ab walk-throughs”)
430
See JX 1066 at ‘895.
92
from Fresenius. Akorn likewise presented the investigation into the azithromycin ANDA
as a joint investigation, when Cravath had conducted that investigation on its own.431 Akorn
also represented that Cravath’s investigation into the azithromycin issue was “supported
by Akorn GQC,”432 without disclosing that Akorn GQC had been kept in a constrained and
limited role.
Even more problematic, Akorn’s presentation endorsed as valid Silverberg’s
claimed justification for signing the CRL with fabricated test results. Under the heading,
“Investigative Findings,” the presentation stated:
Silverberg authorized submission of AET data without knowing stability
table containing particulate matter data would be submitted because stability
table not attached to CRL response Silverberg authorized for submission.433
This statement to the FDA adopted Silverberg’s explanation for his actions. Stuart gave the
presentation and called the FDA’s attention to this statement during the meeting,434 yet
431
See Stuart Tr. 728–29.
432
JX 1068 at ‘009.
433
JX 1068 at ‘014.
434
Stuart Tr. 713. At trial, Stuart testified on direct that he “felt the FDA should
know that that was [Silverberg’s] position on the submission of the CRL response.” Id. at
714. The presentation does not identify the statement as Silverberg’s position. It identifies
the statement as a finding from an Akorn internal investigation conducted by Cravath. See
Stuart Tr. 794; Stuart Dep. 276. I empathize with Stuart, because I suspect that he was
under a great deal of pressure to depict events in this way. I also give Stuart credit for
testifying as directly as he did given the difficult position that his client had put him in. He
appears to be an honest and conscientious person. The record shows that many lawyers
revised and commented on the presentation, and their collective efforts to present Akorn
to the FDA in the best light possible ultimately produced a misleading document. In the
pressure of the moment, Stuart went along.
93
Stuart had said previously that “he did not find Silverberg’s explanations satisfactory.”435
He also believed that there was “a high likelihood that [the FDA] would conclude, given
the document trail that they’ll conclude [Silverberg] did act with intent.”436 Most important,
he had told the Sidley team that he would not be relying on Silverberg’s explanation “in an
attempt to defend the Company before the FDA.”437 Yet that is what the presentation did.
Finally, Akorn told the FDA that it had placed an “emphasis . . . on improving data
integrity controls in the last few years,”438 and the presentation cataloged a number of steps
Akorn had taken. Akorn in fact historically prioritized other matters over data integrity and
only began making a serious effort on data integrity after Sidley and Lachman identified
pervasive problems. Moreover, while highlighting favorable information for the FDA,
Akorn omitted the many deficiencies identified by Cerulean and Akorn’s internal audit
function. This approach resulted in a one-sided, overly sunny depiction. Akorn’s witnesses
have stressed that the FDA usually does not ask for or receive internal audit reports or
435
JX 914 at ‘093; see Stuart Tr. 697, 699–700.
436
JX 935 at ‘031.
437
Stuart Tr. 700–01.
438
JX 1066 at ‘897; see JX 1068 at ‘016 (presentation representing (inaccurately
based on the evidence in this case) that “Akorn management emphasizes the importance of
data integrity and the data governance policy is endorsed at the highest levels of the
organization”); id. at ‘017 (presentation representing (inaccurately based on the evidence
in this case) that “[i]mprovement activities have been prioritized using a risk-based focus
across all facilities”).
94
consultant reports when it conducts an inspection,439 but that is a different scenario than a
company approaching the FDA voluntarily and purporting to come clean.440
After the meeting, Akorn provided Fresenius with a summary of the meeting and a
copy of the presentation.441 On March 22, 2018, Sidley sent Cravath a letter accusing Akorn
of having given the FDA “false, incomplete and misleading information.” 442 Sidley’s
leading criticism was the presentation’s description of Silverberg’s reason for approving
the response to the CRL.443 Although Sidley’s language was strident, that was a fair
criticism of the presentation. Sidley also criticized the presentation’s portrayal of Akorn’s
“many supposed improvements in its data integrity practices.” 444 The language was again
quite strong, but the criticism was a fair one.445
Akorn’s regulatory counsel at Ropes & Gray sent Sidley’s letter to the FDA.446 He
also sent the FDA copies of letters from Sidley to Cravath in which Sidley identified
439
See Wasserkrug Tr. 19; Kaufman Tr. 275.
440
See Kaufman Tr. 399 (agreeing that self-disclosure is different than an audit).
441
See JX 1073.
442
JX 1084 at ‘171; see Sheers Tr. 1050–54 (describing Sidley’s concerns).
443
JX 1084 at ‘171–72.
444
Id. at ‘173.
445
See Wasserkrug Tr. 167–72 (Wasserkrug on cross-examination agreeing that
Akorn did not disclose numerous problems with the data integrity accomplishments it
touted to the FDA).
446
See JX 1105.
95
various data integrity issues, along with Cravath’s response to those letters. He followed
up with a call with an FDA representative, during which he sought to undermine
Fresenius’s criticisms.447 He correctly noted that “the heated tone of the correspondence
was somewhat embarrassing.”448
R. Fresenius Terminates The Merger Agreement.
On March 16, 2018, Sturm raised with the Supervisory Board of Fresenius Parent
the possibility of terminating the Merger Agreement. He cited the results of Fresenius’s
data integrity investigation, which he noted was still ongoing, but which had revealed
evidence of breaches of representations in the Merger Agreement.449 He told the
Supervisory Board that they did not yet have to make a decision.450
On April 13, 2018, the senior executives at Fresenius Kabi decided to recommend
terminating the Merger Agreement to their superiors at Fresenius Parent. They based their
decision on the data integrity problems at Akorn, the costs of remediation, and the decline
in Akorn’s business performance.451
On April 17, 2018, the Supervisory Board met. Management gave the directors a
presentation that detailed (i) the downward revisions in the business plan for Akorn made
447
See JX 1106.
448
Id.
449
JX 1143 at ‘975–76.
450
Id. at ‘976.
451
JX 1142 at ‘496.
96
necessary by Akorn’s dismal business performance, (ii) the cost of data integrity
remediation, and (iii) the lost value from suspending sales of existing products and delaying
production of pipeline products until data could be verified.
 For 2018, Akorn’s projected EBIT fell from $239 million in the signing case to $14
million in the updated case. Of the total, a decline of $221 million was attributable
to on-market products and a decline of $127 million to pipeline products, with these
declines partially offset by deal-related factors.452
 For 2018, data integrity remediation would cost another $48 million, with a decline
in EBIT of $272 million attributable to suspending on-market products pending data
verification. With these effects, Akorn’s adjusted EBIT in 2018 would be negative
$313 million.453
 Over a ten-year period, Akorn would incur $254 million in direct costs to redevelop
the twenty-four most commercially valuable Akorn products.454
 The biggest valuation hit to Akorn would come from suspending on-market
products and pushing out pipeline products while data was verified. Depending on
the assumptions used, the loss in value from the deferral could reach $1.6 billion,
excluding the direct remediation costs.455
 Taking into account both the direct remediation costs and the lost value from
product suspensions and deferrals, Akorn’s value fell from $5.236 billion at the time
of the Merger to $3.307 billion, representing a decline of 37%.456
452
JX 1152 at 17.
453
Id. at 18.
454
Id. at 19; see Henriksson Tr. 979, 1009.
455
JX 1152 at 25.
456
Id.
97
The estimates were developed by a team of Fresenius personnel that included senior
executives and staff who had first-hand experience based on Fresenius’s efforts to
remediate data integrity issues at one of its sites in India.457
Although Sturm and his colleagues were prepared to terminate the Merger
Agreement, they recommended that Fresenius offer Akorn the choice of extending the
outside date for the Merger to the end of August to facilitate further investigation into the
data integrity issues, including the investigations by NSF that Akorn had pledged to the
FDA to conduct. In a letter dated April 18, 2018, Paul Weiss surfaced for the first time and
communicated this offer. The letter asserted that Akorn had breached various provisions in
the Merger Agreement, including its representations regarding regulatory compliance. The
letter noted that “[i]f Akorn believes Fresenius is mistaken in its assessment of the facts
and that Akorn’s own investigation, when complete, would support its position, then
extending the Outside Date could be advantageous to both parties.”458 Akorn declined.
457
See Henriksson Tr. 1005, 1022–23. Given that litigation was on the horizon,
Fresenius also consulted with lawyers from Paul Weiss. Akorn has stressed this point and
observes that Fresenius initially designated the analysis as privileged. See Henriksson Tr.
1002. The fact is that both sides involved lawyers extensively and labeled many internal
documents and analyses privileged. The major difference is that Fresenius used three firms:
Allen & Overy for deal work, Sidley for regulatory work, and Paul Weiss for litigation.
Akorn only used Cravath. It is therefore easier for Akorn to track when Paul Weiss became
involved. I suspect that Akorn took similar steps to consult with Cravath after its disastrous
post-deal performance. Akorn used Cravath litigators to address the whistleblower letters
and had other Cravath litigators involved by February 2018. See JX 986; JX 1337 at ‘405.
I see no reason to criticize either side for consulting with top-flight law firms about the
implications of unfolding events for a high-profile deal.
458
JX 1153 at ‘553.
98
On April 22, 2018, Fresenius gave notice that it was terminating the Merger
Agreement. Fresenius cited its right to terminate under Section 7.01(c)(i) based on (i)
Akorn’s breaches of representations and warranties, including those related to regulatory
compliance, and (ii) Akorn’s breaches of its covenants, including its obligation to operate
in the ordinary course of business. Fresenius also cited its right not to close under Section
6.02(c) because Akorn had suffered a General MAE, which would give rise to a right to
terminate two days later, on April 24, 2018, when the initial Outside Date in the Merger
Agreement was reached.459
S. This Litigation
On April 23, 2018, Akorn filed this action. Fresenius answered and asserted
counterclaims. Akorn sought an expedited trial on or before July 24, 2018.460 Over
Fresenius’s opposition, I granted the request and scheduled trial for July 9–13.461
While the litigation was ongoing, factual developments continued apace. On May
2, 2018, Akorn announced its financial results for the first quarter of 2018. Akorn reported
revenue of $184 million, representing a year-over-year decline of 27%. Akorn reported
operating income of negative $25 million, representing a year-over-year decline of 134%.
459
JX 1165.
460
Dkt. 22.
461
Dkt. 171.
99
Akorn reported a loss of $0.23 per share, a year-over-year decline of 170%. Akorn reported
EBITDA of negative $6 million and Adjusted EBITDA of $24 million.462
While the parties litigated, NSF moved forward with its investigation. The original
plan consisted of (i) conducting data integrity audits at six facilities (but not Somerset), (ii)
reviewing both the ANDAs where Burkert had some involvement and the ANDAs
generated at Somerset since 2006, (iii) examining any lab notebooks to which Burkert had
access and sampling other notebooks at Somerset, and (iv) reviewing sample
manufacturing data for thirty-two products manufactured at Somerset.463
By the time Fresenius issued its termination notice, NSF had only delivered its data
integrity audit for one site (Vernon Hills). By the time of trial, NSF had completed its audits
at four of the five other sites. NSF’s inspection of the Decatur facility was postponed due
to an FDA inspection that began on April 9, 2018, lasted through trial, and eventually ended
on July 23. As noted, NSF did not plan to conduct a data integrity audit at Somerset.
The following table identifies the facilities reports that NSF had conducted by the
time of trial, along with the number and types of findings made by NSF.
462
JX 1250 ¶ 19.
463
See JX 1078 at ‘886.
100
Site Date of Report Major Findings Minor Findings Exhibit
Vernon Hills April 13, 2018 7 7 JX 1141
Amityville April 29, 2018 9 3 JX 1178
Lake Forest May 7, 2018 2 7 JX 1189
Cranbury May 9, 2018 10 8 JX 1190
Hettlingen May 10, 2018 6 9 JX 1192
As the table shows, NSF found major data integrity deficiencies at each site.
Importantly, NSF’s definition of a major deficiency resembled Cerulean’s definition
of a critical deficiency. For NSF, a major finding
documents a systematic failure of a regulatory requirement, correlates to
product defects, and/or represents uncorrected repeat findings cited by FDA
in previous inspections. These findings would appear on a form FDA 483
and may provide the basis for further enforcement action.464
For NSF, a critical finding was more extreme: a “condition which has produced or leads to
a significant risk of producing an unsafe or hazardous product which may be harmful and
puts the consumer at risk of serious injury or death.”465 Minor findings were regulatory
violations that fell short of these standards. A minor finding “would most likely appear on
a Form FDA 483, but would not be a basis for further enforcement action unless it
represents a repeated finding . . . .”466
On May 16, 2018, part way through its investigation of Decatur, the FDA issued a
twenty-four page Form 483 for that facility which identified thirteen categories of
464
JX 1141 at 7.
465
Id.
466
Id.
101
deficiencies.467 Two of the categories addressed the types of data integrity problems that
Fresenius had cited: one identified a “[f]ailure to maintain complete data derived from all
testing and to ensure compliance with established specifications and standards pertaining
to data retention and management;”468 another identified a failure “to thoroughly
investigate any unexplained discrepancy or failure of a batch or any of its components to
meet any of its specifications, whether or not the batch has already been distributed.” 469
The former category included five specific deficiencies; the latter included ten specific
deficiencies, including “[r]epeat observation[s] from 11/2004, 9/2006, 8/2007, 6/2009,
5/2013, 6/2016.”470 This was not the only instance of repeat observations that the Form 483
raised. Another category of deficiencies identified “[r]epeat observations from 11/2004,
9/2006, 8/2007, 6/2009 & 2017.”471 Still another identified a “[r]epeat observation from
11/2004.”472 Based on the Form 483, Wasserkrug testified at trial to her belief that the FDA
had placed Decatur on OAI status and that Akorn will not receive any product approvals
467
JX 1198.
468
Id. at ‘973.
469
Id. at ‘975.
470
Id. at ‘980.
471
Id. at ‘966.
472
Id. at ‘969.
102
until Decatur is cleared.473 The two prior times when an Akorn facility was on OAI status,
it took six months to a year to clear the facility. 474
In May 2018, while the FDA inspection at Decatur was ongoing, the FDA approved
two of Akorn’s pending ANDAs.475 Akorn has cited these approvals to suggest that the
FDA had no concerns about Akorn’s facilities, but the more persuasive interpretation is
that the ANDAs had been in the FDA pipeline for some time and were ready for approval
when Akorn’s issues arose. Consistent with the latter interpretation, the FDA subsequently
declined to approve two other ANDAs, citing quality issues at Decatur.476 Akorn also has
received two CRLs for products that would be manufactured at Decatur.477
In addition to the data integrity audits, NSF reviewed ANDAs from the Somerset
facility. NSF was only able to review two ANDAs before Fresenius terminated the Merger
Agreement. In the first, NSF found thirty-six major deficiencies and twenty-nine minor
deficiencies.478 In the second, NSF found eleven major deficiencies and three minor
deficiencies.479 After receiving the reports, the most Cravath felt it could say to Akorn’s
473
Wasserkrug Tr. 72–73, 77.
474
Id. at 73–74.
475
See JX 1187; JX 1188.
476
JX 1223; JX 1226.
477
Wasserkrug Tr. 71–72.
478
See JX 1156 (Azelastine Hydrochloride Opthalmic Solution (0.05%)).
479
See JX 1157 (Moxifloxacin HCI Ophthalmic Solution, 0.5%).
103
directors was that they did not believe that the approval of either product was in “immediate
jeopardy,” but that the process was still unfolding.480 At the time, NSF still planned on
reviewing another twenty-eight ANDAs.481 Notably, Akorn was not planning to address
the broader universe of products that Silverberg oversaw, precisely because it was
everything the Company had produced during the preceding decade.
By the time of trial, NSF had reviewed another six ANDAs. The following table
summarizes the results:
Product Critical Major Minor Exhibit
Cyclopentolate Hydrochloride Ophthalmic 1 34 8 JX 1185
Solution
Gentamicin Sulfate Opthalmic Ointment 0 30 5 JX 1196
Neomycin and Polymxin B Sulfate and 0 17 15 JX 1201
Bacitracin Zinc Ophthalmic Ointment Sterile
(Veterinary)
Epinastine HCI Opthalmic Solution 0.5% 0 22 19 JX 1204
Olopatadine Hydrochloride Opthalmic 0 26 18 JX 1221
Solution
Olopatadine Ophtalmic Solution 1 34 23 JX 1224
The two critical deficiencies involved data fabrication. One involved an employee from
Vernon Hills who engaged in a deliberate act to force a passing result for cyclopentolate.482
The other involved an employee from Cranbury who engaged in the practice of testing into
480
JX 1159 at ‘389.
481
See JX 1177 at ‘229–31.
482
Wasserkrug Tr. 176–77.
104
compliance for olopatadine.483 NSF’s findings meant that the total number of individuals
at Akorn involved in data fabrication had increased to four: Silverberg, Burkert, and the
two additional employees. It also meant that the number of ANDAs that Akorn had
submitted to the FDA based on false or misleading data had risen to three: azithromycin,
cyclopentolate, and olopatadine.484 NSF expanded its investigation based on its findings.
During its investigation, NSF also found extensive evidence of Akorn employees
performing trial injections, a prohibited practice.485 In response to these findings, on April
5, 2018, Stuart expressed concern about the risk that the FDA would impose the AIP:
[G]iven how prevalent this bad practice was, the FDA is likely to have a very
negative reaction to our report. . . . Potential FDA reactions include (1)
suspension of review of all pending submissions; (2) mandating review by a
third party of product released for the market; and—the worst—(3) “AIP”
(Application Integrity Policy), which requires a third-party monitor to
oversee all activity at Akorn’s sites.486
During a conference call the following day, Akorn’s regulatory counsel expressed concern
that “[i]f audit reports make it look like there are similar issues across the company, FDA
might see need to get whole company under decree.”487 At trial, Wasserkrug testified that
483
Wasserkrug Tr. 179.
484
Id. at 179–80. In addition to inspecting facilities and auditing ANDAs, NSF
conducted employee interviews. The one interview memorandum in the record, dated April
16, 2018, provides striking insight into the absence of a well-functioning quality system at
Akorn and the lack of a top-down culture of compliance. See JX 1149.
485
Wasserkrug Tr. 181–85.
486
JX 1127.
JX 1496 at ‘055; see id. at ‘056 (“Sheer number of issues across all sites audited
487
by NSF . . . could raise concern.”); JX 1493 (“[A]s other audit reports roll out,” it may
105
Akorn still had not yet been able to resolve fifty instances of trial injections involving
approximately twenty analysts and multiple products.488
Through the remediation process that Akorn initiated after its meeting with the
FDA, Akorn identified so many open deficiencies from past internal audits and received
so many new deficiencies flagged by NSF that it retained PricewaterhouseCoopers LLP as
a program manager to keep track of them. PwC’s task was to organize all of the findings
so that they could be evaluated and addressed.489 Before April 2018, no one had ever tried
to create and maintain a master list of deficiencies at Akorn.490
At trial, Akorn asserted that fully remediating its data integrity problems would take
approximately three years.491 Akorn estimated the cost at $44 million.492 The estimate
assumed that Akorn would not uncover any additional problems with data, that no other
ANDAs would be withdrawn, that no products would be recalled, and that there would not
be any effect on Akorn’s pipeline.493
“look[] like multiple sites are having similar issues” and the FDA “may see it as the whole
corporation/multiple sites under decree.”).
488
Wasserkrug Tr. 63, 87, 182–83.
489
Id. at 67–68, 94–95.
490
Id. at 116–17.
491
Id. at 69.
492
JX 1318.003. Wasserkrug read the $44 million figure of the page, but she did not
have any personal knowledge about how it was derived. Wasserkrug Tr. 95, 115–16.
493
See Wasserkrug Tr. 69, 77–78.
106
T. Post-Trial Events
On July 23, 2018, the FDA initiated an inspection at Akorn’s Somerset facility.
Between July 23 and August 30, 2018, the FDA spent a total of twenty-one days inspecting
the site.494
By letter dated August 3, 2018, Akorn reported to the FDA about NSF’s expanded
investigation into the work performed by the miscreant Vernon Hills employee. As part of
this work, NSF found an additional critical deficiency involving fabricated data, this time
for palonosetron hydrochloride.495 NSF also identified major deficiencies related to data
falsification involving six other products.496 NSF found that the fabrication of data by the
Vernon Hills employee was “not isolated but more systemic in nature” and “call[ed] into
question the reliability of data” he had generated.497 As a result, NSF concluded that “a
further comprehensive assessment of [his] work and the work produced by the Vernon
Hills facility in support of GMP activities” was necessary to determine “potential impact
to marketed product, regulatory findings, and submission supporting data.” 498 NSF also
494
Dkts. 199–200.
495
See Dkt. 191, Ex. A at ‘826.
496
See Dkt. 191, Ex. B at ‘098.
497
Id. at ‘098.
498
Id.
107
determined that it would need to sample “all GMP testing . . . conducted by the Cranbury
R&D organization, since its relocation [from Somerset] in October, 2016.”499
By letter dated August 9, 2018, the FDA sent Akorn a letter formally classifying the
Decatur facility as OAI. 500 The August 9 letter stated:
Based on [the FDA’s] inspection, this facility is considered to be in an
unacceptable state of compliance with regards to current good manufacturing
practice (CGMP). The facility may be subject to a CGMP regulatory or
enforcement action based on this inspection, and FDA may withhold
approval of any pending applications or supplements in which this facility is
listed.501
The letter thus not only informed Akorn of Decatur’s OIA status, but also noted the
possibility of “regulatory or enforcement action.”
On August 30, 2018, the FDA issued a twenty-two page Form 483 for the Somerset
site that detailed serious regulatory deficiencies, many of which echoed the evidence
presented at trial.502 The violations included the following:
 Akorn distributed batches of adulterated sterile eye drops that failed four separate
stability tests. Akorn could not provide data for the batches at the beginning of the
FDA’s inspection, and the inspectors later witnessed Akorn employees
retrospectively modifying the relevant laboratory notebooks.503
499
See Dkt. 191, Ex. C at ‘047.
500
Dkt. 191, Ex. D (“FDA has determined that the inspection classification of this
facility is ‘official action indicated’ (‘OAI’).”).
501
Dkt. 191, Ex. D.
502
Dkt. 204, Ex. A.
503
Id. at ‘516–17.
108
 Akorn conducted trial injections as a “widespread practice” dating back to 2015,
and “[n]o corrective measures to prevent this practice were implemented until” May
2018. Akorn’s prior investigation was inadequate and, as a result, “there is limited
assurance in the reliability of data submitted to the Agency and generated for
commercial batches.”504
 Akorn failed to exercise “[a]ppropriate controls . . . over computers or related
systems to assure that changes in master production and control records are
instituted only by authorized personnel.”505
 Akorn “invalidated” negative test results in more than 70% of cases between
January 2017 and July 2017 “without adequately supporting [the reasons for
invalidation] with scientific evidence,” and the investigations into these failing
results did not “determine why the [issues] . . . kept on recurring nor were there
effective CAPAs implemented to minimize these incidents going forward.”506
 Akorn delayed investigating quality issues for months “without adequate
justification.”507
 Akorn failed to review laboratory notebook testing data for months, and an Akorn
employee informed the FDA that “due to personnel resource issue[s], they could not
review the notebooks in a timely manner.”508
By letter dated September 3, 2018, Akorn reported to the court that on August 22,
during the later stages of the FDA’s investigation, the database for a high accuracy liquid
particle counter had been deleted along with the local backup file and the associated
504
Id. at ‘518–19.
505
Id. at ‘527.
506
Id. at ‘518–20.
507
Id. at ‘525–26.
508
Id. at ‘526.
109
electronic security logs.509 These databases contained all of Somerset’s data for the relevant
testing, which is designed to ensure that sterile intravenous products do not contain
excessive amounts of undisclosed solids. Akorn’s preliminary investigation suggested that
the files were deleted intentionally using an electronic shredding utility. 510 Given the timing
of the deletion, it is reasonable to infer that the perpetrator may have been trying to hide
information from the FDA, or from personnel who would follow up on the deficiencies
that the FDA identified in its Form 483.
By letter dated September 21, 2018, Akorn submitted its response to the Somerset
Form 483.511 The response is lengthy, spanning seventy-three pages, and makes expansive
claims about Akorn’s commitment to quality and the steps it has taken or will take to
address the problems that the FDA identified. In light of the record presented at trial,
including my evaluation of the credibility of Akorn’s witnesses, it is difficult to put much
faith in Akorn’s claims about its commitment to quality. Having seen the divergence
between Akorn’s representations to the FDA during the March 2018 meeting and what
Akorn’s internal documents and witness testimony showed, it is equally difficult to have
confidence that Akorn is being fully transparent in describing the corrective actions that it
509
Dkt. 199.
510
Dkt. 201.
511
See Dkt. 234, Exs. A & B.
110
has taken or will take. It would require an additional round of discovery and another merits
hearing to assess the accuracy of Akorn’s claims.
Even taking Akorn’s response at face value, the document evidences the deep and
pervasive nature of Akorn’s quality problems are at Akorn. In an effort to respond to the
FDA’s concerns, Akorn took a barrage of actions, including:
 Stripping the Head of Quality at Somerset of daily oversight responsibilities and
assigning those duties to PwC;
 Stripping the Quality Control Laboratory Director at Somerset of daily oversight
responsibilities responsibility and assigning those duties to NSF;
 Engaging NSF to provide supplemental oversight of the daily operation of the
quality Control laboratory;
 Engaging NSF personnel to act as mentors for the Somerset Quality Control
laboratory supervisory team;
 Engaging NSF to oversee Akorn’s process for reviewing its laboratory data and to
provide mentoring for Akorn’s staff;
 Committing to retrain and certify all of its quality control laboratory personal, all
data reviewers, and all investigators;
 Committing to review and revise all of its laboratory procedures including for
titration, chromatography, and notebook handling;
 Committing to review all of its analytical testing methods;
 Recalling its Azelastine HCl Ophthalmic Solution and Gentamicin Ophthalmic
Solution based on confirmed stability failures;
 Recalling its Ciprofloxacin Ophthalmic Solution based on concerns expressed by
the FDA;
 Committing to investigate the use of trial injections at all Akorn sites;
 Committing to re-investigate all Out-of-Specification results generated in the past
three years at all of its sites;
111
 Committing to address backlogs in reviewing and approving data in notebooks and
procedures for handling notebook retention and storage;
 Committing to review user level access across all laboratory and manufacturing
equipment;
 Committing to review each piece of Somerset laboratory equipment and the data
associated with the equipment;
 Committing to conduct a complete review of all unsigned data and to investigate
any instances that fail to meet acceptance criteria; and
 Recognizing that all of its sites would need to be assessed based on the issues
identified at Somerset.
After hearing the evidence at trial, I did not have any confidence that Akorn would be able
to support its data if the FDA called upon Akorn to do so. Based on developments since
trial, Akorn’s situation has grown even worse.
II. LEGAL ANALYSIS
The disputes in this case are primarily contractual. Fresenius contends that it
terminated the Merger Agreement in accordance with its terms. Akorn contends that
Fresenius did not validly terminate the Merger Agreement and seeks an order of specific
performance to compel Fresenius to close the Merger. Both parties are highly sophisticated
and crafted the Merger Agreement with the assistance of expert counsel. The pertinent
provisions are dense and complex.
The analysis turns on three conditions that Akorn must meet before Fresenius is
obligated to close the Merger:
 Under Section 6.02(a)(ii), Akorn’s representations must be true and correct as of the
Closing Date, except “where the failure to be true and correct would not, individually
112
or in the aggregate, reasonably be expected to have a Material Adverse Effect” (the
“Bring-Down Condition”).512
 Under Section 6.02(b), Akorn must have “complied with or performed in all material
respects its obligations required to be complied with or performed by it at or prior to
the Effective Time” (the “Covenant Compliance Condition”).513
 Under Section 6.02(c), Akorn must not have suffered a Material Adverse Effect (the
“General MAE Condition”).514
The failure of either the Bring-Down Condition or the Covenant Compliance Condition
512
JX 1 § 6.02(a)(ii). See generally Lou R. Kling & Eileen T. Nugent, Negotiated
Acquisitions of Companies, Subsidiaries and Divisions § 1.05[2], at 1-41 (2018 ed.)
(describing “the critical ‘bringdown’ condition”); id. § 1.05[4], at 1-41 (“[O]ne critical
condition almost always found is that the other party’s representations and warranties be
true at closing. If this is not the case, the party need not close.”) (footnote omitted); id. §
14.02, at 14-9 (“From a business point of view, the condition that the other party’s
representations and warranties be true and correct at closing is generally the most
significant condition for Buyers.”).
513
JX 1 § 6.02(b). See generally Kling & Nugent, supra, § 1.05[3], at 1-41
(explaining that the actions that parties commit to take in a transaction agreement are
described as covenants and identifying three general categories); id. § 14.02[7], at 14-16
to -17 (discussing customary condition requiring “that the parties have performed and
complied with all of their obligations and agreements in the acquisition agreement required
to be performed and complied with prior to the closing”); Simon M. Lorne & Joy Marlene
Bryan, Acquisitions & Mergers: Negotiated and Contested Transactions § 3:59 (2018 ed.)
(“The principal conditions to a closing under an acquisition agreement usually include . . .
confirming compliance with all covenants that have been made.”).
514
In the Merger Agreement, the General MAE Condition appears as a formal
condition to closing. Sometimes, a seller may represent that no General MAE has occurred.
When that representation has been made, the bring-down condition also operates as a
General MAE Condition. See Kling & Nugent, supra, § 11.04[9], at 11-57 to -58
(discussing forms of representation); In re IBP, Inc. S’holders Litig., 789 A.2d 14, 42–43
(Del. Ch. 2001) (Strine, V.C.) (analyzing seller’s representation that “since the Balance
Sheet Date,” there had not been “any event, occurrence or development of a state of
circumstances or facts which has had or reasonably could be expected to have a Material
Adverse Effect”).
113
gives Fresenius a right to terminate the Merger Agreement, but only if (i) the breach that
would give rise to the failure of the condition is incapable of being cured by the Outside
Date and (ii) Fresenius is not “then in material breach of any of its representations,
warranties, covenants, or agreements.”515 The failure of the General MAE Condition does
not give Fresenius an independent right to terminate the Merger Agreement, but it does
give Fresenius the right to refuse to close.516
To establish a failure of the Bring-Down Condition, Fresenius relies on Section 3.18
of the Merger Agreement, where (in overly simplistic terms) Akorn represented that it was
in full compliance with all of its regulatory obligations (the “Regulatory Compliance
Representations”).517 To establish a failure of the Covenant Compliance Condition,
Fresenius relies on Akorn’s obligation to “use its . . . commercially reasonable efforts to
carry on its business in all material respects in the ordinary course of business” (the
“Ordinary Course Covenant”).518
515
JX 1 § 7.01(c)(i).
