In a landmark ruling in October 2018, a Delaware court for the first time ever allowed a buyer to back out of a corporate acquisition pursuant to a “material adverse change” (MAC) clause in the merger agreement—a subject examined by Professor Andrew Schwartz in his 2010 article published in the UCLA Law Review.
In the key portion of the court’s opinion, Vice Chancellor J. Travis Laster cites, quotes, and relies on Schwartz’s award-winning article, "A ‘Standard Clause Analysis’ of the Frustration Doctrine and the Material Adverse Change Clause" (57 UCLA Law Review 789, 2010), which explains the MAC clause using a new conceptual tool for drafting and interpreting contracts, the "standard clause analysis."
The court endorses the basic theory set forth by Schwartz, which is that the MAC clause should be understood as a contractual adjustment to the common law doctrine of frustration of purpose that would ordinarily apply. Throughout the opinion, the court relies on Schwartz’s article in its introduction of the MAC clause (page 118) and endorses his view on foreseeability (page 153).
The following is taken from pages 141-42 of the opinion; the bold text indicates direct quotations from Schwartz’s article:
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." This common law doctrine "provides an escape for an acquirer if the target experiences a catastrophe during the executory period." "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." In lieu of the default rule that performance may be excused only where a contract’s principal purpose is completely or nearly completely frustrated, 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." That is what the parties did in this case. . . . Akorn suffered a [MAC].
The losing party plans to appeal to the Delaware Supreme Court.
Schwartz joined the University of Colorado Law School faculty in 2008 and teaches and publishes on corporate, securities and contract law. An internationally recognized expert on securities crowdfunding, he served as a Fulbright Research Scholar and visiting professor at the University of Auckland Law School in New Zealand in 2017.
Update: Akorn v. Fresenius, the opinion that relied on Schwartz's article, was affirmed by the Delaware Supreme Court on Dec. 7. Read more about the decision:
- Fortune: "Akorn CEO Steps Down After Loss of $4.3 Billion Fresenius Deal"
- Chicago Tribune: "Fresenius wins ruling on canceled buyout; Akorn shares fall"