Court Opinion

ID: 4317092
Source: CourtListenerOpinion
Date Created: 2018-10-01 14:11:51.800227+00
Date Added: 2024-06-11T14:45:08.721913
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

AKORN, INC.,                                     )
                                                 )
       Plaintiff and Counterclaim Defendant,     )
                                                 )
          v.                                     )    C.A. No. 2018–0300–JTL
                                                 )
FRESENIUS KABI AG,                               )
QUERCUS ACQUISITION, INC., and                   )
FRESENIUS SE & CO. KGAA,                         )
                                                 )
       Defendants and Counterclaim Plaintiffs.   )

                           MEMORANDUM OPINION

                         Date Submitted: September 25, 2018
                           Date Decided: October 1, 2018

William M. Lafferty, Thomas W. Briggs, Jr., John P. DiTomo, Richard Li, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Robert H. Baron, Daniel
Slifkin, Michael A. Paskin, Justin C. Clarke, CRAVATH, SWAINE & MOORE LLP, New
York, New York; Counsel for Plaintiff and Counterclaim Defendant.

Donald J. Wolfe, Jr., Michael A. Pittenger, T. Brad Davey, Matthew F. Davis, Jacob R.
Kirkham, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Stephen P.
Lamb, Daniel A. Mason, Brendan W. Sullivan, PAUL, WEISS, RIFKIND, WHARTON
& GARRISON LLP, Wilmington, Delaware; Lewis R. Clayton, Andrew G. Gordon,
Susanna M. Buergel, Jonathan H. Hurwitz, Daniel H. Levi, Paul A. Paterson, PAUL,
WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Counsel for
Defendants and Counterclaim Plaintiffs.

LASTER, V.C.
       Pursuant to an agreement and plan of merger dated April 24, 2017 (the “Merger

Agreement”), Fresenius Kabi AG agreed to acquire Akorn, Inc. In the Merger Agreement,

Akorn made extensive representations about its compliance with applicable regulatory

requirements and committed to use commercially reasonable efforts to operate in the

ordinary course of business between signing and closing. Both Fresenius and Akorn

committed to use their reasonable best efforts to complete the merger, and Fresenius

committed to take all actions necessary to secure antitrust approval, without any efforts-

based qualification. The parties agreed to a contractually defined “Outside Date” for

closing, set initially at April 24, 2018. If the need for antitrust approval was the only

condition to closing that had still not been met at that point, then the Outside Date would

extend automatically to July 24, 2018.

       If the merger closed, then each share of Akorn common stock would be converted

into the right to receive $34 per share. Closing, however, was not a foregone conclusion.

First, Fresenius’s obligation to close was conditioned on Akorn’s representations having

been true and correct both at signing and at closing, except where the failure to be true and

correct would not reasonably be expected to have a contractually defined “Material

Adverse Effect.” If this condition was not met and could not be cured by the Outside Date,

then Fresenius could terminate the Merger Agreement. Fresenius could not exercise this

termination right, however, if Fresenius was in material breach of its own obligations under

the Merger Agreement.

       Second, Fresenius’s obligation to close was conditioned on Akorn having complied

in all material respects with its obligations under the Merger Agreement. Once again, if

                                             1
this condition was not met and could not be cured by the Outside Date, then Fresenius

could terminate the Merger Agreement. Here too, Fresenius could not exercise the

termination right if Fresenius was in material breach of its own obligations under the

Merger Agreement.

       Third, Fresenius’s obligation to close was conditioned on Akorn not having suffered

a Material Adverse Effect. The failure of this condition did not give Fresenius a right to

terminate. Once the Outside Date passed, however, either Fresenius or Akorn could

terminate, as long as the terminating party’s own breach of the Merger Agreement had not

been a principal cause of or resulted in the parties’ failure to close before the Outside Date.

       Akorn and Fresenius entered into the Merger Agreement shortly after announcing

their results for the first quarter of 2017. During the second quarter of 2017, Akorn’s

business performance fell off a cliff, delivering results that fell materially below Akorn’s

prior-year performance on a year-over-year basis. The dismal results shocked Fresenius,

because on the same date that the parties signed the Merger Agreement, Akorn had

reaffirmed its full-year guidance for 2018 at Fresenius’s request. Akorn’s performance fell

well below the guidance, forcing management to adjust Akorn’s full-year guidance

downward. Fresenius consulted with Akorn about the reasons for the sudden decline, which

Akorn attributed to unexpected competition and the loss of a key contract.

       Akorn’s CEO reassured Fresenius that the downturn was temporary, but Akorn’s

performance continued to slide in July and again in August 2018. By September,

Fresenius’s management team had become concerned that Akorn had suffered a Material

                                              2
Adverse Effect, although its legal counsel was not certain at that point that Fresenius could

satisfy the high burden imposed by Delaware law.

       In October 2017, Fresenius received a letter from an anonymous whistleblower who

made disturbing allegations about Akorn’s product development process failing to comply

with regulatory requirements. In November 2017, Fresenius received a longer version of

the letter that provided additional details and made equally disturbing allegations about

Akorn’s quality compliance programs. The letters called into question whether Akorn’s

representations regarding regulatory compliance were accurate and whether Akorn had

been operating in the ordinary course of business.

       Fresenius provided the letters to Akorn. Although Fresenius understood that Akorn

would have to investigate the allegations in the ordinary course of business, Fresenius

informed Akorn that Fresenius also needed to conduct its own investigation into the

allegations. Under the Merger Agreement, Fresenius had bargained for a right of

reasonable access to Akorn’s officers, employees, and information so that Fresenius could

evaluate Akorn’s contractual compliance and determine whether the conditions to closing

were met. Invoking this right, Fresenius had expert attorneys and advisors investigate the

issues raised by the whistleblower letters.

       Fresenius’s investigation uncovered serious and pervasive data integrity problems

that rendered Akorn’s representations about its regulatory compliance sufficiently

inaccurate that the deviation between Akorn’s actual condition and its as-represented

condition would reasonably be expected to result in a Material Adverse Effect. During the

course of the investigation, tensions escalated between the parties. Matters came to a head

                                              3
after Akorn downplayed its problems and oversold its remedial efforts in a presentation to

its primary regulator, the United States Food and Drug Administration (“FDA”). As one of

Akorn’s own experts recognized at trial, Akorn was not fully transparent with the FDA.

Put more bluntly, the presentation was misleading. From Fresenius’s standpoint, Akorn

was not conducting its operations in the ordinary course of business, providing an

additional basis for termination.

       During this same period, Akorn’s business performance continued to deteriorate. In

mid-April 2018, Fresenius sent Akorn a letter explaining why conditions to closing could

not be met and identifying contractual bases for terminating the Merger Agreement.

Fresenius nevertheless offered to extend the Outside Date if Akorn believed that further

investigation would enable Akorn to resolve its difficulties. Akorn declined.

       On April 22, 2018, Fresenius gave notice that it was terminating the Merger

Agreement. Fresenius asserted that Akorn’s representations regarding regulatory

compliance were so incorrect that the deviation would reasonably be expected to result in

a Material Adverse Effect. Fresenius also cited Akorn’s failure to comply in all material

respects with its contractual obligations under the Merger Agreement, including Akorn’s

obligation to use commercially reasonable efforts to operate in the ordinary course of

business in all material respects. Fresenius also cited the section in the Merger Agreement

that conditioned Fresenius’s obligation to close on Akorn not having suffered a Material

Adverse Effect.

       Akorn responded by filing this action, which seeks a declaration that Fresenius’s

attempt to terminate the Merger Agreement was invalid and a decree of specific

                                            4
performance compelling Fresenius to close. Fresenius answered and filed counterclaims,

contending it validly terminated the Merger Agreement and is not required to close.

       This post-trial decision rules in favor of Fresenius and against Akorn. First,

Fresenius validly terminated the Merger Agreement because Akorn’s representations

regarding its compliance with regulatory requirements were not true and correct, and the

magnitude of the inaccuracies would reasonably be expected to result in a Material Adverse

Effect. Second, Fresenius validly terminated because Akorn materially breached its

obligation to continue operating in the ordinary course of business between signing and

closing. Third, Fresenius properly relied on the fact that Akorn has suffered a Material

Adverse Effect as a basis for refusing to close.

       If Fresenius had been in material breach of its own obligations under the Merger

Agreement, then Fresenius could not have exercised either of the termination rights on

which it relied. Akorn tried to prove that Fresenius failed to use its reasonable best efforts

to complete the merger and breached its obligation to take all actions necessary to obtain

antitrust approval. By piecing together bits of documents and testimony, Akorn’s skilled

counsel weaved a tale of buyer’s remorse. I have taken this theory seriously, and there is

some evidence to support it.

       Having weighed the evidence and evaluated the credibility of the witnesses, I find

that Fresenius fulfilled its contractual obligations. In prior cases, this court has correctly

criticized buyers who agreed to acquisitions, only to have second thoughts after cyclical

trends or industrywide effects negatively impacted their own businesses, and who then

filed litigation in an effort to escape their agreements without consulting with the sellers.

                                              5
In these cases, the buyers claimed that the sellers had suffered contractually defined

material adverse effects under circumstances where the buyers themselves did not seem to

believe their assertions.

       This case is markedly different. Fresenius responded to a dramatic, unexpected, and

company-specific downturn in Akorn’s business that began in the quarter after signing.

After consulting with Akorn about the reasons for the decline and receiving unconvincing

answers, Fresenius appropriately began evaluating its contractual rights under the Merger

Agreement. While doing so, Fresenius continued to move forward with the transaction.

Later, Fresenius received whistleblower letters that made alarming allegations about data

integrity issues at Akorn. Once again, Fresenius consulted with Akorn, then relied on an

informational access covenant in the Merger Agreement to conduct an investigation. That

too was proper, because buyers obtain informational rights so they can continue to evaluate

the seller after signing and determine whether to close.

       Akorn did prove that for approximately a one-week period during February 2018,

Fresenius embarked on a strategy for achieving antitrust approval that would have breached

its contractual obligation to take all steps necessary to satisfy that condition to closing.

Fresenius promptly reversed course, and the parties were on the cusp of receiving antitrust

approval when Fresenius terminated the Merger Agreement. If all other conditions to

closing had been met on the initial Outside Date such that it would have extended

automatically to June 24, 2018, then the parties easily would have obtained antitrust

approval. Fresenius technically breached its contractual obligation, but it was not a material

                                              6
breach sufficient to deprive Fresenius of its ability to exercise the termination rights on

which it relied.

       Any second thoughts that Fresenius had about the Merger Agreement were justified

by unexpected events at Akorn. The parties agreed to provisions in the Merger Agreement

that addressed those events, and Fresenius properly exercised its rights under those

provisions. As a result, the Merger Agreement terminated on April 22, 2018.

                         I.       FACTUAL BACKGROUND

       A five-day trial took place on July 9–13, 2018. The parties introduced 1,892 exhibits

into evidence and lodged fifty-four deposition transcripts—forty from fact witnesses and

fourteen from experts. Nine fact witnesses and seven experts testified live at trial.

       The parties prepared for trial during eleven weeks of highly expedited litigation.

Despite the massive effort this entailed, the parties required assistance with only one

significant discovery dispute, which involved contentious privilege issues. This case

exemplifies how professionals can simultaneously advocate for their clients while

cooperating as officers of the court. The parties were aided in this effort by a discovery

facilitator who helped them craft and live by a detailed discovery plan.

       My task is to make factual findings based on the record the parties generated. For

that purpose, Fresenius bore the burden of proving by a preponderance of the evidence the

facts supporting the exercise of its termination rights. Akorn bore the burden of proving by

a preponderance of the evidence the facts necessary to establish its claim that Fresenius

could not exercise those rights because Fresenius was in material breach of its own

                                              7
obligations. Akorn bore the burden of proving by clear and convincing evidence the facts

necessary to justify a decree of specific performance.

       Fresenius would have borne the burden of proving the facts necessary to establish

its affirmative defense of unclean hands. In this case, however, there was no meaningful

distinction between its contractual arguments and its unclean hands defense. Fresenius

simply repackaged its contractual arguments as an equitable theory. In my view, the Merger

Agreement governs the parties’ relationship. If there were issues or actions that could

support a defense of unclean hands and which did not come within the analytical

framework of the Merger Agreement, then I would have analyzed that defense. In this case,

however, the facts fit neatly within the analytical framework of the Merger Agreement and

point to a contract-based outcome. Under those circumstances, applying the doctrine of

unclean hands would either duplicate the contractual outcome or create uncertainty by

departing from the result that the parties sought to achieve for themselves. This decision

therefore does not address the defense of unclean hands.

       Based on these allocations of the burden of proof, the evidence supported the

following findings of fact.

A.     Fresenius

       Defendant Fresenius Kabi AG is a pharmaceutical company headquartered in

Germany.1 It employs approximately 37,000 people worldwide, has seventy manufacturing

       1
         PTO ¶ B.2. Citations in this form refer to stipulated facts in the pre-trial order. See
Dkt. 165. Citations in the form “[Name] Tr.” refer to witness testimony from the trial
transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a

                                               8
sites around the world, and is worth about €6.5 billion.2 Its particular areas of focus lie in

clinical nutrition, injectable drugs, IV solutions, and medical devices.3 Fresenius Kabi is a

signatory to the Merger Agreement.

       Fresenius Kabi is the parent corporation of defendant Quercus Acquisition, Inc., a

wholly owned acquisition subsidiary. Under the Merger Agreement, Quercus would merge

with and into Akorn in a reverse triangular merger (the “Merger”). Although a necessary

party for purposes of Akorn’s request for specific performance, Quercus does not play a

meaningful role in the dispute.

       Fresenius Kabi is also the parent corporation of non-party Fresenius Kabi USA,

LLC (“Fresenius USA”), another wholly owned subsidiary.4 In the United States, Fresenius

Kabi operates through Fresenius USA. Fresenius Kabi viewed the Merger as a way to

expand its business in the United States, and personnel from Fresenius USA figure

prominently in the record.

       Fresenius Kabi is itself a wholly owned subsidiary of defendant Fresenius SE & Co.

KGaA (“Fresenius Parent”), a German company whose shares trade publicly on the

deposition transcript. Citations in the form “JX –– at ––” refer to a trial exhibit with the
page designated by the last three digits of the control or JX number or, if the document
lacked a control or JX number, by the internal page number. If a trial exhibit used paragraph
numbers, then references are by paragraph.
       2
           Henriksson Tr. 933, 1027; see PTO ¶ B.2.
       3
           Henriksson Tr. 933–34.
       4
           PTO ¶ C.2.

                                              9
Frankfurt Stock Exchange.5 Through various business segments, Fresenius Parent offers

products and services for hospitals, dialysis, and outpatient treatment.6 Fresenius Parent

has been in existence for more than a century, operates in more than 100 countries, and

employs approximately 277,000 people worldwide.7 For its fiscal year 2017, Fresenius

Parent had sales of approximately €34 billion and an operating profit of nearly €5 billion.8

Fresenius Parent is a signatory to the Merger Agreement for the purpose of causing

Fresenius Kabi to comply with its obligations.9

       The resulting three-tiered corporate structure puts Fresenius Parent at the top, then

Fresenius Kabi, then Fresenius USA. The corresponding human hierarchy starts with the

Supervisory Board of Fresenius Parent, which plays the same role as the board of directors

of a Delaware corporation. Because it is a German company, Fresenius Parent also has a

Management Board, consisting of the senior executives of that entity. Since July 2016,

Stephan Sturm has served as the top executive at Fresenius Parent and Chairman of the

Management Board.10 Since 2013, Mats Henriksson has served as CEO of Fresenius

       5
           Id. ¶¶ B.2–3.
       6
           Id. ¶ B.3.
       7
           Sturm Tr. 1171, 1195.
       8
           Id. at 1171.
       9
           JX 1 § 8.16.
       10
            Sturm Tr. 1169–71.

                                            10
Kabi.11 He also serves as a member of the Management Board of Fresenius Parent.12 For

many years, John Ducker has served as President and CEO of Fresenius USA.13

       Although critically important for many purposes, distinguishing among the

Fresenius entities is generally not necessary in this decision. It therefore refers only to

Fresenius, unless context requires a more specific referent.

B.     Akorn

       Plaintiff Akorn is a specialty generic pharmaceuticals company organized under the

laws of the State of Louisiana and headquartered in Lake Forest, Illinois.14 Akorn’s stock

trades publicly on NASDAQ under the symbol “AKRX.”15 Akorn is defined as the

“Company” in the Merger Agreement, and this decision sometimes uses that term. During

the events giving rise to this litigation, Raj Rai was its President and CEO.

       Akorn’s business model focuses on selectively targeting products with complex

manufacturing processes or that are deliverable in alternative dose forms, such as

       11
            Henriksson Tr. 933–34.
       12
            Sturm Tr. 1172.
       13
            Henriksson Tr. 935–36; Bauersmith Tr. 575–76.
       14
          PTO ¶ B.1. Attentive readers will have noted that none of the parties to the Merger
Agreement is a Delaware entity. Even Quercus, the acquisition subsidiary, is a Louisiana
corporation. The parties nevertheless chose Delaware law to govern the Merger Agreement
(excluding internal affairs matters governed by Louisiana law) and selected the courts of
this state as their exclusive forum for litigation. See JX 1 §§ 8.06 & 8.07.
       15
            PTO ¶ B.1.

                                             11
injectables, eye drops, oral liquids, inhalants, and nasal sprays.16 Akorn’s management

team believes this strategy carries less risk and generates more consistent profit margins

than other generic drug company strategies.17 Akorn has manufacturing facilities in

Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland;

and Paonta Sahib, India. Akorn has research and development centers in Vernon Hills,

Illinois, and Cranbury, New Jersey.18

       Akorn’s primary regulator is the FDA.19 Akorn’s quality operations function is

responsible for ensuring that Akorn’s plants and R&D centers meet FDA requirements.20

To carry out this function, Akorn’s Global Quality Compliance (“GQC”) team conducts

periodic audits; Akorn also retains consultants who evaluate its sites and processes.21

       Akorn’s quality operations function is also responsible for ensuring that Akorn

complies with FDA requirements when making submissions to the FDA, such as when

filing an Abbreviated New Drug Application (“ANDA”) to seek approval for a new generic

       16
            See Rai Tr. 455–56; PTO ¶ B.1.
       17
            See Rai Tr. 456–57; see also Bauersmith Tr. 614; Bauersmith Dep. 111–12.
       18
            Wasserkrug Tr. 7–8.
       19
            Id. at 18–19.
       20
            Id. at 8–9, 15–16.
       21
            See id. at 14–15, 18; Pramik Tr. 219–220; Kaufman Tr. 272; Chesney Tr. 1240–
41.

                                             12
drug.22 When reviewing an ANDA, the FDA relies on data submitted by the applicant. To

ensure that data is reliable, the FDA imposes rigorous data integrity requirements on

pharmaceutical companies.23 From the FDA’s standpoint, “ensuring data integrity is an

important component of [the pharmaceutical] industry’s responsibility to ensure the safety,

efficacy, and quality of drugs, and of [the] FDA’s ability to protect the public health.”24

       The FDA’s data integrity requirements place the burden on the pharmaceutical

company to “prove the origin, transmission, and content of the company’s data and that

data is what it is purported to be.”25 “A properly designed and managed data integrity

program strives to mitigate the risk of purposeful data manipulation or fraud by putting

controls in place that limit to the greatest extent possible the opportunities to manipulate

data . . . .”26 To minimize those risks, the FDA’s data integrity requirements impose strict

requirements that data regarding testing and manufacturing be attributable, legible,

contemporaneously recorded, original or a true copy, and accurate (“ALCOA”), as well as

complete, consistent, enduring, and available.27 The FDA’s data integrity requirements are

part of its current Good Manufacturing Practices (“cGMP”), which are designed to ensure

       22
            See Wasserkrug Tr. 22.
       23
            JX 1251 ¶¶ 17–20.
       24
            JX 112 at 1.
       25
            JX 143 at 1; accord Kaufman Tr. 323; Kaufman Dep. 196; see Wasserkrug Tr. 9.
       26
            JX 1252 ¶ 2.1.
       27
            See JX 1247 ¶ 35; Wasserkrug Tr. 8–9, 22; Franke Dep. 33–36.

                                             13
the systematic safety, quality, and reliability of drug products.28 These requirements are set

out in federal regulations and clarified by FDA guidance.29

       A critical component of a modern data integrity system is the company’s IT

infrastructure.30 The FDA requires that computer systems have adequate “access controls”

that restrict who may access electronic data, as well as “change controls” designed to

“ensure that no unnecessary changes are made, that all changes are documented, and that

the possible effect of a change is evaluated prior to its implementation.”31 The FDA also

requires that lab equipment have “audit trails” to document who uses the equipment, when,

and for what purpose.32

       Data integrity also requires ensuring the authenticity of entries in laboratory

notebooks.33 Notebooks contain original source data that should be contemporaneously

recorded by chemists. Notebooks must be preserved, and missing notebooks are “an

important data integrity issue” because “that data is no longer available” and cannot be

       28
            Wasserkrug Tr. 8, 12; JX 1251 ¶ 22; JX 1249 ¶ 26.
       29
         See, e.g., 21 C.F.R. Pt. 211. See generally Wasserkrug Tr. 12–13; JX 934 at 3; JX
1247 ¶¶ 34–35; JX 1251 ¶¶ 22–23.

       JX 439 at ‘436 (IT is a “core component of a 21st century quality control
       30

management structure”); see Pramik Dep. 26.
       31
            JX 1249 ¶ 96 n.141; see 12 C.F.R. § 211.68(b); Pramik Dep. 27; JX 934 at 3.
       32
            JX 1247 ¶ 36; see 12 C.F.R. § 211.192; Franke Dep. 56; JX 934 at 3.
       33
         See 21 C.F.R. §§ 211.68(b) & 211.194(a); JX 934 at 3; JX 1251 ¶ 83; see also JX
1247 ¶¶ 39–40; Wasserkrug Tr. 22 (describing FDA site visits to inspect notebooks and
batch records “to assure the ALCOA principles of that data”).