516
With the passage of time, however, the failure to close ripens into a termination
right, because under Section 7.01(b)(i) of the Merger Agreement, either side can terminate
once the Outside Date has passed, assuming that the party exercising the termination right
has not itself breached the Merger Agreement in a manner that was a principal cause of the
Merger not closing by the Outside Date. Fresenius terminated the Merger Agreement
before the Outside Date.
517
JX 1 § 3.18.
518
Id. § 5.01(a). Fresenius also contends that Akorn breached its obligation to
provide Fresenius with “reasonable access . . . to the Company’s officers, employees,
agents, properties, books, Contacts and records.” Id. § 5.05. This decision does not reach
the alleged breach of that covenant.
114
To establish a failure of the Covenant Compliance Condition, Akorn relies on each
party’s agreement to “cooperate with the other parties and use . . . their respective
reasonable best efforts . . . to cause the conditions to Closing to be satisfied as promptly as
reasonably practicable and to consummate” the Merger (the “Reasonable Best Efforts
Covenant”).519 Akorn also relies on Fresenius’s specific commitment to “take all actions
necessary” to secure antitrust clearance, which the Merger Agreement states shall require
efforts that “shall be unconditional and shall not be qualified in any manner.”520 This level
of commitment is generally called a “Hell-or-High-Water Covenant.”
Like many transaction agreements, the Merger Agreement deploys the concept of a
Material Adverse Effect in multiple locations, including (i) in the General MAE Condition,
(ii) in various representations for purposes of evaluating any inaccuracies in those
representations at the time of signing, and (iii) in the Bring-Down Condition for purposes
of evaluating any inaccuracies in Akorn’s representations when determining whether
Fresenius is obligated to close.521 The General MAE Condition is not tied to a particular
representation about a particular issue, leading this decision to describe the resulting event
519
Id. § 5.03(a).
520
Id. § 5.03(c).
521
See Kenneth A. Adams, A Legal-Usage Analysis of “Material Adverse Change”
Provisions, 10 Fordham J. Corp. & Fin. L. 9, 10–11 (2004) [hereinafter, Legal-Usage
Analysis] (“MAC provisions are used in different parts of a contract. They occur most
commonly in representations” but can “also occur in closing conditions.”). In their
discussion of material adverse change provisions, Kling and Nugent cite this article with
approval. See, e.g., Kling & Nugent, supra, § 11.04[9], at 11-59 n.100.
115
as a “General MAE.” The Bring-Down Condition examines the inaccuracy of specific
representations and uses as its measuring stick whether the deviation between the as-
represented condition and the actual condition would reasonably be expected to constitute
a Material Adverse Effect. The critical representations for this case are the Regulatory
Compliance Representations, and this decision refers to a sufficient inaccuracy in those
representations as a “Regulatory MAE.”522
Working through the pertinent provisions requires determining whether Akorn has
suffered either a General MAE or a Regulatory MAE, whether Akorn complied in all
material respects with the Ordinary Course Covenant, whether Akorn could cure, and
whether Fresenius itself was in material breach of the Reasonable Best Efforts Covenant
or the Hell-or-High-Water Covenant. This decision makes the following findings:
 The sudden and sustained drop in Akorn’s business performance constituted a General
MAE.
 Akorn’s Regulatory Compliance Representations were not true and correct, and the
deviation between Akorn’s as-represented condition and its actual condition would
reasonably be expected to result in a Regulatory MAE.
 Akorn materially breached the Ordinary Course Covenant.
522
Commentators have used different terms for the two types of MAEs. Adams
refers to an “absolute MAC” and a “modifying MAC.” Legal-Usage Analysis, supra, at
10–11, 15–17, 50. In its annotated model merger agreement, the Mergers and Acquisitions
Committee of the American Bar Association distinguishes between a “MAC condition,”
and a “back-door MAC.” See ABA Mergers and Acquisitions Committee, Model Merger
Agreement for the Acquisition of a Public Company 233, 243–44 (2011) [hereinafter,
Model Merger Agreement].
116
 None of Akorn’s breaches could be cured by the Outside Date, which remained April
24, 2018.
 Fresenius did not breach the Reasonable Best Efforts Covenant.
 Fresenius breached the Hell-or-High-Water Covenant, but the breach was not material.
Based on these findings, Fresenius validly terminated the Merger Agreement under Section
7.01(c)(i) because of (i) a non-curable failure of the Bring-Down Condition and (ii) a non-
curable failure of the Covenant Compliance Condition. Fresenius could validly exercise its
termination rights because it was not in material breach of its obligations. Regardless,
Akorn has suffered a General MAE, so Fresenius cannot be forced to close.
A. The Failure Of The General MAE Condition
From the standpoint of contract interpretation, the most straightforward issue is
whether Akorn suffered a General MAE. Starting with this issue is also helpful because
much of the commentary on MAE clauses has focused on General MAEs. Because
Fresenius seeks to establish a General MAE to excuse its performance under the Merger
Agreement, Fresenius bore the burden of proving that a General MAE had occurred.523
This decision concludes that Akorn suffered a General MAE.
523
See Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 739 (Del.
Ch. 2008) (“[A]bsent clear language to the contrary, the burden of proof with respect to a
material adverse effect rests on the party seeking to excuse its performance under the
contract.”); Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027, at *35 (Del. Ch. Apr.
29, 2005) (“[T]he expectation of the parties, as reflected in the Merger Agreement and as
informed by the case law, was that the burden of demonstrating that the Beverly Hills
Litigation would have (or would not reasonably be expected to have [sic]) an MAE falls
on Holly [the buyer who was asserting breach].”); IBP, 789 A.2d at 53 (“Under both New
117
In any M&A transaction, a significant deterioration in the selling company’s
business between signing and closing may threaten the fundamentals of the deal. “Merger
agreements typically address this problem through complex and highly-negotiated
‘material adverse change’ or ‘MAC’ clauses, which provide that, if a party has suffered a
MAC within the meaning of the agreement, the counterparty can costlessly cancel the
deal.”524
Despite the attention that contracting parties give to these provisions, MAE clauses
York and Delaware law, a defendant seeking to avoid performance of a contract because
of the plaintiff’s breach of warranty must assert that breach as an affirmative defense.”).
524
Robert T. Miller, The Economics of Deal Risk: Allocating Risk Through MAC
Clauses in Business Combination Agreements, 50 Wm. & Mary L. Rev. 2007, 2012 (2009)
(footnote omitted); accord Andrew A. Schwartz, A “Standard Clause Analysis” of the
Frustration Doctrine and the Material Adverse Change Clause, 57 UCLA L. Rev. 789,
820 (2010) (“[T]he MAC clause allows the acquirer to costlessly avoid closing the deal if
the target’s business suffers a sufficiently adverse change during the executory period.”);
see Jeffrey Manns & Robert Anderson IV, The Merger Agreement Myth, 98 Cornell L.
Rev. 1143, 1153 (2013) (“The MAC/MAE Clause gives teeth to the closing conditions in
specifying what type of events would entitle the acquiring company to call the deal off if
events occur between signing and closing that make the deal less advantageous than
expected.”).
“Although the phrase ‘material adverse effect’ (MAE) is more commonly used in
merger agreements, MAC and MAE are generally understood to be synonymous.” Miller,
supra, at 2012 n.2; see Ronald J. Gilson & Alan Schwartz, Understanding MACs: Moral
Hazard in Acquisitions, 21 J.L. Econ. & Org. 330, 331 (2005) (characterizing an MAE
clause as the “equivalent” of a MAC clause). This decision uses the terms interchangeably.
That said, one commentator has argued (in my view, persuasively) that the “material
adverse change” formulation facilitates greater drafting clarity. See Legal-Usage Analysis,
supra, at 17–20.
118
typically do not define what is “material.”525 Commentators have argued that parties find
it efficient to leave the term undefined because the resulting uncertainty generates
productive opportunities for renegotiation.526 Parties also risk creating more problems
525
See Frontier Oil, 2005 WL 1039027, at *33 (“It would be neither original nor
perceptive to observe that defining a ‘Material Adverse Effect’ as a ‘material adverse
effect’ is not especially helpful.”); Y. Carson Zhou, Essay, Material Adverse Effects as
Buyer–Friendly Standard, 91 N.Y.U. L. Rev. Online 171, 173 (2016) (noting that in the
typical MAE provision, the core concept of materiality is “left undefined”),
http://www.nyulawreview.org/sites/default/files/NYULawReviewOnline-91-Zhou.pdf;
Steven M. Davidoff & Kristen Baiardi, Accredited Home Lenders v. Lone Star Funds: A
MAC Case Study 17 (Wayne State Univ. Law Sch. Legal Studies Research Paper Series,
Paper No. 08-16, 2008), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1092115
(“MAC clauses are typically defined in qualitative terms and do not describe a MAC in
quantitative terms.”); Albert Choi & George Triantis, Strategic Vagueness in Contract
Design: The Case of Corporate Acquisitions, 119 Yale L.J. 848, 854 (2010) (“[T]he typical
MAC provision is not quantitative and remains remarkably vague.”); Schwartz, supra, at
826 (“A few MAC clauses include a quantitative definition of materiality, but the
overwhelming majority offer no definition for the key term ‘material.’”) (footnote
omitted); Kenneth A. Adams, A Manual of Style for Contract Drafting 229 (4th ed. 2017)
[hereinafter, Contract Drafting] (“[Q]uantitative guidelines are little used.”). One
commentator sees no reason to criticize the MAE definition for its self-referential quality.
See Legal-Usage Analysis, supra, at 22 (“It has been suggested that there is some
circularity or tautology involved in using the phrase material adverse change in the
definition of MAC. . . . [I]n contracts it is routine, and entirely appropriate, for a definition
to include the term being defined.”) (footnotes omitted); Contract Drafting, supra, at 169
(“Dictionaries shouldn’t use in a definition the term being defined, as that constitutes a
form of circular definition. . . . In a contract, a defined term simply serves as a convenient
substitute for the definition, and only for that contract. So repeating a contract defined term
in the definition is unobjectionable.”).
526
See Choi & Triantis, supra, at 888–892 (arguing that vague MAE clauses are
efficient partly because uncertainty facilitates renegotiation); Eric L. Talley, On
Uncertainty, Ambiguity, and Contractual Conditions, 34 Del. J. Corp. L. 755, 788 (2009)
(“A number of practitioners . . . suggested that, in addition to concerns about uncertainty,
one of the key reasons for a MAC/MAE provision is to provide a backdrop for possible
deal restructuring should market conditions change.”); ABA Mergers and Acquisitions
Committee, Model Stock Purchase Agreement with Commentary 268 (2d ed. 2010)
[hereinafter, Model Stock Purchase Agreement] (explaining that a buyer may prefer a price
119
when they attempt to include specific quantitative thresholds, both during the
negotiations527 and for purposes of subsequent litigation.528 “What constitutes an MAE,
then, is a question that arises only when the clause is invoked and must be answered by the
presiding court.”529
renegotiation rather than engaging in costly litigation over a “subjective” and “vague”
MAE clause); see also Davidoff & Baiardi, supra, at 19 (reasoning that if a buyer credibly
asserts an MAE, then both parties have incentives to renegotiate to a lower price to avoid
an all-or-nothing litigation outcome); Katherine Ashton et al., MAC Clauses in the U.K.
and U.S.: Much Ado About Nothing?, The M&A Lawyer (LegalWorks), Mar. 2014 (“[T]he
lack of clear standards for determining whether a material adverse change has occurred
may inure to [the buyer’s] benefit . . . as the ambiguity might allow the buyer to use the
threat of litigation concerning the MAC clause . . . to pressure the seller to renegotiate the
deal.”).
527
See Claire A. Hill, Bargaining in the Shadow of the Lawsuit: A Social Norms
Theory of Incomplete Contracts, 34 Del. J. Corp. L. 191, 198 (2010) (“[A]chieving clarity
[in an MAE clause] may simply be exceedingly difficult: as a practical, and perhaps,
theoretical, matter, defining ex ante such a change in a manner that commands assent by
the parties and applies cleanly to a significant number of circumstances may be
impossible.”); Kling & Nugent, supra, § 11.04[9], at 11-66.2 (“The problem is that it is
very difficult in most cases for the parties to reach agreement on a particular percentage or
dollar decrease in sales, earnings or net worth.”); Contract Drafting, supra, at 228
(“[E]stablishing one or more numerical thresholds for materiality can complicate the
negotiation process.”). That said, achieving agreement on a specific metric is not
impossible. See, e.g., Nip v. Checkpoint Sys, Inc., 154 S.W.3d 767, 769–70 (Tex. App.
2004) (enforcing MAE clause that set monetary threshold for materiality; affirming jury
determination that target suffered an MAE when its second-largest customer attempted to
cancel all orders from target’s Far East factories).
528
Contract Drafting, supra, at 228 (“Setting a [quantitative] threshold for all
possible [adverse changes] would seem impractical, and addressing only a limited number
could be arbitrary.”); id. (“[I]f the quantitative indicia are illustrative rather than exclusive,
adding them to the definition of MAC would increase the risk that a court wouldn’t
consider to be a MAC a change that doesn’t resemble the examples.”).
529
Zhou, supra, at 173; see Frontier Oil, 2005 WL 1039027, at *34 (“The parties
chose to use the term ‘Material Adverse Effect’ and it is the Court’s function to discern
120
Rather than devoting resources to defining more specific tests for materiality, the
current practice is for parties to negotiate exceptions and exclusions from exceptions that
allocate categories of MAE risk.530 “The typical MAE clause allocates general market or
industry risk to the buyer, and company-specific risks to the seller.”531 From a drafting
perspective, the MAE provision accomplishes this by placing the general risk of an MAE
on the seller, then using exceptions to reallocate specific categories of risk to the buyer.532
what they intended. . . . The notion of an MAE is imprecise and varies both with the context
of the transaction and its parties and with the words chosen by the parties.”); Choi &
Triantis, supra, at 876–77 (“The definition of material adverse event and the related
material adverse change condition leave broad interpretive discretion to the court. For
example, the definitions leave open the scope of changes that affect ‘business’ or
‘operations.’”).
530
See Miller, supra, at 2013 n.7 (“There is virtually universal agreement, among
both practitioners and academics, that MAC clauses allocate risk between the parties.”);
Gilson & Schwartz, supra, at 339–54 (analyzing how MAE clauses allocate risk).
531
Zhou, supra, at 173; accord Choi & Triantis, supra, at 867 (“The principal
purpose of carve outs from the definition of material adverse events or changes seems to
be to remove systemic or industry risk from the MAC condition, as well as risks that are
known by both parties at the time of the agreement.”). “A possible rationale” for this
allocation “is that the seller should not have to bear general and possibly undiversifiable
risk that it cannot control and the buyer would likely be subject to no matter its investment.”
Davidoff & Baiardi, supra, at 15; see also Gilson & Schwartz, supra, at 339 (arguing that
“an efficient acquisition agreement will impose endogenous risk on the seller and
exogenous risk on the buyer”). As with any general statement, exceptions exist, and
“different agreements will select different exogenous risks to shift to the counterparty, and
in stock-for-stock and cash-and-stock deals, parties may shift different exogenous risks to
each other.” Miller, supra, at 2070.
532
See Miller, supra, at 2073 (“Because of the drafting conventions used in MAC
Definitions—all the risks are on the party except for those shifted to the counterparty by
the MAC Exceptions—this class of risks would, strictly speaking, probably be best defined
negatively.”); Schwartz, supra, at 822 (“[T]he risk of a target MAC resulting from a
carved-out cause is allocated to the acquirer, while the risk of a target MAC resulting from
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Exclusions from the exceptions therefore return risks to the seller. A standard exclusion
from the buyer’s acceptance of general market or industry risk returns the risk to the seller
when the seller’s business is uniquely affected. To accomplish the reallocation, the relevant
exceptions are “qualified by a concept of disproportionate effect.”533 “For example, a buyer
might revise the carve-out relating to industry conditions to exclude changes that
disproportionately affect the target as compared to other companies in the industries in
which such target operates.”534
A more nuanced analysis of the types of issues addressed by MAE provisions
reveals four categories of risk: systematic risks, indicator risks, agreement risks, and
business risks.535
 Systematic risks are “beyond the control of all parties (even though one or both parties
may be able to take steps to cushion the effects of such risks) and . . . will generally
affect firms beyond the parties to the transaction.”536
any other cause is allocated to the target.”). See generally Hexion, 965 A.2d at 737 (“The
plain meaning of the carve-outs found in [the MAE clause’s] proviso is to prevent certain
occurrences which would otherwise be MAE’s being found to be so.”).
533
Model Merger Agreement, supra, at 242.
534
Model Merger Agreement, supra, at 242; accord Miller, supra, at 2048; see Choi
& Triantis, supra, at 867 (“The most common carve outs remove from the MAC definition
changes in the general economic, legal, or political environment, and conditions in the
target’s industry, except to the extent that they have ‘disproportionate’ effects on the
target.”).
535
See generally Miller, supra, at 2071–91.
536
Id. at 2071; see Richard A. Brealey & Stewart C. Myers, Principles of Corporate
Finance 168 & n.22 (7th ed. 2003) (explaining that market risk, also known as systematic
122
 Indicator risks signal that an MAE may have occurred. For example, a drop in the
seller’s stock price, a credit rating downgrade, or a failure to meet a financial projection
is not itself an adverse change, but rather evidence of such a change.537
 “Agreement risks include all risks arising from the public announcement of the merger
agreement and the taking of actions contemplated thereunder by the parties.”538
Agreement risks include endogenous risks related to the cost of getting from signing to
closing, e.g., potential employee flight.539
 Business risks are those “arising from the ordinary operations of the party’s business
(other than systematic risks), and over such risks the party itself usually has significant
control.”540 “The most obvious” business risks are those “associated with the ordinary
business operations of the party—the kinds of negative events that, in the ordinary
course of operating the business, can be expected to occur from time to time, including
those that, although known, are remote.”541
Generally speaking, the seller retains the business risk. The buyer assumes the other
risks.542
risk, “stems from the fact that there are . . . economywide perils that threaten all
businesses”).
537
Miller, supra, at 2072, 2082–83.
538
Id. at 2087.
539
Id.
540
Id. at 2073.
541
Id. at 2089.
542
See, e.g., id. at 2073 (explaining that “(a) systematic risks and agreement risks
are usually, but not always, shifted to the counterparty, (b) indicator risks are so shifted in
a significant minority of cases, and (c) business risks are virtually always assigned to the
party itself”).
123
In this case, as a condition to Fresenius’s obligation to close, Akorn must not have
suffered a General MAE. Section 6.02 of the Merger Agreement, titled “Conditions to the
Obligations of [Fresenius Kabi] and Merger Sub,” states:
The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger
shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if
permissible under applicable law) on or prior to the Closing Date of the
following conditions:
* * *
(c) No Material Adverse Effect. Since the date of this Agreement there
shall not have occurred and be continuing any effect, change, event or
occurrence that, individually or in the aggregate, has had or would reasonably
be expected to have a Material Adverse Effect.
The effect of this condition is to place the general risk of an MAE on Akorn.
The Merger Agreement defines the concept of a “Material Adverse Effect” in
customary albeit complex and convoluted prose. The following reproduction of the
definition adds formatting to enhance legibility:
“Material Adverse Effect” means any effect, change, event or occurrence
that, individually or in the aggregate
(i) would prevent or materially delay, interfere with, impair or hinder
the consummation of the [Merger] or the compliance by the Company with
its obligations under this Agreement or
(ii) has a material adverse effect on the business, results of operations
or financial condition of the Company and its Subsidiaries, taken as a whole;
provided, however, that none of the following, and no effect, change, event
or occurrence arising out of, or resulting from, the following, shall constitute
or be taken into account in determining whether a Material Adverse Effect
has occurred, is continuing or would reasonably be expected to occur: any
effect, change, event or occurrence
(A) generally affecting (1) the industry in which the Company and its
Subsidiaries operate or (2) the economy, credit or financial or capital
124
markets, in the United States or elsewhere in the world, including changes in
interest or exchange rates, monetary policy or inflation, or
(B) to the extent arising out of, resulting from or attributable to
(1) changes or prospective changes in Law or in GAAP or in
accounting standards, or any changes or prospective changes in the
interpretation or enforcement of any of the foregoing, or any changes or
prospective changes in general legal, regulatory, political or social
conditions,
(2) the negotiation, execution, announcement or performance of this
Agreement or the consummation of the [Merger] (other than for purposes of
any representation or warranty contained in Sections 3.03(c) and 3.04),
including the impact thereof on relationships, contractual or otherwise, with
customers, suppliers, distributors, partners, employees or regulators, or any
litigation arising from allegations of breach of fiduciary duty or violation of
Law relating to this Agreement or the [Merger],
(3) acts of war (whether or not declared), military activity, sabotage,
civil disobedience or terrorism, or any escalation or worsening of any such
acts of war (whether or not declared), military activity, sabotage, civil
disobedience or terrorism,
(4) pandemics, earthquakes, floods, hurricanes, tornados or other
natural disasters, weather-related events, force majeure events or other
comparable events,
(5) any action taken by the Company or its Subsidiaries that is
required by this Agreement or at [Fresenius Kabi’s] written request,
(6) any change or prospective change in the Company’s credit ratings,
(7) any decline in the market price, or change in trading volume, of
the shares of the Company or
(8) any failure to meet any internal or public projections, forecasts,
guidance, estimates, milestones, budgets or internal or published financial or
operating predictions of revenue, earnings, cash flow or cash position
(it being understood that the exceptions in clauses (6), (7) and (8) shall not
prevent or otherwise affect a determination that the underlying cause of any
such change, decline or failure referred to therein (if not otherwise falling
within any of the exceptions provided by clause (A) and clauses (B)(1)
through (8) hereof) is a Material Adverse Effect);
125
provided further, however, that any effect, change, event or occurrence
referred to in clause (A) or clauses (B)(3) or (4) may be taken into account
in determining whether there has been, or would reasonably be expected to
be, a Material Adverse Effect to the extent such effect, change, event or
occurrence has a disproportionate adverse affect [sic] on the Company and
its Subsidiaries, taken as a whole, as compared to other participants in the
industry in which the Company and its Subsidiaries operate (in which case
the incremental disproportionate impact or impacts may be taken into
account in determining whether there has been, or would reasonably be
expected to be, a Material Adverse Effect).543
As is common, the definition starts with a general statement of what constitutes an MAE.
It next carves out certain types of events that otherwise could give rise to an MAE. It then
creates two broad exceptions to the carve-outs. One is that while the carve-outs confirm
that certain evidentiary indicators of an MAE will not themselves constitute an MAE, such
as a decline in the seller’s market price or an adverse change in its credit rating, those carve-
outs do not foreclose the underlying cause of the negative events from being used to
establish an MAE, unless it otherwise falls within a different carve-out. The other is that
four of the identified carve-outs will give rise to an MAE if the effect, change, event or
occurrence has had a disproportionately adverse effect on the Company.
Fresenius relies on subpart (ii) of the MAE definition, which establishes (subject to
the carve-outs and their exceptions) that an MAE means “any effect, change, event or
occurrence that, individually or in the aggregate that . . . (ii) has a material adverse effect
on the business, results of operations or financial condition of the Company and its
Subsidiaries, taken as a whole.” This aspect of the MAE definition adheres to the general
543
JX 1 at 58.
126
practice and defines “Material Adverse Effect” self-referentially as something that “has a
material adverse effect.”
The subsequent exceptions to the definition and exclusions from the exceptions
implement a standard risk allocation between buyer and seller. Through the exceptions in
subparts (A)(1) and (A)(2), Fresenius accepted the systematic risks related to Akorn’s
industry and “the economy, credit or financial or capital markets, in the United States or
elsewhere in the world, including changes in interest or exchange rates, monetary policy
or inflation.”544 Through the exceptions in subparts (B)(3) and (B)(4), Fresenius also
accepted the systematic risks related to acts of war, violence, pandemics, disasters, and
other force majeure events. Each of these allocations is subject to a disproportionate-effect
exclusion that returns the risk to Akorn to the extent that an event falling into one of these
categories disproportionately affects Akorn “as compared to other participants in the
industry.”545 Under subpart (B)(1), Fresenius also assumes the systematic risk relating to
changes in GAAP or applicable law. This exception is not subject to a disproportionate-
effect exclusion and therefore would remain with Fresenius in any event.
The exceptions in subparts (B)(2) and (B)(5) identify agreement risks. Through
these exceptions, Fresenius assumes these risks.
544
Id.
545
Id.
127
The exceptions in subparts (B)(6), (B)(7), and (B)(8) identify indicator risks. The
MAE definition explicitly treats these risks as indicators, first by excluding them through
the exceptions, then by confirming that although these indicators would not independently
give rise to an MAE, the underlying cause of a change in the indicators could give rise to
an MAE.
What remains is business risk, which Akorn retains. Scholars view this outcome as
economically efficient because the seller “is better placed to prevent such risks (i.e., is the
cheaper cost avoider) and has superior knowledge about the likelihood of the
materializations of such risks that cannot be prevented (i.e., is the superior risk bearer).”546
1. Whether The Magnitude Of The Effect Was Material
The first step in analyzing whether a General MAE has occurred is to determine
whether the magnitude of the downward deviation in the affected company’s performance
is material: “[U]nless the court concludes that the company has suffered an MAE as defined
in the language coming before the proviso, the court need not consider the application of
546
Miller, supra, at 2091; see also id. (arguing that it “would be ludicrous to suggest,
for example, that the [buyer] would be a cheaper risk avoider or superior risk bearer with
respect to, say, design or manufacturing defects in the [seller’s] products or with respect to
hidden liabilities resulting from the [seller’s] operations long ago”); Gilson & Schwartz,
supra, at 357 (arguing that an MAE definition with carve-outs “allocates transaction risks
to the party that can most efficiently bear them”).
128
the . . . carve-outs.”547 Whether the party asserting the existence of an MAE has adduced
sufficient evidence to carry its burden of proof is a question of fact.548
“A buyer faces a heavy burden when it attempts to invoke a material adverse effect
clause in order to avoid its obligation to close.”549 “A short-term hiccup in earnings should
not suffice; rather the Material Adverse Effect should be material when viewed from the
longer-term perspective of a reasonable acquiror.”550 “In the absence of evidence to the
547
Hexion, 965 A.2d at 737.
548
See ChyronHego Corp. v. Wight, 2018 WL 3642132, at *9 (Del. Ch. July 31,
2018) (“At this pleading stage, the Plaintiffs have met their burden to allege a knowingly
false representation of the absence of an MAE, the proof of which is inherently fact-
intensive.”); Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *7
(Del. Ch. Nov. 19, 2013) (finding it reasonably conceivable that the defendants’ “alleged
practice of billing and shipping excess product, without applying the proper credits or
discount, could have a materially adverse effect on the financial condition of the Company
when the excess product is returned and revenues are reduced.”); H–M Wexford LLC v.
Encorp, Inc., 832 A.2d 129, 144 (Del. Ch. 2003) (“If Wexford’s allegations are accepted
as true, then it could show that there was a material adverse change in Encorp’s financial
position between the Balance Sheet Date and the date the Purchase Agreement was
executed.”); see also Pine State Creamery Co. v. Land-O-Sun Dairies, Inc., 201 F.3d 437,
1999 WL 1082539, at *3–6 (4th Cir. 1999) (per curiam) (TABLE) (holding that whether
severe operating losses over a two-month period constituted an MAE was a question of
fact for the jury where there was evidence that the business was seasonal and that
downturns were expected each fall); RUS, Inc. v. Bay Indus, Inc., 322 F. Supp. 2d 302, 314
(S.D.N.Y. 2003) (“[M]aterial issues of fact exist as to whether the need for the Phase II
investigation, when considered in light of the transaction as a whole and the nature of the
environmental issues involved, constituted a material adverse effect that caused the
representations in § 4.8 to be untrue.”).
549
Hexion, 965 A.2d at 738; see also Kling & Nugent, supra, § 11.04[9], at 11-69
(“[I]t is much tougher to prove the existence of a material adverse effect than clients
realize.”).
550
IBP, 789 A.2d at 68.
129
contrary, a corporate acquirer may be assumed to be purchasing the target as part of a long-
term strategy.”551 “The important consideration therefore is whether there has been an
adverse change in the target’s business that is consequential to the company’s long-term
earnings power over a commercially reasonable period, which one would expect to be
measured in years rather than months.”552
This, of course, is not to say that evidence of a significant decline in earnings
by the target corporation during the period after signing but prior to the time
appointed for closing is irrelevant. Rather, it means that for such a decline to
constitute a material adverse effect, poor earnings results must be expected
to persist significantly into the future.553
Put differently, the effect should “substantially threaten the overall earnings potential of
the target in a durationally-significant manner.”554
The Hexion decision teaches that when evaluating the magnitude of a decline, a
company’s performance generally should be evaluated against its results during the same
quarter of the prior year, which minimizes the effect of seasonal fluctuations.555 The Hexion
551
Hexion, 965 A.2d at 738. Commentators have suggested that “the requirement of
durational significance may not apply when the buyer is a financial investor with an eye to
a short-term gain.” Choi & Triantis, supra, at 877; see Genesco, Inc. v. The Finish Line,
Inc., 2007 WL 4698244, at *19 (Tenn. Ch. Dec. 27, 2007) (finding that two quarters of bad
performance would be material to a buyer in a highly leveraged acquisition).
552
Hexion, 965 A.2d at 738.
553
Id.
554
IBP, 789 A.2d at 68.
Hexion, 965 A.2d at 742 (“The proper benchmark . . . (and the analysis the court
555
adopted here) is to examine each year and quarter and compare it to the prior year’s
equivalent period.”).
130
court declined to find an MAE where the seller’s 2007 EBITDA was only 3% below its
2006 EBITDA, and where according to its management forecasts, its 2008 EBITDA would
be only 7% below its 2007 EBITDA. Even using the buyer’s more conservative forecasts,
the seller’s 2008 EBTIDA would still be only 11% below its 2007 EBITDA.556 The average
of analyst estimates for the seller’s 2009 EBITDA was only 3.6% below the seller’s
average results during the prior three years. The court noted that the buyer had
contemplated scenarios consistent with these results.557
In their influential treatise, Lou R. Kling and Eileen T. Nugent observe that most
courts which have considered decreases in profits in the 40% or higher range found a
material adverse effect to have occurred.558 Chancellor Allen posited that a decline in
556
Id.
557
Id. at 743.
558
Kling & Nugent, supra, § 11.04[9], at 11-66. Both the Delaware Supreme Court
and this court regularly rely on this treatise as an authoritative source on M&A practice.
See, e.g., Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 921
& nn.32, 34 (Del. 2017) (citing Kling & Nugent as authority on post-closing
indemnification); ev3, Inc. v. Lesh, 114 A.3d 527, 530–31 & nn.6, 8 (Del. 2014) (citing
Kling and Nugent as authority on letters of intent); Martin Marietta Materials, Inc. v.
