As counsel involved in negotiating mergers, acquisitions, or other transactions know, provisions that allocate antitrust risk between buyer and seller, or between joint venture (JV) partners, are a common feature of merger and JV agreements. Such provisions are increasingly important in today’s aggressive antitrust environment across the globe. They can vary greatly in detail and substance. For transactions that pose little or no antitrust risk, these provisions may require only that the parties work cooperatively to obtain clearance from the relevant antitrust authorities, or they may place all risk on the buyer, which perceives such provision as not much of a “give” if there is no real antitrust risk. For transactions that pose a greater antitrust risk, the agreement may set out each party’s obligations in detail and account for numerous contingencies. Often, the agreement will allocate antitrust risk unevenly between the parties. In more and more cases, the buyer or one JV partner will assume most or all of the risk by committing to use “best efforts,” to pay a sizeable break-up fee if approval is not obtained within a reasonable period, or even to take any and all steps necessary to obtain antitrust approval, up to and including litigation, divestitures, or conduct remedies demanded by enforcers.
A buyer’s commitment to do whatever is necessary to obtain antitrust clearance, commonly known as a “Hell-or-High-Water” provision, featured prominently in a recent merger case decided by Delaware’s Court of Chancery. The case, Akorn Inc. v. Fresenius Kabi AGi, involving a multi-billion-dollar merger between pharmaceutical companies, spotlights the importance of antitrust risk-shifting provisions in merger agreements and is a fresh reminder of the role that antitrust counsel can play early in the deal-making process to avoid unwelcome surprises or disputes between the transacting parties during the antitrust review process.
Background on Case
In April 2017, Fresenius Kabi AG, a German healthcare company, agreed to acquire Akorn, a generic pharmaceutical company, for $4.3 billion. The merger agreement included a Hell-or-High-Water provision, pursuant to which Fresenius was required to “take all actions necessary” to secure antitrust approval and to refrain from taking “any action” that might “hinder or delay” closing. The merger agreement gave Fresenius the exclusive right to “control the strategy” for obtaining clearance from the reviewing antitrust agency--in this case, the Federal Trade Commission (FTC). Soon after signing but before closing, Akorn’s business performance reportedly suffered a dramatic downturn. Fresenius also came to learn that Akorn, in alleged violation of the merger agreement, apparently had misrepresented its compliance with FDA regulations and failed to address significant quality and data integrity issues. In April 2018, Fresenius informed Akorn that it was terminating the merger agreement prior to closing and while FTC approval was still pending. Akorn sued, seeking specific performance.
In the litigation, Akorn argued that Fresenius was contractually barred from canceling the deal. Under the agreement, Fresenius could not exercise its termination right if it was in “material breach” of any merger covenant itself. Akorn claimed in this regard that Fresenius violated the Hell-or-High-Water provision by taking steps to delay antitrust approval by the FTC. Akorn pointed to evidence showing that, for example, Fresenius had temporarily pursued a settlement strategy with the FTC that it knew would delay antitrust approval by two to three months. Akorn argued that, as a result of its failure to diligently obtain FTC approval, Fresenius forfeited its right to terminate the deal by breaching the Hell-or-High-Water covenant.
In its recent decision, the court rejected Akorn’s argument and found that Fresenius’s cancellation of the merger agreement was valid. The court’s discussion regarding the Hell-or-High-Water provision centered on Fresenius’s settlement negotiations with the FTC. According to the court, Fresenius considered offering the FTC one of two divestiture packages. Option 1, which involved selling various ANDAs, would likely have allowed the merger to close in April 2018. Option 2, which involved selling a manufacturing facility, would have required the parties to delay closing a few additional months, until June or July. Fresenius’s decision to pursue “parallel strategies,” the court found, “was a reasonable approach that fell within the ambit” of Fresenius’s exclusive right to “control the strategy” for obtaining FTC clearance. Although the court acknowledged that Fresenius “technically breached the Hell-or-High-Water Covenant” by temporarily pursuing Option 2, it ultimately found that the breach was not “material.” After only briefly entertaining Option 2, Fresenius “quickly abandoned it” in favor of Option 1 and kept the merger on track for an April 2018 closing. The court ruled that Fresenius therefore did not forfeit its termination right, which it properly exercised in light of Akorn’s deficiencies regarding the FDA, data integrity, and quality.
While antitrust risk-shifting provisions are a routine aspect of most significant acquisitions or other transactions, there is a dearth of caselaw interpreting such provisions and, in particular, what constitutes a breach of such provisions. The recent litigation involving Akorn and Fresenius sheds some useful light on how rigidly a court is likely to apply a Hell-or-High-Water commitment. In particular, courts are likely to examine closely the record of what each transacting party has done to pursue antitrust clearance, including the diligence with which it engaged with enforcers to resolve their concerns, including through offers of potential remedies. Where a buyer has not engaged diligently, or when it offers remedies that reasonable antitrust counsel should know are unlikely to move the ball toward antitrust clearance, a buyer may expose itself to a claim of breaching the antitrust covenant in the merger agreement.
Disputes between transacting parties about whether one or the other complied with the antitrust risk-shifting provisions in the transaction agreement unfortunately are increasing, including as more transactions get blocked by enforcers -- such as in Anthem’s proposed acquisition of Cigna and in Sinclair Broadcasting Group’s failed acquisition of Tribune Media, where in both cases the parties are litigating against each other over the parties’ alleged non-compliance with the antitrust risk-shifting provisions. It is, therefore, more important than ever that both sides to a transaction understand the antitrust risks associated with a possible transaction before signing the merger agreement so that they can adequately protect their interests, including making sure, for example, that “crown jewel” type assets are off the table as part of antitrust risk-shifting provisions. The Anthem-Cigna and Sinclair-Tribune Media litigations hopefully will provide more judicial guidance as to when one party crosses the line under a merger agreement’s antitrust commitments.
iNo. CV 2018-0300-JTL, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018).