                                             14
verified.34 At Akorn, each notebook is assigned to a particular individual; making unsigned

entries in another analyst’s notebook violates fundamental principles of data integrity.35

       The FDA’s data integrity rules require that all test data—both failing results and

passing ones—be properly recorded.36 The FDA forbids the practice of “testing into

compliance,” or running tests again and again until passing results are secured and

recording only the passing results.37

       FDA regulations require that potential data integrity violations be promptly

investigated and remediated. FDA guidance calls for “potential data falsification” to be

“fully investigated” by the firm’s “quality system to determine the effect of the event on

patient safety, product quality, and data reliability; to determine the root cause; and to

ensure the necessary corrective actions are taken.”38

       The FDA is required to inspect manufacturing facilities on a risk-based schedule39

and typically inspects Akorn’s sites at least once a year.40 The FDA may also conduct

       34
            Franke Dep. 51–52.
       35
            Sherwani Dep. 54–57; Silverberg Dep. 54–55.
       36
            Wasserkrug Dep. 86–87; see 21 C.F.R. § 211.194(a); JX 934 at 3.
       37
            Wasserkrug Dep. 52–53, 86–87; JX 1252 at 3.
       38
          JX 112 at 9–10 (citing 21 C.F.R. §§ 211.22(a), 211.125(c), 211.192, 211.198,
211.204); see Rai Dep. 26 (acknowledging that Akorn “absolutely” has “responsibilities to
investigate and remediate data integrity problems”).
       39
            21 U.S.C. § 360(h)(3).
       40
            See Wasserkrug Tr. 20.

                                             15
directed “for cause” inspections.41 At the conclusion of an inspection, the FDA holds a

close-out meeting and shares its observations.42 The FDA may provide only oral

observations, or it may document observations in a Form 483, which is a written report

from the FDA documenting “observations [that] are intended to denote significant

conditions that constitute violations of cGMPs.”43 The company has an obligation to

respond to the FDA’s observations within fifteen business days with a root cause analysis,

impact assessment, and a set of corrective and preventative actions (“CAPAs”).44 If the

FDA determines that the company has proposed adequate CAPAs, it will typically classify

the inspection as voluntary action indicated (“VAI”).45 If the FDA determines that the

remedial measures are insufficient, it may classify the inspection as official action indicated

(“OAI”).46 An OAI classification can lead to further regulatory action, such as follow-up

inspections or the issuance of a Warning Letter.47 After the issuance of a Warning Letter,

the FDA typically will not approve new product applications from the facility until the

       41
            JX 934 at 4; JX 1249 ¶ 55; Wasserkrug Tr. 23.
       42
            Wasserkrug Tr. 24.
       43
            JX 1249 ¶ 56; see JX 1247 ¶ 48; Wasserkrug Tr. 24.
       44
            Wasserkrug Tr. 24–25; see JX 1249 ¶ 58.
       45
            JX 1247 ¶ 52; Wasserkrug Tr. 25–26.
       46
            JX 1247 ¶ 53; Wasserkrug Tr. 26.
       47
            Wasserkrug Tr. 13, 25–28, 72; JX 1247 ¶ 53.

                                               16
observations are remediated.48 If the FDA has concerns about a company’s data or a

submission, it may send the company a Complete Response Letter (“CRL”) which, as its

name indicates, requires a complete response.49

       Data integrity violations are particularly serious because they “break trust” between

the offending company and the FDA.50 The FDA may require the withdrawal of an ANDA

if the FDA finds that it contains an untrue statement of material fact.51 In cases of repeated,

intentional submission of inaccurate data, the FDA may invoke its Application Integrity

Policy (“AIP”), which “halts all ongoing scientific review of pending applications to the

agency until specific milestones are accomplished by the company.”52 Exiting from the

AIP is a time-consuming and expensive process that involves an independent investigation,

corrective action plan, recall or retesting of products, and withdrawal and resubmission of

applications.53 If systemic issues remain uncorrected, the FDA may seek a court-enforced

permanent injunction. In extreme cases, the FDA may bar a company from making

       48
            JX 1249 ¶ 61; Wasserkrug Tr. 28; see also JX 1247 ¶ 53; Chesney Dep. 149.
       49
            Chesney Dep. 148–49.
       50
            JX 1251 ¶ 19.
       51
            See 21 U.S.C. § 355(e); JX 934 at 4.
       52
            JX 1251 ¶ 33; see JX 1247 ¶ 53; JX 1355.
       53
            JX 1251 ¶ 34.

                                              17
submissions, exclude it from other federal programs, or refer matters for criminal

prosecution.54

       At the time the Merger Agreement was signed, Mark Silverberg was the head of

Akorn’s quality function, holding the title of Executive Vice President, Global Quality

Affairs.55 Silverberg had been Akorn’s most senior quality official for over ten years. In

that role, he reported directly to Rai, Akorn’s CEO.

       The record demonstrated that Silverberg was not a suitable individual to be

responsible for Akorn’s quality efforts. One year before the Merger Agreement was signed,

Akorn’s board of directors and Rai concluded that Silverberg was not up to task of carrying

out his duties and needed to retire.56 Silverberg nevertheless remained at his post until

nearly one year after the signing of the Merger Agreement, on March 1, 2018, when Kim

Wasserkrug, previously the head of quality at Akorn’s Decatur site, took over the quality

function. Silverberg was shifted to the role of “Quality Advisor.”57 His new role had no

substantive responsibilities (other than to help with this litigation), came with a 20%

       54
            See JX 934 at 5; JX 1249 ¶ 61.
       55
            See JX 204 at ‘056; Rai Tr. 498–99.
       56
            See JX 115; JX 132; JX 137; see also JX 121; JX 890 at ‘274.
       57
            JX 955 at ‘702.

                                             18
diminution in pay, and was originally to last for the lesser of 90 days or until the Merger

closed. It was a constructive termination for cause.58

       Akorn took employment action against Silverberg only after learning that in August

2017, during the period between signing and closing, Silverberg submitted a response to a

CRL that he had been told—and I believe knew—would result in the submission of

fabricated data to the FDA.59 If he had not signed off on the CRL, Akorn would have had

to withdraw the ANDA, which would have been a red flag for Fresenius that could have

put the Merger in jeopardy. In my judgment, Silverberg submitted the false CRL in an

effort to avoid inviting any scrutiny of Akorn’s data integrity deficiencies until after the

Merger closed, when it would be Fresenius’s problem.60 Akorn ultimately withdrew the

ANDA in March 2018.61 But for an investigation that Fresenius was conducting into two

whistleblower letters it received, Akorn would not have withdrawn the ANDA or taken

        See Rai Tr. 496 (“Q. And, of course, as we all know, [Silverberg] was fired, right,
       58

by Akorn? A. Yes.”); Wasserkrug Tr. 105 (“In my mind, he was fired, but yes.”).
       59
          See Wasserkrug Tr. 105 (agreeing that Silverberg was fired “because he failed to
direct the withdrawal of an ANDA submitted to the FDA for the drug azithromycin after
being told that the submission contained likely false or fabricated data” and “for knowingly
resubmitting that inaccurate data, or highly likely inaccurate data, to the FDA in a CRL
response back in August of 2017”).
       60
         In a submission made after post-trial argument, Akorn informed the court that the
database of a stand-alone high accuracy liquid particle counter had been deleted at the
Somerset site on August 22, 2018. Dkt 201 at 1. In a moment of brazen candor, Akorn
argued that if Fresenius had not “repudiated the Merger Agreement itself, the deal would
have closed months earlier and the risk of such an event would have fallen on Fresenius.”
Dkt. 209 at 7; see also Wasserkrug Dep. 157; Wasserkrug Tr. 139; JX 590 at ‘472.
       61
            See JX 1070 at ‘771; Wasserkrug Tr. 43–44.

                                             19
any action against Silverberg. After constructively firing Silverberg, Akorn did not use the

opportunity to deliver any type of message to its employees about the importance of data

integrity or its intolerance for inaccurate submissions to the FDA.62

       During his ten years heading up the quality compliance function, Silverberg placed

“a lot of pressure” on employees “to just get things done and get products out [the] door.”63

In an employee survey conducted in January 2016 that went to Rai and other members of

senior management, a whistleblower submitted the following comment:

       Our current Executive Vice President of Quality Assurance is not fostering a
       willingness to change the current Akorn culture. Instead of acknowledging
       and embracing our compliance gaps and working collaboratively with other
       groups to change and mature our quality systems, he actively works to
       prevent collaboration and transparency. He has actually counselled his staff
       to not speak to Global Quality Compliance staff and to not share information
       with GQC. This is not in line with our new mission and values statement. He
       has also provided misleading information to regulatory bodies including the
       US FDA.64

The comment was exceptional both in its content and its source: it came from someone

who worked in Akorn’s headquarters in Lake Forest, where Silverberg himself worked

along with Rai and the executive team. Yet Akorn did not investigate it. During the same

period when the problems with the azithromycin CRL were unfolding, Silverberg

instructed the head of quality at Akorn’s Swiss site not to open an investigation into a

       62
            Rai Tr. 497, 502–03.
       63
         JX 870 at ‘895 (“[T]here was a lot of pressure from Mark S to just get things done
and get products out [the] door.”).
       64
            JX 246 at ‘573.

                                             20
quality issue he reported, not to put Silverberg’s response in any file relating to the matter,

and not to put FDA-sensitive subjects in emails.65

       On Silverberg’s watch, Akorn did very little to address data integrity issues. In June

2016, Ron Johnson, an Akorn board member with FDA experience,66 wrote to Silverberg

to express concerns about Akorn’s state of compliance:

       I continue to be concerned that our position always seems to be that FDA got
       it wrong and we are just fine. I do not think we are fine, I think there are
       signals that we are missing. As the leader of the quality function, I do not
       understand how you can tolerate the continued non-compliance by
       employees, supervisors and quality assurance staff. . . . We have dogged [sic]
       a bullet a number of times, but at some point, our number will be up unless
       we, once and for all, fix the underlying reasons why our people do not adhere
       to procedures. Why do we not see an effort to do this?67

Silverberg’s initial response was “I think we should communicate live (on the phone).” 68

In December 2016, during a meeting of the board of directors’ Quality Oversight

       65
          See JX 623 (Silverberg stating, “Please do not incorporate this correspondence
into any related complaint investigations or files[,]” and instructing, “Please do not put
FDA sensitive subjects into emails as such.”); JX 667 (Silverberg: “Let’s discuss by phone
please at your earlier convenience.”); JX 778 at ‘557 (Silverberg instructing Sherwani in
connection with the azithromycin investigation, “No more emails.”). Stuart testified that
during Cravath’s investigation into the azithromycin problems, discussed below, they
determined that Silverberg subsequently ordered an investigation into the issue. Stuart Tr.
868–69.
       66
           See, e.g., JX 470 at 14 (April 2017 consultant report quoting unnamed FDA
official: “Ron Johnson [a board member at Oak] is ex-FDA and highly respected. He gives
the company excellent credibility.”) (alteration in original).
       67
            JX 1403 at ‘004.
       68
            Id.

                                              21
Committee, Johnson again “expressed his concern around the repetitiveness of issues

between sites and across sites identified during audits & external inspections.”69

       Also in December 2016, Akorn received a “Compliance Gap Analysis Summary

and Recommendation Report” for its Decatur facility from John Avellanet of Cerulean

Associates LLC, who had inspected the facility during a four-day visit in September

2016.70 The report was blunt: “Overall, the review found that the data integrity controls at

. . . Akorn’s Decatur, Illinois site . . . are insufficient to support compliance with current

data integrity expectations and [FDA] regulatory requirements.”71 The report warned that

“[a]s a result, Akorn currently shoulders significant regulatory and negative public

perception risk.”72

       Cerulean identified seven critical, seven major, and at least five minor

nonconformities at the Decatur site.73 The report defined a critical nonconformity as one

that is “reasonably likely to directly impact (e.g., either immediately cause, enable, or be a

non-compliance) the regulatory compliance status of the organization.”74 The report

warned that “[h]istorically, these findings have consistently resulted in public enforcement

       69
            JX 235 at ‘598; see Rai Tr. 515–16.
       70
            See JX 231; Wasserkrug Tr. 31–32.
       71
            JX 231 at ‘062.
       72
            Id.
       73
            Id. at ‘062, ‘067.
       74
            Id. at ‘067.

                                             22
actions (e.g. FDA Warning Letter, product recall, etc.) and have been significant factors in

product liability litigation.”75 The report also warned that “[r]epeat non-conformities . . .

pose an increased risk because they are indicators that an organization did not take adequate

corrective actions and thus may not treat its responsibilities as seriously as appropriate.”76

       The seven critical findings were:

      “Failure to exercise sufficient controls to prevent data loss.”77

      “Insufficient data integrity controls (both procedural and technical) to prevent
       unauthorized changes to electronic data.”78

      “Insufficient registered record archival controls and retention for records involved
       in drug product manufacture, testing and release, and quality records.”79

      “Failure to have sufficient controls over computerized equipment used in regulated
       processes and used to create, manipulate, edit, [and] store . . . regulated data for drug
       product safety and quality testing and release.”80

      “Inadequate validation of computerized systems to ensure the ongoing suitability of
       systems for Akorn processes, data, and personnel.”81

       75
            Id.
       76
            Id.
       77
            Id. at ‘068.
       78
            Id. at ‘069.
       79
            Id. at ‘071.
       80
            Id. at ‘072.
       81
            Id. at ‘074.

                                              23
      “Inadequate control over approved specifications for drug product and raw
       materials, and failure to ensure that product testing data is derived from compliance
       with established specifications and standards.”82

      “Inadequate corrective action and preventative action and out-of-specification
       investigations, explanations, and corrective actions.”83

Specific deficiencies included that any Akorn employee could add, delete, or modify

electronic data, which undermined “all of the test data [and] all of the production data” at

the Decatur site,84 thereby “call[ing] into serious question the identity, strength, quality,

safety, purity, and sterility of Akorn’s drug products.”85 Cerulean also found that Akorn

had failed to use an audit trail function that would have enabled Akorn to determine

whether employees had exploited their unlimited access, which also “rais[ed] questions

over the integrity of the laboratory’s data since initial usage of the instruments.”86

       In January 2017, Cerulean conducted a similar assessment at the Somerset site.

Cerulean was not able to complete its inspection because of inadequate IT support. 87 In

       82
            Id. at ‘075.
       83
            Id. at ‘076.
       84
            Avellanet Dep. 111–15.
       85
            JX 231 at ‘075.
       86
         Id. at ‘070. Avellanet also found that Akorn was claiming a clearly fraudulent
number of hours for training on quality issues. See id. at ‘077 (“The Akorn Decatur site
alone averages 7,000 trainings a month. Assuming each individual works 7 days a week,
with no vacations or sick leave, that’s 232 trainings a day.”); Avellanet Dep. 120–24.
       87
         Wasserkrug Tr. 131; Wasserkrug Dep. 156–57; Avellanet Dep. 142–45; see JX
439 at ‘430; JX 500; JX 504; JX 505; JX 509.

                                              24
May 2017, Cerulean provided Akorn with a preliminary report on the Somerset facility,

which identified three additional critical findings and three major findings.88 This time,

Avellanet believed that some of the violations were so severe that Akorn’s senior

management should be concerned about potential criminal liability under the Park

doctrine.89 Cerulean found that senior management had failed “to ensure an effective

quality system” and that the IT department failed to “ensure the reliability of the controls

around data used to make, test, [and] release” sterile drug products.90 As at Decatur,

Cerulean determined that the latter deficiency raised “serious questions about the reliability

of any data integrity controls and thus the trustworthiness of any electronic information

used throughout Akorn to make safety, efficacy and quality decisions.”91 Cerulean also

identified additional “critical” computer access and audit trail deficiencies at Somerset

similar to those it found at Decatur.92

       88
            JX 439 at ‘430.
       89
            Id. at ‘435–36; see United States v. Park, 421 U.S. 658 (1975).
       90
            JX 439 at ‘435–36.
       91
            Id. at ‘436.
       92
          See id. at ‘437 (citing Akorn’s “[f]ailure to have sufficient controls over
computerized systems . . . used to create, manipulate, edit, [and] store” data used for
product testing); id. at ‘438 (“Audit trails appear to be inconsistently reviewed . . . .”); see
also JX 564 at ‘352 (Somerset employee complaining in August 2017 that quality-tracking
software’s audit trails showed she had completed investigations for matters to which she
was not even assigned: “It is alarming to me that in light of all the issues that we have
presented with the Trackwise System, we are being told by IT that these issues do not
warrant a re-validation of the system.”).

                                              25
       Akorn made “no effort” to schedule a date for Cerulean to complete the inspection

at the Somerset site.93 Akorn cancelled Cerulean’s previously scheduled assessment of its

Amityville site.94 Silverberg and other members of senior management identified the

Merger as the reason for not having Cerulean do any more work.95 I infer that they did not

want Cerulean to identify any more data integrity gaps that could jeopardize their efforts

to sell the Company. The only interest that Akorn’s executives showed in the Cerulean

report was a request by Joseph Bonaccorsi, Akorn’s Executive Vice President, General

Counsel, and Corporate Secretary, that Cerulean remove the reference to potential criminal

liability for Akorn’s executives.96

       Avellanet testified that Akorn’s data integrity issues were among the “top three

worst” of the 120+ pharmaceutical companies that he has assessed,97 a notorious status

given that his practice only involves companies that “have problems.”98 Avellanet testified

that some of Akorn’s data integrity failures were so fundamental that he would not even

       93
          Wasserkrug Tr. 132; see Avellanet Dep. 139; see also JX 507 at ‘317 (“executive
leadership” decided “that IT resources would not be engaged in the third party data
integrity audit [Cerulean]”).
       94
            Avellanet Dep. 47; see JX 509 at ‘746.
       95
            Wasserkrug Tr. 132.

        Avellanet Dep. 203–07. Gill voiced the request on Bonaccorsi’s behalf. See
       96

Bonaccorsi Dep. 175–78, 196; Avellanet Dep. 203–05.
       97
            Avellanet Dep. 172–73.
       98
            Kaufman Tr. 317–19; accord Avellanet Dep. 301.

                                             26
expect to see them “at a company that made Styrofoam cups,” let alone a pharmaceutical

company manufacturing sterile injectable drugs.99 He believed that the “FDA would get

extremely upset” about Akorn’s lack of data integrity “because this literally calls into

question every released product [Akorn has] done for however many years it’s been this

way.”100

       Roughly contemporaneously, in June 2016, Akorn’s GQC team identified a critical

data integrity failure at the Vernon Hills site that paralleled the problems identified by

Cerulean: a failure to establish proper computer access controls and audit trials.101 In

December 2017 and January 2018, an investigation by Lachman Consulting Services, a

       99
          Avellanet Dep. 173; see also id. at 111–12 (testifying that he had never before
seen a company where any employee could make changes to electronic data “willy-nilly
with no traceability or accountability”).
       100
           Id. at 116–17. Avellanet’s first report concerned Decatur, but the record evidence
supports a finding that conditions at Decatur were representative of company-wide
problems at Akorn. See JX 411 (Wasserkrug sending gap assessment to Sherwani: “I
suspect you will have similar problems with your systems there.”). Witnesses for Akorn
also claimed that its IT problems did not matter because Akorn was a paper-based
company. See Wasserkrug Tr. 66. As one of Fresenius’s experts explained, that claim in
itself is an alarming red flag, because in the current age, a company cannot operate
compliantly using paper-based systems, and regardless, a company’s computerized
systems still must be in compliance. George Tr. 1146.
       101
           JX 655 at ‘479 (“The program . . . is unable to record audit trails and cannot
support accounts with unique user names and passwords for individual users. Analysts
routinely log in as ‘Admin’ without a password.”); id. at ‘472 (“[T]he audit observations
together with the areas of risk identified within Data Integrity; require Akorn to take
immediate action to mitigate said risk.”); see Wasserkrug Tr. 109–12; see also JX 242
(GQC audit report on Amityville from October 2016 identifying “critical” deficiency
related to data integrity).

                                             27
consultant hired by Fresenius, identified similar issues at all of the sites that Lachman

visited. Beginning in March 2018, an investigation conducted by NSF International, a

consultant hired by Akorn, found extensive issues at the sites it examined.

       Akorn did not do anything meaningful to address the issues raised by Cerulean until

March 2018, after the investigation that Fresenius conducted into the whistleblower letters

led to Akorn uncovering Silverberg’s false CRL response, self-reporting to the FDA, and

committing to address its data integrity problems. Until Fresenius’s investigation forced its

hand, Akorn was not devoting resources to data integrity. It is true that Silverberg

facilitated the preparation of a data integrity plan for Decatur in August 2017, but he made

clear in his contemporaneous communications that it was just so Akorn would have a

document to show the FDA. When Akorn’s IT department opposed the plan, Silverberg

reassured them that it was not meant to be implemented. In his jargon, it “serves to

represent to outside authorities our cognizance of the subject, without committing IT to

any near term work or responsibility.”102 In late 2017, Patty Franke, Decatur’s Quality

Assurance Manager for Data Integrity and Compliance, 103 told Cerulean that Akorn was

“making 0 progress on our DI remediation efforts” at Decatur, which she attributed to “the

       102
             JX 590 at ‘472; see Wasserkrug Tr. 136–38, 142–43.
       103
             Franke Dep. 25–26.

                                             28
culture and the message from management.”104 Wasserkrug testified that she was told that

“a lot of this stuff would wait until the Fresenius merger occurred,” which was an excuse

“we heard . . . actually quite often” in late 2017.105

       To reiterate, Akorn only started making a concerted effort to address its data

integrity issues in March 2018, after Fresenius had flagged Akorn’s data integrity problems

and prompted Akorn to uncover Silverberg’s false CRL response, and after Akorn felt it

had to try to get ahead of the problem by going to the FDA and committing to address its

data integrity issues. At that point, Akorn formed an executive steering committee on data

integrity remediation, which held its kickoff meeting on April 19, 2018.106 It took until

June 7, 2018 for Akorn to assemble a list of the hundreds of deficiencies it had

accumulated, many of which went back years.107 Over a year after receiving the Cerulean

report, the Somerset facility had not taken any action to address the deficiencies it

       104
          JX 754 at ‘740. Separate from the periodic audits conducted by GQC and the
consultant assessments, Akorn’s quality assurance personnel conduct ongoing site
monitoring and represent “the eyes and ears” for each facility. See Wasserkrug Tr. 14.
       105
             Wasserkrug Dep. 157–58.
       106
             JX 1155; see Rai. Tr. 530.
       107
             See JX 1885; Rai Tr. 531–34; Wasserkrug Dep. 27–28.

                                              29
identified.108 Decatur had only completed “32% of the corrective actions thus far.”109 By

the time of trial, Akorn still did not have a remediation plan because it was still in the

process of figuring out all of the deficiencies that the Company needed to address.110

       In its post-trial briefs, Akorn attempted to paint a picture of compliance at Akorn

that differed radically from what the evidence showed at trial. Notably absent from the

witness list at trial was any representative from Akorn’s quality function who could speak

to Company-wide conditions before March 2018. Wasserkrug testified, but she took over

the company-wide quality function from Silverberg in March 2018 and could not speak to

matters preceding her tenure, except at the Decatur site where she had been the site quality

director.111 Silverberg was the obvious candidate, but neither he nor Jaspreet Gill, the head

of Akorn’s GQC team, nor any other senior member of the quality function testified at trial.