Vulcan Materials Co., 68 A.3d 1208, 1219 & n.45 (Del. 2012) (citing Kling & Nugent as
authority on NDAs); Ford v. VMWare, Inc., 2017 WL 1684089, at *13 & n.8 (Del. Ch.
May 2, 2017) (citing Kling & Nugent as authority on the purpose of representations and
warranties); Alliance Data Sys. Corp. v. Blackstone Capital P’rs V L.P., 963 A.2d 746, 763
n.60 (Del. Ch.) (Strine, V.C.) (citing Kling & Nugent as authority on best efforts
covenants), aff’d, 976 A.2d 170 (Del. 2009) (TABLE); ABRY P’rs V, L.P. v. F & W Acq.
LLC, 891 A.2d 1032, 1042, 1044 & nn.9, 14 (Del. Ch. 2006) (Strine, V.C.) (citing Kling
& Nugent as authority on representations regarding financial statements and bring-downs).
See generally GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *12 (Del. Ch.
July 11, 2011) (Strine, C.) (“[Y]oung lawyers are now often pointed to the sections of
Negotiated Acquisitions of Companies, Subsidiaries and Divisions, by Lou R. Kling and
131
earnings of 50% over two consecutive quarters would likely be an MAE.559 Courts in other
jurisdictions have reached similar conclusions.560 These precedents do not foreclose the
possibility that a buyer could show that percentage changes of a lesser magnitude
constituted an MAE. Nor does it exclude the possibility that a buyer might fail to prove
that percentage changes of a greater magnitude constituted an MAE.
An example of the latter scenario is IBP, where Chief Justice Strine held while
serving as a Vice Chancellor that a 64% drop in quarterly earnings did not constitute a
material adverse effect. There, a major producer of beef suffered a large quarterly decline
Eileen T. Nugent, which address in even more depth than Freund, just how complex
acquisition agreements work.”); id. at *12–13 (describing Kling & Nugent as among the
“leading works” and “most incisive learned commentary” on M&A practice).
559
Raskin v. Birmingham Steel Corp., 1990 WL 193326, at *5 (Del. Ch. Dec. 4,
1990) (Allen, C.) (“While it is possible that on a full record and placed in a larger context
one might conclude that a reported 50% decline in earnings over two consecutive quarters
might not be held to constitute a material adverse development, it is . . . unlikely to think
that that might happen.”).
560
See Allegheny Energy v. DQE, Inc., 74 F. Supp. 2d 482, 518 (W.D. Pa. 1999)
(finding an MAE and permitting termination of merger agreement where write-off
exceeded company’s annual net income and regulatory action denied company “a large
stream of guaranteed future revenues that it had been receiving prior to deregulation”),
aff’d, 216 F.3d 1075 (3d. Cir. 2000) (TABLE); Peoria Sav. & Loan Ass’n v. Am. Sav.
Ass’n, 441 N.E.2d 853, 854–55, 858–59 (Ill. App. Ct. 1982) (affirming trial court decision
finding an MAE and preliminarily enjoining merger where after signing counterparty
acquired two troubled savings and loan associations but failed to obtain expected federal
financial assistance); Genesco, 2007 WL 4698244, at *16–20 (in the context of highly
leveraged transaction where short-term losses were durationally significant, finding that
weak performance in consecutive quarters would have constituted an MAE if not for carve-
out for materially adverse effects that are not “materially disproportionate” to those
suffered by similarly situated industry participants).
132
in performance primarily due to widely known cycles in the meat industry, exacerbated by
a harsh winter that also affected the buyer.561 After the bad quarter and the onset of spring,
“IBP began to perform more in line with its recent year results.” 562 The Chief Justice
concluded that “IBP remain[ed] what the baseline evidence suggests it was—a consistently
but erratically profitable company struggling to implement a strategy that will reduce the
cyclicality of its earnings.”563 The Chief Justice nevertheless noted that “the question of
whether IBP has suffered a Material Adverse Effect remains a close one” 564 and that he
was “confessedly torn about the correct outcome.”565 He further posited that
[i]f IBP had continued to perform on a straight-line basis using its first
quarter 2001 performance, it would generate earnings from operations of
around $200 million. This sort of annual performance would be
consequential to a reasonable acquiror and would deviate materially from the
range in which IBP had performed during the recent past [thus giving rise to
an MAE].566
561
IBP, 789 A.2d at 22 (“During the winter and spring of 2001, Tyson’s own
business performance was dismal. Meanwhile, IBP was struggling through a poor first
quarter. Both companies’ problems were due in large measure to a severe winter, which
adversely affected livestock supplies and vitality. As these struggles deepened, Tyson’s
desire to buy IBP weakened.”).
562
Id. at 70.
563
Id. at 71.
564
Id. at 68.
565
Id. at 71; accord id. (“I admit to reaching this conclusion [that no MAE occurred]
with less than the optimal amount of confidence.”).
566
Id. at 69.
133
IBP’s prior year earnings from operations during the preceding five years were $528
million (1999), $374 million (1998), $227 million (1997), $323 million (1996), and $480
million (1995).567 An annual performance of $200 million would have represented a 52%
decline from IBP’s five-year average of $386 million. The Chief Justice also noted that the
buyer’s arguments were “unaccompanied by expert evidence that identifies the diminution
in [the seller’s] value or earnings potential as a result of its first quarter performance” and
observed that “[t]he absence of such proof is significant.”568
In this case, Fresenius made the showing necessary to establish a General MAE. At
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.569 The factual record
supports Fischel’s opinions.
567
Id. at 66.
568
Id. at 69–70.
569
See Fischel Tr. 1352 (describing the “collapse in Akorn’s stand-alone value from
the time of the signing of the merger agreement to the termination and collapse that’s
expected to continue into the future”). In contrast to Fischel’s testimony, I did not find the
testimony of Akorn’s rebuttal witness, Professor Anil Shivdasani, to be helpful or, in some
instances, credible. In one telling example, Shivdasani would not even agree that Akorn’s
share price at the time of trial was supported to some degree by the possibility of the
transaction closing. Shivdasani Tr. 1412.
134
As contemplated by Hexion, the following table depicts the year-over-year declines
that Akorn suffered during each of the three quarters of FY 2017 that took place after
signing, plus full-year results for FY 2017, plus first quarter results for FY 2018:
Year-Over-Year Change In Akorn’s Performance570
Q2 2017 Q3 2017 Q4 2017 FY 2017 Q1 2018
Revenue (29%) (29%) (34%) (25%) (27%)
Operating Income (84%) (89%) (292%) (105%) (134%)
EPS (96%) (105%) (300%) (113%) (170%)
Akorn did not report EDBITA or adjusted EBITDA figures on a quarterly basis for 2017.571
It reported full-year EBITDA of $64 million, a year-over-year decline of 86%. Akorn
reported full-year adjusted EBITDA of $241 million, a year-over-year decline of 51%.572
As these figures show, Akorn’s performance declined dramatically, year over year, with
positive operating income and positive earnings per share turning to losses.
In addition to representing a dramatic decline on a year-over-year basis, Akorn’s
performance in FY 2017 represented a departure from its historical trend. Over the five-
year span that began in 2012 and ended in 2016, Akorn grew consistently, year over year,
when measured by revenue, EBITDA, EBIT, and EPS.573 During 2017, Akorn’s
570
See JX 1250 ¶¶ 8–9, 11, 19. To be clear, quarterly declines are measured against
performance in the same quarter the previous year.
571
Id. ¶ 11 n.17.
572
Id. ¶ 11.
573
Fischel Tr. 1353–55; JX 1250 ¶¶ 26–30, Exs. 1–4.
135
performance fell dramatically when measured by each metric.574 For example, Akorn’s
EBITDA and EBIT grew each year from 2012 to 2016, but in 2017, fell by 55% and 62%,
respectively.575 Fischel prepared the following chart that illustrates the percentage change
from year to year in Akorn’s EBITDA.
Notably, Akorn’s performance during the first quarter of 2017—before the Merger
Agreement was signed—did not exhibit the downturn that the ensuing three quarters did.576
574
See Fischel Tr. 1354; JX 1250 Exs. 1–4.
575
Fischel Tr. 1354; JX 1250 ¶¶ 28–29, Exs. 2 & 3.
576
JX 1250 ¶ 26 & n.44.
136
But immediately after the signing of the Merger Agreement, Akorn’s performance dropped
off a cliff.
Akorn’s dramatic downturn in performance is durationally significant. It has already
persisted for a full year and shows no sign of abating.577 More importantly, Akorn’s
management team has provided reasons for the decline that can reasonably be expected to
have durationally significant effects.578 When reporting on Akorn’s bad results during the
second quarter of FY 2017, Rai attributed Akorn’s poor performance to unexpected new
market entrants who competed with Akorn’s three top products—ephedrine, clobetasol,
and lidocaine.579 He noted that Akorn also faced a new competitor for Nembutal, another
important product, which Akorn management had not foreseen.580 As Rai testified, “There
were way more [competitors] than what [Akorn] had potentially projected in [its] forecast
for 2017,”581 and the new competition resulted in unexpected price erosion.582 Akorn also
unexpectedly lost a key contract to sell progesterone, resulting in a loss of revenue where
See Rai Tr. 545–46 (agreeing that he has no reason to think that any of Akorn’s
577
unexpected competitors will withdraw); Portwood Dep. 64–65 (Akorn’s CFO testifying
that he was not aware of any factors indicative of an “uptick”).
578
See JX 1250 ¶ 23.
579
Rai Tr. 542–44.
580
Id. at 545.
581
Id.
Id. at 542; see JX 693 at 35 (attributing poor performance to “more significant
582
than expected declines in net revenue”).
137
Akorn had been forecasting growth.583 When explaining its third quarter results, Akorn
described its poor performance as “[d]riven mostly by unanticipated supply interruptions
and unfavorable impact from competition across [the] portfolio.”584 Akorn also noted that
its “[a]verage product pricing [was] lower than expected due to [an] unfavorable
customer/contract mix and price erosion [that was] not considered in our forecast.”585 There
is every reason to think that the additional competition will persist and no reason to believe
that Akorn will recapture its lost contract.
Additional support for the collapse in Akorn’s value and its durational significance
can be found in recent analyst valuations. In connection with the Akorn board’s approval
of the Merger, the board’s financial advisor, J.P. Morgan, submitted a discounted cash flow
valuation for Akorn with a midpoint of $32.13 per share.586 Based on Akorn’s post-signing
performance, analysts have estimated that Akorn’s standalone value is between $5.00 and
$12.00 per share.587 Analysts also have dramatically reduced their forward-looking
estimates for Akorn.588 For example, as of the date of termination, analysts’ estimates for
Akorn’s 2018, 2019, and 2020 EBITDA were lower than their estimates at signing by
583
Rai Tr. 546–47.
584
JX 688 at ‘606.
585
Id. at ‘607.
586
See JX 520 at ‘841.
587
See Fischel Tr. 1352–53; JX 1505; JX 1508; JX 1250 ¶ 45.
588
See Fischel Tr. 1362–65.
138
62.6%, 63.9%, and 66.9% respectively.589 Analysts’ estimates for Akorn’s peers have
declined by only 11%, 15.3%, and 15%, respectively, for those years.590 Analysts thus
perceive that Akorn’s difficulties are durationally significant.591
To contest this powerful evidence of a Material Adverse Effect, Akorn contends
that any assessment of the decline in Akorn’s value should be measured not against its
performance as a standalone entity, but rather against its value to Fresenius as a synergistic
buyer.592 In my view, the plain language of the definition of an MAE makes clear that any
MAE must be evaluated on a standalone basis. First, the broad definition of an MAE refers
to any “material adverse effect on the business, results of operations or financial condition
of the Company and its Subsidiaries, taken as a whole.” If the parties had contemplated a
589
See id. at 1363–1365; JX 1250 ¶ 39, Ex. 7.
590
See Fischel Tr. 1364–65; JX 1250 ¶ 39, Ex.7.
591
See Fischel Tr. 1365–66 (“[I]f there was an expectation of a big reversal, the
stand-alone values wouldn’t be what they are.”). Akorn misleadingly argues that the mean
of analyst consensus forecasts for Akorn’s EPS from 2018 to 2020 is 46% higher than the
mean of Akorn’s historical EPS from 2011 to 2013. Dkt. 186 at 123. This comparison
leaves out four years of results: 2014, 2015, 2016, and 2017. Akorn attempts to justify its
cherry-picking by claiming that Akorn should be compared to a prior period when it
struggled, but the record does not support a finding that Akorn struggled during this period,
only that it was a smaller company. What is necessary is to evaluate a company’s
performance over a meaningful time horizon to take into account trends, such as cyclicality.
See IBP, 789 A.2d at 71 (noting that analyst EPS forecasts for the seller “for the next two
years would not be out of line with its historical performance during troughs”). Here,
Akorn’s performance improved steadily over the past five years across all of the metrics
that Fischel examined, only to reverse dramatically after the parties signed the Merger
Agreement.
592
See Dkt. 186 at 122–23 n.607.
139
synergistic approach, the definition would have referred to the surviving corporation or the
combined company. Second, subpart (B)(2) of the definition carves out any effects
resulting from “the negotiation, execution, announcement or performance of this
Agreement or the consummation of the [Merger,]” and the generation of synergies is an
effect that results from the consummation of the Merger. A review of precedent does not
reveal any support for Akorn’s argument; every prior decision has looked at changes in
value relative to the seller as a standalone company.593 Akorn’s desire to include synergies
is understandable—it increases the denominator for purposes of any percentage-based
comparison—but it is not supported by the Merger Agreement or the law.
Akorn also argues that as long as Fresenius can make a profit from the acquisition,
an MAE cannot have occurred.594 The MAE definition does not include any language about
the profitability of the deal to the buyer; it focuses solely on the value of the seller.
Assessing whether Fresenius can make a profit would introduce a different, non-
contractual standard. It would effectively require that Fresenius show a goodwill
impairment before it could prove the existence of an MAE. The parties could have
bargained for that standard, but they did not. Requiring a loss before a buyer could show
593
See Hexion, 965 A.2d at 740–42 (analyzing quarter-over-quarter and year-over-
year changes in EBITDA without referring to synergies); id. at 745 (“[U]nder the terms of
the merger agreement, an MAE is to be determined based on an examination of Huntsman
[the seller] taken as a whole.”); IBP, 789 A.2d at 66 (comparing IBP as it existed as of
December 25, 1999, and as portrayed in the merger agreement, with IBP’s later condition).
594
See Dkt. 186 at 122.
140
an MAE also would ignore the fact that acquirers evaluate rates of return when choosing
among competing projects, including acquisitions. A buyer might make money on an
absolute basis, but the opportunity cost on a relative basis would be quite high.
More broadly, the black-letter doctrine of frustration of purpose already operates to
discharge a contracting party’s obligations when his “principal purpose is substantially
frustrated without his fault by the occurrence of an event the non-occurrence of which was
a basic assumption on which the contract was made.”595 This common law doctrine
“provides an escape for an acquirer if the target experiences a catastrophe during the
executory period.”596 “It is not reasonable to conclude that sophisticated parties to merger
agreements, who expend considerable resources drafting and negotiating MAC clauses,
intend them to do nothing more than restate the default rule.”597 In lieu of the default rule
that performance may be excused only where a contract’s principal purpose is completely
595
Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106, 113 (Del. 2006)
(quoting Restatement (Second) of Contracts § 265 (Am. Law Inst. 1981)); see also 14
Corbin on Contracts § 77.1, at 242 (2001 ed.) (“If a frustration of both parties’ respective
purposes were necessary to invoke the [frustration of purpose] doctrine, discharge would
be rare.”); id. § 77.10, at 286 (“The frustration of a contractor’s purpose may be either
complete or only partial. A partial frustration by subsequent events is less likely to
discharge a contractor from its duties.”).
596
Schwartz, supra, at 828.
597
Id.; see id. at 829 (“Although the standard required to invoke a MAC clause is ‘a
high one, the test does not require the offeror to demonstrate frustration in the legal sense.’”
(quoting Takeover Panel, Practice Statement No. 15: Note 2 on Rule 13 – Invocation of
Conditions 3 (Apr. 28, 2004), http://www.thetakeoverpanel.org.uk/wp-
content/uploads/2008/12/2004-13.pdf.)).
141
or nearly completely frustrated,598 a contract could “lower this bar to an achievable level
by providing for excuse when the value of counterperformance has ‘materially’ (or
‘considerably’ or ‘significantly’) diminished.”599 That is what the parties did in this case.
It should not be necessary for Fresenius to show a loss on the deal before it can rely on the
contractual exit right it negotiated.
The record in this case established the existence of a sustained decline in business
performance that is durationally significant and which would be material to a reasonable
buyer. Akorn suffered a General MAE.600
2. Whether The Reason For The Effect Falls Within An Exception
Akorn’s litigation counsel attributes Akorn’s dismal performance to “industry
headwinds” that have affected the generic pharmaceutical industry since 2013. 601 One
598
Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 621 (Del. Ch. 2005),
aff’d in part, rev’d in part on other grounds, 901 A.2d 106 (Del. 2006).
599
Schwartz, supra, at 807; see, e.g., Gilson & Schwartz, supra, at 336 (arguing that
when a merger agreement “has a traditional MAC, the acquirer . . . no longer commits to
purchase the bottom half of a probability distribution, but instead only commits to purchase
if the realized value is close to the negotiated price”); id. at 331 n.5 (“We define a MAC as
‘traditional’ if the acquisition agreement omits setting out explicit exceptions to the
acquirer’s right to cancel in the event of a material adverse change or effect.”).
600
In substance, Akorn and its expert do not contest that Akorn suffered a General
MAE on a standalone basis. Instead, they try to sidestep that reality by arguing that (i)
Akorn’s value should be measured with synergies and (ii) Akorn’s decline in value was
not disproportionate to its peers. For reasons discussed elsewhere, neither of those
arguments succeeds. This outcome leaves Fischel’s opinion that Akorn suffered a General
MAE on a standalone basis effectively uncontested.
601
See Dkt. 186 at 8–9, 123–24.
142
headwind has been a “consolidation of buyer power,” which has “led to large price
reductions.”602 Another headwind has been the FDA’s efforts to approve generic drugs,
“leading to increasing numbers of new entrants and resultant additional price erosion.”603
Akorn’s lawyers also cite “legislative attempts to reduce drug prices” and the FDA’s
requirement that every product have a unique serial number, called serialization.604
According to Akorn, “Fresenius and the market were well aware of these challenges at the
time [Fresenius] agreed to buy Akorn—and that if the headwinds were greater than
expected, Akorn would likely underperform relative to its competitors.”605 Akorn claims
that Fresenius cannot claim the existence of an MAE because everyone, including
Fresenius, knew about these “industry headwinds.”606
Consistent with standard practice in the M&A industry, the plain language of the
Merger Agreement’s definition of a Material Adverse Effect generally allocates the risk of
endogenous, business-specific events to Akorn and exogenous, systematic risks to
Fresenius. The definition accomplishes this by placing the general risk of an MAE on
Akorn, using exceptions to reallocate specific categories of risk to Fresenius, then using
602
Id. at 8.
603
Id.
604
Id. at 8–9.
605
Id. at 9.
606
Id. at 120 (arguing that “[t]he risks of industry headwinds that ultimately caused
Akorn to underperform were known before signing”).
143
exclusions from the exceptions to return risks to the Akorn. Through the exceptions in
subpart (A)(1), Fresenius accepted the systematic risks “generally affecting (1) the industry
in which the Company and its Subsidiaries operate.”607 But this allocation was subject to a
disproportionate-effect exclusion that returned the risk to Akorn to the extent that an event
falling into one of these categories disproportionately affects Akorn “as compared to other
participants in the industry.”608
Under the risk allocation established by the Merger Agreement, Akorn’s argument
about “industry headwinds” fails because the causes of Akorn’s adverse performance were
actually business risks allocated to Akorn. The primary driver of Akorn’s dismal
performance was unexpected new market entrants who competed with Akorn’s three top
products—ephedrine, clobetasol, and lidocaine.609 Akorn also unexpectedly lost a key
contract to sell progesterone.610 These were problems specific to Akorn based on its product
mix. Although Akorn has tried to transform its business-specific problems into “industry
headwinds” by describing them at a greater level of generality, the problems were
endogenous risks specific to Akorn’s business.
607
JX 1 at 58.
608
Id.
609
Rai Tr. 542–44.
610
Id. at 546–47.
144
Assuming for the sake of argument that these were industry effects, they
disproportionately affected Akorn. As a result, under the structure of the contractual
definition of a Material Adverse Effect, these risks were allocated to Akorn.
The record evidence shows that Akorn’s business has suffered a decline that is
disproportionate to its industry peers.611 Ironically, Akorn concedes the point by asserting
that “Akorn was particularly exposed to the risk of these [industry] headwinds.”612
Regardless, to analyze the relative effects of industry-wide conditions, Fischel compared
Akorn’s performance against the performance of the industry peers selected by J.P.
Morgan, Akorn’s financial advisor, when preparing its fairness opinion.613 In each case,
Fischel looked at Q2 2017, Q3 2017, Q4 2017, FY 2017, and Q1 2018 results and compared
Akorn’s actual performance relative to consensus analyst estimates with the actual
performance of the peer companies relative to their consensus analyst estimates. For
revenue, EBITDA, EBIT, and EPS, Akorn’s underperformance in each period was
611
See Hexion, 965 A.2d at 737 (noting that the seller performed “significantly
worse than the mean, and in most, in the bottom decile” when compared to two sets of
benchmark companies in the industry and that “[t]his potentially would be compelling
evidence if it was necessary to reach the carve-outs”).
612
Dkt. 186 at 9.
613
Akorn used the same peer group when crafting the allegations of its complaint.
See Dkt. 1 ¶ 6. Shivdasani did not propose any different peer companies. Shivdasani Tr.
1402.
145
substantially worse than the median and mean of its peers.614 Fischel prepared the following
chart to illustrate the divergence in EBTDA performance:
Fischel also compared the changes in analysts’ forward-looking estimates for Akorn
with the changes in analysts’ forward-looking estimates for the peer companies used by
J.P. Morgan. He found that analyst estimates of Akorn’s revenue, EBITDA, EBIT, and
EPS for 2018, 2019, and 2020 have declined disproportionately more than their estimates
for Akorn’s peers.615 Fischel prepared the following chart to illustrate the divergence in
EBTDA estimates:
614
JX 1250 ¶¶ 33–36.
615
JX 1250 ¶¶ 37–41, Exs. 7 & 8.
146
Based on his analysis, Fischel testified that with “one or two minor exceptions,
Akorn not only vastly underperform[ed] the median and the mean of comparable firms, but
it underperform[ed] every single one of the comparable firms on all time periods, on all
metrics, which is really dramatic underperformance.”616 Akorn’s expert recognized that
Akorn underperformed the generics industry generally and its peers.617 He offered no
opinion on whether the performance was disproportionate.618
616
Fischel Tr. 1361.
617
Shivdasani Tr. 1400; see Grabowski Dep. 59–60.
618
Shivdasani Tr. 1400.
147
This decision finds that Akorn’s dismal performance resulted from Company-
specific factors, not industry-wide effects. Assuming for the sake of analysis that the causes
were industry-wide effects, this decision credits Fischel’s analysis and finds that Akorn
was disproportionately affected by the industry-wide effects.619 For these two independent
reasons, Akorn’s “industry headwinds” argument fails.
619
For purposes of the analysis in this section, I have assumed that Fresenius bore
the burden of proof as part of the general allocation to Fresenius of the burden to establish
a General MAE. In my view, a preferable and more nuanced allocation would require
Fresenius to bear the burden of showing a material decline in Akorn’s performance. At that
point, Akorn would have the burden of proving that the cause of the decline fell into one
of the exceptions in the MAE definition. See 29 Am. Jur. 2d Evidence § 176 (“A party
seeking to take advantage of an exception to a contract is charged with the burden of
proving facts necessary to come within the exception.”); accord Westlake Vinyls, Inc. v.
Goodrich Corp., 518 F. Supp. 2d 947, 951–52 (W.D. Ky. 2007) (collecting cases);
Zebrowski & Assocs., Inc. v. City of Indianapolis, 457 N.E.2d 259, 262 (Ind. Ct. App. 1983)
(“[A] common rule of contract and insurance law states that when performance is promised
in general terms, followed by specific exceptions and limitations, the obligor has the burden
of proving that the case falls with the exception.”); see, e.g., Hollinger Int’l, Inc. v. Black,
844 A.2d 1022, 1070 (Del. Ch. 2004) (Strine, V.C.) (“Black bears the burden to establish
that this contractual exception applies.”); see also, e.g., E.I. du Pont de Nemours & Co. v.
Admiral Ins. Co., 1996 WL 111133, at *1 (Del. Super. Feb. 22, 1996) (“The undisputed
application of Delaware law in an insurance coverage suit requires the insured . . . to prove
initially . . . that the loss is within a policy’s coverage provisions. Once the insured meets
that burden, the burden shifts to the insurer to establish a policy exclusion applies.”); E.I.
du Pont de Nemours & Co. v. Admiral Ins. Co., 711 A.2d 45, 53–54 (Del. Super. 1995)
(placing burden of proof on insured to prove exception to exclusion from coverage; noting
that the insured had better access to information about whether the exception to the
exclusion applied and was better positioned to prevent events that might trigger coverage);
Restatement of the Law of Liability Insurance § 32 cmt. e (Am. Law. Inst. 2018) (“It is the
insurer that has identified the excluded classes of claims and will benefit from being able
to place a specific claim into an excluded class. Thus, assigning the insurer the burden of
proving that the claim fits into the exclusion is appropriate.”). If Akorn met its burden, then
the same authorities would support placing the burden on Fresenius to show that Akorn’s
performance was disproportionate to its peers, bringing the case within an exclusion from
the exception.
148
Akorn has also argued that its poor performance resulted from the restrictions that
the Merger Agreement imposed on its ability to continue growing through acquisitions. In
subpart (B)(2), the definition of Material Adverse Effect excludes effects resulting from
“the . . . performance of this Agreement.” In other words, the definition allocates
agreement-related risks to Fresenius. As Akorn sees it, Fresenius cannot criticize its poor
results when the Merger Agreement prevented Akorn from buying other companies.
This argument fails for multiple reasons. First, Akorn suffered a Material Adverse
Effect because of the sharp downturn in its existing business. It was the performance of
that business that fell off a cliff shortly after the parties signed the Merger Agreement. The
question is not whether Akorn might have been able to hide that downturn and post overall
growth by buying other companies. The problem is what happened to the business that
Fresenius agreed to buy. Second, the downturn happened so quickly as to defeat the
suggestion that it was caused by the Merger Agreement’s restrictions on acquisitions.
Acquisitions take time. It was Akorn’s legacy business that took a nosedive. Third, Akorn
has not only grown through acquisitions. Akorn historically grew both organically and
through acquisitions.620 Fourth, if Akorn wanted to pursue an acquisition, it could have
sought consent from Fresenius. Akorn has not pointed to any acquisition that Fresenius
blocked. The no-acquisitions argument does not bring Akorn within an exception to the
definition of a Material Adverse Effect.
620
See Rai Tr. 455; JX 38 at ‘428-30, ‘444-50; JX 98 at ‘035, ‘040; JX 188 at 9, 11;
JX 204 at ‘021-24.
149
3. Whether Fresenius Knowingly Accepted The Risks That Led To
The General MAE.
Akorn contends most vigorously that Fresenius cannot claim an MAE based on any
risks that Fresenius (i) learned about in due diligence or (ii) generally was on notice about
because of its industry knowledge and did not thoroughly investigate in due diligence.
Akorn relies for its position on Chief Justice Strine’s observation in IBP that “[m]erger
contracts are heavily negotiated and cover a large number of specific risks explicitly,” and
that consequently, even a “broadly written” MAE provision “is best read as a backstop
protecting the acquiror from the occurrence of unknown events that substantially threaten
the overall earnings potential of the target in a durationally-significant manner.”621 In my
view, Akorn goes too far by transforming “unknown events” into “known or potentially
contemplated risks.” The legal regime that Akorn argues for would replace the enforcement
of a bargained-for contractual provision with a tort-like concept of assumption of risk,
where the outcome would turn not on the contractual language, but on an ex-post sifting of
what the buyer learned or could have learned in due diligence.
The “strong American tradition of freedom of contract . . . is especially strong in
our State, which prides itself on having commercial laws that are efficient.” 622 “Delaware
courts seek to ensure freedom of contract and promote clarity in the law in order to facilitate
621
IBP, 789 A.2d at 68 (emphasis added); accord Hexion, 965 A.2d at 738.
622
ABRY, 891 A.2d at 1059–60; see GRT, Inc., 2011 WL 2682898, at *12 (“Under
Delaware law, which is more contractarian than that of many other states, parties’
contractual choices are respected . . . .”).
150
commerce.”623 “When parties have ordered their affairs voluntarily through a binding
contract, Delaware law is strongly inclined to respect their agreement, and will only
interfere upon a strong showing that dishonoring the contract is required to vindicate a
public policy interest even stronger than freedom of contract.”624 Requiring parties to live
with “the language of the contracts they negotiate holds even greater force when, as here,
the parties are sophisticated entities that bargained at arm’s length.”625 “The proper way to
allocate risks in a contract is through bargaining between parties. It is not the court’s role
to rewrite the contract between sophisticated market participants, allocating the risk of an
agreement after the fact, to suit the court’s sense of equity or fairness.”626
623
ev3, Inc., 114 A.3d at 529 n.3; see Aspen Advisors LLC v. United Artists Theatre
Co., 843 A.2d 697, 712 (observing “Delaware law’s goal of promoting reliable and
efficient corporate and commercial laws”) (Del. Ch. 2004) (Strine, V.C.), aff’d, 861 A.2d
1251 (Del. 2004); see, e.g., Elliott Assocs. L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del.
1998) (commending a “coherent and rational approach to corporate finance” and
“uniformity in the corporation law”).
624
Libeau v. Fox, 880 A.2d 1049, 1056 (Del. Ch. 2005) (Strine, V.C.), aff’d in
pertinent part, 892 A.2d 1068 (Del. 2006); see also Related Westpac LLC v. JER Snowmass
LLC, 2010 WL 2929708, at *6 (Del. Ch. July 23, 2010) (Strine, V.C.) (“Delaware law
respects the freedom of parties in commerce to strike bargains and honors and enforces
those bargains as plainly written.”); NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 35
(Del. Ch. 2009) (“Delaware upholds the freedom of contract and enforces as a matter of
fundamental public policy the voluntary agreements of sophisticated parties.”); Personnel
Decisions, Inc. v. Bus. Planning Sys., Inc., 2008 WL 1932404, at *6 (Del. Ch. May 5, 2008)
(Strine, V.C.) (“Delaware is a freedom of contract state, with a policy of enforcing the
voluntary agreements of sophisticated parties in commerce.”).
625
Progressive Int’l Corp. v. E.I. Du Pont de Nemours & Co., 2002 WL 1558382,
at *7 (Del. Ch. July 9, 2002) (Strine, V.C.).
