In Akorn, Inc. v Fresenius Kabi AG, C.A. No. 2018–0300–JTL, the Chancery Court permitted a buyer to terminate a merger agreement including language to the effect that disproportionate industry effects should be taken into account in determining whether there had been a material adverse effect.

After the execution of the merger agreement, (i) the target’s EBITDA decreased by 86% in the year after the execution of merger agreement, (ii) the target significantly changed its business operations, and (iii) the acquiror’s investigations found problems with seller quality control which could be in violation of applicable regulatory requirements.

Even if the seller could not represent that its representations in the merger agreement were true and correct at the time of closing, the merger would move forward except when such failure “would not be reasonably expected” to result in a material adverse effect.

The Court found there was evidence that the seller’s downturn exceeded that of its peers and was disproportionate to the unforeseen competition in the industry.

BOTTOM LINE: The Court suggested that the parties could have excluded specific matters from the definition of material adverse effect; take the time and make the effort to do so!