Rai made claims about quality, but having considered his answers and evaluated his

demeanor while he was being cross-examined about his commitment to quality, I am forced

to conclude that he does not regard it as a priority.112 Bonaccorsi gave testimony about the

       108
           JX 1077 at ‘065–66; see JX 1885 at ‘754; Wasserkrug Tr. 153–54 (“[I]n 2017,
after getting the Somerset Cerulean report, no actions were taken in response.”).
       109
          JX 1094 at ‘623; see JX 1885 at ‘754; Wasserkrug Dep. 204–06; Franke Dep.
239. I do not credit Wasserkrug’s contrary claim at trial that Decatur had completed 70–
75% of the corrective actions. Wasserkrug Tr. 42, 148.
       110
           See Rai Tr. 533–34 (Akorn’s data remediation effort “does not have a
timetable”).
       111
             Wasserkrug Tr. 106–07.
       112
         See Rai Tr. 496–519. Another plausible and more alarming inference is that Rai
consciously disregarded Akorn’s quality issues, including its data integrity problems. Rai

                                             30
overall structure of Akorn’s quality function, but he is not a quality expert, nor is he part

of the quality department.113

       The evidence at trial demonstrated that Akorn took the steps necessary to establish

the formal structure of a quality function. The evidence also revealed a gulf between

appearance and reality.114 The extensive and recurring quality and data integrity problems

is the chair of Akorn’s Quality Oversight Committee and its executive steering committee
on data integrity remediation. Rai Dep. 33, 207. He receives Akorn’s internal audit reports,
but he does not read them. Rai Tr. 489; see Rai Dep. 201. Rai did not read the Cerulean
reports either. Rai Dep. 40–41, 67; Rai Tr. 486. After being asked about these documents
at his deposition, he made no effort to familiarize himself with them between his deposition
and trial. See Rai Tr. 486–87; see also id. at 474. At his deposition, Rai could not recall
whether he had ever seen the Decatur internal audit report that GQC sent him on March
23, 2018. Rai Dep. 200; see JX 1095. When asked for Akorn’s timetable to address the
critical findings in the Cerulean report and March 2018 GQC report, Rai said he would “go
back and ask” for one. Rai Dep. 207–08. Rai made that decision at his deposition and only
because opposing counsel showed him the GQC report. See id. at 208–09. At trial, Rai
asserted that Akorn was “still assessing” a timetable for data remediation. Rai Tr. 534.
       113
             See Bonaccorsi Tr. 872–77; see also id. at 923.
       114
           See, e.g., JX 50 at ‘885 (Akorn board’s Quality Oversight Committee minutes
from 2014 citing need for a “change of culture” around quality); JX 235 at ‘598 (December
2016 Quality Oversight Committee minutes in which director Ron Johnson “expressed his
concern about the repetitiveness of issues between sites and across sites identified during
audits & external inspections” and emphasized need for “corrective actions on a global
basis[,]” and director Brian Tambi noted that “it appears that the implementation of
corrective action is lacking or not timely”); Rai Tr. 514 (“Q. . . . [Y]ou were on a board
committee [in November 2016] that was aware of significant and repeat problems that
Akorn was having in its quality function; isn’t that right? A. Yes.”); id. at 518 (Rai agreeing
that Akorn was having problems across all sites); see also JX 67 at ‘923 (discussion of
problems with logbooks including use of post-it notes); JX 93 (discussion of missing
logbooks and data); JX 104 (email discussing changing data and reporting only one set so
that the FDA would not “point at the data for high impurities”); JX 105 (Franke being told
that lack of password control and data insecurity were longstanding issues; Franke
indicating that “[o]n all of the computerized systems within the [Amityville] lab, all users
have the ability to change the PC time/date while logged in, which is used as a stamp on

                                              31
at Akorn convinced me that Akorn did not have a well-functioning quality system and

lacked a meaningful culture of compliance.

the data file”); JX 106 (Franke noting concerns about Amityville facility that would require
“a difficult explanation to any regulatory agency”); JX 107 (Franke expressing concern to
Silverberg about “[l]ab data system administration” and “[l]ack of [a]ccountability for
invalid or incomplete data sequences”); JX 116 (Gill calling it “too much to be a
coincidence” where FDA’s 2016 investigation of Somerset yielded multiple observations
identical to those made in 2014); JX 126 (Franke noting data integrity problem with piece
of equipment); JX 133 (“The Somerset findings suggest a step back to focus on remedial
improvements before true quality advancement to current industry practices can be
made.”); JX 203 (email regarding investigation into “Falsification/Backdating of
information”); JX 209 (Pramik emailing about competitor’s Form 483 regarding computer
controls and remarking, “From discussions with IT, I have the impression this is an area
we haven’t stayed on top of . . . . Impression is we also have instrumentation that is not
validated.”); JX 216 (“I wanted to make you aware of another documentation (back dating
/ falsification) issue identified this week. . . . Obviously, very concerning given this is the
second issue in as many weeks.”); JX 234 (Franke noting that the absence of a password
for an Akorn backup server “does not meet industry data integrity and protection
standards”); JX 241 at ‘113 (December 2016 Executive Leadership Overview on R&D /
Quality / Compliance IT Systems: “There is FDA compliance risk & likely large
remediation efforts, but not collective visibility to what we’re dealing with”); JX 328
(Wasserkrug informing Silverberg and Franke about “a very serious data integrity issue”
because of lack of access controls in TrackWise); JX 864 (Franke weighing in on quality
issues from audit that remained unresolved); JX 377 at ‘206 (March 2017 presentation to
Akorn Board Quality Committee: “Observations revealed a systemic breakdown in Quality
system across functions, which included management responsibility, training, procedural
deficiencies, qualification program weaknesses and 21 CFR Part 11 deficiencies.”); JX 499
(“We have noticed multiple late entries/incomplete information in the log books in the
lab.”); JX 518; JX 526; JX 565; JX 566; JX 569; JX 870 at ‘895 (“If certain FDA inspectors
come to Somerset, there will be problems there.”); cf. Rai Tr. 484, 496 (Rai backing
Silverberg and crediting his explanation for the false submission to the FDA); id. at 486–
88 (Rai admitting that he never read the Cerulean reports and did not attend the training
Cerulean was hired to give).

                                              32
C.     Akorn Explores Strategic Alternatives.

       In February 2016, Akorn’s board of directors consulted with management and J.P.

Morgan Securities LLC about strategic opportunities.115 The board decided that Akorn

should explore strategic alternatives once it completed a restatement of its 2014 financial

information and became current with its financial reporting.116

       In July 2016, Akorn’s then-Chairman of the Board and largest stockholder, John N.

Kapoor, met with Rai and J.P. Morgan to develop a preliminary list of potential buyers.117

During a meeting later in July, the board decided to “commence a process to solicit

proposals to acquire the Company from potential strategic and financial counterparties.”118

       In August 2016, J.P. Morgan approached Alexander Dettmer, Head of Corporate

Business Development/M&A and Senior Vice President of Fresenius Parent, to explore

whether Akorn would be a good fit for Fresenius Kabi.119 In early October 2016, Rai and

J.P. Morgan met with Ducker and gave him a presentation about Akorn.120 During the same

       115
             See JX 520 at ‘823.
       116
             Id.
       117
             Id. at ‘824.
       118
             Id.
       119
             JX 520 at ‘824; see PTO ¶ C.1; Rai Tr. 460.
       120
             PTO ¶ C.2; JX 520 at ‘824.

                                             33
period, J.P. Morgan approached other potential strategic acquirers and private equity

funds.121 At later points, other potential acquirers dipped in and out of the process.122

D.     Fresenius’s Initial Evaluation Of Akorn

       After being approached by Akorn, Fresenius evaluated Akorn with assistance from

Moelis & Company. A Moelis presentation identified positive attributes, including:

      “Attractive portfolio of niche, high-value generics focused primarily on ophthalmic
       and sterile injective products”123

      “[P]roduction expertise across difficult-to-manufacture alternative dosage forms
       (i.e., other than oral solid dose)”124

      “Deep pipeline of 85% filed ANDAs representing ~$9bn in brand revenue”125

      “Management expects 25 approvals (~$1bn in brand revenue) by March 2017”126

      “Management expects to file at least 20 ANDAs during 2017”127

At the same time, the Moelis presentation highlighted risks:

       121
             See JX 520 at ‘824–25.
       122
          See id. at ‘828–29, ‘832. See also JX 224 at ‘339 (March 2017 draft J.P. Morgan
presentation observing that “[s]ince May 2016, J.P. Morgan and [Akorn] have held
discussions with 8 strategics and 5 financial sponsors”).
       123
             JX 180 at ‘879.
       124
             Id.
       125
             Id.
       126
             Id.
       127
             Id.

                                             34
     “Ephedrine challenges – Akorn is the sole supplier for an unapproved product that
      drives ~20% of revenues; however, Flamel has launched the first FDA-approved
      version and other entrants (e.g., Endo/Par) could emerge”128

     “Akorn’s Ephedrine NDA has been impacted by Form 483 deficiencies at its
      Decatur, IL facility”129

     “However, 483 issues do not impact products outside of Ephedrine”130

An internal Fresenius assessment identified similar pros and cons.131

      On November 4, 2016, Akorn announced its financial results for the third quarter.132

Akorn management spoke about the threat of competition for ephedrine and said their

market share and revenue remained stable.133 Moelis sent Fresenius an updated

presentation that provided additional detail on ephedrine, including by modeling base,

downside, and upside cases for that product.134 Fresenius also obtained and reviewed a

      128
            Id.
      129
            Id.
      130
            Id.
      131
          See JX 188 at ‘007 (citing “[l]arge pipeline of pending ANDAs” but noting risk
of “competition to Ephedrine” and “[c]ompliance status of manufacturing assets”). The
Fresenius team also identified the risk posed by Kapoor’s involvement with Akorn as
Chairman of the Board and its largest stockholder. Kapoor previously had sold a company
he took public, LyphoMed Inc., in a transaction that resulted in the buyer suing for fraud.
See JX 183; see also JX 453 at ‘163; JX 470.
      132
            See JX 194.
      133
            Id. at ‘246.
      134
            See id. at ‘246–47.

                                            35
redacted version of a Form 483 for Decatur.135 James Bauersmith, a Fresenius employee

charged with evaluating Akorn’s pipeline,136 expressed concern about the Form 483, noting

that it was the site where Akorn manufactured ephedrine.137

       On November 8, 2016, Akorn and Fresenius USA entered into two confidentiality

agreements, one covering due diligence generally and the second permitting a “clean team”

to review competitively sensitive information that might have antitrust implications.138 On

November 11, Akorn management gave a lengthy presentation to representatives of

Fresenius and provided them with a forecast.139 Among other things, the presentation

addressed Akorn’s developmental pipeline,140 the steps Akorn was taking to improve

quality control at Decatur,141 and the actions Akorn had taken to remediate its financial

reporting and controls after its financial restatement.142

       135
             See JX 199.
       136
             See JX 296 at ‘991.
       137
             JX 202; see Bauersmith Tr. 591–94.
       138
             PTO ¶ C.3; Bonaccorsi Tr. 878–79.
       139
             PTO ¶ C.4; see JX 224 at ‘339; JX 204.
       140
             See JX 204 at ‘073–79.
       141
             See id. at ‘058–69.
       142
             See id. at ‘082.

                                              36
      After the presentation, Fresenius looked more closely at the Form 483 for Decatur

and two earlier Form 483’s that Decatur received in 2013 and 2014.143 A Fresenius

executive reported that “[t]he 483 shows weaknesses in the quality system but it does not

look [like] a not working quality system. . . . In summary the 483 does not indicate any

topic which should lead to further regulatory measures.”144

E.    Fresenius’s Initial Proposal

      On November 23, 2016, Fresenius proposed to acquire Akorn for $30.00 per share

plus a contingent value right (“CVR”) that would pay up to $5.00 per share based on

cumulative ephedrine sales over the next three years.145 The proposal was conditioned on

satisfactory due diligence and acceptable deal documents. On the day Fresenius made its

proposal, Akorn’s stock closed at $22.40 per share.146

      On December 5, 2016, Rai met with Ducker, stressed the value of Akorn’s pipeline

and pending ANDAs, and told him that Fresenius’s proposal was too low.147 He said

Fresenius would need to improve its bid to gain access to the data room.148

      143
            JX 207.
      144
            Id. at ‘280.
      145
            JX 222; PTO ¶ C.5.
      146
            See JX 520 at ‘826.
      147
            JX 230 at ‘809; see Rai Tr. 461.
      148
            See JX 520 at ‘827.

                                               37
F.     Fresenius Improves Its Bid.

       On January 9, 2017, Rai met with Sturm and reiterated the message about improving

Fresenius’s bid.149 Ducker wanted to improve the bid,150 but he encountered resistance

internally: Bauersmith was heading up a group that was analyzing Akorn’s pipeline,151 and

they questioned Akorn’s ability to obtain FDA approval for as many new products as they

planned, then launch those products as scheduled.152 Bauersmith regarded Akorn’s

schedule for launching new products as “the definition of insanity.”153 Bauersmith and his

team wanted to use more conservative assumptions.154 Ducker disagreed, describing the

more conservative assumptions as “a sure way to kill this project.”155

       On January 30, 2017, the FDA granted approval for a third competitor to sell

ephedrine.156 Akorn’s stock price fell on the news, closing at $18.40 per share.157 After this

       149
             JX 520 at ‘828; see PTO ¶ C.7.
       150
             Bauersmith Tr. 621–23; see id. at 583–84.
       151
             See JX 296 at ‘991; Bauersmith Tr. 574–75, 581.
       152
             JX 245 at ‘314; Bauersmith Tr. 577, 581–82.

         See JX 261 at ‘424 (criticizing assumption of 113 launches over three years); see
       153

also JX 268 (Fresenius employee expressing view Akorn’s “stated plan of about 25
products per year is unrealistic and not doable” and that a more realistic goal would be
“10–12 products per year”); see also JX 278; JX 279; JX 280.
       154
             See Bauersmith Tr. 584–85, 624; JX 260.
       155
             JX 278 at ‘948; see JX 245 at ‘315–16.
       156
             JX 264 at ‘690.
       157
             JX 263; see JX 264.

                                              38
development, Fresenius considered restructuring the proposed CVR to focus on revenue

growth.158 As Bauersmith explained, “We were buying an ephedrine company with a

pipeline, now we are buying a pipeline company.”159 Bauersmith suggested a CVR that

paid out if Akorn achieved its projections for FDA approvals in 2017.160 Ducker agreed

with a CVR tied to revenue, but wanted to base the improved bid on more optimistic

assumptions than Bauersmith’s group would endorse.161 Over the years, Ducker had

developed a high level of credibility with his superiors because he consistently beat his

forecasts.162 When push came to shove, the Management Board supported Ducker.

      On February 3, 2017, Fresenius increased the cash component of its bid to $32.00

per share and modified the CVR to pay up to $4.00 per share based on Akorn’s sales in

2018.163 Ducker told Rai that the CVR would “mitigate the risk inherent in the ambitious

      158
            JX 281.
      159
            Id. at ‘517–18; see Bauersmith Tr. 619–20, 627–28.
      160
         JX 281 at ‘518 (“Specifically, something like a $5/share CVR based on achieving
25 approvals by the end of 2017.”); see also JX 284 at ‘887 (Ducker agreeing with the idea
of a “CVR link[ed] to approvals”).
      161
            See JX 283; JX 284; Bauersmith Tr. 586–87.
      162
          See Sturm Tr. 1194; Henriksson Tr. 936 (“Internally in Fresenius Kabi, Mr. John
Ducker is known as Mr. Sandbag. He is a person who has never made a budget or a forecast
which has not overachieved.”); see, e.g., Sturm Tr. 1185 (“John ‘Freight Train’ Ducker had
overdelivered relative to the expectations of ours and of the market.”).
      163
            PTO ¶ C.8; see JX 285.

                                            39
product launch projections contained in [Akorn’s] business plan.”164 On the day Fresenius

made its proposal, Akorn’s stock closed at $20.08 per share.165

       After receiving guidance from Akorn’s directors, Rai told Ducker on February 4,

2017 that Akorn would give Fresenius access to the data room, but with the expectation

that Fresenius would improve its bid and drop the CVR.166 Ducker agreed to proceed on

those conditions.167

       On February 13, 2017, Akorn gave Fresenius access to its data room.168 Fresenius

conducted detailed due diligence that included an examination of Akorn’s product portfolio

and regulatory issues.169

       On March 1, 2017, Akorn announced its financial results for the quarter and fiscal

year that ended on December 31, 2016.170 Akorn also issued annual guidance for 2017.171

On March 2, Akorn announced that it had received approval from the FDA for a new drug

       164
             JX 1601 at ‘759; see Rai Tr. 463.
       165
             JX 520 at ‘828.
       166
             Id. at ‘829; see JX 1601 at ‘760; Rai Tr. 460–62; JX 286 at ‘360.
       167
             JX 1601 at ‘759; JX 520 at ‘829; see Rai Tr. 463; PTO ¶¶ C.9–10.
       168
             PTO ¶ C.12.
       169
         See, e.g., JX 301; JX 303; JX 304; JX 313; JX 314; JX 319; JX 323; JX 325; JX
326; JX 327; JX 331; JX 332.
       170
             JX 520 at ‘830.
       171
             See JX 341; JX 342.

                                                 40
application involving ephedrine.172 Later that day, Rai spoke with Ducker about the

product, Akorn’s guidance, and the regulatory and tax environment.173

      By March 2, 2017, the Fresenius due diligence team had been working for just over

two weeks. A presentation prepared as of that date identified a “preliminary red flag DD

finding” under the heading of “Sales & Marketing”: “Risk to achieve forecasts due to

stronger competition, especially for Ephedrine, Lidocaine ointment, clobetasol,

Fluticasone.”174 The presentation identified two “Preliminary red flag DD findings” under

the heading of “I&D Regulatory”: (i) “Regulatory Affairs organization appears to be under-

resourced” and (ii) “2016 and 2017 R&D budgets do not substantiate the ambitious

pipeline.”175 The presentation did not identify any data integrity issues. The presentation

concluded: “So far, no deal breakers identified.”176 A Fresenius management presentation

reported that “[t]he level of access being given/promised by [Akorn] is above average for

a public company target.”177 Subsequent versions of the presentations largely offered the

same assessments.178

      172
            JX 520 at ‘830.
      173
            See id.
      174
            JX 339 at 6.
      175
            Id. at 6.
      176
            Id. at 7.
      177
            JX 343 at ‘073; accord JX 339 at 5.
      178
            See JX 353; JX 357.

                                             41
       During this period, Fresenius developed its own projections for Akorn’s product

portfolio and pipeline. Once again, Ducker’s team was more optimistic;179 Bauersmith’s

group was more conservative.180 Fresenius’s final numbers were a mix of their views.181

       Fresenius had largely finalized its due diligence by March 17, 2017.182 During a

meeting that same day, Ducker told Rai that Fresenius would increase its bid.183 On March

20 and 21, Rai and Ducker had further discussions about Fresenius’s due diligence and

Akorn’s financial results for the quarter ending March 31.184 Fresenius reported that Akorn

personnel indicated that “it was a ‘solid’ quarter; and they are on track to meet their full

year expectations.”185

       On March 23, 2017, Fresenius increased its bid to $33 per share and eliminated the

CVR. In its offer letter, Fresenius stated that it had largely completed its due diligence and

was prepared to begin negotiating a merger agreement, but that senior management wanted

to conduct site visits and that Fresenius would need additional information about the

       179
             See, e.g., JX 350; JX 354.
       180
             See JX 365; JX 366; JX 367.
       181
             See JX 385; see also JX 395; Bauersmith Tr. 579–90.
       182
             See JX 379; JX 390.
       183
             JX 520 at ‘830.
       184
             Id. at ‘830; see generally JX 433.
       185
             See JX 433 at ‘619.

                                                  42
Company’s efforts to comply with FDA serialization requirements.186 On the day when

Fresenius made its proposal, Akorn’s stock closed at $22.30 per share.187

       On March 25, 2017, Akorn’s advisors posted a proposed merger agreement to the

data room.188 On March 30, Rai, Kapoor, Ducker, Henriksson, and Sturm met in person.189

Rai said that the Akorn board needed Fresenius to increase its proposal. On March 31,

Kapoor spoke with Sturm and reiterated the need for an improved proposal.190

       On April 2, 2017, Fresenius increased its price to $34 per share and said this was

the highest it would go.191 On the day Fresenius made its proposal, Akorn’s stock closed at

$23.69 per share.192 The Akorn board accepted the $34 per share price.193

       186
           PTO ¶ C.15; JX 403; see also JX 422 at ‘001 (“Implementation of serialization
may not be performed in time at all [Akorn] sites, specifically Amityville and Decatur,
resulting in the risk to not being able to sell prescription drugs until they are serialized. . .
. However, Raj Rai assured John Ducker that Decatur facility status is NAI following
December 2016 audit.”).
       187
             JX 520 at ‘830.
       188
             See JX 413.
       189
             JX 520 at ‘831.
       190
             Id.
       191
           See JX 520 at ‘831; see also JX 477 (Moelis analysis supporting offer of $34 per
share); id. at ‘730 (finding price “in-line with the DCF [even] without synergies”).
       192
             JX 520 at ‘831.
       193
             JX 441; see Rai Tr. 466.

                                               43
       When the Supervisory Board of Fresenius Parent formally approved the bid, the

final presentation they received from management cited Akorn’s strengths as including “92

ANDAs under FDA review and over 75 additional ANDAs in various stages of

development.”194 Management noted that Fresenius would need to integrate and modernize

Akorn’s production network, which would involve closing two Akorn plants and providing

“supplementary capex investment to bring [Akorn] up to [Fresenius] standards while

minimizing compliance risks.”195 In the “Key DD items summary,” the presentation

identified a high risk of a potential exposure of $100+ million from the postponement of

product launches.196 The presentation also cited high risk of a potential exposure of $100+

million from cGMP “deficiencies related to premises and equipment” in the Amityville

and Decatur facilities.197 The presentation projected a need for capital expenditures of $127

million for Amityville and $21 million for Decatur, with the Decatur facility to be closed

       194
             JX 428 at ‘643.
       195
             Id.
       196
          Id. at ‘673 (categorizing potential exposure as a “[o]ne-time effect”); see JX 422
at ‘001 (“Akorn has an aggressive product launch plan, which leads to risk of postponement
for several products . . . and an estimated exposure above $100m. [Fresenius] prepared a
bottom-up model for each molecule and adjusted the launch plan, R&D costs and revenues
accordingly in the business plan.”).
       197
           JX 428 at ‘673; see JX 422 at ‘001 (“Site visit at Amityville and Decatur revealed
[good manufacturing practice] deficiencies related to premises and equipment, which could
result in negative outcome of regulator inspections and a mix of gross profit loss and capex
need amounting to a maximum exposure over $100m. This finding is mitigated via the
business plan.”).