626
Wal–Mart Stores, 872 A.2d at 624; see Nemec v. Shrader, 991 A.2d 1120, 1126
(Del. 2010) (“[W]e must . . . not rewrite the contract to appease a party who later wishes
151
The MAE definition in this case uses exceptions and exclusions to allocate risks
between the parties. The MAE definition could have gone further and excluded “certain
specific matters that [the seller] believes will, or are likely to, occur during the anticipated
pendency of the agreement,”627 or matters disclosed during due diligence, or even risks
identified in public filings.628 Or the parties could have defined an MAE as including only
to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter
into good and bad contracts, the law enforces both.”) (footnote omitted); Allied Capital
Corp. v. GC–Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006) (Strine, V.C.)
(explaining that Delaware courts “will not distort or twist contract language” because “[b]y
such judicial action, the reliability of written contracts is undermined, thus diminishing the
wealth-creating potential of voluntary agreements”); DeLucca v. KKAT Mgmt., L.L.C.,
2006 WL 224058, at *2 (Del. Ch. Jan. 23, 2006) (Strine, V.C.) (“[I]t is not the job of a
court to relieve sophisticated parties of the burdens of contracts they wish they had drafted
differently but in fact did not. Rather, it is the court’s job to enforce the clear terms of
contracts.”). See generally 11 Williston on Contracts § 31:5 (4th ed. 2003) (“A contract is
not a non-binding statement of the parties’ preferences; rather, it is an attempt by market
participants to allocate risks and opportunities. [The court’s role] is not to redistribute these
risks and opportunities as [it sees] fit, but to enforce the allocation the parties have agreed
upon.”) (alterations in original).
627
Kling & Nugent, supra, § 11.04[9], at 11-59 to -60 (identifying examples such
as “the loss or anticipated loss of a significant customer, specific operational problems,
change in government regulation, a favorable contract that won’t survive the closing, write-
downs of assets or adverse business trends”).
628
According to a survey of merger, stock purchase, and asset agreements executed
between June 1, 2016 and May 31, 2017, 28% of deals valued at $1 billion or more involved
an MAE carve-out for developments arising from facts disclosed to the buyer or in public
filings. See Nixon Peabody LLP, NP 2017 MAC Survey 5, 13, https://www.nixonpeabody.
com/-/media/Files/PDF-Others/mac-survey-2017-nixon-peabody.ashx; cf. Talley, supra,
at 789 (opining that Nixon Peabody’s annual MAC survey’s methodology “has become
sufficiently consistent to be usable in empirical investigations”).
152
unforeseeable effects, changes, events, or occurrences.629 They did none of these things.
Instead, for purposes of a General MAE, they agreed upon a condition that turned on
whether an effect, change, event, or occurrence occurred after signing and constituted or
would reasonably be expected to constitute an MAE. 630 The contractual language is
forward-looking and focuses on events. It does not look backwards at the due diligence
process and focus on risks.
As discussed later in this decision, the evidence shows that the events that resulted
in a General MAE at Akorn were unexpected. But assuming for the sake of argument that
Akorn was correct and Fresenius had foreseen them, I do not believe that would change
the result given the allocation of risk under the definition of a Material Adverse Effect set
forth in the Merger Agreement. The IBP decision interpreted a broad MAE clause that did
not contain lengthy lists of exceptions and exclusions, and then-Vice Chancellor Strine did
not suggest that he was prescribing a standard that would govern all MAE clauses,
regardless of what the parties specifically bargained for in the contract. Nor did Hexion,
which adhered closely to IBP on this point. Instead, both cases held that buyers could not
629
See Schwartz, supra, at 834 (“[T]he MAC clause says nothing about
foreseeability. It includes other characteristics of the change—“material” and “adverse”—
but does not mention unforseeability. Inclusio unius est exclusio alterius—the expression
of one thing is the exclusion of another.”); see also id. (providing additional arguments
why MAE provisions should not be interpreted to contain an implied foreseeability term).
630
See JX 1 § 6.02(c) (“Since the date of this Agreement there shall not have
occurred and be continuing any effect, change, event or occurrence that, individually or in
the aggregate, has had or would reasonably be expected to have a Material Adverse
Effect.”) (emphasis added).
153
rely on the manifested consequences of widely known systematic risks. In IBP, the
financial performance of the seller (a beef producer) suffered due to cyclical effects in the
meat industry, exacerbated by a harsh winter that put even greater pressure on the
performance of the buyer (a chicken producer).631 In Hexion, the performance of the seller
(a chemical company) suffered due to macroeconomic challenges, including “rapidly
increased crude oil and natural gas prices and unfavorable foreign exchange rates.”632
Although the decisions framed the analysis in terms of known versus unknown risks, both
cases actually allocated systemic risks to the buyers, consistent with general contracting
practice and the clause at issue in this case.
Assuming for the sake of argument that IBP and Hexion did establish an overarching
standard for analyzing every MAE, those decisions speak in terms of “unknown events,”
not contemplated risks.633 As Akorn’s management admitted, the events that gave rise to
631
See IBP, 789 A.2d at 22 (“During the winter and spring of 2001, Tyson’s own
business performance was dismal. Meanwhile, IBP was struggling through a poor first
quarter. Both companies’ problems were due in large measure to a severe winter, which
adversely affected livestock supplies and vitality. As these struggles deepened, Tyson’s
desire to buy IBP weakened.”); id. at 26 (“Cattle and hog supplies go through cycles that
can be tracked with some general precision using information from the United States
Department of Agriculture. . . . Livestock supply is also heavily weather driven.”); id. at
45 (citing public statements by acquirer acknowledging the cyclical factors that affect
commodity meat products); id. at 47–48 (“Tyson’s anxiety was heightened by problems it
and IBP were experiencing in the first part of 2001. A severe winter had hurt both beef and
chicken supplies, with chickens suffering more than cows.”).
632
Hexion, 965 A.2d at 743.
633
IBP, 789 A.2d at 68; Hexion, 965 A.2d at 738.
154
Akorn’s dismal performance were unexpected.634 Indeed, when announcing the Merger
Agreement on April 24, 2017, Akorn reaffirmed the sales and earnings guidance that
management had provided on March 1, 2017, which projected revenue of $1,010-$1,060
million and adjusted EBITDA of $363-$401 million.635 Akorn underperformed the low end
of its revenue guidance by 17% and the low end of its EBITDA guidance by 31%. If Akorn
management had anticipated the competition and price erosion that was on the horizon,
they would not have reaffirmed their guidance.
Finally, Fresenius did not know about the specific events that resulted in Akorn’s
collapse. Fresenius expected that Akorn would not meet its internal projections and adopted
lower forecasts of its own, but Akorn dramatically underperformed Fresenius’s less
634
See Rai Tr. 467 (citing “more competition than [Akorn] had projected”); id. at
542 (citing “price erosion [for ephedrine] that we had not factored in”); id. at 544 (“Q.
Okay. Now, in fact, you had unexpected competition in 2017 for all of your top three
products, and the competition was way more than what you had projected; isn’t that right?
A. That is correct.”); id. at 545 (“The[re] were way more [competitors] than what [Akorn]
had potentially projected in [its] forecast for 2017.”); id. at 546–47 (discussing the
unexpected loss of a key contract to sell progesterone); JX 688 at ‘606 (Akorn presentation
describing its poor performance as “[d]riven mostly by unanticipated supply interruptions
and unfavorable impact from competition across [the] portfolio”); id. at ‘607 (“Average
product pricing [was] lower than expected due to [an] unfavorable customer/contract mix
and price erosion [that was] not considered in our forecast.”); JX 693 at 35 (Akorn’s Form
10-Q for Q3 2017 discussing “more significant than expected declines in net revenue”).
635
See JX 341; JX 481.
155
optimistic estimates.636 Bauersmith was the resident pessimist on the Fresenius deal team,
and Akorn even performed worse than he anticipated.637
In my view, Fresenius did not assume the risk of the problems that resulted in a
General MAE at Akorn. Instead, the General MAE Condition allocated those risks to
Akorn.
4. The Finding Regarding A General MAE
Fresenius proved that Akorn suffered a General MAE. Fresenius carried its heavy
burden and showed that the decline in Akorn’s performance is material when viewed from
the longer-term perspective of a reasonable acquirer, which is measured in years. Fresenius
also showed that Akorn’s poor performance resulted from Company-specific problems,
rather than industry-wide conditions. Nevertheless, assuming for the sake of argument that
the results could be attributed to industry-wide conditions, those conditions affected Akorn
disproportionately. Neither Akorn nor Fresenius knew about the events that caused
Akorn’s problems, which were unforeseen. Because Akorn suffered a General MAE, the
condition in Section 6.02(c) has not been met, and Fresenius cannot be forced to close.
636
Bauersmith Tr. 595–596 (explaining that Akorn’s performance was “much,
much worse” than Fresenius’s projections); Henriksson Tr. 953 (“[T]he [ephedrine]
decline was bigger than what we had in the original plan.”).
637
Bauersmith Tr. 596 (describing Akorn’s performance as “even worse than what
[he personally] had thought”).
156
B. The Failure Of The Bring-Down Condition
The next question is whether Fresenius validly terminated the Merger Agreement
under Section 7.01(c)(i) because the Bring-Down Condition could not be met. The Bring-
Down Condition permits Fresenius to refuse to close if Akorn’s representations are not true
at closing, except where the deviation from Akorn’s as-represented condition would not
reasonably be expected to constitute a Material Adverse Effect. To defeat the Bring-Down
Condition, Fresenius relies on the Regulatory Compliance Representations, so the analysis
boils down to whether Akorn would reasonably be expected to suffer a Regulatory MAE.
Once again, because Fresenius sought to excuse its performance under the Merger
Agreement, Fresenius bore the burden of proof.638
In a public-company acquisition, it is standard practice to require that the seller’s
representations be true at signing and to condition the buyer’s obligation to close on the
seller’s representations also being true at closing.639 “From a business point of view, the
condition that the other party’s representations and warranties be true and correct at closing
is generally the most significant condition for Buyers . . . . This is what protects each party
638
See Hexion, 965 A.2d at 739; Frontier Oil, 2005 WL 1039027, at *35; IBP, 789
A.2d at 53.
639
See Kling & Nugent, supra, § 1.05[2], at 1-40.2 to -41; Legal-Usage Analysis,
supra, at 10–12.
157
from the other’s business changing or additional, unforeseen risks arising before
closing.”640
Section 7.01(c)(i) gives Fresenius the right to terminate if the Bring-Down
Condition cannot be met. Formatted for greater legibility, Section 7.01(c)(i) states:
This Agreement may be terminated and the [Merger] abandoned at any time
prior to the Effective Time (except as otherwise expressly noted), whether
before or after receipt of the Company Shareholder Approval: . . .
(c) by [Fresenius Kabi]: (i) if the Company shall have breached any
of its representations or warranties . . ., which breach . . .
(A) would give rise to the failure of a condition set forth in
Section 6.02(a) [the Bring-Down Condition] . . . and
(B) is incapable of being cured . . . by the Outside Date . . .
provided that [Fresenius Kabi] shall not have the right to
terminate this Agreement pursuant to this Section 7.01(c)(i) if
[Fresenius Kabi] or Merger Sub is then in material breach of any of
its representations, warranties, covenants or agreements hereunder . .
..
Whether Fresenius could terminate the Merger Agreement pursuant to Section 7.01(c)(i)
therefore turns on three questions: (i) whether Akorn breached a representation in a manner
that would cause the Bring-Down Condition to fail, (ii) whether the breach could be cured
by the Outside Date, and (iii) whether Fresenius was otherwise in material breach of its
obligations under the Merger Agreement. The answer to the third question also determines
640
Kling & Nugent, supra, § 14.02[1], at 14-9; accord id. § 1.05[2], at 1-41; §
1.05[4], at 1-41.
158
whether Fresenius may terminate based on the failure of the Covenant Compliance
Condition, so this decision addresses it separately.
1. The Operation Of The Bring-Down Condition
Section 6.02(a) is the Bring-Down Condition. Formatted for greater legibility, it
states:
The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger
shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if
permissible under applicable law) on or prior to the Closing Date of the
following conditions:
(a) Representations and Warranties. The representations and warranties of
the Company
(i) set forth in Section 3.01(a), Section 3.02(a), Section 3.02(b),
Section 3.03(a)-(c), Section 3.14 and Section 3.20 shall be true and correct
in all material respects as of the date hereof and as of the Closing Date, with
the same effect as though made as of such date (except to the extent expressly
made as of an earlier date, in which case as of such earlier date) and
(ii) set forth in this Agreement, other than in those Sections
specifically identified in clause (i) of this paragraph, shall be true and correct
(disregarding all qualifications or limitations as to “materiality”, “Material
Adverse Effect” and words of similar import set forth therein) as of the date
hereof and as of the Closing Date with the same effect as though made as of
such date (except to the extent expressly made as of an earlier date, in which
case as of such earlier date), except, in the case of this clause (ii), where the
failure to be true and correct would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. . . .
The Bring-Down Condition in the Merger Agreement thus requires Akorn’s
representations to have been true “as of the date hereof,” viz., at signing, and “as of the
Closing Date.”
In this case, Fresenius asserts that Akorn breached the Regulatory Compliance
Representations found in Section 3.18 of the Merger Agreement. In that section, Akorn
159
made extensive representations regarding its compliance with regulatory requirements.
Each of the relevant representations contained specific materiality or MAE qualifiers that
applied for purposes of evaluating the accuracy of those representations in their own right,
such as if Fresenius had asserted a fraud claim. For purposes of testing the Bring-Down
Condition, the language of the condition scrapes away those specific qualifiers in favor of
an aggregate MAE qualifier.641 Formatted for greater legibility, the following reproduction
of the Regulatory Compliance Representations omits the specific qualifiers and the
portions that are not at issue in this case:
(a) The Company and its Subsidiaries are and, to the Knowledge of
the Company, since July 1, 2013, (1) have been in compliance with
(A) all applicable Laws (including all rules, regulations,
guidance and policies) relating to or promulgated by the U.S. Food
and Drug Administration (the “FDA”), DEA, EMEA and other
Healthcare Regulatory Authorities and
(B) all Healthcare Regulatory Authorizations, including all
requirements of the FDA, DEA, the EMEA and all other Healthcare
Regulatory Authorities, in each case that are applicable to the
Company and its Subsidiaries, or by which any property, product,
filing, submission, registration, declaration, approval, practice
(including without limitation, manufacturing) or other asset of the
Company and its Subsidiaries is bound, governed or affected . . . .
(b) All . . . reports, documents, claims and notices required or
requested to be filed, maintained, or furnished to any Healthcare Regulatory
Authority by the Company and its Subsidiaries since July 1, 2013, have been
so filed, maintained or furnished and, to the Knowledge of the Company,
were complete and correct . . . on the date filed (or were corrected in or
supplemented by a subsequent filing) . . . .
641
See Kling & Nugent, supra, § 14.02[3], at 14-12 to -13 (discussing materiality
scrape as a solution to the double materiality problem).
160
The Company and its Subsidiaries are and have been, since July 1,
2013, in compliance with current good manufacturing practices and have
maintained appropriate mechanisms, policies, procedures and practices to
ensure the prompt collection and reporting of adverse event or any other
safety or efficacy data, notifications, corrections, recalls and other actions
required by Law related to their products . . . .
* * *
(d) Since July 1, 2013, neither the Company nor any of its Subsidiaries
(i) have made an untrue statement of . . . fact or fraudulent statement to the
FDA or any other Governmental Authority, (ii) have failed to disclose a . . .
fact required to be disclosed to the FDA or other Governmental Authority,
(iii) have committed any other act, made any statement or failed to make any
statement, that (in any such case) establishes a reasonable basis for the FDA
to invoke its Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
Gratuities Final Policy or (iv) have been the subject of any investigation by
the FDA pursuant to its Fraud, Untrue Statements of Material Facts, Bribery,
and Illegal Gratuities Final Policy . . . .
When Section 3.18 and the Bring-Down Condition are read together, the operative question
becomes whether Fresenius proved by a preponderance of the evidence that (i) the
Regulatory Compliance Representations were inaccurate and (ii) the deviation between
Akorn’s as-represented condition and its actual condition was so great that it would
reasonably be expected to result in a Material Adverse Effect.642
642
See IBP, 789 A.2d at 66 (evaluating whether breach of contractual representation
gave rise to an MAE by comparing IBP’s condition “against the December 25, 1999
condition of IBP as adjusted by the specific disclosures of the Warranted Financials and
the [Merger] Agreement itself. This approach makes commercial sense because it
establishes a baseline that roughly reflects the status of IBP as Tyson indisputably knew it
at the time of signing the Merger Agreement.”); see also Kling & Nugent, supra, §
11.01[1], at 11-3 (“[T]he seller’s representations . . . . ‘paint a picture,’ as of the moment
that the parties become contractually bound, of the business being acquired. It is the target
company as so described that the Buyer believes it is paying for, and much of the remainder
of the acquisition agreement deals with the consequences of this picture either proving in
retrospect to have been inaccurate or changing prior to the closing.”) (footnote omitted);
161
The “reasonably be expected to” standard is an objective one.643 When this phrase
is used, “[f]uture occurrences qualify as material adverse effects.”644 As a result, an MAE
“can have occurred without the effect on the target’s business being felt yet.”645 Even under
this standard, a mere risk of an MAE cannot be enough. “There must be some showing that
there is a basis in law and in fact for the serious adverse consequences prophesied by the
party claiming the MAE.”646 When evaluating whether a particular issue would reasonably
be expected to result in an MAE, the court must consider “quantitative and qualitative
see also E. Thom Rumberger, Jr., The Acquisition and Sale of Emerging Growth
Companies: The M & A Exit § 9:14 (2d ed. 2017) (“[I]t is through target’s representations
and warranties that acquirer contractually sets forth the underlying assumptions for its
investment decision. In effect, acquirer is saying that it is willing to pay the agreed upon
purchase price if the business has the attributes described in the representations and
warranties of target set forth in the merger agreement. The representations and warranties,
in other words, act as a benchmark for acquirer’s investment in target.”).
643
Frontier Oil, 2005 WL 1039027, at *33.
644
Model Merger Agreement, supra, at 268.
645
Kling & Nugent, supra, § 11.04[9], at 11-60 n.102.
646
Frontier Oil, 2005 WL 1039027, at *36 n.224 (addressing claim that risk of
litigation could reasonably be expected to result in an MAE); see also Kling & Nugent,
supra, § 11.04[10], at 11-69 (“[W]hether a material adverse change has occurred depends
in large part on the long-term impact of the event in question (a somewhat speculative
analysis).”). One commentator argues that the “would reasonably be expected” formulation
is best thought of as meaning “‘likely to happen,’ with likely, in turn, meaning ‘a degree
of probability greater than five on a scale of one to ten.’” Legal-Usage Analysis, supra, at
16 (first quoting The New Oxford American Dictionary 597 (2001) and then quoting Bryan
A. Garner, A Dictionary of Modern Legal Usage 597 (2d ed. 1995)). In other words, it
means more likely than not.
162
aspects.”647 “It is possible, in the right case, for a party . . . to come forward with factual
and opinion testimony that would provide a court with the basis to make a reasonable and
an informed judgment of the probability of an outcome on the merits.”648
2. Qualitative Significance
The qualitative dimension of the MAE analysis strongly supports a finding that
Akorn’s regulatory problems would reasonably be expected to result in a Material Adverse
Effect. There is overwhelming evidence of widespread regulatory violations and pervasive
compliance problems at Akorn. These problems existed at signing and got worse, rather
than better, during the period between signing and when Fresenius served its termination
notice. Akorn does not dispute that it has problems, only their extent and seriousness.
As a generic pharmaceutical company, Akorn must comply with the FDA’s
regulatory requirements. This is no small thing; it is an essential part of Akorn’s business.
It was also essential to Fresenius, which cared a great deal about Akorn’s pipeline of
647
Frontier Oil, 2005 WL 1039027, at *37; see also id. at *34 (“The notion of an
MAE is imprecise and varies both with the context of the transaction and its parties and
with the words chosen by the parties.”); Hexion, 965 A.2d at 738 & n.53 (“For the purpose
of determining whether an MAE has occurred, changes in corporate fortune must be
examined in the context in which the parties were transacting.”); IBP, 789 A.2d at 68 n.154
(discussing federal court decision finding a MAC “in a context where the party relying on
the MAC clause was providing funding in a work-out situation, making any further
deterioration of [the company’s] already compromised condition quite important”);
Genesco, 2007 WL 4698244, at *18 (considering “whether the change relates to an
essential purpose or purposes the parties sought to achieve by entering into the merger”).
648
Id. at *36.
163
ANDAs and new products. The value of Akorn’s pipeline depended on Akorn’s ability to
comply with the FDA’s regulatory requirements.
Under the FDA’s data integrity requirements, Akorn must be able “to prove the
origin, transmission, and content of the company’s data and that data is what it is purported
to be.”649 Data must meet be attributable, legible, contemporaneously recorded, original or
a true copy, and accurate, as well as complete, consistent, enduring and available.650 A
properly functioning data integrity system, including an effective IT infrastructure, is
essential for meeting these requirements.651
Akorn has pervasive data integrity and compliance problems that prevent Akorn
from being able to meet these standards. As discussed in the Factual Background, Akorn
hired Cerulean in 2016 to assess its data integrity systems. Avellanet testified that some of
Akorn’s data integrity failures were so fundamental that he would not even expect to see
them “at a company that made Styrofoam cups,” let alone a pharmaceutical company
manufacturing sterile injectable drugs.652 In his opinion, Akorn’s data integrity issues were
649
See JX 143 at 1; accord Kaufman Tr. 323; Kaufman Dep. 196; see Wasserkrug
Tr. 9.
650
Wasserkrug Tr. 8, 12; Franke Dep. 33–36; JX 1247 ¶ 35.
651
See JX 1252 ¶ 2.1; JX 439 at ‘435–36; Pramik Dep. 26.
652
Avellanet Dep. 173; see also id. at 111–12 (testifying that he had never before
seen a company where any employee could make changes to electronic data “willy-nilly
with no traceability or accountability”).
164
among the “top three worst” of the 120+ pharmaceutical companies that he has assessed,653
a notorious status given that his practice only involves companies that “have problems.”654
He believed that the “FDA would get extremely upset” about Akorn’s lack of data integrity
“because this literally calls into question every released product [Akorn has] done for
however many years it’s been this way.”655
As discussed at greater length in the Factual Background, Cerulean’s report on the
Decatur facility identified seven critical, seven major, and at least five minor
nonconformities.656 Cerulean’s report on the Somerset facility was never completed
because Akorn’s IT department failed to provide adequate support,657 but the preliminary
report identified three critical findings and three major findings.658 Avellanet believed that
some of the violations were so severe that Akorn’s senior management should be concerned
about potential criminal liability.659 Akorn made “no effort” to schedule a date to complete
653
Avellanet Dep. 172–73.
Kaufman Tr. 317–19; accord Avellanet Dep. 301. It was Akorn’s expert, Zena
654
Kaufman, who pointed out the dubious exclusivity of Cerulean’s clientele. See Kaufman
Tr. 282.
655
Avellanet Dep. 116–17.
656
JX 231 at ‘062, ‘067.
657
Wasserkrug Tr. 131; see JX 439 at ‘430.
658
JX 439 at ‘430.
659
Id. at ‘435–36.
165
the Somerset inspection660 and cancelled Cerulean’s previously scheduled assessment at
Amityville.661
Akorn’s internal quality experts confirmed the validity of the critical deficiencies
that Cerulean identified.662 They also determined that Akorn essentially ignored them. In
March 2018, the GQC team found that Akorn had not yet addressed the vast majority of
the deficiencies.663 Somerset had done absolutely nothing to address its deficiencies.664
Decatur likewise had “failed to appropriately investigate and remediate” Cerulean’s
findings, having only completed “32% of the corrective actions.”665 These findings are
consistent with a contemporaneous email written by Franke, who told Avellanet in late
660
Wasserkrug Tr. 32; see Avellanet Dep. 139; see also JX 507 at ‘317 (“executive
leadership” decided “that IT resources would not be engaged in the third party data
integrity audit [Cerulean]”).
661
Avellanet Dep. 47, 164–65; see JX 509 at ‘746.
662
See JX 1077 at ‘143–47; Wasserkrug Tr. 155–56.
663
JX 1077 at ‘065; Wasserkrug Tr. 151–54.
664
See JX 1077 at ‘065–66 (“Somerset . . . while having received the draft audit
report on 31 May 2017, decided to wait for the final report received on 3 March 2018 and
failed to initiate formal corrective actions or have a documented plan to date.”);
Wasserkrug Tr. 153–54 (“[I]n 2017, after getting the Somerset Cerulean report, no actions
were taken in response.”).
665
JX 1094 at ‘623; see Wasserkrug Dep. 204–06; see Franke Dep. 239 (testifying
that 11 of the 12 items scheduled for Q1 2018 on the Decatur data integrity plan had not
been completed).
166
2017 that Akorn was “making 0 progress on our DI remediation efforts,” which she
attributed to “the culture and the message from management.”666
As discussed in the Factual Background, during the same time frame that Cerulean
was conducting its reports, Akorn’s GQC team identified similar data integrity violations.
 At Lake Forest, in April 2016, GQC found that audit trails were not being reviewed for
even “minimum criteria,” including “data deletion” and “data manipulation.” 667 GQC
also found that “multiple Akorn staff members” had unauthorized “system access
allowances” that enabled them to modify data and to delete audit trails.668 When GQC
visited Lake Forest again in December 2017, the problems had not been remediated.669
 At Vernon Hills, in June 2016, a GQC audit identified a critical data integrity failure
that permitted unauthorized personnel to “make changes in master production and
control records.”670 The internal audit also found that laboratory equipment was “unable
to record audit trails” and could not identify the users performing tests.671 More than a
year later, a September 2017 GQC audit found exactly the same problems.672 The report
observed that corrective actions had “been halted and remain incomplete,” and noted
that Akorn’s failure to remediate these deficiencies “presents undue risk to the site’s
ongoing operations.”673 By the time of trial, the problems had still not been fixed, and
Vernon Hills did not even have a data integrity compliance plan.674
666
JX 754 at ‘740.
667
JX 124 at ‘764.
668
Id. at ‘769.
669
JX 782 at ‘799–802.
670
JX 136 at ‘344.
671
Id.
672
JX 655 at ‘479–80.
673
Id. at ‘472.
674
Wasserkrug Tr. 118, 136.
167
 At Somerset, in April 2017, GQC identified critical problems involving access controls
and audit trail reviews.675 When GQC returned in December 2017, the problems had
not been remediated.676 By the time of trial, Somerset still did not have an approved
data integrity compliance plan.677
In 2017, GQC identified numerous other data integrity deficiencies at Akorn’s sites, with
seventeen at Hettlingen, fifteen at Cranbury, five at Amityville, and five at Lake Forest.678
In addition to these reports, the factual record contains extensive evidence of other,
widespread quality problems at Akorn.
After the signing of the Merger Agreement, Akorn’s exacerbated its compliance
problems. As discussed in the Factual Background, Silverberg authorized a response to a
CRL for azithromycin in August 2017 that contained two sets of fabricated data.679 I am
forced to conclude that Silverberg knew that the CRL would rely on fabricated data but
authorized it anyway because he did not want to withdraw the ANDA and wave a red flag
in front of Fresenius that would call attention to Akorn’s data integrity problems while the
Merger was pending. Akorn and its advisors immediately recognized the seriousness of the
675
JX 515 at ‘115.
676
JX 801 at ‘663–64.
677
Wasserkrug Tr. 136.
678
See JX 1318.019–31; Wasserkrug Tr. 118, 122–24.
679
JX 1068 at ‘014.
168
issue and expressed concern that the FDA would invoke the AIP or take other significant
action against Akorn.680
Akorn then aggravated the situation by providing the FDA with a misleading
description of the investigation, its views on whether Silverberg acted knowingly, and the
state of Akorn’s data integrity efforts. Akorn also concealed a troubling incident in which
Silverberg sought to coordinate stories with Sherwani about the azithromycin incident and
destroy evidence of the coordination. Even Akorn’s FDA expert agreed that Akorn was
“not fully transparent” with the FDA.681 She suggested that Akorn had subsequently
become transparent by providing the FDA with Cerulean’s reports and correspondence
from Sidley, but in reality, Akorn never provided the FDA with Cerulean’s reports, and
Akorn’s regulatory counsel primed the FDA to discount anything Sidley said.682
As part of its effort to get ahead of the issue with the FDA, Akorn retained NSF to
conduct data integrity audits at six Akorn facilities (excluding Somerset). NSF would
review a limited number of ANDAs from the Somerset facility and a sampling of product
batch records. NSF quickly identified numerous major deficiencies that were consistent
with the problems that Cerulean and Akorn’s GQC team had identified. As soon as the
680
See JX 884 at ‘068; JX 908 at ‘831; see also Stuart Tr. 853–54.
681
Kaufman Tr. 378; see also id. at 391 (agreeing that Akorn should have disclosed
Silverberg’s efforts to coordinate stories).
See JX 1066 at ‘893–94; Stuart Tr. 840–44. Compare Kaufman Tr. 402, 414 with
682
Wasserkrug Tr. 40 and JX 1063 at ‘004–05.
169
NSF reports began coming in, Akorn’s representatives worried about severe regulatory
consequences, including the possibility that the FDA would impose the AIP.683 As NSF’s
investigation continued, its data integrity reports largely confirmed the existence of
widespread problems at Akorn’s facilities.684 By the time of trial, NSF had examined eight
ANDAs involving currently marketed products that had been prioritized for review.685 NSF
found two critical deficiencies involving the submission of intentionally manipulated data
to the FDA and over 200 major deficiencies.686 NSF also found numerous trial injections
683
See JX 1127 (expressing concern that “the FDA is likely to have a very negative
reaction to our report” and indicating that possible responses included the AIP, “suspension
of review of all pending submissions,” and “mandat[ory] review by a third party of product
released for the market”); JX 1496 at ‘055–56 (Akorn’s regulatory counsel observing that
“[i]f audit reports make it look like there are similar issues across the company, FDA might
see need to get whole company under decree” and that the “[s]heer number of issues across
all sites audited by NSF . . . could raise concern”); JX 1493 (“[A]s other audit reports roll
out,” the FDA “may see it as the whole corporation/multiple sites under decree.”).
