The deal that showed Musk how hard it would be to exit Twitter bid
US court ruling over generic drugmaker Akorn set high bar for any bidder seeking to withdraw from a takeover offer
It turns out that once-disgraced generic drugmaker Akorn will, most likely, remain a unicorn in Delaware law.
The company was the hapless star of a court battle that set an important legal benchmark for US mergers and acquisitions after German healthcare group Fresenius Kabi signed a $4bn deal to buy it in 2016.
Two years after that agreement, a Delaware state court allowed Fresenius to walk away from the deal. It is the first and last time in the state’s history that a buyer was allowed to terminate a merger agreement over a so-called “material adverse effect”, a degradation of a target company so grave that a buyer would not get the company they bargained for.
The decision has been pored over in recent months by many a lawyer to see if would provide an escape hatch for Elon Musk to dissolve his $44bn deal to buy Twitter.
Before suddenly indicating last week that he wanted to complete the buyout on the original terms, Musk had apparently been wavering on the deal, with the Tesla boss questioning Twitter over allegedly fake accounts, violations of government orders and false securities filings.
But the Akorn case shows how hard it would be for Musk, or any corporate acquirer in similar circumstances, to walk away. A key lesson of the Delaware decision is to not just examine the deterioration of a selling company but also how a buyer acts in the process of first trying to close and then terminating a deal.
Such conduct is crucial as a buyer seeking termination cannot first be in breach of their own obligations. The judge in the Akorn case ruled that Fresenius, by in large, carefully did its part to close the initial transaction and not breach its own obligations to do so, something Musk may not be able to match.
Musk’s erratic actions since signing the Twitter deal in April include trashing the company’s management in his tweets as well as seemingly trying to slow-walk the closing, according to disclosed texts and tweets. These alone would do him no favours in any trial.
Even last week, Twitter said in a filing that a deposition witness testified on Thursday that Musk still had not fully commenced the process of drawing on the committed debt financing even as he insisted days before that he now wanted to close.
There are other substantive differences between the Twitter and Akorn battles. After Fresenius and Akorn announced their deal, a German company received anonymous correspondence. A whistleblower was alleging huge data integrity problems at Akorn’s manufacturing facilities. Fresenius was separately getting nervous about its deal as Akorn had badly missed its forecast for revenue and profits.
On the manufacturing problems, a subsequent lengthy investigation by Fresenius uncovered enough red flags — including submitting false data to the Food and Drug Administration — to motivate it to terminate the deal. According to the ruling, a consultant testified at the trial that “Akorn’s data integrity failures were so fundamental that he would not even expect to see them ‘at a company that made styrofoam cups’”.
The cost to remedy the problems— $900mn or a fifth of the deal value — was substantial enough that the judge let Fresenius escape even as Akorn argued that the German company had accepted the risk of operational problems.
As at Akorn, a whistleblower emerged at Twitter after Musk had signed his deal. The former head of security at the company, Peiter Zatko, alleged that Twitter had not been complying with government decrees on data security. Musk’s lawyers seized on the parallels to the Akorn case, writing in his filings, “[a]s in Akorn, Defendants [Musk] are entitled to investigate those allegations and others in Zatko’s complaint to verify the accuracy of representations”.
Twitter’s stock price has steadily moved up since Musk’s termination attempt in July, a decent indicator of the quality of his grievances. But his antics are also likely a part of the calculus that Musk will either lose in court or settle first.
Fresenius had hired lawyers to investigate their ability to exit Akorn. But the trial record showed that Fresenius had been careful to listen to its lawyers’ advice and make sure its own house was in order.
The Delaware court has said Musk has until October 28 to complete the deal or otherwise face a legal process that he suddenly decided he wanted to avoid. It is his best chance to show that he can live up to what he signed for.