                                             44
once products were transitioned to other sites.198 The presentation did not identify a risk

from data integrity issues.

G.     The Merger Agreement

       After the agreement on price, the parties negotiated the terms of the transaction

documents.199 On April 24, 2017, they executed the Merger Agreement.200

       In the Merger Agreement, the parties allocated risks through detailed

representations, warranties, covenants, and conditions:

      Akorn made extensive representations about its compliance with FDA regulations,
       including (i) “compliance with . . . all applicable Laws . . . relating to or promulgated
       by the” FDA,201 (ii) “compliance with current good manufacturing practices[,]”202
       (iii) that all studies or tests had “been conducted in compliance with standard
       medical and scientific research procedures and applicable Law,”203 (iv) that Akorn
       had not “made an untrue statement of a material fact or a fraudulent statement to the
       FDA,”204 and (v) that all “ANDAs submitted by [Akorn] . . . are true, complete and
       correct,”205 in each case except where failure of the representation to be true and
       correct would not reasonably be expected to have a Material Adverse Effect.

       198
             JX 428 at ‘712.
       199
             See JX 520 at ‘831–32.
       200
             PTO ¶ D.1.
       201
             JX 1 § 3.18(a).
       202
             Id. § 3.18(b).
       203
             Id. § 3.18(c).
       204
             Id. § 3.18(d).
       205
             Id. § 3.18(g).

                                              45
   Akorn committed to “use . . . commercially reasonable efforts to carry on its
    business in all material respects in the ordinary course of business” between signing
    and closing.206

   Akorn agreed to “afford to [Fresenius and Fresenius’s representatives] reasonable
    access” to information about its business.207

   Fresenius agreed to take “all actions necessary” to secure antitrust clearance.208

   Fresenius had the right to terminate the Merger Agreement if any of Akorn’s
    representations or warranties were not true and correct at signing or at closing,
    except, in the case of certain representations and warranties (including those at issue
    in this case), where “the failure to be true and correct would not individually or in
    the aggregate, reasonably be expected to have a Material Adverse Effect.”209

   Fresenius had the right to terminate the Merger Agreement if Akorn “failed to
    perform any of its covenant or agreements” “in all material respects” and the breach
    was “incapable of being cured . . . .”210

   Fresenius could refuse to close the Merger if Akorn had suffered “any effect,
    change, event or occurrence that, individually or in the aggregate, has had or would
    reasonably be expected to have a Material Adverse Effect.”211

   Fresenius could not exercise its termination right for an inaccurate representation or
    breach of covenant if Fresenius was “then in material breach of any of its
    representations, warranties, covenants or agreements” under the Merger
    Agreement.212

    206
          Id. § 5.01(a).
    207
          Id. § 5.05.
    208
          Id. § 5.03(c).
    209
          Id. §§ 6.02(a) & 7.01(c)(i).
    210
          Id. §§ 6.02(b) & 7.01(c)(i).
    211
          Id. § 6.02(c).
    212
          Id. § 7.01(c)(i).

                                          46
      Both sides had the ability to terminate if the Merger was not completed by the
       Outside Date, defined initially as April 24, 2018, but if antitrust approval had not
       been received by April 24 and all other conditions to closing were met, then the
       Outside Date would extend automatically to July 24.213

This decision addresses the pertinent provisions in greater detail in the Legal Analysis.

       After the close of trading on April 24, 2017, Akorn and Fresenius announced the

Merger.214 The total purchase price was $4.75 billion, comprising $4.3 billion in cash plus

assumption of approximately $450 million in debt.215 Fresenius stated in a press release

that “Akorn brings to Fresenius Kabi specialized expertise in development, manufacturing

and marketing of alternate dosage forms, as well as access to new customer segments like

retail, ophthalmology and veterinary practices. Its pipeline is also impressive, with

approximately 85 ANDAs filed and pending with the FDA and dozens more in

development.”216

       When committing Fresenius to the transaction, Sturm asked Akorn to reaffirm its

guidance for 2017. Sturm viewed guidance as a promise to the markets, and he felt a public

reaffirmation would confirm that Akorn management had committed to its numbers and

       213
             Id. § 7.01(b)(i).
       214
             JX 520 at ‘833.
       215
             JX 481 at 1.
       216
             Id.

                                            47
would continue to perform post-signing.217 As part of its announcement of the transaction,

Akorn reaffirmed its full-year guidance, projecting $1,010–$1,060 million for revenue and

$363–$401 million in EBITDA.218

       Fresenius Parent held a conference call with its investors to discuss the Merger.

During the call, Sturm described the due diligence process as follows:

       [W]e performed a detailed due diligence [with] access to a comprehensive
       data room, held countless expert sessions, and were able to address all our
       questions and concerns. Have we overlooked anything material? Possible,
       but unlikely. The due diligence also included plant visits, by me and much
       better qualified experts, as well as a detailed review of Akorn’s product
       portfolio. That led to us building a solid bottom-up business plan, which
       formed then the basis of our decision to make a bid.219

Sturm stated that during due diligence, Fresenius found Akorn operating at a “generally

good regulatory standard.”220 He noted that while Akorn had received a Form 483 for

Decatur, Fresenius had “received quite a number of form 483s also in the past” and

therefore “should be humble and avoid any form of arrogance” regarding regulatory

issues.”221

         See Sturm Tr. 1176–77; see also id. at 1178 (explaining that guidance “where
       217

I’m coming from, is a promise”); id. at 1180 (“[A]t Fresenius, we consistently make our
numbers. We view a guidance as a promise. We tend to keep promises.”).
       218
             JX 341; JX 481 at 2; Rai Tr. 538.
       219
             JX 490 at ‘907.
       220
             Id. at ‘918.
       221
             Id. at ‘919; see Sturm Tr. 1199–1200.

                                                 48
       During a special meeting on July 19, 2017, Akorn’s stockholders approved the

Merger by a wide margin.

H.     Akorn Management Makes Changes In Response To The Merger.

       Under the Merger Agreement, Akorn was required to continue operating in the

ordinary course of business between signing and closing.222 This obligation included,

among other things, investigating and remediating quality issues and data integrity

violations as they were identified.223

       Instead of operating in the ordinary course, Akorn changed how its quality function

and IT function approached their jobs.224 Employees in these groups were told that

“[p]riorities have been revised, and some 2017 initiatives will be stopped[,]” with the cited

reason being the “implications of the pending Fresenius Kabi transaction.”225

       For the quality function, Akorn replaced certain regular internal audits scheduled

for the end of 2017 with “verification” audits that would only assess Akorn’s progress in

       222
            JX 1 § 5.01(a); see JX 488 at ‘574 (presentation to Akorn senior executives on
interim operating covenants highlighting Akorn’s obligation to “[c]arry on in the ordinary
course”); Rai Tr. 521 (agreeing that Akorn was obligated “to operate as an independent
business between the signing of the acquisition agreement and any closing of the deal”);
see also JX 551 at ‘999 (announcement to all Akorn employees: “Until the transaction
closes, it is business as usual and Akorn and Fresnius Kabi will continue to operate as two
independent companies.”).
       223
             Rai Tr. 525; Kaufman Tr. 371.
       224
             See JX 538; JX 539.
       225
          JX 539 at ‘105; see id. at ‘106 (“2017 initiatives to be stopped” including
“Quality Assurance overview” and “IT overview”); id. at ‘107 (“STOP - the identified
2017 projects and associated activities / spend”); JX 538 at ‘471 (“Reset 2017 Priorities”).

                                             49
addressing prior audit findings.226 One of the sites that switched to verification audits was

Decatur, the site Cerulean had visited.227 The shift to verification audits meant that Akorn

would not be identifying any new problems at those sites that might cause difficulties for

the Merger. Akorn also used the Merger as grounds for stopping Cerulean’s engagement.228

Fresenius never gave approval for Akorn to change its audit and investigatory practices

pending closing.229

       226
           Wasserkrug Tr. 17 (“[A]fter the merger was announced, it was decided that we
would only do verification audits in the remaining facilities, which meant we were just
going to look at the previous audits and the corrective actions that were applied from those
previous audits to make sure that they were closed.”); accord id. at 156–58; JX 532 at ‘276;
JX 692; see Gill Dep. 60; Rai Dep. 42–43; JX 692; see also JX 1026 (“[T]he two are very
different activities (audits vs. verifications). Verification is the last step in an audit
lifecycle.”); Rai Tr. 480–81 (explaining why certain audits “were not done deliberately”);
id. at 525–26 (agreeing that Akorn only conducted verification audits for certain facilities
because of the Merger). Wasserkrug recognized that Akorn had “a responsibility to
continue with our audits[,]” and when the Merger did not close, Akorn resumed them.
Wasserkrug Tr. 18.
       227
             See Rai Tr. 551.
       228
             See Wasserkrug Tr. 132.
       229
           See Rai Tr. 527–28, 554–55. Wasserkrug suggested at trial that Fresenius
supported the decision to move from regular audits to verification audits, but her testimony
on this subject consisted of hearsay and was not reliable. Wasserkrug Tr. 165–67. The more
persuasive evidence is that Akorn did not mention this change to Fresenius. See Gill Dep.
61–63; Rai Tr. 527–29. Rai asserted at trial that Akorn made the switch so that Akorn could
give Fresenius a short document summarizing open audit findings. Rai Tr. 526; Rai Dep.
42–43; see Gill Dep. 63. Rai did not know whether Akorn ever prepared (or started) a
report, and during discovery Akorn did not produce one. See Rai Tr. 526–27.

                                             50
       For the IT function, Wasserkrug testified at trial that “[a]ny [IT] projects that we

wanted to put in place were deferred by the merger or had to be approved.” 230 In light of

the freeze, Akorn’s IT department could not provide resources for data integrity projects.231

In July 2017, Tammy Froberg, Executive Director of R&D and Quality Compliance

Systems, told a quality manager at Vernon Hills that “we are not actioning any Data

Integrity activities in 2017.”232 In August, Misbah Sherwani, the head of quality at

Somerset, reported to Silverberg that even though Akorn was “on the cusp of the FK”

merger, Somerset was “in a state of jeopardy as it relates to data integrity[,]” and IT was

refusing to provide resources.233 Also in August, Kathy Pramik, Akorn’s acting Chief

Information Officer, told Silverberg and other executives that she was “not authorizing” IT

resources for Decatur’s Data Integrity Site Master Compliance Plan, the first plan Akorn

ever developed.234 She admonished that it was “not appropriate” to “establish[] Data

       230
             Wasserkrug Tr. 141–42.
       231
            See Pramik Tr. 223–24; see also JX 957 at ‘921 (“In July, we . . . reset 2017
priorities. . . . We also communicated that some 2017 priorities were being adjusted, per
implications of the pending Fresenius Kabi transaction.”). Ostensibly these projects were
only put on hold until Silverberg assembled “an overall roadmap for data integrity,” but
the roadmap was never finalized. Pramik Tr. 234–36, 248.
       232
             JX 891; see Kaster Dep. 118–20.
       233
             JX 564 at ‘352.
       234
           JX 589 at ‘192. Pramik is not an Akorn employee, but rather a consultant. She
was retained in August 2016 to fill the CIO role while Akorn searched for a permanent
hire. They never found one. See Pramik Tr. 191–92; JX 149. When she took the role,
Pramik had no prior experience in how pharmaceutical companies handle data integrity
issues. See id. at 242–45. To be fair to Pramik, it also appears that she inherited a bad
situation. When she arrived, she found that “[t]here were foundational processes not in

                                               51
Integrity Plans” because “Fresenius Kabi Quality & IT Leaders will drive any actions in

this area.”235 That same month, Froberg refused a data integrity project, stating bluntly that

“[e]xecutive leadership have discussed and aligned that data integrity changes are not

actionable in 2017 in regards to adding responsibilities to cross functional teams.”236 In

December 2017, Franke complained to another employee that “DI remediation activities

place at Akorn[,]” including “no project governance” for IT. Id. at 196–97; see JX 150 (list
of “IT Key Risks Identified By IA”); JX 223 (Rai in November 2016: “It seems like IT is
a disaster across the company and out of control.”). A significant motive for shutting down
data integrity projects appears to have been her desire to focus her under-resourced
department on senior management’s priorities, which did not include data integrity. It
nevertheless remains true that Pramik and her staff prevented any data integrity work that
required IT resources from getting off the ground in 2017 and early 2018. This did not
change until March 2018, when in response to Fresenius’s investigation, Pramik rebranded
an existing but dormant committee that had not met since early 2017. See Pramik Dep. 76–
77 (formerly “R&D quality and compliance IT counsel”); Pramik Tr. 230–32 (now “data
integrity steering committee”); JX 1082 (also referring to a “DI Oversight Committee”);
see also Pramik Dep. 254–58 (agreeing that the rebranded committee is largely “the same
governing body” as the executive steering committee Rai chaired a month later). Pramik
gave much of her testimony in response to leading questions based on a demonstrative
exhibit, resulting in my giving it diminished weight. See Pramik Tr. 199–224.
       235
             JX 589 at ‘192–93.
       236
             JX 596; accord JX 769 (Froberg writing in December 2017 that “[b]ased on a
previous executive leadership directive, data integrity is not a 2017 approved project for
cross functional teams [such as IT]. I wanted to . . . confirm IT resources will not be
involved in [Franke’s visit to the Cranbury site to discuss data integrity].”); JX 950
(Froberg reminding Pramik in February 2018 to draft an email from “executive leadership
. . . to align all sites that we are not launching data integrity remediation initiatives at the
sites at this time”); JX 957 at ‘921–22 (Pramik’s draft email with Silverberg’s comments:
“With . . . the close of the acquisition transaction not occurring in fiscal 2017, unapproved
project requests related to such things as Data Integrity are starting to arise again from the
sites, and we need to alignment [sic] and focus on our priority initiatives, which are
continuing in 2018 (e.g., Serialization, Somerset and Decatur lab modernizations /
expansions, etc.).”).

                                              52
are not something that we are resourced to address at the moment.”237 There is no evidence

that Fresenius ever gave approval for Akorn to stop working on data integrity projects.238

I.     The Downturn In Akorn’s Business

       After the signing of the Merger Agreement, Akorn’s business performance fell

dramatically. On July 21, 2017, two days after Akorn’s stockholders approved the Merger,

Akorn gave Fresenius a preview of their second quarter results. The headline was revenue

of $199 million, compared to a business plan of $243 million.239 Management attributed

$12 million of the miss to competition for ephedrine, but told Fresenius that “[m]arket

share in Q2 is meeting expectations.”240 Management lowered its revenue forecast for the

year from $1 billion to $930 million.241 Management also reduced expectations for revenue

from Akorn’s pipeline, which fell to $24 million, down from the $80 million projected

earlier in 2017.242

       On July 31, 2017, Akorn publicly announced its results. The reported revenue

number of $199 million represented a year-over-year decline of 29%. Akorn’s reported

       237
             JX 832.
       238
             See Pramik Tr. 249; Bowles Dep. 152–158.
       239
             JX 547 at 1.
       240
             Id. at 2.
       241
             Id. at 15.
       242
             JX 554.

                                            53
operating income of $15 million represented a year-over-year decline of 84%. Akorn’s

reported earnings of $0.02 per share represented a year-over-year decline of 96%.243

       Rai attributed the bad results to unexpected new market entrants who competed with

Akorn’s three top products—ephedrine, clobetasol, and lidocaine.244 Akorn also faced a

new competitor for Nembutal, another important product, which Akorn management had

not foreseen.245 As Rai testified, “There were way more than what [Akorn] had potentially

projected in [its] forecast for 2017.”246 The new competition resulted in unexpected price

erosion.247 Akorn also unexpectedly lost a key contract to sell progesterone, resulting in a

loss of revenue where Akorn had been forecasting growth.248

       243
             JX 1250 ¶ 8.
       244
             Rai Tr. 542–44; Rai Dep. 237.
       245
             Rai Tr. 545; Rai Dep. 238–39.
       246
             Rai Tr. 545; Rai Dep. 238.

         Rai Tr. 542; see JX 693 at 35 (attributing poor performance to “more significant
       247

than expected declines in net revenue”).
       248
             Rai Tr. 546–47.

                                             54
       Ducker described the results bluntly, “Not very pretty I’m afraid.”249 Sturm was

“very unhappy.”250 He asked his executive team whether they thought Fresenius “had been

defrauded.”251 They did not think so. Sturm “also asked if there was a way to cancel the

deal.”252 His team said “not at this point.”253

       Sturm and Henriksson flew to Lake Forest, Illinois to meet in person with Ducker

and the Akorn executives.254 Sturm told Rai that the “complete drop” in Akorn’s business

post-signing was “the most embarrassing personal or professional thing” that had happened

to him.255 Sturm could not understand how the parties had signed up a deal, only to have

Akorn’s results fall “off the cliff.”256 Rai told Sturm that “[m]any, if not most” of the

       249
          JX 547 at 1; see Sturm Tr. 1177 (describing performance as “dismal” and “well
below our expectations and theirs”); Henriksson Tr. 952 (describing results as “very, very
disappointing” with “a big miss, both on sales and profit, compared to the estimates that
had been provided to us before”); Bauersmith Tr. 595 (describing Akorn’s performance in
the quarter after signing compared to is projections as “[a]bysmal”); id. at 596 (testifying
that Akorn’s performance was “even worse than what I thought, as the pessimist”).
       250
             Sturm Tr. at 1202; see Henriksson Tr. 952 (“Stephan was, rightfully, very, very
upset.”).
       251
             JX 550 at ‘924.
       252
             Id.
       253
             Id.
       254
             Sturm Tr. 1178.
       255
             JX 554.
       256
             Rai Tr. 468.

                                              55
reasons for the poor performance were “temporary in nature.”257 Sturm was not satisfied.

He felt that Akorn management exhibited “a complete lack of commitment” and that the

guidance for 2017 “had been forgotten and was a thing of the very long past.”258 He did

not perceive any sense of urgency to rectify the underperformance.259

       After the meeting in Lake Forest, Sturm had his team analyze Fresenius’s options.

He tasked Henriksson and Ducker with finding new synergies and developing a business

plan that would offset Akorn’s problems.260 Sturm also had his legal department look into

whether Akorn’s terrible financial performance qualified as a Material Adverse Effect.261

Although Akorn has asserted that Fresenius decided at this point to find a way to terminate

       257
             Sturm Tr. 1178.
       258
             Id.
       259
             Id. at 1178–79.
       260
          See Henriksson Tr. 956–58; Sturm Tr. 1179–80; JX 554 (“Our marching orders
are to find a way so we can hold to guidance on EBITA and Top line for 2018.”).
Bauersmith, the primary skeptic about the deal, believed Fresenius needed to close the
transaction quickly so that they could take control of Akorn and try to right the ship. See
JX 554 (“The need to close fast is even more pressing as we can’t really steer this wayward
vessel until we are aboard.”). Bauersmith couldn’t resist an I-told-you-so, noting that “it is
looking more and more like we should have pushed for a CVR on 2017 approvals as [I]
suggested back in February.” JX 549; see Bauersmith Tr. 600; see also JX 602; JX 603;
JX 674. Other contemporaneous documents support the finding that closing remained a
high priority within Fresenius. See JX 568 (Pramik reporting on Ducker making it a “very
high priority” to plan IT integration); JX 572 (Fresenius executives exploring whether they
could mitigate negative reactions by Fresenius Parent’s stockholders by closing and then
immediately stopping the reporting of separate results for Akorn); JX 575 (August 2017
Fresenius presentation regarding financial integration).
       261
             See JX 581; JX 587.

                                             56
the deal, I do not agree. Sturm testified credibly that he wanted “to get myself

knowledgeable about my options under the merger agreement, but also my responsibility,

my fiduciary duties in serving my shareholders, and hence I was asking my colleagues on

the legal side to get us appropriate legal advice.”262

       As part of this process, the Fresenius team looked at precedent deals gone bad. One

involved Abbott Laboratories’s attempt to terminate its acquisition of Alere Inc. Paul,

Weiss, Rifkind, Wharton & Garrison LLP had represented Alere, and Fresenius began

consulting with Paul Weiss.263

       Fresenius also began looking closely at Akorn’s monthly results to determine

whether the second quarter performance was an isolated occurrence, as Rai maintained, or

the harbinger of deeper problems. Akorn’s preliminary results for July did not show any

improvement, but Rai claimed that Akorn was on track to deliver $80 million in sales in

August.264 If Akorn hit that figure and repeated the performance in September, then Akorn

would meet its lowered forecast for the third quarter.265

        Sturm Tr. 1183; see id. at 1209 (Sturm testifying that Paul Weiss was hired “[t]o
       262

make me acquainted with my rights and obligations”).
       263
             See id. at 1183–84.
       264
             JX 592 at ‘100.
       265
             Id.

                                              57
       In mid-September 2017, Fresenius heard that Akorn would fall short of its August

revenue target.266 Akorn later confirmed that it had achieved only $70 million.267 Sturm

was furious: “10m less within a few days? Without any sense of embarrassment? . . . These

guys are shameless. I’m afraid we’ve got to build our legal case.”268 At trial, Sturm noted

that over the same period, Fresenius USA exceeded expectations.269

       Nor was the revenue miss Akorn’s only bad news. The FDA issued a CRL for

Difluprednate, a key pipeline product, and Akorn had to push back its launch from 2017

until 2019.270

       Fixating on Sturm’s email about “build[ing] our legal case,” Akorn argues that

Fresenius set out to manufacture a basis for termination. At trial, Sturm testified credibly

to a more nuanced and responsible view. He candidly admitted that at this point, he

personally wanted to terminate the transaction. He was “very unhappy” with Akorn’s

performance, believed that “the underperformance was more likely to be longer-lasting,”

and felt that Fresenius had overpaid.271 At the same time, he knew that Fresenius had signed

       266
             See JX 636 at ‘891.
       267
             See JX 646 at ‘654.
       268
             JX 647 at ‘657.
       269
             Sturm Tr. 1185.
       270
           JX 610; JX 611 at 2; Sturm Tr. 1185; see JX 615 (“[A]korn got a deficiency letter
from FDA regarding Difluprednate which is the biggest launch in 2018. The effect from
this is 57 M.”).
       271
             Sturm Tr. 1186–88.