684
See JX 1141 at ‘081 (Vernon Hills: “Data entry into notebooks does not appear
to always be contemporaneous. In a large number of instances in every notebook reviewed,
the date of the technician’s work in the notebook is a week or more later than the date that
the HPLC sequences were run.”); id. (Vernon Hills: “Review and verification of notebook
activities is not always timely. In a large number of instances in every notebook reviewed,
the verified date is months later, and in some cases more than a year after the work was
performed.”); id. (Vernon Hills: “The adequacy of notebook verification is questionable
since the equations for some calculations are not described in the notebook.”); id. at ‘079
(Vernon Hills: “User access levels are not appropriate to protect data from deletion or
further manipulation.”); JX 1190 at ‘712–13 (finding that laboratory notebooks at Cranbury
were “lacking in traceability, legibility, [and] authenticity”); JX 1178 at ‘356 (observing
that analysts at Amityville could “delete or modify” data on “[a]ll stand-alone
instruments”); id. (noting that many laboratory instruments at Amityville did not have audit
trails).
685
See JX 1516 at ‘595–96; Wasserkrug Tr. 175–76.
686
See JX 1156; JX 1157; JX 1185; JX 1196; JX 1201; JX 1204; JX 1221; JX 1224.
170
that appeared to have been used in FDA submissions over a five-year period involving
multiple Akorn analysts and products.687 NSF advised Akorn that this issue had major
regulatory significance and was one of its “most serious observations.”688
At trial, Fresenius presented fact testimony from Sheers, the lawyer who led the
Sidley team that investigated the whistleblower allegations. He testified credibly that
Sidley’s interviews with Akorn employees revealed a “lack of awareness of compliance
issues, with a lack of understanding as to what the FDA requires and why [Akorn’s]
deficient practices would be problematic to the FDA.”689 He also testified credibly that the
Sidley team identified “serious fundamental flaws in the way [Akorn] managed their data
such that there was no data integrity, essentially,” at Decatur, Vernon Hills, or Somerset.690
Based on its investigation, Sidley concluded that “all of the data that was generated was
not reliable, and the FDA would consider all of the products that were made in those
facilities adulterated.”691
687
JX 1141 at ‘090; see Wasserkrug Tr. 183 (testifying that the trial injections
involved “approximately 20” analysts and multiple products).
688
JX 1141 at ‘090, ‘092; see JX 1164 at ‘421 (talking points prepared by Akorn’s
counsel for a call with Akorn’s directors noting that “the Company has identified many
[chromatography sequences] that are the type of problematic, unreported trial injections
FDA has warned of”); JX 1127 (Akorn’s counsel acknowledging that the “problematic
practice [of trial injections] went on for four years and involved about 25 chemists”).
689
Sheers Tr. 1037.
690
Id. at 1036–39.
691
Id. at 1039.
171
Lachman assisted Sidley and conducted onsite assessments at Vernon Hills,
Somerset, Cranbury, and Decatur. Lachman identified “major, systemic data integrity
gaps” at every location.692 Lachman determined that “cGMP compliance deficiencies” at
Akorn’s sites “call[] into serious question” the reliability of Akorn’s testing data, the
effectiveness of its quality system, the accuracy of its regulatory submissions, “and thus
the safety and efficacy of Akorn’s products.”693 At trial, George gave highly credible
testimony about these issues, including his assessment of the extreme nature of Akorn’s
problems:
Everywhere that Lachman looked at policies, procedures, practices and data,
we found noncompliance. And the unusual thing is, is when we go into a
client’s site, we might find one area where they’re weak in compliance. But
at Akorn, across the board, everything we looked at had significant
noncompliance associated with it.694
He reiterated that “a lot of clients may have one particular deficiency in compliance, but
not the broad scope of systemic issues that we identified at the Akorn sites.”695 When asked
692
See JX 1252 ¶ 2.3. Like Cerulean and Akorn’s GQC team, Lachman observed
that Akorn’s computer and laboratory systems at multiple sites were “not secure from
unauthorized change.” See George Tr. 1133–34 (explaining that users of Akorn’s
Chromeleon system—used for chromatography testing—were able “to access data, to
modify data, to move data, to delete data, [and] to generate data” in hidden folders, which
was “obviously a major concern” and meant that “the data itself is not trustworthy”); id. at
1135 (testifying that he had never before seen “this kind of a complete system failure across
all the electronic systems in the laboratory”).
693
JX 1252 ¶ 2.2; see George Tr. 1127–1128 (“[T]he trustworthiness of the data
supporting [Akorn’s regulatory] submissions is -- it’s not there.”)
694
George Tr. 1126–27.
695
Id. at 1127.
172
to rank Akorn among the laboratories he had seen, George said he “would put them with
the worst.”696 George opined that Akorn’s “problems were systematic in nature and the
reliability of all the data should be questioned.”697
David L. Chesney also testified as an expert for Fresenius. Chesney previously
served at the FDA for twenty-three years and subsequently spent twenty-three years as a
regulatory consultant. In his assessment, “Akorn has a number of very serious data integrity
issues” which are “widespread” and “pervasive.”698 In his forty-six-year career, in which
he has visited hundreds of companies, Chesney had “rarely seen integrity issues that exist
at the scope and scale we see” at Akorn.699 He opined that in light of the severity of Akorn’s
issues, the FDA has sufficient grounds to invoke the AIP.700 He further opined that even if
the FDA did not formally impose the AIP, the FDA likely would take action that would
696
Id.; see JX 1252 ¶ 2.5 (opining that quality conditions at Akorn represented “one
of the poorest states of compliance that I have encountered”).
697
George Tr. 1127–28. Akorn has attacked the credibility of George and Lachman,
arguing that they were hired guns retained by Sidley to manufacture a case for Fresenius.
Having seen George testify, I reject those assertions. At heart, George is a scientist, and he
is clearly dedicated to data and the facts. He does not seem capable of shading the truth.
698
Chesney Tr. 1241.
699
Id. at 1249.
700
Id. at 1254 (“[T]he test for imposition of the AIP has been met.”); see JX 1251 ¶
15. Although Fresenius retained Chesney as an expert in this case, Akorn previously
retained Chesney to give a presentation to its board of directors on FDA matters and to
provide regulatory training for Akorn’s employees at Decatur and Somerset. See Chesney
Tr. 1234–35.
173
halt the approval of Akorn’s ANDAs until Akorn proves that its data is reliable.701 Chesney
explained that when evaluating what action to take, the FDA will view Silverberg’s
intentional misconduct as an aggravating factor calling for more severe enforcement
action.702 Chesney’s testimony was cogent and credible.
Akorn’s expert, Zena Kaufman, attempted to normalize the problems at Akorn by
opining that they resemble problems found across the industry and at Fresneius. Kaufman
appears to be a person of integrity, and as a result, aspects of her testimony supported
Fresenius’s position.
Kaufman’s expertise in quality compliance stems primarily from a three-year stint
between 2012 and 2015 as head of global quality for Hospira, Inc., a company that faced
pervasive compliance problems when she joined.703 When she left, Hospira still had not
completed its remediation efforts; it had resolved the issues at its U.S. plants, but its foreign
plants still had outstanding Warning Letters.704 Despite having spent three years overseeing
701
Chesney Tr. 1254, 1256–57; JX 1249 ¶¶ 59, 61. Akorn’s expert, David Adams,
did not testify at trial and did not offer an opinion on whether Akorn had met the test for
the AIP. JX 1289; Adams Dep. 83–85. Adams agreed that the FDA could suspend Akorn’s
product approvals without invoking the AIP. Adams Dep. 126–28. I found Chesney’s
opinions more credible and rely on his views.
702
See Chesney Tr. 1244–45 (testifying that Akorn’s violations are “not simply the
result of innocent lapses, mistakes, sloppy procedures, [or] unclear forms, but have a
deliberate element to them, which is definitely an aggravating factor in the FDA’s view”).
One of Akorn’s experts, Kaufman, agreed that these facts are likely to lead to more severe
action by the FDA. See Kaufman Tr. 374–75.
703
See Kaufman Tr. 257–62, 307–08, 312; see also JX 1388.
704
Kaufman Tr. 261–62.
174
quality at a deeply troubled generic manufacturer, Kaufman had never before encountered
some of the data integrity problems that Akorn exhibited, including a senior quality officer
who made misrepresentations to the FDA, company-wide computer access issues that
allowed any employee to make changes to files without any traceability or accountability,
and the pervasive backdating of lab entries.705 She agreed that the FDA would be “quite
concerned” about Akorn’s lack of access controls because it undermined the security of
Akorn’s data.706 She agreed that this concern would affect both Akorn’s ANDAs and
“product released into the market.”707
Kaufman’s primary technique for normalizing Akorn’s problems was to analyze
publicly available Form 483s and warning letters for other companies, then compare the
“types of observations, the categories” raised in those filings with the types of observations
at Akorn.708 Kaufman did not persuade me that her methodology enabled her to assess
reliably the relative significance or pervasiveness of the problems.709 Compared to
Fresenius’s experts, Kaufman had less experience with quality issues and data integrity
705
Id. at 315, 317, 355, 362.
706
Id. at 315–17, 322–24.
707
Id. at 324.
708
See id. at 266–79.
709
See id. at 349–55 (identifying omissions from her data set observations; noting
that observations were limited to critical finding and excluded major findings); id. at 372–
74 (failing to consider whether and to what extent Akorn had responded to the observations
or how long they had been outstanding); id. at 441 (agreeing that she provided different
explanations for how her data set was compiled).
175
issues. She had never performed a data integrity audit or conducted a data integrity
investigation.710 She did not claim to be an expert in data remediation plans.711 Unlike
Fresenius’s experts, she did not visit any Akorn sites or speak to any Akorn personnel.712
When rendering her opinions, Kaufman also did not take into account Akorn’s failure to
be transparent with the FDA.713
In its post-trial briefs, Akorn relied on its history of past inspections with the FDA
to argue that it must not have serious quality or data integrity issues. But as Kaufman
recognized, “you can get an FDA inspection with zero issues but then significant problems
are discovered.”714 From the FDA’s standpoint, “you are . . . only as good as your last
inspection.”715
Since trial, Akorn has received lengthy and detailed Form 483s for Decatur and
Somerset, both of which identify data integrity issues. The FDA sent Akorn two CRLs that
conditioned the approval of ANDAs for products from Decatur on “[s]atisfactory
710
Id. at 304.
711
Id. at 267–68, 343.
712
Id. at 304.
713
See id. at 379 (“Q. You did not say in either of those two reports that Akorn was
not transparent. Correct? A. Correct.”).
714
Id. at 437.
715
Klener Dep. 79–80; accord Klener Tr. 1321.
176
resolution of the observations” in its Form 483.716 Akorn has not received any new ANDA
approvals for any of its sites since May 4, even though approval for many of the ANDAs
is now overdue.717 By letter dated August 9, 2018, the FDA formally classified Decatur as
OAI and informed Akorn that “[t]he facility may be subject to a CGMP regulatory or
enforcement action based on this inspection, and FDA may withhold approval of any
pending applications or supplements in which this facility is listed.”718
Perhaps most strikingly, by letter dated September 3, 2018, Akorn reported to the
court that on August 22, during the later stages of the FDA’s investigation, someone had
erased the database at Somerset for a high accuracy liquid particle counter along with the
local backup file and the associated electronic security logs. FDA inspectors had been on
site at Somerset intermittently between July 23 and August 30.719 Akorn has reported the
incident to law enforcement. Given the timing of the deletion, it is reasonable to infer that
the perpetrator may have been trying to hide information from the FDA, or from personnel
who would follow up on the deficiencies that the FDA identified in its Form 483.
716
See JX 1223; JX 1226; JX 1198; JX 1249 ¶¶ 122–23.
717
JX 491. The two approvals from early May would have been “in the late, final
stages of the review process” by the time Akorn disclosed its data integrity issues,
indicating that “the FDA simply allow[ed]” the review process “to complete.” Chesney
Tr. 1260–61. The only other approvals since that time have involved changes to labeling
and the addition of new third-party manufacturers for already-approved Akorn drugs,
neither of which concerns Akorn’s data. See Sheers Tr. 1061; Chesney Tr. 1262.
718
Dkt. 191, Ex. D.
719
Dkt. 199 at 1.
177
The systemic failures at Akorn raise questions about the accuracy and reliability of
all of its data, regardless of site or product. As a result, Akorn cannot meet its burden to
prove to the FDA that its data is accurate. To the contrary, Akorn’s products and facilities
are known not to comply with cGMP and FDA requirements, as shown by the reports of
its own internal audit team. Akorn does not make products where quality issues can be
overlooked until problems arise. As Henriksson testified, “[W]e are talking about drugs
which are used by people . . . who are critically ill . . . [and] many of those products . . . .
are going to be injected into people.”720
In my view, the regulatory situation at Akorn is qualitatively “material when viewed
from the longer-term perspective of a reasonable acquiror.”721 Akorn has gone from
representing itself as an FDA-compliant company with accurate and reliable submissions
from compliant testing practices to a company in persistent, serious violation of FDA
requirements with a disastrous culture of noncompliance. The qualitative aspect of the
MAE analysis warrants a finding that the regulatory issues would reasonably be expected
to result in a Material Adverse Effect.
3. Quantitative Significance
The quantitative aspect of the MAE analysis likewise warrants a finding that
Akorn’s regulatory issues would reasonably be expected to result in a Material Adverse
720
Henriksson Tr. 974; see Sturm Tr. 1196 (“[T]here is zero tolerance to exposing
patients to known risks.”).
721
IBP, 789 A.2d at 68.
178
Effect. Akorn and Fresenius have each provided estimates of the economic impact of the
data integrity problems. Akorn’s estimate contemplates direct outlays of $44 million with
no other effect on Akorn’s value.722 Fresenius’s estimate contemplates direct outlays of
$254 million plus a valuation hit of up to $1.9 billion from suspending on-market products
and pushing out pipeline products while Akorn’s data is verified.723 As might be expected
given their respective positions in the litigation, Akorn’s estimate is a best case scenario.
It contemplates a world in which consultants complete a limited process to correct Akorn’s
protocols and confirm that everything is OK, but where nothing else is uncovered, no data
needs to be revalidated, and no products need to be withdrawn or deferred. Fresenius’s
estimate is a worst case scenario. It contemplates rebuilding Akorn’s quality systems,
validating the data for its twenty-four leading products, obtaining new approvals for those
products from the FDA, and not selling any products until Akorn’s data can be verified.
In my view, Akorn’s figure is not credible. Akorn did not present any fact witness
at trial who could testify about the accuracy of the $44 million estimate or how it was
developed. Wasserkrug read the figure off the page during her direct testimony, but she
admitted that she had “no idea” whether the “number is correct or incorrect.”724 Kaufman
thought the overall dollar figure felt right as a “benchmark,” but she focused on whether
722
JX 1318.
723
JX 1152 at 19–20, 25; see Henriksson Tr. 978–82.
724
Wasserkrug Tr. 115–16.
179
Akorn had the right “compliance aspects” in the plan, such as IT systems, and admitted
that she did not have the expertise to determine what the amounts should be.725
More significantly, Akorn’s estimate assumed that Akorn would continue with the
relatively limited investigation that it proposed after reporting to the FDA on the
azithromycin issue in March 2018. The estimate assumed that the investigation would not
uncover any additional problems with Akorn’s data, would not result in any additional
ANDAs being withdrawn, would not have any effect on Akorn’s pipeline, and would not
result in any product recalls. Given Akorn’s pervasive data integrity issues and its
obligation to prove the reliability of its data to the FDA, this seems highly unlikely.
Wasserkrug agreed that Akorn will need to “pull a product off the market” if it cannot
support the data on which the ANDA was based,726 and the evidence at trial indicates that
Akorn cannot currently prove the accuracy of its data. Any suspensions of existing products
or delays of new products will obviously have a negative effect on Akorn’s value. 727 Since
trial, Akorn has been forced to expand the scope of its remediation efforts dramatically.728
725
Kaufman Tr. 292–93.
726
Wasserkrug Tr. 69.
727
See JX 1253; JX 1254; Bowles Dep. 19–22, 67–68. Kaufman only was able to
assert that Akorn’s remediation plan was adequate because she assumed that Akorn had
committed to conduct “for any instrument or equipment found to have inadequate access
control levels or permissions, a retrospective review of associated data and a root cause
assessment.” JX 1295 ¶ 113. In other words, she assumed that if Akorn found problems,
Akorn would do more. Kaufman declined to opine on “how many Akorn products and
Akorn ANDAs have been affected” by data integrity issues. See Kaufman Tr. 324–25.
728
See Dkt. 234, Exs. A & B.
180
Unlike Akorn’s estimate, Fresenius’s estimate takes into account the need to
conduct a complete investigation and the strong likelihood that such an investigation will
uncover additional problems with Akorn’s data, will result in additional ANDAs being
withdrawn, will have effects on Akorn’s pipeline, and could result in product recalls.
Sturm, Henriksson, and Bauersmith testified to the detailed analysis and care that went into
preparing Fresenius’s plan. The views of Fresenius’s management team on this subject are
particularly credible, because Fresenius has direct experience remediating serious data
integrity issues at one of its facilities in India and understands what a project of this nature
entails.729 Fresenius’s management team developed the plan so that the Supervisory Board
could understand Fresenius’s potential exposure if Fresenius closed the Merger, and the
Supervisory Board relied on the document when deciding whether to terminate the Merger
Agreement. Sturm testified publicly that Fresenius stands behind the analysis and will
undertake those steps if Fresenius is forced to close.
Henriksson testified that to properly remediate the data integrity issues at Akorn,
there must be a temporary halt on the release of Akorn products until additional safety
measures can be instituted.730 Akorn’s R&D department must be comprehensively
restructured to “build a culture of [] compliance,” implement IT systems with proper
729
See Henriksson Tr. 1022–23.
730
Id. at 975.
181
controls, and retrain personnel.731 He projected that these initial steps will take
approximately one year. After that, Akorn will need to redevelop its products using reliable
data, then obtain approval from the FDA for those products.732 Fresenius anticipates
redeveloping Akorn’s twenty-four leading products, with a simple product taking one year
and a complex product taking two years, followed in each case by an additional year to
receive FDA approval. As a result, the overall remediation of Akorn’s data integrity issues
would take at least four years. During the first year of this period, Akorn’s ability to
generate revenue would stop, then come back on line gradually as its products were
reformulated and reapproved.
The evidence persuades me that a responsible remediation plan would be much
closer to what Fresenius has proposed than what Akorn currently intends to pursue. Given
the widespread problems at all of Akorn’s sites and the evidence implicating Akorn’s
senior quality officer in data falsification, Akorn should be conducting a complete
review.733 So far, NSF’s narrow review has identified two additional ANDAs that were
731
Id. at 976–77.
732
Id. at 977–78.
733
JX 1298 ¶ 39 (“The investigation should . . . include a retrospective review of all
test results . . . .”); see Henriksson Tr. 976 (“They have already looked at nine ANDAs.
They have found severe data manipulation on three. You know, when do you stop sampling
and when do you say that, okay, I’ve seen enough. We’ve got to check it all.”); Sheers Tr.
1064 (“[T]hey should be doing a complete review. There are now several instances,
confirmed instances, of data falsification and fabrication, and the [FDA] expects in those
circumstances for a complete review to be conducted. And it’s not just enough to look at
what is currently being done. You have to do a retrospective review, because there’s
182
based on fabricated data and two additional persons of interest. A complete review is highly
likely to uncover more problems with data integrity that will call ANDAs and products into
question and push out the timing of Akorn’s pipeline. Even under Akorn’s more limited
approach, its witnesses have agreed that the effort is “going to take about three years.”734
Fresenius developed a credible plan for a complete review and remediation of the
serious problems at Akorn. It nevertheless represents a worst-case scenario in which every
product at Akorn has to be fixed. What seems more likely, in my view, is that a complete
investigation would determine that only some of Akorn’s products will require re-
validation and that the level of disruption and delay will not be quite so extensive as
Fresenius projects. Rajiv Gokhale submitted an expert report that addresses the impact of
shorter deferrals of Akorn’s cash flows. Using the discounted cash flow model that
Fresenius generated in the ordinary course of business to evaluate the Merger, he calculated
that a delay of one-and-a-half years would have a negative impact on Akorn’s value of
$604 million, and a two-year delay would have a negative impact on Akorn’s value of $808
million.735 Gokhale observed that in April 2017, when the Merger Agreement was
executed, Akorn had a standalone equity value of approximately $3.9 billion. The valuation
product that’s still in the market that is supported by that data, and there’s product that’s
going out the door today that is supported by data that is questionable.”).
734
Wasserkrug Tr. 68–69; see Avellanet Dep. 78–79 (“[I] have never seen a firm be
able . . . to remediate all of its issues in less than three years.”); JX 1295 ¶ 61 (Kaufman
relying on estimate of two to three years).
735
JX 1254 ¶ 6.
183
impact of a one-and-a-half or two-year delay therefore represented, respectively, 16% and
21% of Akorn’s standalone equity value.736
It is not possible to define with precision the financial impact of Akorn’s data
integrity issues. In an ideal world, I would run a series of Monte Carlo simulations using
varying assumptions. Lacking that ability and having considered the record evidence, I
suspect the most credible outcome lies in the vicinity of the midpoint of the parties’
competing submissions, at approximately $900 million. This rough estimate is also close
to the $800 million that Gokhale calculated for a two-year delay, particularly when one
adds to Gokhale’s estimate amounts for out-of-pocket remediation costs. Using the equity
value of $4.3 billion that is implied by the Merger Agreement, a valuation hit of $900
million represents a decline of 21%. That range of valuation consequence makes intuitive
sense to me given the seriousness of Akorn’s regulatory problems and the ever-expanding
efforts that Akorn has been forced to make to remediate them.737
736
Id. Gokhale also opined as to the effect of comparable delays on Akorn’s value
in April 2018, when Fresenius terminated the Merger. In that analysis, the lost value from
the deferred cash flows is higher and the standalone value of Akorn is lower, so the
percentage decline is materially larger. See id. ¶¶ 8–9. To be conservative, this decision
uses the lower values. In my judgment, that approach also makes sense for the Regulatory
MAE, which compares the as-represented value of the seller with its value in light of the
deviations from the representation. See IBP, 789 A.2d at 66. The measure of Akorn’s equity
value at the time of signing pre-dated the dramatic downturn in Akorn’s business and the
discovery of much of the information about Akorn’s data integrity problems. It therefore
provides a better measure of Akorn’s as-represented value.
737
See Dkt. 234, Exs. A & B.
184
Unfortunately, the parties have not provided much assistance in determining
whether remediation costs equal to approximately 20% of the target’s standalone value
would constitute an amount that would “be material when viewed from the longer-term
perspective of a reasonable acquiror.”738 In Hexion, the court agreed that materiality for
purposes of an MAE should be viewed as a term of art that drew its meaning from
Regulation S-K and Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”739 It would have been helpful to have access to
expert testimony or studies about the thresholds companies generally use when reporting
material events, such as material acquisitions. It also would have been helpful to understand
the thresholds that Fresenius and Akorn have used. No one addressed these issues.
Although both the factual record and the corpus of available authority are limited, I
believe that for Akorn, this expense would be “material when viewed from the longer-term
perspective of a reasonable acquiror.”740 In making this finding, I have primarily weighed
738
IBP, 789 A.2d at 68.
739
Hexion, 965 A.2d at 742.
740
IBP, 789 A.2d at 68. Some readers may get hung up on a perceived difference
between this decision’s earlier discussion of a General MAE in terms of percentage
declines in revenue and profitability, where Kling and Nugent highlighted 40% as a range
where courts often find the existence of an MAE, see Part II.A.1, supra, and this section’s
discussion of a Regulatory MAE in terms of remediation costs, which concludes that a loss
in the vicinity of 21% of Akorn’s standalone value constituted a Material Adverse Effect.
No one should fixate on a particular percentage as establishing a bright-line test. No one
should interpret this decision as suggesting that there is one set of percentages for revenue
and profitability metrics and another for liabilities. No one should think that a General
MAE is always evaluated using profitability metrics and an MAE tied to a representation
is always evaluated relative to the entity’s valuation. In this case, the parties briefed the
185
the evidence in the record against my own intuition and experience (admittedly as a lawyer
and judge rather than as a buyer or seller of businesses).
Among other things, the record demonstrates that Akorn pushed Fresenius to pay
top dollar for Akorn, extracting every cent that Fresenius was willing to pay. When a deal
is priced for perfection, a reasonable acquirer has less ability to accommodate an expense
that equates to a substantial portion of the seller’s value. In this case, the record indicates
that Fresenius remained willing to close despite identifying a high risk of a potential
exposure in the amount of approximately $100 million due to postponement of product
launches,741 as well as another high risk exposure of a similar amount related to cGMP
“deficiencies related to premises and equipment” in the Amityville and Decatur
facilities.742 The data integrity violations represent an incremental loss in value
General MAE question based on profitability metrics and the Regulatory MAE question
using remediation costs, so that is what the decision analyzed. In the context of this case,
the narrower focus for the Regulatory MAE makes sense and gives effect to the contract-
driven requirement that there be a sufficient connection between the breach of the
Regulatory Compliance Representations and the Regulatory MAE. The General MAE
Condition does not have an equivalent causal linkage to a particular issue. The question is
simply whether a General MAE had occurred.
741
JX 428 at ‘673; see JX 422 at ‘001 (“Akorn has an aggressive product launch
plan, which leads to risk of postponement for several products . . . and an estimated
exposure above $100m. [Fresenius] prepared a bottom-up model for each model and
adjusted the launch plan, R&D costs and revenues accordingly in the business plan.”).
742
JX 428 at ‘673; see JX 422 at ‘001 (“Site visit at Amityville and Decatur revealed
[good manufacturing practice] deficiencies related to premises and equipment, which could
result in negative outcome of regulator inspections and a mix of gross profit loss and capex
need amounting to a maximum exposure over $100m. This finding is mitigated via the
business plan.”).
186
approximately four to five times greater than the combined exposure from both of these
risks.
As a cross-check, I have considered external sources which, to my mind, might
suggest how a reasonable buyer would view the situation. First, there is the general
magnitude of a 20% change. By one common definition, a bear market occurs when stock
prices fall at least 20% from their peak,743 which suggests a broad cultural sense that this
level of losses is viewed as material. On a percentage basis, a 20% decline would be the
second largest single-day drop in the history of Dow Jones Industrial Average, exceeded
only by Black Monday in 1987, when the market fell by 22.61%.744
Second, there are the levels at which parties renegotiate after one side asserts an
MAE. One unpublished study found that “[w]hen the target experiences a firm-specific
743
See, e.g., Adrian R. Pagan & Kirill A. Sossounov, A Simple Framework for
Analysing Bull and Bear Markets, 18 J. Appl. Econ. 23, 30 (2003) (“[M]ost bull markets
rise more than 20% while a much smaller fraction of bear markets culminate in a fall of
more than 20%.”); Asger Lunde & Allan Timmermann, Duration Dependence in Stock
Prices: An Analysis of Bull and Bear Markets, 22 J. Bus. & Econ. Stat. 253, 253–55 (2004)
(discussing definition of bear market where “the stock market switches from a bull state to
a bear state if stock prices have declined by a certain percentage since their previous (local)
peak within that bull state” and observing that a 20% decrease “is conventionally used in
the financial press”); E.S. Browning, Bear Sightings on Wall Street: Is This Really a Bear
Market, or Some Other Animal?, Wall St. J., Jan. 16, 2001, at C1 (“If a bear market is a
20% drop from a high—and that is the most common definition—the Nasdaq is in a nasty,
growling bear.”); John R. Dorfman, If It Looks Like a Bear and Walks Like a Bear, Chances
Are That the Bear Market Has Arrived, Wall St. J., Sept. 27, 1990, at C1 (chart of “[h]ow
stocks have performed in bear markets (declines of 20% or more) since 1919”).
744
See Dow Jones Industrial Average All-Time Largest One Day Gains and Losses,
Wall St. J., http://www.wsj.com/mdc/public/page/2_3024-djia_alltime.html (last visited
Sept. 19, 2018).
187
MAE, the subsequent renegotiation reduces the price by 15%, on average.”745 The fact that
acquirers force renegotiations and then reach agreement (on average) at the 15% level
suggests that an acquirer would regard a drop in value of 20% as material.
Third, there are the ranges that parties generally use for the upper and lower bounds
of collars in deals involving stock consideration.746 Two academic studies find that parties
agree, on average, to a lower bound for the collar at a price approximately 10% below the
initial deal consideration.747 Practitioners observe that the upper and lower bounds for
collars generally fall within 10% to 20% of the consideration at signing.748 In other words,
745
Antonio J. Macias, Risk Allocation and Flexibility in Acquisitions: The Economic
Impact of Material-Adverse-Change (MACs) Clauses 27 (Apr. 17, 2009), http:/ssrn.com/
abstract=1108792; see also, e.g., JX 641 at ‘595, ‘599 (discussing negotiated 8.9%
decrease in deal price after Abbott Labs asserted an MAE at Alere).
746
Collars come in two broad types: (i) a fixed-consideration version in which the
exchange ratio adjusts between an upper and lower bound to keep the value of the
consideration constant, but floats above and below the lower bound, and (ii) a floating-
consideration version in which the exchange ratio remains constant between an upper and
lower bound, thereby allowing the value of the consideration to float, then becomes fixed
if the value rises above the upper bound or falls below the lower bound. See generally
Rumberger, supra, § 5:48 (describing collars). For the basic directional inference that I
seek to draw, the difference between these structures seems unlikely to be material.
747
See Micah S. Officer, The Market Pricing of Implicit Options in Merger Collars,
79 J. Bus. 115, 128–29 (2006); Kathleen P. Fuller, Why Some Firms Use Collar Offers in
Mergers, 38 Fin. Rev. 127 (2003).
748
See Rumberger, supra, § 5:48 (“Typically, the collar is set at plus or minus 10%
or 20% of acquirer’s stock price at the signing of the acquisition agreement, although the
upper and lower prices are not always symmetrical.”); Craig M. Wasserman, Dealing With
Market Risks in Stock-for-Stock Mergers, The M&A Lawyer (LegalWorks), Oct. 1998
(noting that a collar “is often set at 10% to 15% up and down from the acquiror’s stock
price at the time the deal is signed”). Wasserman likewise notes that agreements also often
include walk-away rights that are triggered when the value changes by 15% or 20%,
188
parties (on average) view a 10% change in value as a material breakpoint that results in the
deal consideration being handled differently. I recognize that this is a noisy proxy for
materiality, because parties who use collars typically also include MAE-based termination
provisions.749 My point is not to argue that one type of provision is a substitute for the
other, nor to offer any fine-grained opinions about their relative roles in different types of
deals. The only inference I seek to draw is far more basic: If parties establish a lower bound
for collars (on average) around 10% below the initial deal consideration and cause the deal
pricing to change significantly at that point, then this suggests that they view a drop in
value of 10% as material and would therefore also view a drop of more than 20% as
material.750
Fourth, there is the magnitude of reverse termination fees. A reverse termination fee
is an amount the buyer agrees to pay the seller if the buyer cannot or does not complete an
effectively creating an objectively determined MAE. See id.; accord Lou R. Kling et al.,
Summary of Acquisition Agreements, 51 U. Miami L. Rev. 779, 811 (1997) (“At the outer
limits of the collar (or, alternatively, at other, wider limits), parties may have termination
rights.”); Officer, supra, at 128 (finding that the median termination right for a collar is
approximately 20% below the initial deal consideration).
