Delaware Chancery Court Rejects MAE Termination of Merger Agreement: The Court Finds Buyer Breached Best Efforts Covenant and Orders Buyer to Close TransactionSullivan & Cromwell LLP - December 20, 2019
In a decision issued earlier this week in Channel Medsystems, Inc. v. Boston Scientific Corp., No. 2018-0673 (Del. Ch. Dec. 18, 2019), the Delaware Court of Chancery held that the putative purchaser in a merger agreement failed to prove a Material Adverse Effect (“MAE”) justifying its purported termination of the merger agreement. Following a four day trial, the Court of Chancery ruled in a 119-page decision that the buyer failed to prove that theft and other misconduct by an employee of the target, Channel Medsystems (“Channel”)—which included falsifying documents that were included in Channel’s then pending application for Food and Drug Administration (“FDA”) approval of Cerene, an in-development medical device and Channel’s only product—met Delaware’s stringent test for establishing an MAE that might justify termination of a merger agreement. Cerene ultimately received FDA approval in March 2019—about the same time the parties contemplated approval would be achieved upon signing of the merger agreement, and six months before the deadline for FDA approval in the merger agreement. The Court forcefully rejected the claim that the effects of the employee misconduct were qualitatively and quantitatively material, as is necessary to prove an MAE in Delaware, in part because they appeared to be litigation-driven justifications that nowhere appeared in any documents and instead conflicted with contemporary evidence. The Court of Chancery also found the buyer in breach of its contractual obligation to use “commercially reasonable efforts” to consummate the merger. The Channel decision reinforces long-standing Delaware jurisprudence that MAE claims are highly fact-specific, and present a very high bar to success.