                                            58
a contract, and “[t]he last thing [he] wanted to do was to . . . to go to court . . . without a

valid case.”272 He also recognized that if Akorn had a stronger performance in the fourth

quarter, then the situation would be different, although he was “not very optimistic.”273

        Sturm is a sophisticated international businessman. He speaks English fluently, but

it is not his native language, and I therefore do not draw the inference that by “build our

legal case,” he meant to manufacture one. At trial, his testimony was direct and credible. I

accept his explanation that in September 2017, he was “in an exploratory phase.” 274 He no

longer liked the deal, and he would seek to terminate it if Akorn’s performance continued

to deteriorate, but Fresenius also would live up to its obligations.

        Consistent with this testimony, the contemporaneous evidence shows that Fresenius

continued to assess how it could close the Merger and make the numbers work.275 Fresenius

also tasked a team with reviewing Akorn’s most significant product launches to determine

whether any of them could be accelerated to replace lost pipeline revenue.276 Instead,

Fresenius learned that three other launches would be delayed.277 At the same time,

        272
              Id. at 1189.
        273
              See id.

          Id.; see id. at 1206 (“Q. Okay. And you started looking for a way to get out of
        274

the transaction, did you not? A. No. I did not.”).
        275
              See JX 627 at ‘498; JX 657; JX 658; JX 661; JX 664; JX 670 at 20; JX 684 at
‘911.
        276
              See JX 605; JX 619; JX 620.
        277
              See JX 624.

                                              59
Fresenius began examining whether there were grounds to assert a Material Adverse

Effect.278 Based on advice from Paul Weiss, Fresenius concluded that it did not have clear

grounds for termination.279 Given the Delaware precedent, this was hardly surprising.

J.     Akorn’s Third Quarter Results

       On October 30, 2017, Akorn provided Fresenius with a presentation describing the

quarterly results that Akorn expected to announce the next day.280 Akorn would report

revenue of $202 million, representing a miss from its reduced forecast of $225 million.281

Akorn described the results as “[d]riven mostly by unanticipated supply interruptions and

unfavorable impact from competition across [the] portfolio (Ephedrine, lack of new

awards, unfavorable customer contract mix . . .).”282 Akorn also noted that its “[a]verage

product pricing [was] lower than expected due to [an] unfavorable customer/contract mix

and price erosion [that was] not considered in our forecast.”283

       278
             See JX 634; JX 635; JX 637.
       279
           See Sturm Tr. 1211–12; Empey Dep. 106–08. In her deposition, the CFO of
Fresenius Parent testified from memory about her understanding of these discussions, in
which she did not personally participate. She stated the outcome in absolute terms: “[W]e
concluded that there was no basis for a termination of the transaction.” Empey Dep. 107.
Based on Sturm’s testimony, my knowledge about how rarely lawyers frame their legal
advice in absolute terms, and the CFO’s distance from the discussions, I am confident that
this testimony oversimplifies matters and states the outcome too strongly.
       280
             JX 688; cf. JX 732 (Ducker describing October 2016 results as “awful”).
       281
             JX 688 at ‘605.
       282
             Id. at ‘606.
       283
             Id. at ‘607.

                                             60
      On October 31, 2017, Akorn informed Fresenius that Kapoor had resigned from the

Akorn board.284 Five days earlier, federal law enforcement had arrested Kapoor and

charged him with criminal fraud in connection with his leadership of another

pharmaceutical company.285

      On November 1, 2017, Akorn announced its financial results.286 Akorn’s reported

revenue of $202 million represented a year-over-year decline of 29%. Akorn’s operating

income of $9 million represented a year-over-year decline of 89%. Akorn reported a loss

of $0.02 per share, a year-over-year decline of 105%.287

      In addition to another poor quarter, Akorn fell further behind in its product launches.

Akorn had anticipated thirty-four launches in 2017; by mid-November it had launched only

fourteen, with another six planned by year end. The fourteen launches netted only $3.3

million in sales. Akorn originally had projected $60 million from new product launches in

2017.288 These results were far worse than what even Bauersmith, the biggest critic of

      284
            See JX 689.
      285
          See JX 696 at ‘041; Press Release, District of Massachusetts, U.S. Attorney’s
Office, Department of Justice, Founder and Owner of Pharmaceutical Company Insys
Arrested and Charged with Racketeering (Oct. 26, 2017), https://www.justice.gov/usao-
ma/pr/founder-and-owner-pharmaceutical-company-insys-arrested-and-charged-
racketeering.
      286
            JX 693.
      287
            JX 1250 ¶ 9.
      288
            See JX 707 at ‘505.

                                            61
Akorn’s pipeline, had anticipated.289 He viewed the performance of Akorn’s launches as

“almost comical,” because it did not make commercial sense to launch a drug if that was

the expected return.290

       In spite of the bad news from Akorn, Sturm maintained a positive outlook about the

Merger when speaking with Fresenius Parent’s investors. He described Akorn’s results as

“for sure not what we had hoped for, but at least a sequential stabilization.”291 He also

stated that “the reasons for the disappointing financial performance are broadly unchanged

from the second quarter,” citing three factors:

       A, more pronounced competition. Akorn continues to experience price
       pressure and market share losses on some of its key molecules. And while
       increased competition was generally anticipated, the impact has was [sic]
       unfortunately been greater than expected. . . .

       B, supply disruptions. And while some supply issues from the second quarter
       were resolved, new constraints have occurred, leading again to higher than
       normal backorders and inability to supply charges. Frankly, [we] can’t wait
       to assume management control, so we can help with our expertise and our
       financial power.

       C, new product launches. And even though Akorn has launched a respectable
       13 new products year-to-date, it had even higher expectations. So launch
       delays, including to some significant molecules, contributed to the shortfall
       versus projected revenues. We have reviewed these delays with Akorn’s
       management, and we believe that the opportunities are essentially postponed
       rather than significantly diminished.292

       289
             Bauersmith Tr. 596.
       290
             Id. at 598.
       291
             JX 699 at ‘669.
       292
             Id.

                                             62
Notwithstanding these problems, Sturm said that Fresnius Parent would not revise its

expectations for Akorn’s performance in 2018, explaining:

      First, let me remind you that our 2018 expectations came[,] by our
      standards[,] extremely early and were based on the comprehensive but still
      outside[-]in due diligence process. Couple that with injectable generics,
      arguably Fresenius’ most volatile business, and so we called it very
      consciously an expectation rather than a guidance. Now, in light of Akorn’s
      year-to-date performance, it appears likely the 2017 base will be lower than
      assumed. And as a consequence, the stretch required to reach our 2018
      expectations is clearly larger.

      But as I just said, this is a highly volatile business with limited visibility,
      notoriously hard to predict, and where you just cannot extrapolate from a
      quarterly run rate, where individual drugs and launches can make and have
      made a major difference. So I’m not ready to revise those expectations for
      next year. Please bear with us until February. By then, we will be Akorn’s
      controlling owner and we’ll provide you with a guidance of a reliability level
      that you’re used to.293

My impression is that Sturm knew that expectations would have to be lowered, but he did

not have numbers that he trusted and would not have them until his own people were

running the Company.

      After Akorn and Fresenius announced their third quarter results, Fresenius updated

its business plan for Akorn. During a teleconference on November 12, 2017, Ducker

presented the plan to the Management Board.294

      293
            Id.
      294
           See JX 714 (Ducker circulating presentation to senior Fresenius Parent
executives in advance of call).

                                            63
       Ducker’s presentation noted that the “[s]trategic rationale for the Akorn acquisition

remains compelling.”295 The compelling strategic rationale was Fresenius Kabi’s desire to

expand its North American footprint, which acquiring Akorn facilitated.296

       The Akorn deal, by contrast, had become far from compelling. The presentation

observed that Akorn’s “2017 business performance has been disappointing and has fallen

well short of guidance”297 To partially address the shortfall, “[c]ost reduction opportunities

well in excess of the deal model are now planned.”298 Even with these additions, the

changes in the 2018 business plan were striking:

                             Original Plan299 November Update          % Change
         Revenue                      $1,061            $783                 (26%)
         Gross Profit                   $612            $414                 (32%)
         EBITDA                         $397            $241                 (39%)
         EBIT                           $239            $125                 (47%)
         Net Income                      $33            $(38)              (215%)

       295
           Id. at 2; see JX 730 at ‘832 (“The strategic rationale for the acquisition remains
sound.”). Fresenius made this same point in other presentations and in a call with its
investors. See JX 743 at ‘306; JX 781 at ‘398; JX 874 at ‘779; JX 994 at 5, 15.
       296
             See JX 994 at 5.
       297
             JX 714 at 2.
       298
             Id.
       299
             In millions of dollars.

                                             64
      Akorn’s performance was so bad, and the situation in such flux, that the

Management Board excluded Akorn from their 2018 budget, which they presented to the

Supervisory Board in December 2017.300 The presentation explained the omission:

      Akorn is not included in the budget. We see some deviations to the original
      business plan and we are working on counter measures to mitigate these
      effects. This process will be ongoing until early February 2018. Until then
      we will also have better clarity about when closing will happen and we will
      only then seek for approval for the Akorn budget.301

This explanation is consistent with Sturm’s earlier refusal to change his Akorn-related

guidance to the market: the Management Board did not have any numbers they trusted for

Akorn. I believe they also considered the possibility that Fresenius would terminate the

Merger Agreement and either never own Akorn at all, or at least not own it during 2018,

while the litigation over a broken deal would be ongoing.

      Despite the senior management team’s powerful internal misgivings, Fresenius did

not change its public stance on the Merger. In roadshow materials dated November 27,

2017, Fresenius told investors the following:

     “[Akorn] Q3 performance below expectations.”302

     “Achievement of 2018 expectation challenging.”303

      300
            JX 716; see JX 744 at 4.
      301
            JX 744 at 4.
      302
            JX 743 at ‘306.
      303
            Id.

                                            65
      “Strategic rationale unchanged: Deal offers offensive and defensive merits.”304

      “Substantial cost and growth synergies paired with limited integration
       complexity.”305

      “Accretive to Group net income from 2018.”306

Fresenius described the Merger in similar terms in a presentation to investors at

conferences in December 2017 and January 2018.307

K.     The Whistleblower Letters

       On October 5, 2017, Fresenius received an anonymous letter from a whistleblower

who raised allegations about Akorn’s product development processes at Vernon Hills,

Decatur, and Somerset.308 On November 2, Fresenius received a longer version of the letter

that added more detail about the problems and included assertions about flaws in Akorn’s

quality control processes.309

       During a teleconference on November 12, 2017, the senior executives of Fresenius

Parent discussed the November letter. When circulating his presentation, Ducker noted that

he had asked Jack Silhavy, the general counsel of Fresenius USA, “to join us for the first

       304
             Id.
       305
             Id. at ‘307.

         Id.; accord id. at ‘308 (“Accretive [to EPS] in 2018 (excluding integration costs),
       306

from 2019 (including integration costs)”).
       307
             See JX 781 at ‘398–400; JX 874 at ‘779–81.
       308
             See JX 789; see also JX 934 at 11.
       309
             See JX 788; see also JX 934 at 11.

                                              66
part of the call to brie[f] everyone on the letter just received from an Akorn employee, and

the possible implications and next steps.”310 On November 13, the Fresenius executives

had a call with Paul Weiss.311 After the call, Fresenius personnel began looking into the

information Akorn provided during due diligence about its R&D facilities and past FDA

inspections.312

       Having considered the evidence, I believe that during the teleconference on

November 12, 2017, the Fresenius executives decided that they did not want to proceed

with the Merger as negotiated and would seek to terminate the Merger Agreement if they

had a valid contractual basis for doing so. They had ample grounds to reach this conclusion.

My sense is that they regarded Akorn’s disastrous performance as falling within a

businessperson’s understanding of what should qualify as a material adverse effect, but

their legal advisors were not confident that they could prove to the satisfaction of a court

applying Delaware law that Akorn had suffered a Material Adverse Effect within the

meaning of the Merger Agreement.

       The whistleblower allegations about regulatory problems were yet another blow to

the deal. The letters called into question the accuracy of Akorn’s representations regarding

regulatory compliance. They also called into question whether Akorn was operating in the

       310
             JX 714.
       311
             JX 717.
       312
             See JX 718; JX 720; JX 721.

                                            67
ordinary course of business.313 It was not clear yet whether the allegations were true, but

the whistleblower letters gave Fresenius good cause to investigate.

       In the Merger Agreement, Fresenius had bargained for a customary right of

reasonable access to Akorn’s “officers, employees, agents, properties, books, Contracts,

and records.”314 The purpose of that covenant is to enable a buyer to investigate issues that

arise between signing and closing. The Fresenius executives decided to use their

information right for its intended purpose.

L.     Fresenius Notifies Akorn.

       On November 16, 2017, Ducker and Henriksson called Rai, informed him about the

whistleblower letters, and conveyed Fresenius’s view that both companies needed to

investigate the allegations.315 Ducker followed up with a formal notice letter, which stated:

       [P]ursuant to Section 5.05 of the [Merger Agreement] and for other reasons,
       Fresenius Kabi will be providing Akorn with requests for documents,
       information and access to potentially knowledgeable individuals regarding
       the allegations in these letters and related issues. We are in the process of
       identifying and retaining a team of third party experts with the skills and
       experience to properly investigate these matters expeditiously, and we ask
       that Akorn immediately take steps to begin to gather all related documentary
       material.316

       313
             See JX 1 §§ 6.02(a)(ii) & (b), 7.01(c)(i).
       314
             See id. § 5.05.
       315
             See JX 723 at ‘800–01.
       316
             JX 724 at ‘204.

                                                68
The letter closed by noting that Fresenius “reserve[d] all of our rights under the merger

agreement.”317

       After receiving the whistleblower letters from Fresenius, Akorn shared them with

its board members. Johnson, a director with substantial FDA experience, described them

as “very worrisome,” noting that “[i]f they were to get to FDA, we should expect an

intensive investigation” and that “[m]ost data integrity issues are surfaced through

whistleblowers going to FDA.”318 He advised that Akorn needed to conduct a “responsive

and credible” investigation that “would require a review of named applications including

product development files and lab notebooks” as well as “[i]nterviews of those involved,

in any way, with the named submissions . . . .”319 He advised that if the investigation

uncovered problems, then “a much broader investigation following FDA guidance would

be necessary.”320

       On November 17, 2017, Silhavy told Bonaccorsi that Fresenius could not simply

rely on the investigation that he expected Akorn to conduct, but rather Fresenius would

have to do its own investigation as well.321 As it turned out, Akorn decided not to conduct

       317
             Id. at ‘205.
       318
             JX 761.
       319
             Id.
       320
             Id.
       321
          JX 726 at ‘084 (Silhavy reporting to Ducker about call with Bonaccorsi: “We
then discussed how to proceed . . . . I told him I needed to be very clear that we needed to
do our own investigation, not just rely on the one they needed also to do.”); see also JX
723 at ‘801 (Fresenius anticipating that both companies would conduct investigations). In

                                            69
its own investigation into the whistleblower letters because Akorn did not want to uncover

anything that would jeopardize the Merger.

       In the ordinary course of business, an FDA-regulated company confronted with a

detailed whistleblower letter would conduct an investigation using counsel experienced in

data integrity issues and knowledgeable about FDA compliance. Akorn chose to rely on its

deal counsel, Cravath, Swaine & Moore LLP. Cravath’s job was not to conduct an

investigation, but rather to monitor Fresenius’s investigation and head off any problems.322

       David M. Stuart, a litigation partner, led the Cravath team.323 Stuart previously

worked for the SEC and had experience conducting internal investigations.324 He is clearly

a skilled and careful attorney, but he had never conducted a data integrity investigation for

response to Fresenius’s argument that Akorn breached its obligation to operate its business
in the ordinary course by failing to conduct its own investigation, Bonaccorsi testified at
trial that Silhavy instructed him over the phone that Akorn should not investigate.
Bonaccorsi Tr. 887–88. Given the seriousness of the whistleblower allegations, that would
not have been a viable position for Silhavy to take, and it would have contravened the
ordinary course covenant in the Merger Agreement. The contemporaneous documents
convince me that Bonaccorsi misremembered this conversation. Silhavy instead conveyed
that Fresenius could not rely on Akorn’s investigation and would also have to conduct its
own investigation. See JX 723 at ‘801; JX 726 at ‘084.
       322
           See Stuart Tr. 673 (“Q. So were you actually asked at that time to conduct an
internal investigation for Akorn? A. I was asked to coordinate with Fresenius’ counsel in
conducting an investigation but not to do an independent investigation on my own.”);
accord id. at 728.
       323
             See id. at 671.
       324
             See id. at 671–72.

                                             70
a pharmaceutical company, had never appeared before the FDA, and had no familiarity

with FDA rules, regulations, or administrative guidance.325

       Fresenius, by contrast, conducted a real investigation. Fresenius turned to the FDA

Enforcement and Compliance Group at Sidley Austin LLP.326 Nathan Sheers, a Sidley

partner who specializes in FDA enforcement and compliance, led the team.327 The Sidley

       325
           Id. at 688, 703, 730–31 (“Q. And prior to this moment in time [when Stuart was
charged with leading the investigation], you weren’t even familiar with the FDA rules,
regulations, and guidance for the industry on data integrity and compliance. A. That’s
correct.”); Stuart Dep. 30–40.
       326
           See JX 719; Stuart Tr. 674 (testifying that Sidley “said that they had been hired
to do an investigation to assess the validity of the allegations in these anonymous
whistleblower letters”). Stuart claimed not to have known that Sidley’s work could be used
to evaluate whether Akorn was in compliance with its representations in the Merger
Agreement and that he would have acted differently if he had known. See Stuart Tr. 675. I
do not credit that testimony. Stuart is a sophisticated partner at one of the world’s most
sophisticated law firms. He certainly knew that if the whistleblower allegations were true,
then they posed problems under the Merger Agreement. He also certainly knew that
Fresenius would be assessing that issue when reviewing Sidley’s work. Cravath’s approach
to the common interest agreement, discussed below, evidences an understanding of the
dual implications of Sidley’s work and an unsuccessful attempt to secure the high ground
for Akorn by including contractual provisions that could trip up Sidley and Fresenius.
Stuart also testified that if he had known that Sidley’s work would be used to evaluate
Akorn’s compliance with the Merger Agreement, he would have prepared Akorn’s
witnesses before their interviews. Cravath did prepare Akorn’s witnesses, although it was
relatively “low-key prep.” See JX 1443 at ‘130 (Stuart: “Similar to what we did in
Somerset, I think a little low-key prep for each interviewer [sic] is important. We should
let them know that while we have no reason to think there are concerns about operations
in Decatur, Sidley will ask whether the interviewee is aware of any data integrity issues
and, if the interviewee is, we should address that before the Sidley interview.”); JX 1445
(Stuart directing Cravath associates on how to “instruct” Akorn employees during pre-
interview “screening”); Sheers Tr. 1039–41 (describing his observations regarding
Cravath’s preparation of witnesses).
       327
             Sheers Tr. 1029–30.

                                            71
team also included Jeff Senger, the former acting chief counsel at the FDA.328 Fresenius

and Sidley determined that they needed technical expertise from a firm that could evaluate

the integrity of the data Akorn used to support its drug applications. 329 For that task, they

hired Lachman.330 The Lachman team was led by Ron George, a scientist with over 40

years of experience in the pharmaceutical industry and who now specializes in data

integrity audits and remediation.331 Having heard George testify at trial, I judge him to be

among the most credible witnesses I have seen in court.

       Sidley started its investigation by examining the materials on regulatory compliance

that Akorn posted to the virtual data room.332 Before doing so, Sidley considered whether

       328
             Sheers Tr. 1035.
       329
           See JX 776 at ‘758 (describing Lachman’s role). Fresenius also needed a firm to
extract the data for Lachman to analyze and retained Ernst & Young LLP for that purpose.
See id.
       330
           See Sheers Tr. 1035–36. Formally retaining Lachman took some time. Lachman
told Fresenius that it had a conflict and would require waivers from both Fresenius and
Akorn, but Lachman declined to disclose whether or not Akorn was or had been a client or
to discuss the nature of any engagement. Silhavy worried about granting a blind waiver,
noting that although it was unlikely, “Lachman could have worked for Akorn on the very
topics that are at issue here.” JX 734 at ‘192. See id. at ‘191 (noting that in the most extreme
case, Lachman might have “evaluated the very data integrity issues that we want them to
investigate, and opined to Akorn [that] those are not of a type or magnitude that would
cause there to have been fraud on the FDA?”). After considerable effort, an agreement was
reached with Lachman in early December. See JX 772. Akorn contends that Silhavy wanted
an expert who would give him the answer he wanted, but I find that he correctly wanted a
consultant who would take a fresh look at the issues, not one who had worked on the same
issues for Akorn.
       331
             George Tr. 1115–17.
       332
             See JX 735.

                                              72
anything in the confidentiality agreement between Fresenius and Akorn prevented them

from using the information. After reviewing the agreement, Sidley concluded that they

were “Representatives” of Fresenius who could receive the “Evaluation Material” in the

virtual data room without prior written consent from Akorn. The Sidley attorneys noted

that the Evaluation Material could be used “solely for the purpose of evaluating,

negotiating, and executing” a transaction. Sidley concluded that their investigation was part

of the process of executing (i.e., carrying out) the transaction, and hence they could use the

Evaluation Material in their investigation.333 I agree with that interpretation.

       Next, Fresenius provided Akorn with a request for access, information, and

documents to conduct its investigation.334 Demonstrating the importance of the

investigation to Fresenius, Sturm and his fellow senior executives at Fresenius Parent were

personally involved in reviewing and revising the requests.335

       333
           See JX 747; Sheers Tr. 1106. Sidley also noted that the confidentiality agreement
foreclosed speaking with the FDA, or anyone else, about regulatory issues related to the
Akorn transaction. See JX 748. Akorn has argued that executing the agreement only meant
signing it, but the meanings of the verb include to carry out. Akorn also says that Fresenius
could not have been seeking to carry out the Merger Agreement if it was considering
terminating it, but carrying out the deal includes evaluating one’s rights and obligations
under the deal, including rights and obligations which turn on a counterparty’s compliance
with its obligations.
       334
             JX 771; JX 776.
       335
             See JX 767.