749
See Joel F. Houston and Michael D. Ryngaert, Equity Issuance and Adverse
Selection: A Direct Test Using Conditional Stock Offers, 52 J. Fin. 197, 203–04 (1997)
(noting that collar deals virtually always have material adverse change clauses). By the
same token, in deals where parties negotiate walk rights that are triggered when the deal
consideration floats outside of the collar, the materiality signal is even stronger.
750
Cf. Micah S. Officer, Collars and Renegotiation in Mergers and Acquisitions, 59
J. Fin. 2719, 2722–23 (2004) (arguing that collars represent a form of ex ante price
renegotiation based on changes in the relative value of bidder and target).
189
acquisition. In its purest form, the seller’s sole remedy against the buyer is the payment of
the reverse termination fee. That structure effectively creates an option for the buyer and
establishes a floor for the loss in value that a buyer needs to contemplate: If the potential
loss in value exceeds the amount of the termination fee, the buyer can pay the fee and walk
away.751 A law firm study in 2011 found median reverse termination fees equal to 6.36%
of transaction value.752 Studies of reverse termination fees during the period leading up to
the financial crisis found fees hovering at the much lower level of approximately 3%.753
Even more so than collars, reverse termination fees provide a noisy indication of
materiality because many are tied to contractual conditions, should be priced as options,
and are frequently used in private equity deals rather than in strategic acquisitions. Taking
all those distinctions into account, to the extent these amounts provide a rough indication
of the point where certain buyers have bargained for the right to walk, they suggest a point
at which transacting parties regard a change in value as material. Given that the amounts
are far lower than the remediation expense in this case, they suggest that an expense
amounting to 20% of Akorn’s value would be material to a reasonable acquirer.
751
See Steven M. Davidoff, The Failure of Private Equity, 82 S. Cal. L. Rev. 481,
483, 497–98, 515 (2009).
752
See Matthew D. Cain et al., Broken Promises: The Role of Reputation in Private
Equity Contracting, 40 J. Corp. L. 565, 593–94 (2015) (citing study).
753
See Brian JM Quinn, Optionality in Merger Agreements, 35 Del. J. Corp. L. 789,
811 (2010) (3.29%); Elizabeth Nowicki, Reverse Termination Fee Provisions in
Acquisition Agreements 6 (Jul. 5, 2009), http:/ssrn.com/abstract=1121241 (2.7%).
190
To reiterate, I do not pretend that any of these indicators is directly on point. I have
considered them as cross-checks when attempting to evaluate my intuitive belief that the
remediation expense would be material to a reasonable strategic acquirer. In this case, I am
persuaded that the quantitative aspect of the MAE analysis warrants a finding that the
regulatory issues would reasonably be expected to result in a Material Adverse Effect.
4. Whether Fresenius Knowingly Accepted The Risk
As it did when arguing against the existence of a General MAE, Akorn contends
that Fresenius cannot claim that its regulatory issues would be reasonably likely to result
in a Material Adverse Effect because Akorn knew about the risk of potential issues and
signed the Merger Agreement anyway. I agree that Fresenius knew broadly about the risk
of regulatory non-compliance; that is precisely why Fresenius bargained for
representations on this subject. I do not agree, however, that Fresenius’s general knowledge
about potential regulatory issues or questions about the extent to which it conducted due
diligence into these issues means that Fresenius cannot now rely on the representation it
obtained.
Writing as a Vice Chancellor in Cobalt Operating, LLC v. James Crystal
Enterprises, LLC, Chief Justice Strine addressed whether a buyer who had reason to be
concerned about the accuracy of a representation and had the ability to conduct due
diligence to confirm whether or not it was accurate could nevertheless rely on the
191
representation for purposes of asserting its contractual rights.754 The seller argued that the
buyer could not have relied on the representation and therefore should not be able to
recover for breach. The Chief Justice rejected this argument:
[A] breach of contract claim is not dependent on a showing of justifiable
reliance. That is for a good reason. Due diligence is expensive and parties to
contracts in the mergers and acquisitions arena often negotiate for contractual
representations that minimize a buyer’s need to verify every minute aspect
of a seller’s business. In other words, representations like the ones made in
[the agreement] serve an important risk allocation function. By obtaining the
representations it did, [the buyer] placed the risk that [the seller’s] financial
statements were false and that [the seller] was operating in an illegal manner
on [the seller]. Its need then, as a practical business matter, to independently
verify those things was lessened because it had the assurance of legal
recourse against [the seller] in the event the representations turned out to be
false. . . .
[H]aving given the representations it gave, [the seller] cannot now be heard
to claim that it need not be held to them because [the buyer’s] due diligence
did not uncover their falsity. . . . Having contractually promised [the buyer]
that it could rely on certain representations, [the seller] is in no position to
contend that [the buyer] was unreasonable in relying on [the seller’s] own
binding words.755
Other Delaware decisions reach the same conclusion.756
2007 WL 2142926 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008)
754
(TABLE).
755
Id. at *28 (footnotes omitted).
756
See Gloucester Hldg. Corp. v. U.S. Tape & Sticky Prods., LLC, 832 A.2d 116,
127–28 (Del. Ch. 2003) (“Reliance is not an element of a claim for indemnification” for
“breach of any of the representations or warranties in [the agreement] . . . .”); id. at 127
(rejecting contention that justifiable reliance was an element of breach of contract as
“simply incorrect”); Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del.
Super.) (“No such reasonable reliance is required to make a prima facie claim for breach.”),
aff’d, 886 A.2d 1278 (Del. 2005) (TABLE). See generally Victor P. Goldberg, Protecting
Reliance, 114 Colum. L. Rev. 1033, 1080 (2014) (“The weight of authority, and practice,
is with the pro-sandbagging side.”). Commentators often use the term “sandbagging” to
192
Chief Justice Strine’s analysis in Cobalt comports with how Kling and Nugent
describe the interaction between the due diligence process and the representations in the
transaction agreement. As they explain,
a party may well ask for a specific representation and warranty on a certain
topic because its investigation of the business being acquired has it convinced
that such topic is particularly important to that business or has made it aware
refer to the practice of asserting a claim based on a representation despite having had reason
to suspect it was inaccurate. See, e.g., Charles K. Whitehead, Sandbagging: Default Rules
and Acquisition Agreements, 36 Del. J. Corp. L. 1081, 1087, 1092–93 (2011) (surveying
jurisdictions and acquisition agreements; concluding that New York and Delaware are pro-
sandbagging and that very few acquisition agreements have anti-sandbagging clauses).
This is a loaded and pejorative term: It “originates from the 19th century where gang
members would fill socks full of sand to use as weapons against unsuspecting opponents.
While at first glance, the socks were seemingly harmless, when used to their full potential
they became very effective and would inflict substantial damage on a ‘sandbagged’
victim.” Stacy A. Shadden, How to Sandbag Your Opponent in the Unsuspecting World of
High Stakes Acquisitions, 47 Creighton L. Rev. 459, 459 (2014) (footnote omitted). From
my perspective, the real question is whether the risk allocation in the contract controls, or
whether a more amorphous and tort-like concept of assumption of risk applies. To my
mind, the latter risks having cases routinely devolve into fact disputes over what was
provided or could have been provided in due diligence. The former seems more in keeping
with Delaware’s contractarian regime, particularly in light of Delaware’s willingness to
allow parties to restrict themselves to the representations and warranties made in a written
agreement. See ChyronHego, 2018 WL 3642132, at *4–7; Novipax Hldgs. LLC v. Sealed
Air Corp., 2017 WL 5713307, at *10–13 (Del. Super. Nov. 28, 2017); IAC Search, LLC v.
Conversant LLC, 2016 WL 6995363, at *4–8 (Del. Ch. Nov. 30, 2016); Prairie Capital
III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 50–51 (Del. Ch. 2015); Anvil Hldg. Corp.
v. Iron Acq. Co., Inc., 2013 WL 2249655, at *8 (Del. Ch. May 17, 2013); ABRY, 891 A.2d
at 1035–36, 1051–64; Homan v. Turoczy, 2005 WL 2000756, at *17 & n.53 (Del. Ch. Aug.
12, 2005) (Strine, V.C.); H–M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 142 & n.18
(Del. Ch. 2003); Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 555–56
(Del. Ch. 2001). See generally Steven M. Haas, Contracting Around Fraud Under
Delaware Law, 10 Del. L. Rev. 49 (2008).
193
of a specific problem or concern as to which it wants the added comfort of a
specific representation.757
The identification of issues in due diligence thus does not simply lead to a binary go/no-go
decision on the acquisition; it also affects how the parties use representations in the
transaction agreement to allocate responsibility for those issues.
Suppose the Buyer requests the Seller to represent that the Company being
sold is not in material breach of any material contracts. The Company may
in fact be in violation of three material agreements, two of which violations
the Seller is sure are material and one of which it believes to probably be
immaterial. What does the Seller do? It modifies the representation to state:
“Except as set forth on the Disclosure Schedule, the Company is not in
material breach of any material agreement.” The referenced schedule will
then list the two or possibly all three of the agreements in question.758
From the seller’s perspective, the representation is now true, and the buyer will not be able
to claim an inaccuracy that would give the buyer a right not to close or, in a deal with post-
closing remedies, a potential right to recover damages.759 But if the parties do not qualify
the representation, then the party making the representation assumes the risk for a
deviation.
Again relying on IBP’s statement that a “broadly written” MAE provision “is best
read as a backstop protecting the acquiror from the occurrence of unknown events,”760
Akorn argues that these principles do not apply when a representation contains an MAE
757
Kling & Nugent, supra, § 1.06, at 1-43.
758
Id. § 10.02, at 10-3.
759
See id. § 10.02, at 10-3.
760
IBP, 789 A.2d at 68; accord Hexion, 965 A.2d at 738.
194
qualification. Akorn contends that adding an MAE qualification not only introduces a
measure of variance from a flat representation, but also incorporates a broad carve-out for
any risks that the buyer may have known about or issues which the buyer identified or
could have identified through due diligence.
In my view, the analysis of the Regulatory MAE should take into account that the
Material Address Effect is tied to an issue that the parties have addressed in a
representation. The existence of the representation evidences the seller’s knowledge of a
risk, and the representation constitutes an effort by the parties to allocate that risk. 761 By
adding an MAE qualifier, the parties do not change the nature of the representation or its
risk allocation function; the qualifier instead addresses the degree of deviation from the
representation that is permissible before the representation would be deemed inaccurate. In
761
See, e.g., Model Merger Agreement, supra, at 27 (“The representations and
warranties . . . provide a mechanism for allocating between the buyer and the target the risk
of the occurrence of the events . . . described therein, whether before or (except for
representations and warranties made as of a specific date) after the signing of the definitive
agreement. Given this potential role of the representations and warranties, in some cases
the target may be asked to make representations that are not necessarily within the
knowledge of the target, but are matters that the parties believe present a potential risk that
should be addressed.”); JX 1239 ¶ 47 (Subramanian) (“The reps & warranties, when
combined with the bring-down condition, serve an important risk allocation purpose. In
effect, they provide downside protection on specific aspects of the deal. If those aspects
are not true at the closing, the buyer has the right to walk away. This can include events
that are outside the seller’s control. For example, if the target company represents that there
are no material legal proceedings against the company (beyond what is contained in the
disclosure schedule), but the target company is sued in a way that triggers a MAC between
signing and closing, the buyer will have a contractual right to walk away.”).
195
this role, the MAE qualifier stands in for a specific dollar figure, replacing a specified
amount with an ex post judicial determination based on the facts and circumstances.
To illustrate the difference, assume that one of the Regulatory Compliance
Representations was drafted using a dollar figure rather than an MAE qualifier.762 It might
read as follows:
The Company and its Subsidiaries are and, to the Knowledge of the Company
since July 1, 2013, have been in compliance with all applicable Laws relating
to or promulgated by Healthcare Regulatory Authorities, except where
noncompliance would not, individually or in the aggregate, reasonably be
expected to result in a loss of more than $10 million.
Assume that at the time of signing, the seller had a data integrity issue that would cost $15
million to remediate, and the buyer learns of it between signing and closing. The magnitude
of this issue would render the representation inaccurate. In my view, the buyer should be
able to pursue any rights it has under the merger agreement based on the inaccuracy of the
representation. Under the rationale of the Cobalt decision and other Delaware cases, it
should not matter that the buyer may have had concern about potential regulatory
compliance issues and likely conducted some degree of due diligence into those issues.
Indeed, the existence of the representation by itself evidences the fact that the buyer did
have concerns about potential regulatory compliance issues. What should matter is that the
parties allocated the risk of any regulatory compliance issues through the representation,
762
See generally Kling & Nugent, supra, § 11.03[1], at 11-21 (discussing
representations qualified by “the dollar level of an item or problem necessary to result in a
representation being false”).
196
qualified by a dollar figure so that the representation would only be inaccurate and give
rise to contractual rights if an issue exceeded the threshold.
To my mind, an MAE qualifier serves the same purpose; it just replaces the specific
dollar figure with a threshold that turns on facts and circumstances.763 Drafted with an
MAE qualifier, the same representation might read as follows:
The Company and its Subsidiaries are and, to the Knowledge of the Company
since July 1, 2013, have been in compliance with all applicable Laws relating
to or promulgated by Healthcare Regulatory Authorities, except where
noncompliance would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
From my standpoint, it still should not matter whether or not the buyer had concerns about
potential regulatory compliance issues (which the representation evidences) or conducted
some degree of due diligence. The parties allocated the risk of those issues through the
representation, qualified so that the representation would only be inaccurate if an issue
arose that was sufficiently serious that it would reasonably be expected to have a Material
Adverse Effect.764
If parties wish to carve out anything disclosed in due diligence from the scope of a
representation, then they can do so. If parties wish to carve out specific items or issues
763
Cf. id. § 11.03[1], at 11-21 to -24 (discussing qualification of representations by
the adjective “material” in lieu of a dollar value; noting that parties may also use the higher
standard of “having a materially adverse effect on”).
764
Cf. id. § 11.03[2], at 11-25 (noting that with a materiality-qualified
representation, “the Buyer will have the ability to walk from the transaction”; however,
“[t]he only difference, which may be of some economical [sic] significance, is that none of
these rights will be triggered unless there is a ‘material’ problem”).
197
from the scope of a representation, then they can use the common technique of qualifying
the representation so that it excludes items listed on a corresponding schedule.765 A seller
could, for example, represent that it was in compliance with all regulatory requirements
except for those listed on Schedule 3.18(a), and on that schedule identify data integrity
issues. In this case, the Regulatory Compliance Representations are not qualified by any
carve-outs or scheduled exceptions, but only by an MAE qualification for purposes of the
Bring-Down Condition. As Akorn’s counsel candidly conceded during post-trial argument,
a regime which holds that a buyer cannot assert a breach of an MAE-qualified
representation if the buyer learned or could have learned about aspects of the risk covered
765
See, e.g., IBP, 789 A.2d at 39–40 (quoting examples of representations qualified
by scheduled exceptions); Kling & Nugent, supra, § 10.01, at 10-2 (“[T]he disclosure
schedule serves either to expand, or more commonly, to set forth exceptions to, the various
representations. . . . Such schedules may affect whether the Buyer is required to close the
acquisition of the Company as well as its ability to seek indemnification from the Seller
for problems which may come to light after the closing.”); id. § 11.03[2], at 11-25 (“[I]n a
large transaction the choice in many instances may be between use of materiality
exceptions and long disclosure schedules containing endless lists of exceptions to the
representations. In the situation where speed and secrecy are essential, the use of
materiality qualifiers becomes critical.”) (footnote omitted); id. (“[T]he addition of a
materiality standard to a representation is not necessarily fatal to any of the three functions
generally served by representations and warranties portions of the agreement. The due
diligence role is still performed, albeit to a lesser extent; the Buyer won’t learn about the
business with the level of detail that would be the case absent the qualification, but it should
still find out about the serious problems. Similarly, the Buyer will have the ability to walk
from the transaction as well as enjoy the benefit of any indemnification provisions.”).
See also, e.g., id. § 11.04[9], at 11-69 (“[A]n acquiror’s pre-signing knowledge
about trends and possible events, including what is learned in due diligence and disclosed
on the schedules to the agreement, could diminish its ability to successfully claim that a
material adverse effect has occurred.”) (discussing IBP).
198
by the representation during due diligence turns an MAE-qualified representation into the
functional equivalent of a scheduled representation that schedules everything provided in
due diligence.766 One could likewise say that Akorn’s argument turns an MAE-qualified
representation into the functional equivalent of a representation with an expansive
knowledge-based exception framed in terms of everything the buyer knew or should have
known. To my mind, that reading is not consistent with the plain language of the Merger
Agreement.
Assuming for the sake of argument that a buyer who knew about a specific fact that
rendered a seller’s representation inaccurate should not be permitted to close a transaction
and then recover damages based on that specific fact, it does not necessarily follow that a
buyer should be prevented from relying on a representation simply because the buyer knew
about a risk. It also does not necessarily follow that a buyer should be prevented from
relying on a representation when exercising a right not to close. As the Chief Justice
observed in IBP,
[t]he public policy reasons for denying relief to the buyer [when it seeks
damages] are arguably much different than are implicated by a decision
whether to permit a buyer simply to walk away before closing in reliance on
a specific contractual representation that it had reason to suspect was untrue
as of the time of signing.767
766
Dkt. 220 at 123–28.
767
IBP, 789 A.2d at 82 n.200.
199
In this case, Fresenius did not know about the data integrity issues that would reasonably
be expected to result in a Regulatory MAE. Fresenius obtained and reviewed a redacted
Form 483 for Decatur, but it identified manufacturing issues, not data integrity concerns.768
During an early pitch meeting in November, where Rai introduced Silverberg to Fresenius
as Akorn’s head of quality, no one mentioned that Silverberg had overstayed his welcome
at Akorn and was scheduled to retire in January 2017.769 Akorn did not provide Fresenius
with its GQC audit reports on data integrity issues or the Cerulean gap assessments. Akorn
has pointed out that Fresenius did not ask for them, but this also shows that Fresenius did
not know about these issues.770
During due diligence, Fresenius did identify significant regulatory compliance and
other business risks at Akorn, including risks related to Akorn’s product launch plan, its
manufacturing and quality functions, and its ability to comply with FDA serialization
requirements.771 But Fresenius’s comprehensive risk assessment did not reference data
768
See JX 199; Bauersmith Dep. 217.
769
Rai Dep. 156–57; see JX 137.
770
See Ducker Dep. 269 (expressing regret that Fresenius did not request “internal
and external audit reports” that “might have given us prior knowledge of their data integrity
problems, because obviously they were well aware of those problems but had chosen not
to inform us”); see also JX 882.
771
See JX 422 at ‘000–002 (discussing twelve leading risks uncovered in due
diligence); JX 428 at ‘673, ‘682, ‘710–14; JX 399 at 8–9; JX 431 (“Red Flag Tax Due
Diligence Report”); see also JX 412 (“Quality Related Aspects in Due Diligence
Activities”). Throughout due diligence, Fresenius kept track of “red flag DD findings.” See
JX 331; JX 401 at 9; see also JX 416 ‘388–408 (final due diligence slide deck addressing
200
integrity as a risk.772 The final presentation to the Supervisory Board also did not identify
risks related to data integrity.773 In any case, many of the events giving rise to the
Regulatory MAE had not yet occurred at the time of signing. Even with full knowledge of
the data integrity risks, Fresenius could not have foreseen Silverberg’s false CRL
submission or Akorn’s misleading presentation to the FDA. Even under Akorn’s view of
the law, the Merger Agreement allocates these unknowable risks to Akorn.
In my view, the combination of the Regulatory Compliance Representations and the
Bring-Down Condition allocated to Akorn the risk that Akorn would suffer a Regulatory
MAE. Akorn cannot now seek to re-trade that contractual allocation by arguing that
Fresenius knew or should have known about those risks.
5. The Possibility Of Cure
Section 7.01(c)(i) permits Fresenius to terminate if the failure of a condition
is incapable of being cured or, if capable of being cured by the Outside Date,
the Company (x) shall not have commenced good faith efforts to cure breach
or failure to perform within 30 calendar days following receipt by the
Company of written notice of such breach or failure to perform from
[Fresenius Kabi] stating [Fresenius Kabi’s] intention to terminate this
Agreement pursuant to this Section 7.01(c)(i) and the basis for such
termination . . . .
“Areas of concern”). These files presumably would reference widespread data integrity
issues if Fresenius knew about them.
772
See Henriksson Tr. 945 (testifying that Fresenius’s observations about quality
and equipment had “nothing to do with data integrity”). The exception was data integrity
risk at Akorn’s India site, which Fresenius identified based on a June 2014 FDA inspection.
JX 331 at ‘680.
773
See JX 428.
201
Under the plain language of this provision, Section 7.01(c)(i) permits Fresenius to
terminate if the failure of a condition cannot be cured before the Outside Date.
Section 7.01(b)(i) defines the Outside Date as part of the right that both sides have
to terminate the Merger Agreement if the closing does not occur before the Outside Date.
Formatted for greater legibility, the provision states that either side may terminate
if the Effective Time shall not have occurred on or prior to April 24, 2018
(as such date may be expected pursuant to the immediately succeeding
proviso, the “Outside Date”);
provided that if on the Outside Date [1] any of the conditions set forth in
Section 6.01(b) or Section 6.01(a) (to the extent relating to the matters set
forth in Section 6.01(b)) shall not have been satisfied but [2] all other
conditions set forth in Article VI shall have been satisfied or waived . . . then
the Outside Date shall be automatically extended to July 24, 2018 . . .;
provided, further, that if the Outside Date shall have been extended pursuant
to the preceding proviso and on the extended Outside Date any of the
conditions set forth in Section 6.01(b) or Section 6.01(a) (to the extent
relating to the matters set forth in Section 6.01(b)) shall not have been
satisfied but all other conditions set forth in Article VI shall have been
satisfied or waived . . ., and [Fresenius Kabi] is then actively engaged in
actions required to discharge its obligations under the second sentence of
Section 5.03(c), then [Fresenius Kabi] shall have the right to extend the
Outside Date to October 24, 2018 . . . .
Under this provision, the Outside Date starts out as April 24, 2018, can extend
automatically to July 24, 2018, and can be extended at Fresenius’s option to October 24,
2018.
As determined in the previous section, Akorn had experienced a General MAE
before April 24, 2018, so “all other conditions set forth in Article VI” were not “satisfied
or waived.” Therefore, the Outside Date did not extend beyond April 24. When the Outside
Date came and went, Akorn was only beginning to attempt to determine what it needed to
202
do to remediate its data integrity issues. NSF was in the early stages of its investigation.
PwC was just getting started on its master list of deficiencies.
Even if the Outside Date had extended, Akorn could not have cured its regulatory
problems in time. The evidence at trial demonstrated that Akorn had pervasive regulatory
issues that would require years to fix. Akorn’s witnesses coalesced around three years.
Fresenius posited four years. Accepting Akorn’s estimate, the problems would not be fixed
until 2021.
Akorn argues that if the breaches were curable in the abstract, then Fresenius had to
give Akorn notice and an opportunity to cure and could not exercise its termination right
while Akorn was engaged in good faith efforts to cure. Under Akorn’s interpretation,
Akorn could hold Fresenius to the Merger Agreement for the four years that Fresenius
believes it will take to remediate Akorn’s regulatory issues, as long as Akorn is engaged in
good faith efforts to cure. But that is not what the Merger Agreement says. Section
7.01(c)(i) only requires notice and gives Akorn an opportunity to cure if the failure of a
condition is “capable of being cured by the Outside Date.” In this case, Akorn’s breaches
were not capable of being cured by the Outside Date. Consequently, Fresenius did not have
to wait to give Akorn an opportunity to cure. Fresenius could terminate immediately.
6. The Finding Regarding The Bring-Down Condition
Fresenius proved that Akorn’s breach of the Regulatory Compliance
Representations would be reasonably be expected to result in a Regulatory MAE, causing
the failure of the Bring-Down Condition. In making this showing, Fresenius established
that Akorn’s regulatory difficulties have such qualitative and quantitative significance that
203
the effect on Akorn’s business is material when viewed from the longer-term perspective
of a reasonable acquirer, which is measured in years. Fresenius also showed that Akorn
could not cure the failure of the Bring-Down Condition by the Outside Date. Because the
Bring-Down Condition has not been met, Fresenius cannot be forced to close. More
importantly, Fresenius had the right to terminate the Merger Agreement, provided that
Fresenius was not then in material breach of its own contractual obligations.
C. The Failure Of The Covenant Compliance Condition
The next question is whether Fresenius validly terminated the Merger Agreement
under Section 7.01(c)(i) because the Covenant Compliance Condition could not be met.
The answer to this question turns on whether Akorn incurably breached the Ordinary
Course Covenant. Yet again, because Fresenius sought to excuse its performance under the
Merger Agreement, Fresenius bore the burden of proof.774
In addition to providing a termination right based on an incurable failure to comply
with the Bring-Down Condition, Section 7.01(c)(i) gives Fresenius the right to terminate
if Akorn incurably breached the Covenant Compliance Condition. Formatted for greater
legibility, Section 7.01(c)(i) states:
This Agreement may be terminated and the [Merger] abandoned at any time
prior to the Effective Time (except as otherwise expressly noted), whether
before or after receipt of the Company Shareholder Approval: . . .
(c) by [Fresenius Kabi]: (i) if the Company shall have . . . failed to
perform any of its covenants or agreements . . ., which failure to perform
774
See Hexion, 965 A.2d at 739; Frontier Oil, 2005 WL 1039027, at *35; IBP, 789
A.2d at 53.
204
(A) would give rise to the failure of a condition set forth in . . .
Section 6.02(b) [the Covenant Compliance Condition] and
(B) is incapable of being cured . . .;
provided that [Fresenius Kabi] shall not have the right to
terminate this Agreement pursuant to this Section 7.01(c)(i) if
[Fresenius Kabi] or Merger Sub is then in material breach of any of
its representations, warranties, covenants or agreements hereunder . .
..
Whether Fresenius had a termination right under this aspect of Section 7.01(c)(i) therefore
turns on three questions: (i) whether Akorn failed to perform any of its covenants or
agreements in a manner that would cause the Covenant Compliance Condition to fail, (ii)
whether the failure could be cured, and (iii) whether Fresenius was otherwise in material
breach of its obligations under the Merger Agreement. Whether Fresenius breached its
obligations is the same analysis under both the Covenant Compliance Condition and the
Bring-Down Condition, so this decision addresses that issue separately.
1. The Operation Of The Covenant Compliance Condition
Formatted for greater legibility, the Covenant Compliance Condition states:
The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger
shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if
permissible under applicable law) on or prior to the Closing Date of the
following conditions:
* * *
(b) Compliance with Covenants. The Company shall have complied with or
performed in all material respects its obligations required to be complied with
or performed by it at or prior to the Effective Time . . . .
205
Notably, the Merger Agreement does not condition closing on an absolute requirement that
Akorn have complied with or performed all of its obligations. Instead, Akorn need only
have complied with or performed its obligations “in all material respects.”
In this case, Fresenius asserts that Akorn failed to comply with the Ordinary Course
Covenant. Parties include ordinary-course covenants in transaction agreements to add an
additional level of protection for the buyer beyond the Bring-Down Condition and help
ensure that “the business [the buyer] is paying for at closing is essentially the same as the
one it decided to buy at signing . . . .”775 “For a variety of reasons, reliance on the target’s
representations, as they are brought down to test the condition of closing that the
representations remain substantially true and correct on the closing date, will not provide
the buyer adequate assurance as to the target’s maintenance of its business.”776 “Most
importantly, representations do not provide a remedy with respect to conduct during the
775
Kling & Nugent, supra, § 13.03, at 13-19; see Model Stock Purchase Agreement,
supra, at 202 (“Generally, a buyer has an interest in assuring that the business of the target
will be substantially the same as closing as it was on the date the purchase agreement was
signed.”); see also JX 1239 ¶¶ 39, 41 (Professor Subramanian explaining that an ordinary-
course covenant seeks “to mitigate or eliminate the moral hazard problem that exists for
the target’s management between the signing and the closing of the deal,” which “involves
the incentive for the seller to act opportunistically between signing and closing, because if
the deal closes the cost of this opportunistic behavior will be borne by the buyer, who does
not yet have control over the target’s assets”).
776
Model Merger Agreement, supra, at 120.
206
interim period between signing and closing. If the target does not remain appropriately
motivated to close, reliance on the bring-down condition would be ineffective.”777
In this case, the Ordinary Course Covenant consists of a broad affirmative covenant
and sixteen categories of prohibited acts. Section 5.01(a) sets out the broad affirmative
covenant. Formatted for legibility, it states:
(a) Except as required by applicable Law, Judgment or a Governmental
Authority, as expressly contemplated, required or permitted by this
Agreement or as set forth in Section 5.01 of the Company Disclosure Letter,
during the period from the date of this Agreement until the Effective Time
(or such earlier date on which this Agreement is terminated pursuant to
Section 7.01), unless [Fresenius Kabi] otherwise consents in writing (such
consent not to be unreasonably withheld, delayed or conditioned),
(i) the Company shall, and shall cause each of its Subsidiaries to, use
its and their commercially reasonable efforts to carry on its business in all
material respects in the ordinary course of business, and
(ii) to the extent consistent with the foregoing, the Company shall, and
shall cause its Subsidiaries to, use its and their commercially reasonable
efforts to preserve its and each of its Subsidiaries’ business organizations
(including the services of key employees) substantially intact and preserve
existing relations with key customers, suppliers and other Persons with
whom the Company or its Subsidiaries have significant business
relationships substantially intact, in each case, substantially consistent with
past practice;
provided that no action by the Company or any of its Subsidiaries with
respect to matters specifically addressed by Section 5.01(b) shall be deemed
to be a breach of this Section 5.01(a) unless such action would constitute a
breach of Section 5.01(b).778
777
Id.
778
JX 1 § 5.01(a).
207
Two aspects of the Ordinary Course Covenant jump out. First, the Ordinary Course
Covenant contains the same type of materiality qualification found in the Covenant
Compliance Condition: Akorn need not carry on its business in the ordinary course in every
respect, only “in all material respects.” Second, Akorn did not promise to maintain
compliance with the Ordinary Course Covenant. It only committed to use “commercially
reasonable efforts” to try to maintain compliance.
a. “In All Material Respects”
For starters, both the Covenant Compliance Condition and the Ordinary Course
Covenant require compliance “in all material respects.” The parties debate the meaning of
this term.
Akorn argues that this phrase adopts the common law doctrine of material breach,
under which “[a] party is excused from performance under a contract if the other party is
in material breach thereof.”779 As a matter of common law, “[a] breach is material if it goes
to the root or essence of the agreement between the parties, or touches the fundamental
purpose of the contract and defeats the object of the parties in entering into the contract.”780
Under this doctrine, whether a breach is material “is determined by weighing the
consequences in the light of the actual custom of men in the performance of contracts
779
BioLife Sols., Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003).
