VC Laster had to answer two difficult questions: This “overwhelming evidence” matters because “he value of pipeline depended on ability to comply with the FDA’s regulatory requirements.” Īrriving at a determination for the quantitative prong was more complicated.
He said there was “overwhelming evidence of widespread regulatory violations and pervasive compliance problems” at Seller. VC Laster did not have trouble finding enough evidence to support a MAC under the qualitative prong.
Notably, Seller’s stock price generally traded close to the $5 to $12 range standalone value that was determined by equity analysts, which suggests a low expected probability that the sale for $34 per share would close. Seller’s stock price declined by 55% the next day and stayed well below the $34 deal price going forward. Given the large decline in Seller’s financial performance that was discussed in the first article, maintaining a price near $34 per share suggests a near 100 percent probability that the deal would close.Ĭontemporaneous market participants’ view changed dramatically when Seller announced, after the markets closed on February 26, 2018, that it was “investigating alleged breaches of FDA data integrity requirements relating to product development at the company.” This investigation related to the Regulatory MAC. As shown in Figure 1, Seller’s stock price is a tale of two periods.ĭuring the first 10 months after the deal was announced, Seller’s stock price generally tracks the present value of the $34 per share deal price to be received when the deal closes. Seller’s stock price can be used as a tool to identify whether contemporaneous market participants believed the deal would close. Second, as will be shown below, Seller’s stock price did not suggest Buyer could successfully assert a MAC argument until the possibility of a Regulatory MAC was disclosed. Buyer’s legal advisors were skeptical that they could win with just a General MAC given Delaware’s history of never allowing a buyer to terminate a deal due to a MAC. First, VC Laster believes the possibility of a Regulatory MAC led Buyer’s executives to seek terminating the merger agreement if they could. However, contemporaneous parties placed a lot of weight on the Regulatory MAC. Thus, the opinions in this case suggests Buyer would have prevailed without the Regulatory MAC clause. Buyer was ultimately able to terminate the merger agreement under both the General MAC and Regulatory MAC clauses. In some respects, the Regulatory MAC is not particularly important to this story. Why is the Regulatory MAC Clause Important?
This investigation opened the door for Buyer to develop the argument that it could terminate the merger agreement due to a Regulatory MAC. The second whistleblower letter provided a reason for Buyer to investigate the allegations. The second whistleblower letter raised allegations about Seller’s development processes and flaws in Seller’s quality control processes. Buyer can terminate the merger agreement when those regulatory-related representations are materially wrong.īuyer received three whistleblower letters.
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According to Vice Chancellor (VC) Laster, Seller represented that it was in full compliance with these regulatory obligations, which were primarily with the Federal and Drug Administration (FDA). In “overly simplistic terms,” the Regulatory MAC clause pertains to Seller’s compliance with regulatory obligations. The Delaware Chancery and Supreme courts had to decide this issue. Seller countered by arguing there was no MAC and demanded specific performance: that Buyer acquire Seller for $34 per share. Buyer gave notice on April 22, 2018, that it was terminating the merger agreement per its right under the MAC clauses. One of these conditions was that Seller did not suffer from a MAC. Seller agreed to acquire Buyer, but closing the deal was subject to certain conditions. The deal was expected to take a while to close due to the need to get antitrust approvals. Buyer is a wholly owned subsidiary of a German healthcare company with a U.S. Seller is a specialty generic pharmaceutical company. (the Seller) for $34 per share, which valued Seller’s equity at $4.3 billion. This case is about a merger agreement dated April 24, 2017, in which Fresenius Kabi AG (the Buyer) agreed to acquire Akorn, Inc. This article addresses the Regulatory MAC clause. The previous article addressed the General MAC clause. This is a follow-up article about the first seller that successfully terminated a deal in Delaware due to a Material Adverse Change (MAC) clause.
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