                                              73
       After receiving the requests, Cravath spoke with Sidley about how to proceed.336

During these discussions, Sidley learned that Cravath would not be conducting its own

investigation, but rather facilitating Fresenius’s investigation, sitting in on interviews, and

generally “shadowing” Sidley.337 The lawyers also discussed “whether the interviews

would be conducted under a ‘common interest privilege.’”338 Internally, Sidley expressed

concern that “the only common interest at this point is the solicitation of information from

the interviewees and to conduct a thorough investigation,” but that how the resulting

information was used “likely is outside the scope of any common interest.”339

       To support the common interest privilege, Cravath proposed a draft agreement

which recited that Sidley and Cravath were conducting “a privileged joint investigation for

the purpose of assisting our clients close the acquisition.”340 The draft elaborated that the

       mutual interest arises from the desire of both Fresenius and Akorn to
       consummate the pending merger between the two companies and prepare a
       defense for the surviving entity in anticipation of any litigation that might
       arise, including by the FDA, another interested government entity or private
       litigant, based on the substance or fact of the allegations in the anonymous
       communications.341

       336
             See JX 784.
       337
             See Bonaccorsi Tr. 908; Stuart Tr. 728; Rai Tr. 509–11; JX 784; JX 793.
       338
          JX 784; see Sheers Tr. 1085–86 (“Before they would permit us to interview
anyone, they said we had to sign a common interest agreement.”).
       339
             JX 784.
       340
             JX 793.
       341
             JX 792 at ‘700.

                                              74
Proposing this language was a clever way to try to box in Fresenius and prevent them from

using any information to evaluate Akorn’s compliance with its representations. For

precisely this reason, the Fresenius executives reacted negatively to this language.342

       The parties ended up agreeing to a modified version of the common interest

agreement that struck the concept of a joint investigation and stated in its place that “[t]he

investigation may include joint interviews, document collection and review and sharing of

information related to Akorn’s processes, procedures and controls.”343 The final agreement

also changed the language on mutual interest to state that it “arises from and under the

Merger Agreement dated April 24, 2017 between Fresenius (and certain affiliates) and

Akorn, and additionally because of the possibility of claims made by third parties.”344 The

final agreement stated expressly that “either party shall be free to use or disclose the fact

of, and any and all information learned or obtained during, the referenced investigation,

including information exchanged hereunder, in any dispute between them.” 345 These

changes put Akorn on notice that Fresenius could use the fruits of the investigation to

       342
           See JX 794 (Silhavy emailing Sheers: “Cravath’s proposal has caused a stir in
Germany. They would like a call tomorrow . . . and do not want us signing anything until
after that call.”); see also JX 798 at ‘812 (Sidley attorney referring to Akorn as “our
adversary here”).
       343
             JX 804 at ‘988.
       344
             Id. at ‘988.
       345
             Id. at ‘989.

                                             75
evaluate its rights and obligations under the Merger Agreement and not merely for the

purpose of closing the Merger.

M.     The Site Visits Begin.

       Between December 11 and December 15, 2017, the Fresenius team visited Vernon

Hills. Sidley interviewed nineteen employees, and Fresenius’s consultants toured the

laboratory and questioned employees about equipment, software, controls, processes, and

procedures. The Fresenius team identified serious data integrity issues.346

       Between December 18 and December 21, 2017, the Fresenius team visited Somerset

and Cranbury. Sidley interviewed ten employees while the consultants toured the

laboratory. The Fresenius team again identified serious data integrity issues.347

       From January 2 until January 5, 2018, the Fresenius team visited Decatur. They

interviewed eleven employees while the consultants toured the laboratory facilities. The

Fresenius team again identified serious data integrity issues.348

       346
           See JX 809; JX 856 at ‘872–77; JX 934 at 14; Sheers Tr. 1092. Sidley and
Lachman later had a follow-up visit at Vernon Hills. See Sheers Tr. 1094. Akorn has fixated
on a comment that George made when visiting the Vernon Hills site about looking for
“smoking gun[s].” Sheers Tr. 1090. The details and context of this statement are too vague
for me to draw any inferences from it.
       347
             See JX 828; JX 856 at ‘878–86; JX 934 at 14; Sheers Tr. 1093.
       348
          See JX 934 at 14; JX 856 at ‘887–94; Sheers Tr. 1093. Sidley and Lachman later
had a follow-up visit at Vernon Hills. See Sheers Tr. 1094–95.

                                             76
       On January 5, 2018, Fresenius received a third whistleblower letter, which alleged

that Vernon Hills personnel had concealed information from Fresenius.349 Fresenius sent

the letter to Akorn.350 Based on the letter’s allegations and its own concerns, Fresenius

questioned whether Akorn was providing Fresenius with reasonable access to information.

Akorn provided a pointed and detailed response.351

       On December 18, 2017, while the Fresenius team was starting its visit at the

Somerset site, Cravath commenced the only investigatory work that it did on its own, in

contrast to simply shadowing Sidley.352 While preparing witnesses for their interviews,

Cravath learned about problems with the data supporting Akorn’s ANDA for azithromycin

and about Silverberg’s submission in August 2017 of a response to a CRL that relied on

false data.353 Cravath started investigating what had happened.354

       Two days after Cravath started investigating, on December 20, 2017, Silverberg

went to Misbah Sherwani, Executive Director of Quality at Somerset, to try to coordinate

their stories. Sherwani immediately called an associate at Cravath, telling the associate that

       349
          JX 842 (alleging that personnel were instructed “not to cooperate with” Fresenius
and “not to disclose any information” to Sidley); see also JX 934 at 12.
       350
             See JX 848; JX 851.
       351
             See JX 853.
       352
             See Stuart Tr. 728.
       353
             See id. at 679–80.
       354
             See id. at 680–82; Sheers Tr. 1041–42.

                                              77
      she is uncomfortable being in the same room with Mark right now because
      he is telling her to do things with respect to opening a [T]rackwise
      investigation that she is seriously concerned about (including inaccurate
      justifications for why an investigation was not opened earlier and telling her
      he will “eat” the drafts of the language about that).355

The associate called Stuart, who spoke by phone with Silverberg and Sherwani.356

      Stuart claimed at trial that the phrase “eat the draft” did not mean anything to him.357

It sounds to me like a fairly obvious reference to coordinating stories, documenting the

coordinated story in Trackwise, the software Akorn uses to track quality issues and

investigations, then concealing the evidence of the coordination. This is exactly how

Sherwani understood it.358 She said Silverberg told her that they should agree on a

description of the investigation and then Silverberg would “get rid of” what they had

drafted.359 Stuart “very quickly” dismissed this as a “fleeting issue” by deciding that

Silverberg and Sherwani simply had a miscommunication.360

      Cravath’s investigation took approximately four weeks. The resulting record

supports the following findings:

      355
            JX 825.
      356
            Stuart Tr. 767, 769.
      357
            Id. at 690, 768.
      358
            See Sherwani Dep. 114–116.
      359
            Stuart Tr. 691, 718, 771.
      360
            Id. at 690, 693, 769, 773–74.

                                             78
     In 2012, Akorn began developing a topical ophthalmic form of azithromycin, a
      prescription antibiotic, at its Somerset site, but could not perform particulate matter
      stability testing due to its viscosity.361

     In September 2012, an Akorn lab supervisor at Somerset named Jim Burkert entered
      stability testing data into the lab notebook of an Akorn chemist. There is no evidence
      that he had the data; he seems to have made it up.362

     In December 2012, Akorn submitted to the FDA an ANDA for azithromycin which
      included the false data.363

     In fall 2014, the stability testing issue came up again, and the chemist discovered
      the entries in her notebook. She also noticed other entries in the same notebook and
      in two other notebooks that were not in her handwriting. She reported it to Burkert,
      who did not ask any questions or follow up. The chemist next brought the issue to
      the attention of a quality manager who instructed all scientists to review their
      notebooks. The review discovered numerous instances of altered and missing data.
      In addition, two of Burkert’s notebooks were missing.364

     On December 30, 2014, Burkert resigned voluntarily.365

     In July 2016, Silverberg visited Somerset. He interviewed the chemist and told her
      to note in her notebooks where the writing was not hers. She identified six additional
      products where the writing was not hers. After learning about the missing
      notebooks, Silverberg instructed that going forward, all notebooks would be stored

      361
            See JX 890 at ‘268–69; JX 821 at ‘207; JX 1889 at 1; Stuart Tr. 682–83.
      362
            See JX 890 at ‘268–69; JX 821 at ‘207; JX 1889 at 1; see also JX 914 at ‘087
(“In brief, Stuart admitted that the company submitted to FDA ‘fabricated’ stability data—
i.e., data for which the company has no support—for the Azithromycin ANDA . . . .”); id.
at ‘088 (“[T]he data was in fact ‘fabricated.’”); Stuart Tr. 740–41 (“Q. . . . Cravath
concluded that there was a high likelihood that the data was false; correct? A. Yes.”).
      363
            JX 890 at ‘269; JX 1889 at 2.
      364
            JX 1889 at 2–4.
      365
            JX 890 at ‘273; JX 1889 at 4.

                                             79
      in the quality manager’s office and checked in and out. Employees expressed
      concern that Silverberg was not addressing the issues properly. 366

     In August 2017, Somerset was attempting to respond to a CRL that asked questions
      about the stability testing for azithromycin, albeit not specifically the fabricated test.
      When preparing the response, Akorn personnel identified the problems with the data
      and brought them to Sherwani’s attention. She and a colleague, Michael Stehn,
      concluded that Akorn would need to withdraw the ANDA, and they elevated the
      issue to Silverberg.367

     During Silverberg’s discussion with Sherwani and Stehn, Silverberg was told that it
      was highly likely that there was false or fabricated data in the initial ANDA
      submitted to the FDA.368

     During a meeting on August 17, 2017, Silverberg told Sherwani and Stehn that
      Akorn would not withdraw the ANDA and should instead pull samples and test
      them to see if the samples passed the test.369 Silverberg subsequently instructed
      Sherwani and Stehn to respond to the CRL, not to ask for an extension, and not to
      open an investigation in the data issues.370

     Sherwani believed it was essential to conduct an investigation and to obtain an
      extension from the FDA. Sherwani asked Silverberg whether he was “allowing
      Regulatory Affairs to continue to submit inaccurate information” to the FDA.371
      Silverberg argued that the FDA was asking about different data.372

      366
            See JX 821 at ‘208; JX 890 at ‘274–75; JX 1889 at 6–8; Stuart Tr. 683.
      367
           See JX 853 at ‘545; JX 579; JX 821 at ‘209–10; JX 890 at ‘278; JX 1889 at 8–
10; Stuart Tr. 683–84, 744–45.
      368
            Stuart Tr. 741.
      369
          See JX 591 (Silverberg describing request for extension as “stupid”); JX 821 at
‘210; JX 1889 at 10–11; Stuart Tr. 745.
      370
         See JX 607 at ‘105–06; JX 821 at ‘210–11; JX 1887 at 2; JX 1888 at 1–2; Stuart
Tr. 759–63.
      371
            JX 607 at ‘103; JX 821 at ‘211; JX 1889 at 11.
      372
            See JX 607 at ‘102–03; JX 821 at ‘211; JX 1889 at 11.

                                             80
      Sherwani disagreed with Silverberg’s positon and declined to sign the CRL.373

      Silverberg instructed Sherwani that there should be “[n]o more emails.”374

      Silverberg signed the CRL on Sherwani’s behalf while she was out of the office.375

      By signing off on the CRL, Silverberg validated the attachments, which were not
       yet attached to the form he signed. The attachments included the false stability
       data.376 Sherwani had made clear to Silverberg that signing the CRL would
       constitute a resubmission of the false data.377

N.     Cravath Reports To Sidley On Its Investigation.

       On January 12, 2018, Stuart gave Sidley a preliminary report on Cravath’s

investigation.378 At that point Cravath had interviewed twenty-four employees and

reviewed 6,000 emails. Stuart told Sidley that the investigation would take another three to

four weeks.379

       373
          See JX 777 at ‘221–22; id. at ‘216 (forwarding her exchange between Silverberg
and herself to a colleague, Sherwani comments, “I’m not going to be his scapegoat”); JX
890 at ‘279.
       374
             JX 778 at ‘557.
       375
             See JX 821 at ‘211; JX 1889 at 12.
       376
             See JX 873 at ‘320; Stuart Tr. 684–85, 786–89.
       377
           JX 1425 at ‘102; Stuart Dep. 153; Sherwani Dep. 99–103; JX 1891 at 1, 3–5, 7;
Stuart Tr. 802.
       378
             See JX 873 at ‘320; Stuart Tr. 695; Sheers Tr. 1042–43.

         JX 873 at ‘323. But see Stuart Tr. 681 (“We were substantially complete by the
       379

middle of January”); id. at 697 (Stuart testifying that the investigation was “substantially
complete” by January 22, 2018).

                                              81
       After receiving the preliminary report, Fresenius sent Akorn a letter identifying

“extremely serious data integrity concerns.”380 Internally, Fresenius started a project to

determine what it would cost to remediate the data integrity issues at Akorn so they could

evaluate whether the issues constituted a Material Adverse Effect.381

       On January 22, 2018, Stuart, Bonaccorsi, and members of the Cravath team gave a

follow-up report to Silhavy and Sidley.382 Stuart stated that Silverberg’s explanations

“were not satisfactory, they didn’t hang together.”383 He also said that he would not be

       380
           JX 866; see Sheers Tr. 1037–39 (summarizing concerns). There is evidence that
Fresenius executives wanted Sidley and Lachman to be even more critical of Akorn than
they were. See JX 900; Sheers Tr. 1099–01. I find that Sidley and Lachman properly
resisted this pressure and conducted appropriately professional investigations.
       381
           See JX 887; JX 889; see also JX 888. Bauersmith handled the initial modeling
and led the project team. In a bit of gallows humor, he labeled his draft presentations and
some communications with the faux code name “Project CERAFA.” See, e.g., JX 978.
Commonly known as oak rot, cerafa fagacearum is a fungus that kills oak trees.
Baeursmith Tr. 609. Fresenius’s code name for the Akorn acquisition was Project Oak, and
Akorn understandably infers from this name that Bauersmith had been instructed to come
up with a way to kill Project Oak. While this is one plausible interpretation of the evidence,
I credit Bauersmith’s testimony that he believed Akorn was already rotten, and that his job
was to determine the extent of the rot. Id. (“[W]e thought that the tree was rotted.”).
Consistent with his testimony, Bauersmith had questioned Akorn’s pipeline from the outset
and been skeptical of its value. Bauersmith resigned effective May 4, 2018, and had no
reason to shade his testimony to favor Fresenius. JX 1182; Bauersmith Tr. 573. In my
judgment, he was a credible witness.
       382
             JX 914.
       383
          Stuart Tr. 700; accord JX 914 at ‘093; JX 1128; see Stuart Tr. 697 (“My
assessment was that Mr. Silverberg’s conduct was wholly unacceptable, that his
explanations for his conduct were not satisfactory, and that we needed to take some action
with respect to Mr. Silverberg.”); id. at 748 (“Q. Okay. And in fact, you find [Silverberg’s]
explanation about this totally unsatisfactory. A. That’s true.”); Sheers Tr. 1044 (“[W]e
asked Mr. Stuart whether he found [Silverberg’s] statement credible, that explanation

                                             82
relying on Silverberg’s explanation “in an attempt to defend the [C]ompany before the

FDA.”384 Although Stuart did not say this to the Fresenius team, he believed that there was

“a high likelihood that [the FDA] would conclude, given the document trail that they’ll

conclude [Silverberg] did act with intent.”385 Stuart did not report on (or ever tell Sidley

about) the incident between Silverberg and Sherwani in which Silverberg attempted to

coordinate their stories and suggested he would “eat the draft” if necessary.386

       Bonaccorsi and other senior executives at Akorn thought the situation was serious,

and they worried that if they disclosed the azithromycin incident to the FDA and withdrew

credible, and he told us specifically that he did not find his story satisfactory; that it did not
hang together; and he told us that he wasn’t going to defend it.”). At trial, Stuart and his
counsel spent a lot of time attempting to distinguish between finding Silverberg’s
explanation “not satisfactory” and finding it not credible. They did so in an attempt to
justify the later presentation of Silverberg’s explanations to the FDA as findings from
Cravath’s investigation. Based on the evidence, I do not perceive a meaningful distinction.
Regardless of what adjective one uses, Akorn later presented the FDA with a finding from
its investigation that parroted an explanation that the lead investigator did not find
satisfactory.
       384
             Stuart Tr. 700–01.
       385
             JX 935 at ‘031.
       386
           Sheers Tr. 1045–46. Based on Cravath’s presentation, Silhavy did not initially
regard Silverberg’s findings as “earthshattering” or as providing a basis, standing alone, to
terminate the Merger Agreement. Silhavy Dep. 158–60; see JX 878. Sturm scolded Silhavy
for expressing this view before hearing from Fresenius’s subject-matter experts. Sturm Tr.
1190–91, 1216–17; see Silhavy Dep. 158–60. Given this exchange and Sturm’s candid
testimony about his view of the Merger after Akorn’s dismal performance, it is reasonable
to infer that Sturm hoped the investigation would support a decision by Fresenius to
terminate the Merger Agreement.

                                               83
the ANDA, then the FDA would invoke the AIP.387 To help them navigate dangerous

waters, they decided to hire a law firm with specific FDA expertise. They selected Hyman,

Phelps & McNamara, P.C., although this firm had also done work for Fresenius and

therefore faced a potential conflict. They also decided to hire an outside consultant to

conduct a review of Akorn’s procedures and potentially tainted submissions. Akorn later

chose NSF to conduct the investigation.388

       After consulting with Hyman Phelps, Akorn decided that they should go to the FDA

relatively soon, disclose the problems they had discovered, and explain how the false CRL

came to be submitted.389 Akorn also decided that Silverberg should no longer head up its

quality function.390 Effective March 1, 2018, they removed him from his position of

Executive Vice President, Global Quality Affairs and placed him in the new role of

“Quality Advisor.”391 His new position paid $250,000 per year, a reduction from his prior

salary of $318,000, and he was not eligible for any bonus. The initial placement was for 90

days or until the Merger closed. He was “[n]ot to initiate any contact with Akorn employees

       387
           JX 884 at ‘068 (“They’re going to invoke the application integrity policy.”); see
Stuart Tr. 854; see also JX 908 at ‘831 (discussing AIP); JX 1127 (same).
       388
             JX 1078; see JX 932; JX 939; JX 951; JX 967; Stuart Tr. 707–08.
       389
             See Stuart Tr. 703.
       390
             Bonaccorsi Tr. 894–95.
       391
             See JX 955 at ‘702; JX 961; JX 984.

                                             84
at any level except for inquiries to the CHRO or General Counsel.”392 He was “[n]ot to

have any contact with the U.S. FDA or other regulatory facilities.”393 He was “[n]ot to

physically report to any Akorn location unless specifically requested or directed by his

manager, CHRO or General Counsel.”394 Akorn took these steps with the understanding

that the FDA would expect to see this type of disciplinary outcome in a case of “deliberate

misconduct.”395 As of trial, Silverberg remained in his new role.

       To fill the hole this created at the top of Akorn’s quality function, Akorn promoted

Wasserkrug to the position of Vice President, Quality Operations. Although historically

the head of quality reported directly to the CEO, she would report to the head of

pharmaceutical operations, where the entire quality assurance function would reside.396

       Akorn also decided that it would be a good idea to start working on some data

integrity projects. Bonaccorsi had Pramik start planning for IT to address some projects in

this area.397 The IT department also began responding to the issues raised in the Cerulean

audits from December 2016 and May 2017.398

       392
             JX 955 at ‘702.
       393
             Id.
       394
             Id.
       395
             Stuart Tr. 705.
       396
             JX 955 at ‘703.
       397
             JX 957 at ‘921.
       398
             See JX 977.

                                            85
O.     Tensions Escalate.

       By the second half of February 2018, tensions between the parties had escalated.399

On February 16, Sidley sent Cravath a letter attaching an extensive list of FDA submissions

where Lachman had not been able to locate the underlying data. Sidley asked for the data

or, alternatively, an explanation for why it was missing.400 Three days later, on February

19, Bonaccorsi sent Silhavy a lengthy email in which he accused Fresenius of foot-

dragging before the FTC and failing to use its reasonable best efforts to obtain antitrust

clearance.401 Four days later, on February 23, Silhavy sent Bonaccorsi an email informing

him that Fresenius would be making the following statement about the Merger on February

27, when Fresenius Parent held it earnings call:

       Fresenius is conducting an independent investigation, using external experts,
       into alleged breaches of FDA data integrity requirements relating to the
       product development at Akorn, Inc.

       In addition to FTC clearance, closing of the acquisition will now depend on
       the outcome of this investigation and the assessment of such outcome by the
       management and supervisory boards of Fresenius.402

Silhavy also sent Bonaccorsi an email complaining that Cravath had not yet provided

Sidley with the emails from Cravath’s investigation into the fabricated-data issues and

expressing concern that “Akorn has not been and is not acting in good faith to fulfill its

       399
             See Stuart Tr. 709, 866.
       400
             JX 970.
       401
             JX 972.
       402
             JX 983 at ‘002.

                                            86
obligation to provide prompt and reasonable access to information under Section 5.05 of

the Merger Agreement.”403

       The very next day, on February 24, 2018, a Cravath litigation partner sent a letter to

Fresenius’s outside deal counsel asserting that Fresenius had “made clear that it does not

intend to perform its obligations under the Merger Agreement.”404 The letter cited

Fresenius’s positions regarding antitrust clearance and its planned disclosure about closing

depending on the outcome of its investigation.405

       Over the weekend, Cravath produced a portion of the emails to Sidley, and

Bonaccorsi promised that the balance would be coming soon.406 On February 26, 2018,

Akorn’s newly retained regulatory counsel at Hyman Phelps reached out to the FDA to

advise them about the potential data integrity issues involving fabricated data.407 The FDA

agreed to a “listening only meeting” on March 7.408

P.     The Earnings Calls

       On February 27, 2018, Fresenius held its quarterly earnings call. Sturm announced

that Fresenius was investigating “information which originated from an anonymous source

       403
             JX 991 at ‘948.
       404
             JX 986 at ‘186.
       405
             Id. at ‘187.
       406
             JX 991 at ‘946.
       407
             See JX 987; JX 988; Stuart Tr. 706.
       408
             JX 1000 at ‘031.