780
Mrs. Fields Brand, Inc. v. Interbake Foods LLC, 2017 WL 2729860, at *28 (Del.
Ch. June 26, 2017) (internal quotation marks omitted), clarified on denial of reargument
2017 WL 3863893 (Del. Ch. July 27, 2017).
208
similar to the one that is involved in the specific case.”781 The Restatement (Second) of
Contracts provides five guiding factors: (i) “the extent to which the injured party will be
deprived of the benefit which he reasonably expected,” (ii) “the extent to which the injured
party can be adequately compensated for the part of that benefit of which he will be
deprived,” (iii) “the extent to which the party failing to perform or to offer to perform will
suffer forfeiture,” (iv) “the likelihood that the party failing to perform or to offer to perform
will cure his failure, taking account of all the circumstances including any reasonable
assurances,” and (v) “the extent to which the behavior of the party failing to perform or to
offer to perform comports with standards of good faith and fair dealing.”782
“[N]onperformance will attain this level of materiality . . . when the covenant not
performed is of such importance that the contract would not have been made without it.”783
Treatises on M&A agreements suggest a different purpose for including the phrase
“in all material respects.” Drafters use this language to eliminate the possibility that an
immaterial issue could enable a party to claim breach or the failure of a condition.784 The
781
BioLife Sols., 838 A.2d at 278 (internal quotation marks omitted); accord 23
Williston on Contracts § 63:3 (4th ed. 2003).
782
Restatement (Second) of Contracts § 241 (Am. Law Inst. 1981). “Courts in
Delaware look to Section 241 of the Restatement (Second) of Contracts for guidance
regarding materiality of a breach.” Medicalgorithmics S.A. v. AMI Monitoring, Inc., 2016
WL 4401038, at *24 (Del. Ch. Aug. 18, 2016).
783
14 Williston on Contracts § 43:6 (4th ed. 2003) (footnotes omitted).
784
See Kling & Nugent, supra, § 14.02[3], at 14-12 (“[T]here are clearly
representations where a minor mistake should not give the other party a walk-right.”); id.
§ 14.02[7], at 14-17 (contrasting compliance “in all material respects” with “absolute
209
language seeks to exclude small, de minimis, and nitpicky issues that should not derail an
acquisition. Consistent with this interpretation, the Restatement (Second) of Contracts
recognizes that parties can depart from the common law doctrine of material breach, under
which only a material breach excuses performance, by including express conditions to a
party’s performance in the agreement.785 The Covenant Compliance Condition is one of
those conditions. As Kling and Nugent observe, “It is precisely to avoid these types of
compliance”); Contract Drafting, supra, at 213 (“An important drafting tool is the adjective
material, as in Widgetco is not a party to any material litigation. Drafters use it, and the
adjective materially . . . to narrow an otherwise overly broad provision so it covers only
what really matters.”).
785
See Restatement (Second) of Contracts § 241 cmt. a (Am. Law Inst. 1981)
(discussing the “the situation where the parties have, by their agreement, made an event a
condition”); id. § 226 (“An event may be made a condition either by the agreement of the
parties or by a term supplied by the court.”); id. § 241 cmt. a (“A determination that a
failure is not material means only that it does not have the effect of the non-occurrence of
a condition under §§ 237 and 238.”); id. § 237 cmt. a (“[A] material failure of performance,
including defective performance as well as an absence of performance, operates as the non-
occurrence of a condition.”); see, e.g., Williams Cos. v. Energy Transfer Equity, L.P., 159
A.3d 264, 273 (Del. 2017) (analyzing whether breach of a covenant “materially
contribute[d] to the failure of [a] closing condition”); Sarissa Capital Domestic Fund LP
v. Innoviva, Inc., 2017 WL 6209597, at *24 n.263 (Del. Ch. Dec. 8, 2017) (“Th[e]
distinction between ‘condition precedent’ and ‘covenant’ is significant . . . . The press
release as a ‘condition precedent’ would allow Innoviva to walk away from the settlement
if Sarissa failed to perform; the press release as ‘covenant’ would allow Innoviva to sue for
breach of contract if Sarissa failed to perform. Non-performance of the ‘covenant,’
however, would not provide a basis for Innoviva to walk away from the deal (unless, of
course, Sarissa committed a material breach of the press release term after the parties
engaged in good faith negotiations of the press release language).”) (citation omitted). See
generally 2 Farnsworth on Contracts § 8.2, at 415 (3d ed. 2004) (“Although a condition is
usually an event of significance to the obligor, this need not be the case. In exercising their
freedom of contract the parties are not fettered by any test of materiality or reasonableness.
If they agree, they can make even an apparently insignificant event a condition.”).
210
issues [viz., arguments over the common law doctrine of material breach] that parties
carefully draft acquisition agreements (although the condition is typically qualified by
materiality), and provide for a ‘bring down’ condition, including as it relates to covenants
in the acquisition agreement.”786
Based on these authorities, the plain meaning of “in all material respects” in the
Covenant Compliance Condition and the Ordinary Course Covenant calls for a standard
that is different and less onerous than the common law doctrine of material breach. Relying
on Frontier Oil, Fresenius argues that the phrase “in all material respects” requires only a
“substantial likelihood that the . . . fact [of breach] would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information.”787 This
test builds on the standard for materiality under disclosure law. Despite the oddity of
relying on a disclosure-based standard to evaluate contractual compliance, the Frontier Oil
test (as conceived by Fresenius) fairly captures what I believe the “in all material respects”
786
Kling & Nugent, supra, § 14.01, at 14-3 n.3; see Cooper Tire & Rubber Co. v.
Apollo (Mauritius) Hldgs. Pvt. Ltd., 2014 WL 5654305, at *13–17 (Del. Ch. Oct. 31, 2014)
(analyzing whether party had complied “in all material respects” with a contractual
covenant; the court did not cite the common law doctrine of material breach); Model Stock
Purchase Agreement, supra, at 253 (discussing condition for covenant compliance and
finding that “if Sellers breach any of their pre-closing covenants in a material respect,
Buyer will have a ‘walk right’ in addition to its right to sue and recover damages from
Sellers because of the breach”).
787
See Frontier Oil, 2005 WL 1039027, at *38 (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)); see also Contract Drafting, supra, at 213 (“In
an M&A context, and from the buyer’s perspective, this meaning of material refers to
information that would have caused the buyer not to enter into the agreement or would
cause the buyer not to want to close the transaction.”).
211
language seeks to achieve. It strives to limit the operation of the Covenant Compliance
Condition and the Ordinary Course Covenant to issues that are significant in the context of
the parties’ contract, even if the breaches are not severe enough to excuse a counterparty’s
performance under a common law analysis.
It bears noting when analyzing the Covenant Compliance Condition that the
presence of the “in all material respects” qualifier in both the condition and the underlying
covenant results in two levels of materiality. To my mind, the double-materiality standard
simply emphasizes that the breach of the Ordinary Course Covenant cannot be immaterial.
It has to matter both as a departure from a generic pharmaceutical company’s operations
in the ordinary course of business and as a deviation from the buyer’s reasonable
expectations regarding what it would receive at closing.
b. “Commercially Reasonable Efforts”
The other key qualifier in the Ordinary Course Covenant—“commercially
reasonable efforts”—is an example of an efforts clause. Clauses of this type mitigate the
rule of strict liability for contractual non-performance that otherwise governs. Generally
speaking, “[i]f a party agrees to do something, he must do it or be liable for resulting
damages” (or potentially be subject to an order compelling specific performance). 788 At
times, however, a party’s ability to perform its obligations depends on others or may be
788
Kling & Nugent, supra, § 13.06, at 13-44.
212
hindered by events beyond the party’s control.789 In those situations, drafters commonly
add an efforts clause to define the level of effort that the party must deploy to attempt to
achieve the outcome.790 The language specifies how hard the parties have to try. “In
acquisition transactions, the parties will generally bind themselves to achieve specified
results with respect to activities that are within their control . . . and reserve [an efforts]
standard for things outside of their control or those dependent upon the actions of third
parties.”791
Deal practitioners have a general sense of a hierarchy of efforts clauses.792 The ABA
Committee on Mergers and Acquisitions has ascribed the following meanings to
commonly used standards:
 Best efforts: the highest standard, requiring a party to do essentially
everything in its power to fulfill its obligation (for example, by
expending significant amounts or management time to obtain
consents).
 Reasonable best efforts: somewhat lesser standard, but still may
require substantial efforts from a party.
789
See Model Stock Purchase Agreement, supra, at 212 (“An absolute duty to
perform covenants or similar obligations relating to future actions will often be
inappropriate or otherwise not acceptable to one or more parties to the agreement, as, for
instance, when a party’s ability to perform depends upon events or third-party acts beyond
that party’s control. In such circumstances, parties typically insert ‘efforts’ provisions.”).
790
See id. at 212 (“‘Efforts’ clauses are commonly used to qualify the level of effort
required in order to satisfy an applicable covenant or obligation.”).
791
Kling & Nugent, supra, § 13.06, at 13-44.
792
See id. § 13.06, at 13-46 to -47; Model Stock Purchase Agreement, supra, at 212.
213
 Reasonable efforts: still weaker standard, not requiring any action
beyond what is typical under the circumstances.
 Commercially reasonable efforts: not requiring a party to take any
action that would be commercially detrimental, including the
expenditure of material unanticipated amounts or management time.
 Good faith efforts: the lowest standard, which requires honesty in fact
and the observance of reasonable commercial standards of fair
dealing. Good faith efforts are implied as a matter of law.793
Kling and Nugent “believe that most practitioners treat ‘reasonable efforts,’ ‘commercially
reasonable efforts’ and ‘reasonable best efforts’ as all different from and as imposing less
of an obligation than, ‘best efforts.’”794 They also observe that “‘reasonable best efforts’
sounds as if it imposes more of an obligation than ‘commercially reasonable efforts.’”795
Commentators who have surveyed the case law find little support for the distinctions
that transactional lawyers draw.796 Consistent with this view, in Williams Companies v.
793
Model Stock Purchase Agreement, supra, at 212 (citation omitted); see Ryan A.
Salem, Comment, An Effort to Untangle Efforts Standards Under Delaware Law, 122 Penn
St. L. Rev. 793, 800 (2018) (identifying five commonly used standards: good faith efforts,
reasonable efforts, best efforts, commercially reasonable efforts, and diligent efforts).
794
Kling & Nugent, supra, § 13.06, at 13-46 to -47 (footnote omitted); see Contract
Drafting, supra, at 195 (“Anecdotal evidence suggests that many who work with contracts
believe that best efforts obligations are more onerous than reasonable efforts obligations.
The distinction is often expressed like this: reasonable efforts requires only what is
reasonable in the context, whereas best efforts requires that you do everything you can to
comply with the obligation, even if you bankrupt yourself.”).
795
Kling & Nugent, supra, § 13.06, at 13-47.
796
See Kling & Nugent, supra, § 13.06, at 13-44 to -49 & nn.2–9, 11 (collecting
cases); Contract Drafting, supra, at 193 (observing that “[t]here’s widespread confusion
over phrases using the word efforts”; recommending that drafters use a single standard of
“reasonable efforts”); Salem, supra, at 800–21 (surveying case law; recommending that
Delaware resolve the ambiguity created by different efforts standards by adopting a single
standard of “reasonable efforts”); Zachary Miller, Note, Best Efforts?: Differing Judicial
214
Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction
agreement that used both “commercially reasonable efforts” and “reasonable best efforts.”
Referring to both provisions, the high court stated that “covenants like the ones involved
here impose obligations to take all reasonable steps to solve problems and consummate the
transaction.”797 The high court did not distinguish between the two. While serving as a
member of this court, Chief Justice Strine similarly observed that even a “best efforts”
obligation “is implicitly qualified by a reasonableness test—it cannot mean everything
possible under the sun.”798 Another Court of Chancery decision—Hexion—also framed a
buyer’s obligation to use its “reasonable best efforts” to obtain financing in terms of
commercial reasonableness: “[T]o the extent that an act was both commercially reasonable
Interpretations of a Familiar Term, 48 Ariz. L. Rev. 615, 615 (2006) (“The judicial
landscape is littered with conflicting interpretations of efforts clauses”); see also Kenneth
A. Adams, Understanding “Best Efforts” And Its Variants (Including Drafting
Recommendations), 50 Prac. Law., Aug. 2004, at 11, 18–20 (arguing that courts should
only apply a single standard of “reasonable efforts”); 2 Farnsworth on Contracts § 7.17c,
at 405 n.13 (3d ed. 2004) (“The terms ‘best efforts’ and ‘reasonable efforts’ are generally
used interchangeably, although sometimes it is suggested that ‘best’ is more demanding
than ‘reasonable.’”).
797
159 A.3d at 272. In a dissenting opinion, Chief Justice Strine maintained a
distinction between “best efforts” and “commercially reasonable efforts,” describing the
former as one that “can potentially lead to the party making the promise having to take
extreme measures to fulfill it” and the latter as “a strong, but slightly more limited,
alternative[.]” 159 A.3d at 276 & n.45 (Strine, C.J., dissenting).
798
Alliance Data Sys., 963 A.2d at 763 n.60 (quoting Coady Corp. v. Toyota Motor
Distribs., Inc., 361 F.3d 50, 59 (1st Cir. 2004)).
215
and advisable to enhance the likelihood of consummation of the financing, the onus was
on Hexion to take that act.”799
2. Akorn’s Failure To Use Commercially Reasonable Efforts To
Operate In The Ordinary Course Of Business
Under the Merger Agreement, Akorn was obligated to use commercially reasonable
efforts to operate in the ordinary course of business in all material respects. As interpreted
by the Delaware Supreme Court in Williams, this standard required that Akorn “take all
reasonable steps” to maintain its operations in the ordinary course of business. 800 The
record establishes that Akorn breached that obligation in multiple ways.
First, a generic pharmaceutical company operating in the ordinary course of
business is obligated to conduct regular audits and to take steps to remediate deficiencies.
As discussed at length in the Factual Background, Akorn departed from this aspect of
ordinary course operations after the Merger Agreement was signed by cancelling regular
audits at four sites in favor of verification audits that would not look for additional
deficiencies. Fresenius also cancelled Cerulean’s assessment of Amityville and never
completed Cerulean’s inspection of Somerset, even though Akorn had planned for both to
take place before the Merger Agreement was signed. Akorn personnel stated that these
changes were made because of the Merger. Fresenius did not consent to these changes.
799
Hexion, 965 A.2d at 749.
800
159 A.3d at 272.
216
Second, a generic pharmaceutical company operating in the ordinary course of
business is obligated to maintain a data integrity system that enables the company to prove
to the FDA that the data underlying its regulatory filings and product sales is accurate and
complete. As discussed at length in the Factual Background, Akorn did not do this. Despite
receiving the results of its internal GQC audits and the Cerulean assessments, Akorn senior
management instructed its IT department not to devote any resources to data integrity
projects. Akorn did not begin to address its data integrity issues until March 2018, just one
month before Fresenius terminated the Merger Agreement.801
Third, a generic pharmaceutical company operating in the ordinary course of
business does not submit regulatory filings to the FDA based on fabricated data. As
discussed at length in the Factual Background, Akorn departed from this aspect of ordinary
course operations in August 2017 when Silverberg submitted the CRL for azithromycin
that relied on fabricated data. The evidentiary record convinces me that Silverberg knew
that the CRL relied on fabricated data and submitted it anyway because the only alternative
would have been to withdraw the ANDA and start an investigation. That would have been
a red flag for Fresenius. As Akorn’s expert recognized, one of the purposes of an ordinary-
801
See JX 1077 at ‘065–66; Wasserkrug Tr. 141–54.
217
course covenant is to constrain the moral hazard problem that can lead to misconduct like
Silverberg’s.802
Akorn also failed to act in the ordinary course of business when Fresenius provided
Akorn with the whistleblower letters. As an Akorn director with FDA expertise recognized,
Akorn should have conducted a “responsive and credible” investigation using counsel with
experience in regulatory matters.803 Akorn chose not to conduct an investigation of its own.
Instead, Akorn decided to have its deal counsel, Cravath, front run the investigation that
Fresenius intended to conduct and head off any problems that Fresenius otherwise might
uncover. As discussed in the Factual Background, Akorn did not make this decision
because Fresenius somehow directed Akorn not to investigate, but rather because Akorn
feared a broad investigation of its own would uncover widespread problems.
Unfortunately for Akorn, it became clear when Cravath spoke with employees at
the Somerset site that Sidley would quickly uncover Silverberg’s fraud. At that point,
Cravath began investigating, but Akorn’s desire to tamp down that problem and prevent
the issue from derailing the Merger led to non-ordinary-course efforts at damage control.
These efforts included discounting the import of Silverberg’s efforts to coordinate his story
with Sherwani and destroy any evidence of their coordination, which failed only because
802
See generally JX 1239 ¶¶ 39–42 (Subramanian) (“[T]he ordinary course
covenant focuses on the conduct (actions) of the seller’s managers and prohibits
opportunistic behavior by those managers.”).
803
JX 761.
218
Sherwani refused to go along. They also included making a misleading presentation to the
FDA. Even Akorn’s expert witness agreed that Akorn was “not fully transparent” during
the meeting on March 16, 2018.804
Only after Akorn decided to try to get ahead of its problems by meeting with the
FDA about the azithromycin incident did Akorn start acting like a generic pharmaceutical
company operating in the ordinary course of business. At that point, Akorn retained expert
regulatory counsel (Ropes & Gray) and hired a consultant (NSF) to evaluate its data
integrity. After the meeting with the FDA, NSF conducted data integrity audits at five of
Akorn’s sites (excluding Somerset), reviewed ANDAs from Somerset, and reviewed a
sampling of batch records. NSF uncovered a slew of major deficiencies and two critical
findings involving the submission of inaccurate data to the FDA.
When making decisions about not remediating deficiencies, not continuing its audit
program, not maintaining its data integrity system, and not conducting investigations,
Akorn chose consciously to depart from the ordinary course of business that a generic
pharmaceutical company would follow.805 As a result, Akorn did not use commercially
reasonable efforts to operate in the ordinary course. By contrast, the record does not permit
a similar finding with respect to the destruction of Akorn’s database for a high accuracy
804
Kaufman Tr. 377–78.
805
See Rai Tr. 525 (‘Q. Okay. And one of the things you knew that Akorn had to
do, and in the ordinary course of business on that stand-alone basis after the acquisition
agreement was signed, was to both investigate and remediate data integrity problems;
correct? A. Correct.”); accord Kaufman Tr. 371.
219
liquid particle counter along with the local backup file and the associated electronic
security logs. That was not an ordinary course of business event, but it is one where the
“commercially reasonable efforts” modifier prevents a finding of breach. The destruction
of these files was an unexpected event outside of Akorn’s control, which is the
paradigmatic situation where an efforts clause comes into play. It is possible that by failing
to maintain its data integrity systems, Akorn created the conditions under which the
destruction of the files could occur, but the evidence in this case is not sufficient to support
a finding to that effect.
3. Akorn’s Failure To Use Commercially Reasonable Efforts Was
Material.
Using the standard of materiality discussed above, Akorn’s breaches of the Ordinary
Course Covenant were material. In the context of the Merger Agreement, the breaches of
the Ordinary Course Covenant departed from what Fresenius could reasonably expect and
changed the calculus of the acquisition for purposes of closing.
Akorn’s ordinary course violations after signing cost Akorn a year of what could
have been meaningful remediation efforts. After receiving reports about data integrity
issues from the GQC team during 2016, followed by Cerulean’s damning assessment of
Decatur in December 2016, Akorn should have prioritized the remediation of its data
integrity systems. Accepting for purposes of analysis that Akorn’s contractual obligation
to Fresenius only began in April 2017, Akorn’s failure to remediate from that point on cost
Akorn a full year. Based on Akorn’s own estimates that remediation would take three years,
Akorn could have completed one-third of its efforts. If Akorn had embarked on the steps
220
that Fresenius contends are necessary, then Akorn would have verified its IT and testing
systems, retrained existing employees, hired new R&D employees, taken major steps
towards introducing a culture of compliance, and begun validating the data for its principal
products.
Instead, Akorn made its regulatory situation immeasurably worse when its head of
quality submitted fraudulent data to the FDA in August 2017. Akorn then complicated
matters further by failing to be fully transparent with the FDA in March 2018 and instead
providing a misleading presentation to the agency.
As shown by the inclusion of the Regulatory Compliance Representations in the
Merger Agreement, whether Akorn complied with its obligations to the FDA was an
important issue for the parties. While the combination of the Regulatory Compliance
Representations and the Bring-Down Condition gave Fresenius some protection on this
issue, the Merger Agreement also required that Akorn use commercially reasonable efforts
to continue to engage in regulatory compliance activities between signing and closing. By
using the phrase “in all material respects” in the Ordinary Course Covenant and the
Covenant Compliance Condition, the parties adopted a lower standard for those provisions
than the Regulatory MAE standard built into the Bring-Down Condition. As a result,
Fresenius could refuse to close if Akorn did not continue to operate in the ordinary course
of business with respect to regulatory compliance and the deviation from ordinary course
practice was significant. That was the case here, resulting in a breach of the Ordinary
Course Covenant.
221
Akorn’s breach of the Ordinary Course Covenant was also sufficiently significant
to implicate the Covenant Compliance Condition. The record convinces me that Fresenius
would not have agreed to buy Akorn if Fresenius understood that Akorn would not be
continuing to conduct full audits at all of its facilities, would not be addressing any of its
data integrity issues, and would be providing fabricated data to the FDA. Akorn is a generic
pharmaceutical company, so compliance with FDA regulations is essential. The parties
knew that closing the Merger could take an extended period of time, which is why the
Outside Date was originally set for a year after signing and would extend automatically for
another three months if the only impediment remaining was antitrust clearance. No
reasonable acquirer would have agreed that during this lengthy period, Akorn could stop
engaging in ordinary-course activities relating to quality compliance and data integrity,
much less that Akorn could trigger a major incident with the FDA by making a submission
that relied on fabricated data.
4. Whether The Covenant Breach Was Curable
As previously discussed, Section 7.01(c)(i) permits Fresenius to terminate if the
failure of a condition is incapable of being cured by the Outside Date. As this decision has
already held, the Outside Date remained April 24, 2018; it did not automatically extend to
July 24.
As of April 24, 2018, Akorn had finally started trying to remediate its data integrity
problems, but it was in the early stages of this effort and trying to get a handle on the many
data integrity deficiencies that dated back years. Akorn had not become transparent with
222
the FDA. NSF was in the early stages of its investigation. Akorn could not have cured its
covenant breach by April 24.
Once again, even if the Outside Date had extended, Akorn could not have cured its
regulatory problems in time. Akorn estimated it would take three years, well beyond what
the Merger Agreement contemplated.
5. The Finding Regarding The Covenant Compliance Condition
Fresenius proved that Akorn failed to use commercially reasonable efforts to operate
in the ordinary course of business in all material respects, resulting in a breach of the
Ordinary Course Covenant. This breach was material and could not be cured by the Outside
Date, causing the Covenant Compliance Condition to fail. Because the Covenant
Compliance Condition has not been met, Fresenius cannot be forced to close. More
importantly, Fresenius had the right to terminate the Merger Agreement, provided that
Fresenius was not then in material breach of its own contractual obligations.
D. Has Fresenius Breached?
The final issue is whether Fresenius was barred from exercising its termination right
because of its own material breaches of the Merger Agreement. Section 7.01(c)(i) contains
a proviso which states that Fresenius cannot exercise its right to terminate “if [Fresenius]
is then in material breach of any of its representations, warranties, covenants or agreements
hereunder.” Akorn contends that Fresenius could not terminate the Merger Agreement
because it breached both the Reasonable Best Efforts Covenant and the Hell-or-High-
Water Covenant. Akorn bore the burden of proof on these issues because Akorn sought to
223
invoke an exception to Fresenius’s termination right.806 The evidence shows that Fresenius
did not breach the Reasonable Best Efforts Covenant. The evidence shows that Fresenius
breached the Hell-or-High-Water Covenant, but that the breach was not material.
1. The Reasonable Best Efforts Covenant
In the Reasonable Best Efforts Covenant, each party to the Merger Agreement
agreed to “cooperate with the other parties and use . . . their respective reasonable best
efforts to promptly . . . take . . . all actions . . . necessary, proper or advisable to cause the
conditions to Closing to be satisfied as promptly as reasonably practicable and to
consummate and make effective, in the most expeditious manner reasonably practicable,
the [Merger].”807 Under the Delaware Supreme Court’s decision in Williams, the
“reasonable best efforts” standard in this provision imposed an obligation on Fresenius “to
take all reasonable steps to solve problems and consummate the transaction.”808
Importantly from my perspective, the parties agreed in the Reasonable Best Efforts
Covenant to seek “to consummate and make effective” the transaction that they had agreed
to in the Merger Agreement on the terms set forth in that contract. They were not
committing themselves to merge at all costs and on any terms. Instead, they were
806
See 29 Am. Jur. 2d Evidence § 176 (“A party seeking to take advantage of an
exception to a contract is charged with the burden of proving facts necessary to come within
the exception.”); Hollinger, 844 A.2d at 1070 (“Black bears the burden to establish that
this contractual exception applies.”).
807
JX 1 § 5.03(a).
808
159 A.3d at 272.
224
committing themselves to fulfill the contract they had signed, which contained
representations that formed the basis for the transaction, established conditions to the
parties’ performance, and gave both sides rights to terminate under specified
circumstances. As I see it, the Reasonable Best Efforts Covenant did not require either side
of the deal to sacrifice its own contractual rights for the benefit of its counterparty. The
concept of acting for the benefit of another is a fiduciary standard, not a contractual one.
When evaluating whether a merger partner has used reasonable best efforts, this
court has looked to whether the party subject to the clause (i) had reasonable grounds to
take the action it did and (ii) sought to address problems with its counterparty. In Hexion
and IBP, this court criticized parties who did not raise their concerns before filing suit, did
not work with their counterparties, and appeared to have manufactured issues solely for
purposes of litigation.809 Kling and Nugent offer the following insightful commentary on
IBP:
809
See Hexion, 965 A.2d at 725 (“[P]erhaps realizing that the MAE argument was
not strong, Apollo and its counsel began focusing on insolvency.”); id. at 726 (criticizing
reliance on solvency opinion generated by consultants who “knew that their client had
litigation on its mind and still based their opinion their opinion on the same biased numbers
as the consulting team”); id. at 730 (criticizing solvency expert for not talking to seller’s
executives); id. (criticizing buyer for making “the deliberate decision not to consult with
[the seller] regarding the [solvency] analysis prior to filing the lawsuit”); IBP, 789 A.2d at
49 (“In an internal e-mail, Gottsponer explained Tyson’s renegotiation strategy: . . . ‘To
keep the pressure on their stock price. Based on the voice mails that have been left for me
(those seven) the street views these restatements as insignificant. We know these
accounting issues aren’t the biggest reason to renegotiate (i.e. beef margins). Lets remind
people of that (softly). To set the stage for other points that may help us to renegotiate.’”);
id. at 49 (“Don Tyson returned to the meeting and announced that Tyson should find a way
to withdraw. The problems at DFG apparently played no part in his decision, nor did the
comments from the SEC. Indeed, DFG was so unimportant that neither John nor Don
225
One gets the impression that Vice Chancellor Strine thought that Tyson itself
did not believe there had been a material adverse effect, but, was, instead,
suffering “buyer’s remorse.” Among the facts that supported this result were
that Tyson’s bankers still thought the deal was fair to it with “tremendous
strategic sense” and represented “great long term value.” In addition, Tyson
did not even raise the material adverse effect claims in its correspondence
with IBP, its announced reasons for terminating the merger agreement or,
indeed, until the litigation started.810
The Hexion court similarly noted that the buyer “made the deliberate decision not to consult
with [the seller] . . . prior to filing [its] lawsuit.”811
Tyson knew about Schedule 5.11 of the Agreement until this litigation was underway.”)
(footnote omitted); id. at 51 (“Notably, the [termination] letter does not indicate that IBP
had suffered a Material Adverse Effect as a result of its first-quarter performance.”); id. at
65 (“[I]t is useful to be mindful that Tyson’s publicly expressed reasons for terminating the
Merger did not include an assertion that IBP had suffered a Material Adverse Effect. The
post-hoc nature of Tyson’s arguments bear on what it felt the contract meant when
contracting, and suggests that a short-term drop in IBP’s performance would not be
sufficient to cause a MAE.”); id. at 70 (“Even after Hankins generated extremely
pessimistic projections for IBP in order to justify a lower deal price, Merrill Lynch still
concluded that a purchase of IBP at $30 per share was still within the range of fairness and
a great long-term value for Tyson. The Merrill Lynch analysis casts great doubt on Tyson’s
assertion that IBP has suffered a Material Adverse Effect.”); id. at 71 (“[T]he analyst views
support the conclusion that IBP remains what the baseline evidence suggests it was—a
consistently but erratically profitable company struggling to implement a strategy that will
reduce the cyclicality of its earnings. Although IBP may not be performing as well as it
and Tyson had hoped, IBP’s business appears to be in sound enough shape to deliver results
of operations in line with the company’s recent historical performance. Tyson’s own
investment banker still believes IBP is fairly priced at $30 per share.”).
810
Kling & Nugent, supra, § 11.04[9], at 11-68 n.133 (citations omitted); accord
Schwartz, supra, at 827 n.220 (arguing that the absence of Delaware decisions finding an
MAE “may be partially due to the Delaware courts’ suspicion that acquirers use the MAC
clause as a pretext to avoid closing a suddenly unappealing acquisition”) (citing IBP, 789
A.2d at 65).
811
965 A.2d at 730.
226
In this case, Akorn’s dismal post-signing performance gave Fresenius good cause
to evaluate its rights and obligations under the Merger Agreement. The General MAE
Condition gave Fresenius the right to refuse to close if Akorn suffered a Material Adverse
Effect, and Fresenius was entitled to evaluate whether that condition was met. Fresenius
also was entitled to consult with Paul Weiss. As this court observed in Hexion, it is
“undoubtedly true” that a company can “seek[] expert advice to rely upon” when evaluating
its contractual alternatives.812 Importantly, Fresenius communicated directly with Akorn
about its performance. Sturm and Henriksson flew to Lake Forest, Illinois to meet in person
with Ducker and the Akorn executives.813 Fresenius also analyzed and remained committed
to fulfilling its obligations under the Merger Agreement if it was not entitled to terminate.
Sturm testified credibly that he was “in an exploratory phase.” 814
Consistent with his
testimony, the contemporaneous evidence shows that at the same time Fresenius was
consulting with Paul Weiss, Fresenius was also working hard to figure out how the deal
could still work.815
The whistleblower letters subsequently gave Fresenius good cause to evaluate
whether Akorn’s representations were accurate and whether Fresenius might have
812
Id. at 754.