                                              87
alleging deficiencies and misconduct regarding the product development process for new

drugs at Akorn.”409 He stated that during due diligence, Fresenius had “examined and

audited [Akorn] as intensively, carefully, and conscientiously as possible,” and he

described the due diligence as “the most intensive and comprehensive that I have

experienced during my time at Fresenius,” but he added that “when you wish to acquire a

competitor, there are restrictions,” and “[t]here are areas where you simply are not allowed

to look, including product development and drug approval processes.”410

       So how do you protect yourself in these areas? You ask the seller for
       assurances, representations [and] warranties, to use the legal term, on certain
       key facts and issues. The task now is to verify whether these assurances
       provided by the seller actually hold true. . . . [S]hould the allegations prove
       to be of a nonmaterial nature, then we will complete the acquisition, as
       planned, and together make it a success . . . .

       If, however, the allegations are proved and prove to be so serious that we
       must question the very basis of the takeover agreement, then in the interest
       of our shareholders, we may use our rights to withdraw from the
       transaction.411

Akorn’s stock price plummeted on the news.412

       409
             JX 994 at 5.
       410
             Id.
       411
            Id. Sturm “stress[ed] that the strategic rationale behind our offer for Akorn
remains absolutely sound,” and that Fresenius remained “determined to pursue the strategic
goal of expanding our liquid pharmaceutical product offering in North America.” Id.; see
also id. at 15.
       412
             See JX 992.

                                             88
       On February 29, 2018, Akorn reported its financial results for the final quarter of

2017, along with annual results for 2017.413 For the quarter, Akorn reported revenue of

$186 million, representing a year-over-year decline of 34%. Akorn reported operating

income of negative $116 million, representing a year-over-year decline of 292%. Akorn

reported a loss of $0.52 per share, representing a year-over-year decline of 300%.414

       For 2017 as a whole, Akorn reported revenue of $841 million, representing a year-

over-year decline of 25%. Akorn reported operating income of $18 million, representing a

year-over-year decline of 105%. Akorn reported a loss of $0.20 per share, representing a

year-over-year decline of 113%.415 Akorn reported EBITDA of $64 million for 2017, down

86% from 2016, and adjusted EDBITA of $249 million, down 51% from 2016.416 Akorn’s

actual revenue declined by 17% from the low end of the guidance of $1,010–$1,060 million

that Akorn reaffirmed when announcing the Merger Agreement. Akorn’s adjusted

EBDITA declined by 31% from the low end of Akorn’s reaffirmed guidance of $363–$401

million.417

       413
             JX 998.
       414
             JX 1250 ¶ 11; see JX 941 at 5.
       415
             JX 1250 ¶ 11; see JX 941 at 5.
       416
             JX 1250 ¶ 11.
       417
             Id. ¶ 22.

                                              89
Q.     The FDA Meeting

       During the weeks leading up to Akorn’s meeting with the FDA, Akorn withdrew

the ANDA for azithromycin,418 and the parties butted heads over several issues. When

Fresenius realized that Hyman Phelps would be attending the meeting, they asserted a

conflict based on Hyman Phelps’s contemporaneous representation of Fresenius.419 Akorn

complained that Fresenius was trying to harm its ability to present its case to the FDA, but

Fresenius had a legitimate concern that Akorn was going to whitewash its problems, and

Hyman Phelps was contemporaneously appearing for Fresenius in matters before the FDA.

Fresenius did not want any blowback from a misleading depiction to hurt its own counsel’s

credibility. Akorn replaced Hyman Phelps with Ropes & Gray LLP.420 The meeting was

rescheduled for March 16, and the change in counsel does not appear to have made any

difference.

       Akorn took similar stances towards Fresenius. When Sidley asked to attend the

meeting, Akorn said no.421 When Sidley asked to interview Avellanet, the author of the

       418
             See JX 1091.
       419
             See JX 1003; JX 1006; JX 1017; Stuart Tr. 710; Bonaccorsi Tr. 901–02.
       420
             Stuart Tr. 710–11.
       421
          See JX 1013 at ‘486; Sheers Tr. 1049. At trial, Stuart cited three reasons. First,
by conflicting out Hyman Phelps, Fresenius had taken the position that Akorn and
Fresenius’s interests were not aligned regarding the meeting. Second, “by that time, the
relationship between Sidley and Cravath, as well as between Fresenius and Akorn, had
grown to be hostile.” Stuart Tr. 711. Third, Akorn feared that Sidley would try to sabotage
the meeting. Id. at 711–12. All three seem to be variants on a theme: both sides’ interests
were becoming adverse.

                                             90
Cerulean reports, Akorn again said no.422 Akorn also instructed Sidley that they could not

interview any former Akorn employees without Akorn’s approval.423 Akorn also instructed

Sidley that no one other than Fresenius’s outside consultants could review the documents

Akorn was providing unless Akorn gave prior consent to provide specific documents to

specific individuals.424

       In advance of the in-person meeting on March 16, 2018, a lawyer from Ropes &

Gray had a “sidebar” call with an FDA representative in which he denigrated Fresenius’s

motives and suggested that Fresenius would try to call Akorn’s presentation into

question.425 During the subsequent in-person meeting, eight Akorn representatives,

including Stuart and Bonaccorsi, met with sixteen FDA representatives, with four

participating by phone.426

       422
             See JX 1023; JX 1032.
       423
             JX 1037.
       424
             JX 1038 at ‘447.
       425
           JX 1066 at ‘893; see JX 1063 at ‘005; Stuart Tr. 840–44. Stuart failed to mention
the criticisms of Fresenius when he described the sidebar call for Sidley. See JX 1071 at
‘707; Stuart Tr. 845–46. At trial, Sheers identified statements in the talking points for the
sidebar call that did not accurately describe the state of the record. See Sheers Tr. 1055–
58. Based on the trial record, Sheers’s assessment appears correct. The sidebar call was
thus another means by which misleading information reached the FDA.
       426
             JX 1066 at ‘894.

                                             91
       As Akorn’s expert conceded at trial, Akorn was “not fully transparent” with the

FDA during the meeting.427 First, Akorn presented the overall investigation into the

whistleblower letters as one conducted jointly by Akorn and Fresenius.428 In reality, Akorn

did not conduct an investigation into the whistleblower letters. Fresenius expected Akorn

to conduct an investigation, but Akorn chose to have Cravath shadow the Sidley

investigation instead. Akorn’s presentation cited investigatory work that Sidley and

Lachman had performed in a manner that implied that Akorn had been responsible for it.429

Akorn also described its production of emails to Sidley in a manner that implied it had

happened months earlier, at the start of the investigation and as part of a joint effort,430

when in fact the emails had been provided only three weeks before in response to pressure

       427
           Kaufman Tr. 378. Kaufman claimed that Akorn later became transparent by
sending the FDA a letter containing Sidley’s criticisms and the Cerulean reports. Id. at 402,
414. In fact, Akorn has never sent the FDA the Cerulean reports. Wasserkrug Tr. 40.
Moreover, Akorn’s regulatory counsel undermined the curative efficacy of sending the
Sidley letter by priming the FDA not to give any credence to Sidley’s concerns.
       428
           See JX 1066 at ‘895 (“Dave Stuart presented briefly on . . . the whistleblower
letters sent to Fresenius and the investigation conducted by Akorn and Fresenius as a result
of those letters.”); JX 1068 at ‘009 (“In response to anonymous letters, Akorn and
Fresenius conduct investigation focused on data integrity controls.”); JX 1068 at ‘038
(“Akorn has extensively investigated the concerns raised by the anonymous letters . . . .”).
Stuart described the investigation differently when he reported on the meeting to Sidley.
See JX 1071 at ‘707 (Stuart telling Sidley that they had told the FDA that “Fresenius,
Sidley, Lachman, and EY had been given access to Akorn’s sites, raw data, audit trails,
emails and employees” and that “you were analyzing all of the information and data you
had obtained”).

         See JX 1068 at ‘009 (citing site visits, “65+ interviews of current and former
       429

Akorn personnel”; and “[l]ab walk-throughs”)
       430
             See JX 1066 at ‘895.

                                             92
from Fresenius. Akorn likewise presented the investigation into the azithromycin ANDA

as a joint investigation, when Cravath had conducted that investigation on its own.431 Akorn

also represented that Cravath’s investigation into the azithromycin issue was “supported

by Akorn GQC,”432 without disclosing that Akorn GQC had been kept in a constrained and

limited role.

       Even more problematic, Akorn’s presentation endorsed as valid Silverberg’s

claimed justification for signing the CRL with fabricated test results. Under the heading,

“Investigative Findings,” the presentation stated:

       Silverberg authorized submission of AET data without knowing stability
       table containing particulate matter data would be submitted because stability
       table not attached to CRL response Silverberg authorized for submission.433

This statement to the FDA adopted Silverberg’s explanation for his actions. Stuart gave the

presentation and called the FDA’s attention to this statement during the meeting,434 yet

       431
             See Stuart Tr. 728–29.
       432
             JX 1068 at ‘009.
       433
             JX 1068 at ‘014.
       434
           Stuart Tr. 713. At trial, Stuart testified on direct that he “felt the FDA should
know that that was [Silverberg’s] position on the submission of the CRL response.” Id. at
714. The presentation does not identify the statement as Silverberg’s position. It identifies
the statement as a finding from an Akorn internal investigation conducted by Cravath. See
Stuart Tr. 794; Stuart Dep. 276. I empathize with Stuart, because I suspect that he was
under a great deal of pressure to depict events in this way. I also give Stuart credit for
testifying as directly as he did given the difficult position that his client had put him in. He
appears to be an honest and conscientious person. The record shows that many lawyers
revised and commented on the presentation, and their collective efforts to present Akorn
to the FDA in the best light possible ultimately produced a misleading document. In the
pressure of the moment, Stuart went along.

                                              93
Stuart had said previously that “he did not find Silverberg’s explanations satisfactory.”435

He also believed that there was “a high likelihood that [the FDA] would conclude, given

the document trail that they’ll conclude [Silverberg] did act with intent.”436 Most important,

he had told the Sidley team that he would not be relying on Silverberg’s explanation “in an

attempt to defend the Company before the FDA.”437 Yet that is what the presentation did.

       Finally, Akorn told the FDA that it had placed an “emphasis . . . on improving data

integrity controls in the last few years,”438 and the presentation cataloged a number of steps

Akorn had taken. Akorn in fact historically prioritized other matters over data integrity and

only began making a serious effort on data integrity after Sidley and Lachman identified

pervasive problems. Moreover, while highlighting favorable information for the FDA,

Akorn omitted the many deficiencies identified by Cerulean and Akorn’s internal audit

function. This approach resulted in a one-sided, overly sunny depiction. Akorn’s witnesses

have stressed that the FDA usually does not ask for or receive internal audit reports or

       435
             JX 914 at ‘093; see Stuart Tr. 697, 699–700.
       436
             JX 935 at ‘031.
       437
             Stuart Tr. 700–01.
       438
           JX 1066 at ‘897; see JX 1068 at ‘016 (presentation representing (inaccurately
based on the evidence in this case) that “Akorn management emphasizes the importance of
data integrity and the data governance policy is endorsed at the highest levels of the
organization”); id. at ‘017 (presentation representing (inaccurately based on the evidence
in this case) that “[i]mprovement activities have been prioritized using a risk-based focus
across all facilities”).

                                              94
consultant reports when it conducts an inspection,439 but that is a different scenario than a

company approaching the FDA voluntarily and purporting to come clean.440

       After the meeting, Akorn provided Fresenius with a summary of the meeting and a

copy of the presentation.441 On March 22, 2018, Sidley sent Cravath a letter accusing Akorn

of having given the FDA “false, incomplete and misleading information.” 442 Sidley’s

leading criticism was the presentation’s description of Silverberg’s reason for approving

the response to the CRL.443 Although Sidley’s language was strident, that was a fair

criticism of the presentation. Sidley also criticized the presentation’s portrayal of Akorn’s

“many supposed improvements in its data integrity practices.” 444 The language was again

quite strong, but the criticism was a fair one.445

       Akorn’s regulatory counsel at Ropes & Gray sent Sidley’s letter to the FDA.446 He

also sent the FDA copies of letters from Sidley to Cravath in which Sidley identified

       439
             See Wasserkrug Tr. 19; Kaufman Tr. 275.
       440
             See Kaufman Tr. 399 (agreeing that self-disclosure is different than an audit).
       441
             See JX 1073.
       442
             JX 1084 at ‘171; see Sheers Tr. 1050–54 (describing Sidley’s concerns).
       443
             JX 1084 at ‘171–72.
       444
             Id. at ‘173.
       445
           See Wasserkrug Tr. 167–72 (Wasserkrug on cross-examination agreeing that
Akorn did not disclose numerous problems with the data integrity accomplishments it
touted to the FDA).
       446
             See JX 1105.

                                               95
various data integrity issues, along with Cravath’s response to those letters. He followed

up with a call with an FDA representative, during which he sought to undermine

Fresenius’s criticisms.447 He correctly noted that “the heated tone of the correspondence

was somewhat embarrassing.”448

R.     Fresenius Terminates The Merger Agreement.

       On March 16, 2018, Sturm raised with the Supervisory Board of Fresenius Parent

the possibility of terminating the Merger Agreement. He cited the results of Fresenius’s

data integrity investigation, which he noted was still ongoing, but which had revealed

evidence of breaches of representations in the Merger Agreement.449 He told the

Supervisory Board that they did not yet have to make a decision.450

       On April 13, 2018, the senior executives at Fresenius Kabi decided to recommend

terminating the Merger Agreement to their superiors at Fresenius Parent. They based their

decision on the data integrity problems at Akorn, the costs of remediation, and the decline

in Akorn’s business performance.451

       On April 17, 2018, the Supervisory Board met. Management gave the directors a

presentation that detailed (i) the downward revisions in the business plan for Akorn made

       447
             See JX 1106.
       448
             Id.
       449
             JX 1143 at ‘975–76.
       450
             Id. at ‘976.
       451
             JX 1142 at ‘496.

                                            96
necessary by Akorn’s dismal business performance, (ii) the cost of data integrity

remediation, and (iii) the lost value from suspending sales of existing products and delaying

production of pipeline products until data could be verified.

      For 2018, Akorn’s projected EBIT fell from $239 million in the signing case to $14
       million in the updated case. Of the total, a decline of $221 million was attributable
       to on-market products and a decline of $127 million to pipeline products, with these
       declines partially offset by deal-related factors.452

      For 2018, data integrity remediation would cost another $48 million, with a decline
       in EBIT of $272 million attributable to suspending on-market products pending data
       verification. With these effects, Akorn’s adjusted EBIT in 2018 would be negative
       $313 million.453

      Over a ten-year period, Akorn would incur $254 million in direct costs to redevelop
       the twenty-four most commercially valuable Akorn products.454

      The biggest valuation hit to Akorn would come from suspending on-market
       products and pushing out pipeline products while data was verified. Depending on
       the assumptions used, the loss in value from the deferral could reach $1.6 billion,
       excluding the direct remediation costs.455

      Taking into account both the direct remediation costs and the lost value from
       product suspensions and deferrals, Akorn’s value fell from $5.236 billion at the time
       of the Merger to $3.307 billion, representing a decline of 37%.456

       452
             JX 1152 at 17.
       453
             Id. at 18.
       454
             Id. at 19; see Henriksson Tr. 979, 1009.
       455
             JX 1152 at 25.
       456
             Id.

                                               97
The estimates were developed by a team of Fresenius personnel that included senior

executives and staff who had first-hand experience based on Fresenius’s efforts to

remediate data integrity issues at one of its sites in India.457

       Although Sturm and his colleagues were prepared to terminate the Merger

Agreement, they recommended that Fresenius offer Akorn the choice of extending the

outside date for the Merger to the end of August to facilitate further investigation into the

data integrity issues, including the investigations by NSF that Akorn had pledged to the

FDA to conduct. In a letter dated April 18, 2018, Paul Weiss surfaced for the first time and

communicated this offer. The letter asserted that Akorn had breached various provisions in

the Merger Agreement, including its representations regarding regulatory compliance. The

letter noted that “[i]f Akorn believes Fresenius is mistaken in its assessment of the facts

and that Akorn’s own investigation, when complete, would support its position, then

extending the Outside Date could be advantageous to both parties.”458 Akorn declined.

       457
           See Henriksson Tr. 1005, 1022–23. Given that litigation was on the horizon,
Fresenius also consulted with lawyers from Paul Weiss. Akorn has stressed this point and
observes that Fresenius initially designated the analysis as privileged. See Henriksson Tr.
1002. The fact is that both sides involved lawyers extensively and labeled many internal
documents and analyses privileged. The major difference is that Fresenius used three firms:
Allen & Overy for deal work, Sidley for regulatory work, and Paul Weiss for litigation.
Akorn only used Cravath. It is therefore easier for Akorn to track when Paul Weiss became
involved. I suspect that Akorn took similar steps to consult with Cravath after its disastrous
post-deal performance. Akorn used Cravath litigators to address the whistleblower letters
and had other Cravath litigators involved by February 2018. See JX 986; JX 1337 at ‘405.
I see no reason to criticize either side for consulting with top-flight law firms about the
implications of unfolding events for a high-profile deal.
       458
             JX 1153 at ‘553.

                                               98
       On April 22, 2018, Fresenius gave notice that it was terminating the Merger

Agreement. Fresenius cited its right to terminate under Section 7.01(c)(i) based on (i)

Akorn’s breaches of representations and warranties, including those related to regulatory

compliance, and (ii) Akorn’s breaches of its covenants, including its obligation to operate

in the ordinary course of business. Fresenius also cited its right not to close under Section

6.02(c) because Akorn had suffered a General MAE, which would give rise to a right to

terminate two days later, on April 24, 2018, when the initial Outside Date in the Merger

Agreement was reached.459

S.     This Litigation

       On April 23, 2018, Akorn filed this action. Fresenius answered and asserted

counterclaims. Akorn sought an expedited trial on or before July 24, 2018.460 Over

Fresenius’s opposition, I granted the request and scheduled trial for July 9–13.461

       While the litigation was ongoing, factual developments continued apace. On May

2, 2018, Akorn announced its financial results for the first quarter of 2018. Akorn reported

revenue of $184 million, representing a year-over-year decline of 27%. Akorn reported

operating income of negative $25 million, representing a year-over-year decline of 134%.

       459
             JX 1165.
       460
             Dkt. 22.
       461
             Dkt. 171.

                                             99
Akorn reported a loss of $0.23 per share, a year-over-year decline of 170%. Akorn reported

EBITDA of negative $6 million and Adjusted EBITDA of $24 million.462

       While the parties litigated, NSF moved forward with its investigation. The original

plan consisted of (i) conducting data integrity audits at six facilities (but not Somerset), (ii)

reviewing both the ANDAs where Burkert had some involvement and the ANDAs

generated at Somerset since 2006, (iii) examining any lab notebooks to which Burkert had

access and sampling other notebooks at Somerset, and (iv) reviewing sample

manufacturing data for thirty-two products manufactured at Somerset.463

       By the time Fresenius issued its termination notice, NSF had only delivered its data

integrity audit for one site (Vernon Hills). By the time of trial, NSF had completed its audits

at four of the five other sites. NSF’s inspection of the Decatur facility was postponed due

to an FDA inspection that began on April 9, 2018, lasted through trial, and eventually ended

on July 23. As noted, NSF did not plan to conduct a data integrity audit at Somerset.

       The following table identifies the facilities reports that NSF had conducted by the

time of trial, along with the number and types of findings made by NSF.

       462
             JX 1250 ¶ 19.
       463
             See JX 1078 at ‘886.

                                              100
 Site                 Date of Report        Major Findings   Minor Findings      Exhibit
 Vernon Hills         April 13, 2018               7               7            JX 1141
 Amityville           April 29, 2018               9               3            JX 1178
 Lake Forest           May 7, 2018                 2               7            JX 1189
 Cranbury              May 9, 2018                10               8            JX 1190
 Hettlingen           May 10, 2018                 6               9            JX 1192

As the table shows, NSF found major data integrity deficiencies at each site.

       Importantly, NSF’s definition of a major deficiency resembled Cerulean’s definition

of a critical deficiency. For NSF, a major finding

       documents a systematic failure of a regulatory requirement, correlates to
       product defects, and/or represents uncorrected repeat findings cited by FDA
       in previous inspections. These findings would appear on a form FDA 483
       and may provide the basis for further enforcement action.464

For NSF, a critical finding was more extreme: a “condition which has produced or leads to

a significant risk of producing an unsafe or hazardous product which may be harmful and

puts the consumer at risk of serious injury or death.”465 Minor findings were regulatory

violations that fell short of these standards. A minor finding “would most likely appear on

a Form FDA 483, but would not be a basis for further enforcement action unless it

represents a repeated finding . . . .”466

       On May 16, 2018, part way through its investigation of Decatur, the FDA issued a

twenty-four page Form 483 for that facility which identified thirteen categories of

       464
             JX 1141 at 7.
       465
             Id.
       466
             Id.

                                              101
deficiencies.467 Two of the categories addressed the types of data integrity problems that

Fresenius had cited: one identified a “[f]ailure to maintain complete data derived from all

testing and to ensure compliance with established specifications and standards pertaining

to data retention and management;”468 another identified a failure “to thoroughly

investigate any unexplained discrepancy or failure of a batch or any of its components to

meet any of its specifications, whether or not the batch has already been distributed.” 469

The former category included five specific deficiencies; the latter included ten specific

deficiencies, including “[r]epeat observation[s] from 11/2004, 9/2006, 8/2007, 6/2009,

5/2013, 6/2016.”470 This was not the only instance of repeat observations that the Form 483

raised. Another category of deficiencies identified “[r]epeat observations from 11/2004,

9/2006, 8/2007, 6/2009 & 2017.”471 Still another identified a “[r]epeat observation from

11/2004.”472 Based on the Form 483, Wasserkrug testified at trial to her belief that the FDA

had placed Decatur on OAI status and that Akorn will not receive any product approvals

       467
             JX 1198.
       468
             Id. at ‘973.
       469
             Id. at ‘975.
       470
             Id. at ‘980.
       471
             Id. at ‘966.
       472
             Id. at ‘969.