813
Sturm Tr. 1178.
814
Id. at 1189; see id. at 1206 (“Q. Okay. And you started looking for a way to get
out of the transaction, did you not? A. No. I did not.”).
See JX 605; JX 619; JX 620; JX 624; JX 627 at ‘498; JX 657; JX 658; JX 661;
815
JX 664; JX 670 at 20; JX 684 at ‘911.
227
contractual grounds to terminate. It was reasonable for Fresenius to use the informational
right it possessed under the Merger Agreement to evaluate these issues. A reasonable
access covenant “provides Buyer with the opportunity to confirm the accuracy of Sellers’
representations and verify the satisfaction of the other condition to Buyer’s obligation to
complete the acquisition, such as the absence of a Material Adverse Change with respect
to each Acquired Company.”816 The covenant exists “in order for the Buyer to continue the
‘due diligence’ process.”817 Fresenius used its reasonable access rights for that purpose.
Moreover, as when responding to Akorn’s poor business performance, Fresenius
communicated directly with Akorn about these issues.
As discussed in the Factual Background, I believe that by November 12, 2017, the
senior executives at Fresenius had concluded that they did not want to proceed with the
Merger as negotiated. Akorn had performed too badly, and the regulatory problems raised
by the whistleblower letters were another blow. Even recognizing that the Fresenius
executives had a motive to get out of the deal, I do not believe that Fresenius breached the
Reasonable Best Efforts Covenant. In addition to having an obligation to work towards
816
See Model Stock Purchase Agreement, supra, at 198; see also, e.g., id. at 199
(“During its due diligence investigation, Buyer is likely to have access to extensive
information concerning the Acquired Companies. If, during the period between signing
and Closing, the information reveals a material inaccuracy in any of Sellers’
representations as of the date of the Model Agreement, Buyer has several options. If the
inaccuracy results in the inability of Sellers to satisfy the applicable closing condition . . .
Buyer can decide to terminate [the merger agreement].”).
817
Kling & Nugent, supra, § 13.02[1], at 13-6.
228
closing, Fresenius also had the right to terminate the Merger Agreement if Akorn’s
Regulatory Compliance Representations were inaccurate and the deviation would
reasonably and incurably be expected to result in a Material Adverse Effect. Fresenius also
had the right to terminate the Merger Agreement if Akorn incurably failed to comply in all
material respects with the Ordinary Course Covenant. Fresenius was entitled to investigate
these issues and assert good faith positions based on its contractual rights.
Akorn views Fresenius’s investigation cynically as an effort by Fresenius to
manufacture grounds for termination. There is some evidence to support that view.
Nevertheless, having considered the record and evaluated the credibility of the witnesses,
I believe that Fresenius acted legitimately and uncovered real problems. I believe that
Akorn knew about both the existence and magnitude of these problems and hoped that
Fresenius would not get the full story until after the deal closed. Instead, the investigation
caused Fresenius to learn about the pervasive nature of Akorn’s compliance and data
integrity issues before closing. In my view, as its investigation unfolded, Fresenius acted
reasonably, culminating ultimately in its decision to terminate the Merger Agreement.
Before doing so, Fresenius offered to extend the Outside Date for the Merger Agreement
so that Akorn could continue its investigation and remediation efforts and, if Akorn thought
it was possible, cure its breaches. Akorn declined.
Akorn understandably has tried to cast Fresenius in the mold of the buyers in IBP
and Hexion by accusing Fresenius of having “buyer’s remorse.” In my view, the difference
between this case and its forebearers is that the remorse was justified. In both IBP and
Hexion, the buyers had second thoughts because of problems with their own businesses
229
spurred by broader economic factors. In this case, by contrast, Fresenius responded after
Akorn suffered a General MAE and after a legitimate investigation uncovered pervasive
regulatory compliance failures.
On a more granular level, this decision has already rejected many of the inferences
that Akorn draws when portraying Fresenius as a bad faith actor. The principal components
of Akorn’s tale run as follows:
 Akorn claims that Sturm instructed management in September 2017 to build a legal
case to terminate the Merger Agreement. This decision has found that Sturm was
not seeking to manufacture a case. He was focused on understanding Fresenius’s
rights under the Merger Agreement so that Fresenius could exercise its rights if
warranted. Otherwise, Fresenius would live up to its obligations.
 Akorn claims that Fresenius retained Paul Weiss to navigate a path towards
termination. In my view, retaining expert counsel was prudent.
 Akorn asserts that Fresenius’s advisors tried to manufacture a record that would
justify termination. There is some evidence to support this view, and the advisors
undoubtedly understood that Fresenius was unhappy with the deal. On balance,
however, I believe the advisors acted consistently with Fresenius’s rights under the
Merger Agreement. In particular, I find that Sidley, Lachman, and E&Y conducted
a professional investigation into the whistleblower letters that Fresenius had good
cause to pursue.
 Akorn claims that Fresenius instructed Akorn not to investigate the anonymous
letters. In the Factual Background, I rejected this interpretation of the evidence,
finding instead that Fresenius told Akorn that it could not rely on Akorn’s
investigation and would have to also conduct one of its own. Akorn then chose not
to conduct an independent investigation and instead have Cravath front run Sidley’s
investigation in an attempt to head off any problems.
 Akorn claims Fresenius secretly strategized with Paul Weiss and Sidley about
manufacturing “fraud on the FDA” allegations818 and “placing collateral pressure
818
JX 719 at ‘238.
230
on Akorn by communicating concerns to the regulatory agency,”819 then did just
that in letters aimed at “stimulating the [FDA] to require a searching audit of Akorn
and perhaps an FDA investigation” and “piqu[ing] the FDA’s interest.”820 Akorn
accurately quotes from documents when making this argument. In my view,
however, Fresenius had good cause to investigate the whistleblower letters. Once
that investigation uncovered serious problems, Fresenius had good reason to be
concerned that Akorn would present a misleading picture of its situation to the FDA
in an effort to get to closing and stick Fresenius with the regulatory problems.
Fresenius acted reasonably in response to Akorn’s conduct.
 Akorn claims that Fresenius drafted intentionally onerous information requests
designed to induce Akorn to refuse access and supply an alternative basis for
termination. I do not agree with this assessment. While Fresenius and its advisors
drafted broad requests, the requests were reasonable in light of the seriousness of
the charges in the whistleblower letters. After negotiations between counsel for the
companies, Akorn largely complied.
 Akorn asserts that Sidley accessed confidential Akorn materials in the virtual data
room, without Akorn’s knowledge or permission and in breach of the confidentiality
agreement. In my view, Sidley carefully evaluated whether it could access the
virtual data room and properly concluded that it could use the information in the
data room for purposes of “executing” the Merger Agreement, in the sense of
carrying out the parties’ contractual obligations. Those obligations did not require a
single-minded drive to closing. They also contemplated the possibility of failed
conditions and termination. Sidley properly used the information in the data room
to evaluate Fresenius’s rights under the Merger Agreement.
 Akorn contends that Fresenius executed a fraudulent common interest agreement.
The two sides negotiated a common interest agreement which reflected that they
had a “mutual interest” in “join[ing] in an investigation,” and that “[t]his mutual
interest arises from and under the Merger Agreement.”821 Fresenius was properly
seeking to evaluate its rights under the Merger Agreement to determine whether the
conditions to closing were met.
819
JX 738 at ‘297.
820
JX 1488 at ‘820.
821
JX 804 at ‘988; see Sturm Tr. 1220–21; Ducker Dep. 241–44; see also JX 798;
Sheers Tr. 1088.
231
 Akorn contends that Fresenius lied to Akorn by falsely assuring Bonaccorsi that
“the goal here was to investigate. . . . [T]his was not a litigation exercise.”822 In my
view, Fresenius’s goal was to investigate. Fresenius did not want to litigate unless
it had to and would not litigate unless it had valid claims. If the investigation into
the whistleblower letters had not suggested grounds for termination, or if events had
unfolded along any number of other paths, then litigation would not have ensued.
 Akorn observes that Fresenius disqualified Akorn’s FDA counsel because it did not
want the FDA to get the impression of a “joint investigation,” notwithstanding
representations in the common interest agreement.823 It is true that Fresenius refused
to waive a conflict that Hyman Phelps faced, but Fresenius had good cause for doing
so. At that point, Fresenius was justifiably concerned that Akorn would make a
misleading presentation to the FDA, and Fresenius did not want its long-time
regulatory counsel associated with a misleading presentation. That was a reasonable
concern and borne out by events. The misleading nature of the presentation stemmed
in part from Akorn’s claims that the investigation had been conducted jointly, when
in fact Cravath simply had been front running Sidley until Cravath discovered the
azithromycin fraud. Fresenius’s obligation to use its reasonable best efforts to fulfill
its obligations under the Merger Agreement did not extend to assisting Akorn in
misleading the FDA.
I give Akorn’s top-flight attorneys credit for assembling a credible account. I am not
suggesting that there is no evidence to support their position. Particularly after Akorn began
exhibiting performance that ultimately led this decision to find that the Company had
suffered a Material Adverse Effect, Fresenius did not want to go the extra mile. Fresenius
wanted to live by the Merger Agreement and do what it was obligated to do, while at the
same time protecting its own contractual rights and terminating the transaction if it had a
valid basis for doing so. In my judgment, Fresenius succeeded in doing what it was
822
Bonaccorsi Tr. 891–92.
823
Sturm Tr. 1224–26.
232
obligated to do. Akorn has not shown by a preponderance of the evidence that Akorn
breached the Reasonable Best Efforts Covenant.
2. The Hell-Or-High-Water Covenant
Section 5.03(c) of the Merger Agreement sets out a series of affirmative and
negative covenants relating to antitrust approval. The language that this decision refers to
as the Hell-Or-High-Water Covenant states:
[Fresenius Kabi] shall promptly take all actions necessary to secure the
expiration or termination of any applicable waiting period under the HSR
Act or any other Antitrust Law and resolve any objections asserted with
respect to the [Merger] under the Federal Trade Commission Act or any other
applicable Law raised by any Governmental Authority, in order to prevent
the entry of, or to have vacated, lifted, reversed or overturned, any Restraint
that would prevent, prohibit, restrict or delay the consummation of the
[Merger], including
(i) (A) executing settlements, undertakings, consent decrees,
stipulations or other agreements with any Governmental Authority or with
any other Person, (B) selling, divesting or otherwise conveying or holding
separate particular assets or categories of assets or businesses of [Fresenius
Kabi] and its Subsidiaries, (C) agreeing to sell, divest or otherwise convey or
hold separate any particular assets or categories of assets or businesses of the
Company and its Subsidiaries contemporaneously with or subsequent to the
Effective Time, (D) permitting the Company to sell, divest or otherwise
convey or hold separate any of the particular assets or categories of assets or
businesses of the Company or any of its Subsidiaries prior to the Effective
Time, (E) terminating existing relationships, contractual rights or obligations
of the Company or [Fresenius Kabi] or their respective Subsidiaries, (F)
terminating any joint venture or other arrangement, (G) creating any
relationship, contractual right or obligation of the Company or [Fresenius
Kabi] or their respective Subsidiaries or (H) effectuating any other change or
restructuring of the Company or [Fresenius Kabi] or their respective
Subsidiaries (and, in each case, entering into agreements or stipulating to the
entry of any Judgment by, or filing appropriate applications with, the Federal
Trade Commission (the “FTC”), the Antitrust Division of the Department of
Justice (the “DOJ”) or any other Governmental Authority in connection with
any of the foregoing and, in the case of actions by or with respect to the
Company, by consenting to such action by the Company (including any
233
consents required under this Agreement with respect to such action);
provided that any such action may, at the discretion of the Company, be
conditioned upon the Closing) and
(ii) defending through litigation any claim asserted in court or
administrative or other tribunal by any Person (including any Governmental
Authority) in order to avoid entry of, or to have vacated or terminated, any
Restraint that would prevent the Closing prior to the Outside Date.
All such efforts shall be unconditional and shall not be qualified in any
manner and no actions taken pursuant to this Section 5.03 shall be considered
for purposes of determining whether a Material Adverse Effect has occurred
or would reasonably be expected to occur. . . .
The Company, [Fresenius Kabi] and Merger Sub and any of their respective
Affiliates shall not take any action with the intention to, or that could
reasonably be expected to, hinder or delay the expiration or termination of
any waiting period under the HSR Act or the obtaining of approval of the
DOJ or FTC as necessary (including, in the case of [Fresenius Kabi] and
Merger Sub, acquiring or merging with any business, Person or division
thereof, or entering into a definitive agreement with respect thereto, if doing
so could reasonably be expected to have such effect). . . .824
In other words, Fresenius agreed to take “all actions necessary” to secure antitrust approval,
without any mitigating efforts obligation.825
Somewhat in tension with the flat obligation to take “all actions necessary” to secure
antitrust approval, the Merger Agreement gave Fresenius sole control over the strategy for
securing antitrust approval (the “Strategy Provision”). Formatted for legibility, this aspect
of Section 5.03(c) states:
824
JX 1 § 5.03(c).
825
See Alliance Data Sys., 963 A.2d at 763 n.60 (describing a Hell-Or-High-Water
Covenant as “a much stronger and broader commitment” than a reasonable best efforts
obligation “with respect to a discrete regulatory subject: antitrust approval”).
234
[Fresenius Kabi] shall (x) control the strategy for obtaining any approvals,
consents, registrations, waivers, permits, authorizations, orders and other
confirmations from any Governmental Authority in connection with the
[Merger] and
(y) control the overall development of the positions to be taken and the
regulatory actions to be requested in any filing or submission with a
Governmental Authority in connection with the [Merger] and in connection
with any investigation or other inquiry or litigation by or before, or any
negotiations with, a Governmental Authority relating to the [Merger] and of
all other regulatory matters incidental thereto;
provided that [Fresenius Kabi] shall consult and cooperate with the Company
with respect to such strategy, positions and requested regulatory action and
consider the Company’s views in good faith. . . .826
The Strategy Provision inherently recognizes that there is no single and obvious answer as
to how to pursue antitrust approval and that Fresenius had the power to make those
decisions after consulting and cooperating with the Company.
Akorn’s post-trial briefs placed great emphasis on antitrust issues, yet the trial
record on this point was comparatively sparse. During trial, only two witnesses made more
than a passing reference to FTC clearance.827 Bauersmith, who oversaw Fresenius’s
divestiture efforts, testified at trial that he was not asked to delay the process. 828 As noted
826
JX 1 § 5.03(c). Cravath’s initial draft of the Merger Agreement provided that
Fresenius and Akorn “shall jointly, and on an equal basis,” control the strategy for antitrust
clearance. JX 420 at ‘686. Fresenius requested sole control over strategy, and Akorn
accepted the change. Silhavy Dep. 24–25.
827
See Bauersmith Tr. 604–08; Bonaccorsi Tr. 912–21, 932.
828
Bauersmith Tr. 604; Bauersmith Dep. 128, 218; see also id. at 217 (describing
the FTC approval process as “a rigorous pace insofar as identifying the appropriate buyers,
striking the right value deal, and creating a set of agreements that we believed would be
acceptable to the FTC”).
235
in the Factual Background, Bauersmith was a credible witness. At trial, Akorn’s counsel
never asked Bauersmith about the FTC or Fresenius’s divestment partner Alvogen. In its
briefing, Akorn relies heavily on the deposition of its corporate strategy official Jennifer
Bowles, who largely testified to her “perception” that Fresenius intentionally delayed FTC
approval for self-interested reasons.829 Bowles did not testify at trial.830
There is no serious dispute that during the first six months after the Merger
Agreement was signed, Fresenius diligently pursued antitrust approval. Fresenius started
by assessing the degree to which its ANDAs overlapped with Akorn’s,831 then analyzed
the likelihood the FTC would require divestment.832 Working through these issues required
Fresenius to evaluate the number of competitors and relative market share for each
product.833 Once Fresenius had a sense of what it thought the FTC would want sold,
Fresenius worked with Moelis to structure a bidding process for potential buyers that
829
See Bowles Dep. 134–35; id. at 128–29 (discussing “opinions” Bowles formed
when FTC-related activities “should not have taken as long as they did”); see also Rai Dep.
247 (“I think the whole process of getting the FTC approval was slow and should have
been done sooner, based on my personal experience, because I’ve been through one before,
or a couple of times.”).
830
Because Bowles did not appear at trial and also lacked first-hand knowledge of
Fresenius’s negotiations with Alvogen, her deposition testimony receives limited weight.
See Bowles Dep. 130.
831
Bauersmith Dep. 149.
832
Id.
833
Id.
236
included access to a data room.834 Alvogen was the winning bidder, and Fresenius began
working on a transaction agreement with Alvogen.
In October 2017, Fresenius submitted a proposed divestiture agreement to the FTC,
consistent with the plan to submit by mid-November.835 In early November, the FTC threw
a wrench into the process by asking Fresenius to divest its versions of the overlapping
products rather than selling Akorn’s.836 The FTC also raised other objections to the
divesture package that the parties had not anticipated and which seemed to depart from
past agency practice.837
The parties had not expected to receive FTC clearance until early 2018,838 so
Fresenius made the reasonable decision to ask the FTC to reconsider having Fresenius
834
Id. at 150.
835
Ducker Dep. 274; see Bauersmith Dep. 218 (“[A]lvogen and Fresenius . . .
submitted what we thought in October was an agreement and a proposal that the FTC
should accept.”); JX 524 at ‘416 (timeline calling for “[c]ontract finalization & supply and
tech transfer agreements, and final submission to FTC” between the third week of
September and the second week of November); see also Silhavy Dep. 47–48.
836
See JX 698 at ‘866–67; see also Bauersmith Dep. 154.
837
See Bauersmith Dep. 153–55; Bauersmith Tr. 605; accord Silhavy Dep. 165–67;
see also Ducker Dep. 274 (discussing Allen & Overy’s view that the switch on Fresenius’s
overlapping products “was a very unusual step for the FTC to take”); Empey Dep. 184–85.
838
See Silhavy Dep. 48–49; Sturm Tr. 1175 (noting that the Merger could close
“towards the end of 2017, at the earliest”); JX 524 at ‘416 (divestment timeline from June
2017 contemplating “FTC review of submission and final negotiations with FTC” between
the third week of November 2017 and the second week of January 2018).
237
divest its version of the overlapping products rather than Akorn’s.839 Fresenius also began
considering whether it should sell the Decatur site as part of the divestiture package,
believing that if the FTC learned that Fresenius was considering selling Decatur, it would
want the plant included in the package of divestitures.840 Based on feedback from the FTC,
Fresenius came to believe that a sale of Decatur standing alone would enable the Merger
to obtain FTC clearance, without the need to divest other products.841 Under the Strategy
Provision, it was Fresenius’s job to consider these issues.
The Fresenius team evaluated whether pursuing a sale of Decatur would create
problems by delaying FTC approval and concluded that although there was a risk of delay,
the benefits outweighed the risk.842 As of early January 2018, the Fresenius executives
believed that pursuing a divestiture strategy involving Decatur would result in FTC
approval in mid-April, within the timeframe contemplated by the Merger Agreement, as
opposed to potential approval in February without Decatur.843 Fresenius therefore decided
to pursue “parallel strategies” on divestiture: Option 1, which involved selling various
839
See Bowles Dep. 131–34.
840
See JX 816 at ‘971–72; Henriksson Dep. 67 (“We didn’t want to bring it to the
FTC, because we thought that that would then delay the clearance, but . . . I wanted to sell
that plant to Alvogen.”).
841
See Silhavy Dep. 169–70; JX 1456 at 2 (“Sale of Decatur facility would solve
virtually all FTC concerns”); Henriksson Dep. 314–15.
842
See Schulte-Noelle Dep. 185–89; Ducker Dep. 274–75; JX 816 at ‘971–72.
843
See JX 844 at ‘410–11; Silhavy Dep. 168–69.
238
Fresenius ANDAs, and Option 2, which involved selling Decatur.844 In my view, this was
a reasonable approach that fell within the ambit of the Strategy Provision.
The first documentary evidence of Akorn registering complaints about Fresenius’s
pursuit of regulatory approval emerges in minutes of a board meeting on January 5, 2018,
where Rai and Bowles “provided their opinions that FK is dragging its feet with respect to
the FTC clearance activities highlighting their unwillingness to accept FTC’s stated
positions with respect to divestitures.”845 The Akorn executives notably raised these issues
after multiple quarters of terrible business performance by Akorn, after the investigation
into the whistleblower letters had uncovered Silverberg’s submission of false data to the
FDA, and during a meeting where the board, management, and Cravath attorneys “engaged
in a robust and lengthy discussion regarding the status of investigation, MAE standard,
conditions of closing and whether Akorn can insist on FK taking accelerating [sic] its
efforts to obtain FTC clearance.”846 Akorn’s desire to raise these issues at this point seems
as much a defensive response to the pressure that Akorn was under as it was the product of
actual problems with Fresenius’s compliance. Internal Fresenius emails indicate that
844
See Silhavy Dep. 173; id. at 185 (“We knew that it would solve a number of the
issues outstanding with the FTC, but have the effect of perhaps taking longer than going
with the straight option of divesting the products without a . . . corresponding divestiture
of . . . Decatur.”); JX 959 at ‘498 (discussing Option 1 and Option 2).
JX 1337 at ‘403; see also Bonaccorsi Tr. 915 (testifying that by late 2017, he and
845
Bowles “felt [Fresenius was] beginning to slow-walk the FTC process”).
846
JX 1337 at ‘403.
239
during January, Bauersmith was pressing forward to obtain FTC approval promptly for a
divestiture option that involved Decatur,847 and Fresenius’s attorneys were likewise
working with the FTC on aspects of the ANDA divestiture package.848
For approximately a week in February 2018, Fresenius contemplated a path that
could have constituted a material breach of the Hell-or-High-Water Covenant had
Fresenius continued to pursue it. The Hell-or-High-Water Covenant forbids Fresenius from
taking any action that could be reasonably expected to delay FTC approval, and Fresenius
nearly adopted an FTC strategy that it knew would delay approval by two months or more.
During a meeting on February 9, 2018, the Fresenius steering committee discussed
the two options for obtaining FTC clearance.849 Option 1 continued the ANDA divestiture
strategy.850 Under this option, the Merger could close in April.851 Option 2 involved a sale
of Decatur and obviated the need to resolve multiple longstanding disputes with the FTC
847
See JX 889 at ‘591.
848
See JX 886.
849
JX 959.
850
See id. at ‘498 (“Option 1: Negotiate a ‘reverse’ swap of FK Acetylcysteine
ANDAs to Alvogen.”); id. at ‘497 (“FTC is requesting FK to divest its acetylcysteine assets
instead of the original plan to invest Akorn’s assets.”).
851
Id. at ‘498.
240
about Option 1.852 Option 2 would result in the Merger closing in June or July. 853 The
February 9 minutes indicated that “[p]ost-close integration teams are preparing for an
imminent closing including putting key support contracts in place.” 854 In an email sent to
the group of Fresenius executives who were overseeing the antitrust clearance process,
Ducker wrote:
The key topic is how to proceed with Alvogen and FTC. If Stephan [Sturm]
is likely to go nuclear on the closing we should instruct the team to follow
Option 2. This avoids us having a potential closing event before we have a
more developed legal position on the investigation. But if the Supervisory
Board does not support the refusal to close we want the quickest option which
is #1. I suggest we ask Jamie [Bauersmith] to explore both options with
Alvogen. This will test their appetite for both and leaves both options open
for potential negotiations of terms. It will buy us a couple of weeks to the
Feb 22 or 23 decision point.855
852
See id. at ‘497–98; Ducker Dep. 275 (explaining that Option 2 “simplifies matters
significantly with the FTC and removes the need for escrow accounts, and we could remove
the requirement for us to divest our on-market acetylcysteine product”); Schoenhofen Dep.
196.
853
JX 959 at ‘498; see also Bauersmith Dep. 161–62 (explaining that the Option 2
schedule built in time for Alvogen to diligence Decatur); cf. JX 889 at ‘591 (January 19,
2018 email referencing Alvogen’s request for due diligence at Decatur).
854
JX 959 at ‘500.
855
JX 976 at ‘067.
241
The executives picked Option 2,856 but Fresenius “quickly abandoned” it once Alvogen
made an unattractive offer for Decatur.857 After barely one week, Fresenius reverted to
Option 1, and the Merger stayed on track for an April closing.
By choosing Option 2, which would delay antitrust clearance by two months,
Fresenius technically breached the Hell-or-High-Water Covenant. But because Fresenius
changed course in approximately a week and returned to Option 1, the breach was not
material. As of that point, Fresenius had positioned the parties to close the Merger in
conjunction with the original Outside Date of April 24, 2018, and months before the
extended Outside Date of July 24, which would have applied automatically if receipt of
antitrust approval was the only condition to closing that had not been met.
Akorn makes much of Bonaccorsi’s testimony about his interactions with
Fresenius’s lead antitrust counsel, Elaine Johnston of Allen & Overy. Bonaccorsi testified
that Johnston told him that she was not in regular contact with Fresenius and could not
856
JX 959 at ‘498.
857
See Silhavy Dep. 173; Bauersmith Tr. 607–08 (testifying that Fresenius spent
“[a]bout a week or so” pursuing Option 2 before Alvogen “came in with an incredibly low
offer for the Decatur facility”); Ducker Dep. 275–76; Schulte-Noelle Dep. 189–90 (“[I]
think it was only a few days later we realized that there was no attractive offer and, hence,
the only option that would be left would be [Option 1].”). The steering committee’s
February 9 minutes reflect that it directed Bauersmith “to approach Alvogen . . . to gauge
their interest level” in Option 2. JX 959 at ‘498. Bauersmith explained that he “reached out
to Alvogen pretty much right away” to assess their interest but that they “offered something
that was not palatable, so we just pursued option 1.” Bauersmith Dep. 220–21.
242
explain the delays in the FTC process.858 These communications appear to have taken place
during the brief period in February when Fresenius was deciding between the two options,
initially chose Option 2, then reverted to Option 1. It makes sense to me that Johnston and
Fresenius were not on same page during the brief period when Fresenius was making a
major decision about strategy. Akorn does not point to any evidence of miscommunications
between Fresenius and Johnston, or for that matter between Fresenius and Akorn, after
February 2018.
During a meeting on March 23, 2018, Bowles advised the Akorn directors about the
timeline for receiving FTC approval and did not identify any problems. 859 On April 20,
the FTC sent Akorn and Fresenius a draft Decision and Order, which is one of the final
steps in the FTC review process before approval.860 When Akorn filed its complaint on
April 23, it alleged that FTC approval was expected in May 2018. 861 It appears that the
FTC is now reserving judgment until this litigation is resolved,862 but Fresenius cannot be
faulted for that.
858
Bonaccorsi Dep. 218–19; Bonaccorsi Tr. 918–19; see also JX 972 (Bonaccorsi
discussing February 13 call with Johnston); JX 1337 at ‘403 (Akorn February 23 board
minutes discussing dialogue with Johnston).
859
JX 1337 at ‘405; see also id. at ‘404–05 (March 2 and 9 board minutes
referencing “FTC related activities,” but no problems).
860
Dkt. 1 ¶ 118; see Bowles Dep. 146–47 (“Q. And so is it your understanding that,
as of April 23, antitrust approval was now close at hand? A. Yes.”).
861
Dkt. 1 ¶ 119.
862
See Dkt. 220 at 109–10.
243
The facts of this case differ markedly from Hexion, which Akorn cites for the settled
proposition that a party can breach a hell-or-high-water covenant by dragging its feet on
obtaining antitrust clearance.863 In Hexion, at the time of trial, the buyer still had not
“signed agreements with the proposed buyer of the assets to be divested” and still “had not
responded to certain interrogatories from the FTC” or “put itself in a position to do so . . .
.”864 The buyer in that case consciously delayed obtaining approval as a strategy to avoid
the transaction.865 Fresenius did not do that. Fresenius took steps to obtain timely antitrust
approval, but other conditions in the Merger Agreement failed before approval could be
received.
There is also contemporaneous evidence indicating that Akorn recognized that
Fresenius could cure any breach of the Hell-or-High-Water Covenant by moving forward
on Option 1. In a letter dated February 24, 2018, Cravath accused Fresenius of breaching
its obligation to secure antitrust clearance and posited that Fresenius “cure its breach
immediately” by committing to “promptly agree to whatever terms are necessary to
complete the negotiations with Alvogen” over Option 1.866 By the time Fresenius received
the letter, Fresenius had abandoned its flirtation with Option 2 and was pursuing Option 1,
thereby curing its breach.
863
See Hexion, 965 A.2d at 756.
864
Id. at 735, 756.
865
Id. at 756.
866
JX 986 at ‘188.
244
I find that Fresenius breached the Hell-or-High-Water Covenant by briefly pursuing
Option 1, but Akorn failed to prove by a preponderance of the evidence that Fresenius
materially breached the Hell-or-High-Water Covenant. Under the Strategy Provision,
Fresenius had the exclusive right to “control the strategy” and “the overall development of
the positions to be taken” to obtain FTC clearance.867 Fresenius chose a strategy that
ultimately would have resulted in FTC approval well within the timeframe permitted by
the Merger Agreement. There also is ample evidence indicating that Fresenius could have
secured FTC clearance by the original Outside Date if the FTC had not wavered on aspects
of the original divestiture package. Under these circumstances, Akorn did not establish that
Fresenius materially breached the Hell-or-High-Water Covenant such that it should be
barred from exercising an otherwise valid termination right.
III. CONCLUSION
Akorn brought this action seeking a decree of specific performance that would
compel Fresenius to close. Akorn cannot obtain specific performance because three
conditions to closing failed: the General MAE Condition, the Bring-Down Condition, and
the Covenant Compliance Condition.
Fresenius sought a declaration that it had validly terminated the Merger Agreement
on April 22, 2018. As of that date, Fresenius had not materially breached its obligations
under the Merger Agreement and therefore could exercise its termination rights.
867
JX 1 § 5.03(c).
245
Fresenius validly terminated the Merger Agreement because Akorn’s Regulatory
Compliance Representations were untrue, the deviation from the representations could not
be cured by the Outside Date, and the degree of deviation would reasonably be expected
to result in a Regulatory MAE. This scenario caused the Bring-Down Condition to fail in
an incurable manner and entitled Fresenius to terminate.
Fresenius also validly terminated the Merger Agreement because Akorn had
materially breached the Ordinary Course Covenant and the breach could not be cured by
the Outside Date. This scenario caused the Covenant Compliance Condition to fail in an
incurable manner and entitled Fresenius to terminate.
Within ten days, the parties shall submit a joint letter identifying any other matters
that need to be addressed to bring this matter to a conclusion at the trial level. If possible,
the parties shall submit a final order implementing this decision that has been agreed as to
form. If there are further issues to be resolved at the trial level, the parties shall propose a
schedule for addressing them.
246