                                            102
until Decatur is cleared.473 The two prior times when an Akorn facility was on OAI status,

it took six months to a year to clear the facility. 474

       In May 2018, while the FDA inspection at Decatur was ongoing, the FDA approved

two of Akorn’s pending ANDAs.475 Akorn has cited these approvals to suggest that the

FDA had no concerns about Akorn’s facilities, but the more persuasive interpretation is

that the ANDAs had been in the FDA pipeline for some time and were ready for approval

when Akorn’s issues arose. Consistent with the latter interpretation, the FDA subsequently

declined to approve two other ANDAs, citing quality issues at Decatur.476 Akorn also has

received two CRLs for products that would be manufactured at Decatur.477

       In addition to the data integrity audits, NSF reviewed ANDAs from the Somerset

facility. NSF was only able to review two ANDAs before Fresenius terminated the Merger

Agreement. In the first, NSF found thirty-six major deficiencies and twenty-nine minor

deficiencies.478 In the second, NSF found eleven major deficiencies and three minor

deficiencies.479 After receiving the reports, the most Cravath felt it could say to Akorn’s

       473
             Wasserkrug Tr. 72–73, 77.
       474
             Id. at 73–74.
       475
             See JX 1187; JX 1188.
       476
             JX 1223; JX 1226.
       477
             Wasserkrug Tr. 71–72.
       478
             See JX 1156 (Azelastine Hydrochloride Opthalmic Solution (0.05%)).
       479
             See JX 1157 (Moxifloxacin HCI Ophthalmic Solution, 0.5%).

                                               103
directors was that they did not believe that the approval of either product was in “immediate

jeopardy,” but that the process was still unfolding.480 At the time, NSF still planned on

reviewing another twenty-eight ANDAs.481 Notably, Akorn was not planning to address

the broader universe of products that Silverberg oversaw, precisely because it was

everything the Company had produced during the preceding decade.

       By the time of trial, NSF had reviewed another six ANDAs. The following table

summarizes the results:

                     Product                   Critical Major Minor              Exhibit
    Cyclopentolate Hydrochloride Ophthalmic       1      34     8               JX 1185
                     Solution
     Gentamicin Sulfate Opthalmic Ointment        0      30     5               JX 1196
     Neomycin and Polymxin B Sulfate and          0      17    15               JX 1201
   Bacitracin Zinc Ophthalmic Ointment Sterile
                   (Veterinary)
    Epinastine HCI Opthalmic Solution 0.5%        0      22    19               JX 1204
      Olopatadine Hydrochloride Opthalmic         0      26    18               JX 1221
                     Solution
         Olopatadine Ophtalmic Solution           1      34    23               JX 1224

The two critical deficiencies involved data fabrication. One involved an employee from

Vernon Hills who engaged in a deliberate act to force a passing result for cyclopentolate.482

The other involved an employee from Cranbury who engaged in the practice of testing into

       480
             JX 1159 at ‘389.
       481
             See JX 1177 at ‘229–31.
       482
             Wasserkrug Tr. 176–77.

                                            104
compliance for olopatadine.483 NSF’s findings meant that the total number of individuals

at Akorn involved in data fabrication had increased to four: Silverberg, Burkert, and the

two additional employees. It also meant that the number of ANDAs that Akorn had

submitted to the FDA based on false or misleading data had risen to three: azithromycin,

cyclopentolate, and olopatadine.484 NSF expanded its investigation based on its findings.

       During its investigation, NSF also found extensive evidence of Akorn employees

performing trial injections, a prohibited practice.485 In response to these findings, on April

5, 2018, Stuart expressed concern about the risk that the FDA would impose the AIP:

       [G]iven how prevalent this bad practice was, the FDA is likely to have a very
       negative reaction to our report. . . . Potential FDA reactions include (1)
       suspension of review of all pending submissions; (2) mandating review by a
       third party of product released for the market; and—the worst—(3) “AIP”
       (Application Integrity Policy), which requires a third-party monitor to
       oversee all activity at Akorn’s sites.486

During a conference call the following day, Akorn’s regulatory counsel expressed concern

that “[i]f audit reports make it look like there are similar issues across the company, FDA

might see need to get whole company under decree.”487 At trial, Wasserkrug testified that

       483
             Wasserkrug Tr. 179.
       484
          Id. at 179–80. In addition to inspecting facilities and auditing ANDAs, NSF
conducted employee interviews. The one interview memorandum in the record, dated April
16, 2018, provides striking insight into the absence of a well-functioning quality system at
Akorn and the lack of a top-down culture of compliance. See JX 1149.
       485
             Wasserkrug Tr. 181–85.
       486
             JX 1127.

         JX 1496 at ‘055; see id. at ‘056 (“Sheer number of issues across all sites audited
       487

by NSF . . . could raise concern.”); JX 1493 (“[A]s other audit reports roll out,” it may

                                             105
Akorn still had not yet been able to resolve fifty instances of trial injections involving

approximately twenty analysts and multiple products.488

       Through the remediation process that Akorn initiated after its meeting with the

FDA, Akorn identified so many open deficiencies from past internal audits and received

so many new deficiencies flagged by NSF that it retained PricewaterhouseCoopers LLP as

a program manager to keep track of them. PwC’s task was to organize all of the findings

so that they could be evaluated and addressed.489 Before April 2018, no one had ever tried

to create and maintain a master list of deficiencies at Akorn.490

       At trial, Akorn asserted that fully remediating its data integrity problems would take

approximately three years.491 Akorn estimated the cost at $44 million.492 The estimate

assumed that Akorn would not uncover any additional problems with data, that no other

ANDAs would be withdrawn, that no products would be recalled, and that there would not

be any effect on Akorn’s pipeline.493

“look[] like multiple sites are having similar issues” and the FDA “may see it as the whole
corporation/multiple sites under decree.”).
       488
             Wasserkrug Tr. 63, 87, 182–83.
       489
             Id. at 67–68, 94–95.
       490
             Id. at 116–17.
       491
             Id. at 69.
       492
         JX 1318.003. Wasserkrug read the $44 million figure of the page, but she did not
have any personal knowledge about how it was derived. Wasserkrug Tr. 95, 115–16.
       493
             See Wasserkrug Tr. 69, 77–78.

                                              106
T.      Post-Trial Events

        On July 23, 2018, the FDA initiated an inspection at Akorn’s Somerset facility.

Between July 23 and August 30, 2018, the FDA spent a total of twenty-one days inspecting

the site.494

        By letter dated August 3, 2018, Akorn reported to the FDA about NSF’s expanded

investigation into the work performed by the miscreant Vernon Hills employee. As part of

this work, NSF found an additional critical deficiency involving fabricated data, this time

for palonosetron hydrochloride.495 NSF also identified major deficiencies related to data

falsification involving six other products.496 NSF found that the fabrication of data by the

Vernon Hills employee was “not isolated but more systemic in nature” and “call[ed] into

question the reliability of data” he had generated.497 As a result, NSF concluded that “a

further comprehensive assessment of [his] work and the work produced by the Vernon

Hills facility in support of GMP activities” was necessary to determine “potential impact

to marketed product, regulatory findings, and submission supporting data.” 498 NSF also

        494
              Dkts. 199–200.
        495
              See Dkt. 191, Ex. A at ‘826.
        496
              See Dkt. 191, Ex. B at ‘098.
        497
              Id. at ‘098.
        498
              Id.

                                             107
determined that it would need to sample “all GMP testing . . . conducted by the Cranbury

R&D organization, since its relocation [from Somerset] in October, 2016.”499

       By letter dated August 9, 2018, the FDA sent Akorn a letter formally classifying the

Decatur facility as OAI. 500 The August 9 letter stated:

       Based on [the FDA’s] inspection, this facility is considered to be in an
       unacceptable state of compliance with regards to current good manufacturing
       practice (CGMP). The facility may be subject to a CGMP regulatory or
       enforcement action based on this inspection, and FDA may withhold
       approval of any pending applications or supplements in which this facility is
       listed.501

The letter thus not only informed Akorn of Decatur’s OIA status, but also noted the

possibility of “regulatory or enforcement action.”

       On August 30, 2018, the FDA issued a twenty-two page Form 483 for the Somerset

site that detailed serious regulatory deficiencies, many of which echoed the evidence

presented at trial.502 The violations included the following:

      Akorn distributed batches of adulterated sterile eye drops that failed four separate
       stability tests. Akorn could not provide data for the batches at the beginning of the
       FDA’s inspection, and the inspectors later witnessed Akorn employees
       retrospectively modifying the relevant laboratory notebooks.503

       499
             See Dkt. 191, Ex. C at ‘047.
       500
            Dkt. 191, Ex. D (“FDA has determined that the inspection classification of this
facility is ‘official action indicated’ (‘OAI’).”).
       501
             Dkt. 191, Ex. D.
       502
             Dkt. 204, Ex. A.
       503
             Id. at ‘516–17.

                                            108
      Akorn conducted trial injections as a “widespread practice” dating back to 2015,
       and “[n]o corrective measures to prevent this practice were implemented until” May
       2018. Akorn’s prior investigation was inadequate and, as a result, “there is limited
       assurance in the reliability of data submitted to the Agency and generated for
       commercial batches.”504

      Akorn failed to exercise “[a]ppropriate controls . . . over computers or related
       systems to assure that changes in master production and control records are
       instituted only by authorized personnel.”505

      Akorn “invalidated” negative test results in more than 70% of cases between
       January 2017 and July 2017 “without adequately supporting [the reasons for
       invalidation] with scientific evidence,” and the investigations into these failing
       results did not “determine why the [issues] . . . kept on recurring nor were there
       effective CAPAs implemented to minimize these incidents going forward.”506

      Akorn delayed investigating quality issues for months “without adequate
       justification.”507

      Akorn failed to review laboratory notebook testing data for months, and an Akorn
       employee informed the FDA that “due to personnel resource issue[s], they could not
       review the notebooks in a timely manner.”508

       By letter dated September 3, 2018, Akorn reported to the court that on August 22,

during the later stages of the FDA’s investigation, the database for a high accuracy liquid

particle counter had been deleted along with the local backup file and the associated

       504
             Id. at ‘518–19.
       505
             Id. at ‘527.
       506
             Id. at ‘518–20.
       507
             Id. at ‘525–26.
       508
             Id. at ‘526.

                                           109
electronic security logs.509 These databases contained all of Somerset’s data for the relevant

testing, which is designed to ensure that sterile intravenous products do not contain

excessive amounts of undisclosed solids. Akorn’s preliminary investigation suggested that

the files were deleted intentionally using an electronic shredding utility. 510 Given the timing

of the deletion, it is reasonable to infer that the perpetrator may have been trying to hide

information from the FDA, or from personnel who would follow up on the deficiencies

that the FDA identified in its Form 483.

       By letter dated September 21, 2018, Akorn submitted its response to the Somerset

Form 483.511 The response is lengthy, spanning seventy-three pages, and makes expansive

claims about Akorn’s commitment to quality and the steps it has taken or will take to

address the problems that the FDA identified. In light of the record presented at trial,

including my evaluation of the credibility of Akorn’s witnesses, it is difficult to put much

faith in Akorn’s claims about its commitment to quality. Having seen the divergence

between Akorn’s representations to the FDA during the March 2018 meeting and what

Akorn’s internal documents and witness testimony showed, it is equally difficult to have

confidence that Akorn is being fully transparent in describing the corrective actions that it

       509
             Dkt. 199.
       510
             Dkt. 201.
       511
             See Dkt. 234, Exs. A & B.

                                             110
has taken or will take. It would require an additional round of discovery and another merits

hearing to assess the accuracy of Akorn’s claims.

       Even taking Akorn’s response at face value, the document evidences the deep and

pervasive nature of Akorn’s quality problems are at Akorn. In an effort to respond to the

FDA’s concerns, Akorn took a barrage of actions, including:

      Stripping the Head of Quality at Somerset of daily oversight responsibilities and
       assigning those duties to PwC;

      Stripping the Quality Control Laboratory Director at Somerset of daily oversight
       responsibilities responsibility and assigning those duties to NSF;

      Engaging NSF to provide supplemental oversight of the daily operation of the
       quality Control laboratory;

      Engaging NSF personnel to act as mentors for the Somerset Quality Control
       laboratory supervisory team;

      Engaging NSF to oversee Akorn’s process for reviewing its laboratory data and to
       provide mentoring for Akorn’s staff;

      Committing to retrain and certify all of its quality control laboratory personal, all
       data reviewers, and all investigators;

      Committing to review and revise all of its laboratory procedures including for
       titration, chromatography, and notebook handling;

      Committing to review all of its analytical testing methods;

      Recalling its Azelastine HCl Ophthalmic Solution and Gentamicin Ophthalmic
       Solution based on confirmed stability failures;

      Recalling its Ciprofloxacin Ophthalmic Solution based on concerns expressed by
       the FDA;

      Committing to investigate the use of trial injections at all Akorn sites;

      Committing to re-investigate all Out-of-Specification results generated in the past
       three years at all of its sites;

                                            111
      Committing to address backlogs in reviewing and approving data in notebooks and
       procedures for handling notebook retention and storage;

      Committing to review user level access across all laboratory and manufacturing
       equipment;

      Committing to review each piece of Somerset laboratory equipment and the data
       associated with the equipment;

      Committing to conduct a complete review of all unsigned data and to investigate
       any instances that fail to meet acceptance criteria; and

      Recognizing that all of its sites would need to be assessed based on the issues
       identified at Somerset.

After hearing the evidence at trial, I did not have any confidence that Akorn would be able

to support its data if the FDA called upon Akorn to do so. Based on developments since

trial, Akorn’s situation has grown even worse.

                            II.      LEGAL ANALYSIS

       The disputes in this case are primarily contractual. Fresenius contends that it

terminated the Merger Agreement in accordance with its terms. Akorn contends that

Fresenius did not validly terminate the Merger Agreement and seeks an order of specific

performance to compel Fresenius to close the Merger. Both parties are highly sophisticated

and crafted the Merger Agreement with the assistance of expert counsel. The pertinent

provisions are dense and complex.

       The analysis turns on three conditions that Akorn must meet before Fresenius is

obligated to close the Merger:

 Under Section 6.02(a)(ii), Akorn’s representations must be true and correct as of the
  Closing Date, except “where the failure to be true and correct would not, individually

                                           112
   or in the aggregate, reasonably be expected to have a Material Adverse Effect” (the
   “Bring-Down Condition”).512

 Under Section 6.02(b), Akorn must have “complied with or performed in all material
  respects its obligations required to be complied with or performed by it at or prior to
  the Effective Time” (the “Covenant Compliance Condition”).513

 Under Section 6.02(c), Akorn must not have suffered a Material Adverse Effect (the
  “General MAE Condition”).514

The failure of either the Bring-Down Condition or the Covenant Compliance Condition

       512
           JX 1 § 6.02(a)(ii). See generally Lou R. Kling & Eileen T. Nugent, Negotiated
Acquisitions of Companies, Subsidiaries and Divisions § 1.05[2], at 1-41 (2018 ed.)
(describing “the critical ‘bringdown’ condition”); id. § 1.05[4], at 1-41 (“[O]ne critical
condition almost always found is that the other party’s representations and warranties be
true at closing. If this is not the case, the party need not close.”) (footnote omitted); id. §
14.02, at 14-9 (“From a business point of view, the condition that the other party’s
representations and warranties be true and correct at closing is generally the most
significant condition for Buyers.”).
       513
           JX 1 § 6.02(b). See generally Kling & Nugent, supra, § 1.05[3], at 1-41
(explaining that the actions that parties commit to take in a transaction agreement are
described as covenants and identifying three general categories); id. § 14.02[7], at 14-16
to -17 (discussing customary condition requiring “that the parties have performed and
complied with all of their obligations and agreements in the acquisition agreement required
to be performed and complied with prior to the closing”); Simon M. Lorne & Joy Marlene
Bryan, Acquisitions & Mergers: Negotiated and Contested Transactions § 3:59 (2018 ed.)
(“The principal conditions to a closing under an acquisition agreement usually include . . .
confirming compliance with all covenants that have been made.”).
       514
           In the Merger Agreement, the General MAE Condition appears as a formal
condition to closing. Sometimes, a seller may represent that no General MAE has occurred.
When that representation has been made, the bring-down condition also operates as a
General MAE Condition. See Kling & Nugent, supra, § 11.04[9], at 11-57 to -58
(discussing forms of representation); In re IBP, Inc. S’holders Litig., 789 A.2d 14, 42–43
(Del. Ch. 2001) (Strine, V.C.) (analyzing seller’s representation that “since the Balance
Sheet Date,” there had not been “any event, occurrence or development of a state of
circumstances or facts which has had or reasonably could be expected to have a Material
Adverse Effect”).

                                             113
gives Fresenius a right to terminate the Merger Agreement, but only if (i) the breach that

would give rise to the failure of the condition is incapable of being cured by the Outside

Date and (ii) Fresenius is not “then in material breach of any of its representations,

warranties, covenants, or agreements.”515 The failure of the General MAE Condition does

not give Fresenius an independent right to terminate the Merger Agreement, but it does

give Fresenius the right to refuse to close.516

       To establish a failure of the Bring-Down Condition, Fresenius relies on Section 3.18

of the Merger Agreement, where (in overly simplistic terms) Akorn represented that it was

in full compliance with all of its regulatory obligations (the “Regulatory Compliance

Representations”).517 To establish a failure of the Covenant Compliance Condition,

Fresenius relies on Akorn’s obligation to “use its . . . commercially reasonable efforts to

carry on its business in all material respects in the ordinary course of business” (the

“Ordinary Course Covenant”).518

       515
             JX 1 § 7.01(c)(i).
       516
           With the passage of time, however, the failure to close ripens into a termination
right, because under Section 7.01(b)(i) of the Merger Agreement, either side can terminate
once the Outside Date has passed, assuming that the party exercising the termination right
has not itself breached the Merger Agreement in a manner that was a principal cause of the
Merger not closing by the Outside Date. Fresenius terminated the Merger Agreement
before the Outside Date.
       517
             JX 1 § 3.18.
       518
           Id. § 5.01(a). Fresenius also contends that Akorn breached its obligation to
provide Fresenius with “reasonable access . . . to the Company’s officers, employees,
agents, properties, books, Contacts and records.” Id. § 5.05. This decision does not reach
the alleged breach of that covenant.

                                             114
       To establish a failure of the Covenant Compliance Condition, Akorn relies on each

party’s agreement to “cooperate with the other parties and use . . . their respective

reasonable best efforts . . . to cause the conditions to Closing to be satisfied as promptly as

reasonably practicable and to consummate” the Merger (the “Reasonable Best Efforts

Covenant”).519 Akorn also relies on Fresenius’s specific commitment to “take all actions

necessary” to secure antitrust clearance, which the Merger Agreement states shall require

efforts that “shall be unconditional and shall not be qualified in any manner.”520 This level

of commitment is generally called a “Hell-or-High-Water Covenant.”

       Like many transaction agreements, the Merger Agreement deploys the concept of a

Material Adverse Effect in multiple locations, including (i) in the General MAE Condition,

(ii) in various representations for purposes of evaluating any inaccuracies in those

representations at the time of signing, and (iii) in the Bring-Down Condition for purposes

of evaluating any inaccuracies in Akorn’s representations when determining whether

Fresenius is obligated to close.521 The General MAE Condition is not tied to a particular

representation about a particular issue, leading this decision to describe the resulting event

       519
             Id. § 5.03(a).
       520
             Id. § 5.03(c).
       521
          See Kenneth A. Adams, A Legal-Usage Analysis of “Material Adverse Change”
Provisions, 10 Fordham J. Corp. & Fin. L. 9, 10–11 (2004) [hereinafter, Legal-Usage
Analysis] (“MAC provisions are used in different parts of a contract. They occur most
commonly in representations” but can “also occur in closing conditions.”). In their
discussion of material adverse change provisions, Kling and Nugent cite this article with
approval. See, e.g., Kling & Nugent, supra, § 11.04[9], at 11-59 n.100.

                                             115
as a “General MAE.” The Bring-Down Condition examines the inaccuracy of specific

representations and uses as its measuring stick whether the deviation between the as-

represented condition and the actual condition would reasonably be expected to constitute

a Material Adverse Effect. The critical representations for this case are the Regulatory

Compliance Representations, and this decision refers to a sufficient inaccuracy in those

representations as a “Regulatory MAE.”522

      Working through the pertinent provisions requires determining whether Akorn has

suffered either a General MAE or a Regulatory MAE, whether Akorn complied in all

material respects with the Ordinary Course Covenant, whether Akorn could cure, and

whether Fresenius itself was in material breach of the Reasonable Best Efforts Covenant

or the Hell-or-High-Water Covenant. This decision makes the following findings:

 The sudden and sustained drop in Akorn’s business performance constituted a General
  MAE.

 Akorn’s Regulatory Compliance Representations were not true and correct, and the
  deviation between Akorn’s as-represented condition and its actual condition would
  reasonably be expected to result in a Regulatory MAE.

 Akorn materially breached the Ordinary Course Covenant.

      522
           Commentators have used different terms for the two types of MAEs. Adams
refers to an “absolute MAC” and a “modifying MAC.” Legal-Usage Analysis, supra, at
10–11, 15–17, 50. In its annotated model merger agreement, the Mergers and Acquisitions
Committee of the American Bar Association distinguishes between a “MAC condition,”
and a “back-door MAC.” See ABA Mergers and Acquisitions Committee, Model Merger
Agreement for the Acquisition of a Public Company 233, 243–44 (2011) [hereinafter,
Model Merger Agreement].

                                            116
 None of Akorn’s breaches could be cured by the Outside Date, which remained April
  24, 2018.

 Fresenius did not breach the Reasonable Best Efforts Covenant.

 Fresenius breached the Hell-or-High-Water Covenant, but the breach was not material.

Based on these findings, Fresenius validly terminated the Merger Agreement under Section

7.01(c)(i) because of (i) a non-curable failure of the Bring-Down Condition and (ii) a non-

curable failure of the Covenant Compliance Condition. Fresenius could validly exercise its

termination rights because it was not in material breach of its obligations. Regardless,

Akorn has suffered a General MAE, so Fresenius cannot be forced to close.

A.    The Failure Of The General MAE Condition

      From the standpoint of contract interpretation, the most straightforward issue is

whether Akorn suffered a General MAE. Starting with this issue is also helpful because

much of the commentary on MAE clauses has focused on General MAEs. Because

Fresenius seeks to establish a General MAE to excuse its performance under the Merger

Agreement, Fresenius bore the burden of proving that a General MAE had occurred.523

This decision concludes that Akorn suffered a General MAE.

      523
          See Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 739 (Del.
Ch. 2008) (“[A]bsent clear language to the contrary, the burden of proof with respect to a
material adverse effect rests on the party seeking to excuse its performance under the
contract.”); Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027, at *35 (Del. Ch. Apr.
29, 2005) (“[T]he expectation of the parties, as reflected in the Merger Agreement and as
informed by the case law, was that the burden of demonstrating that the Beverly Hills
Litigation would have (or would not reasonably be expected to have [sic]) an MAE falls
on Holly [the buyer who was asserting breach].”); IBP, 789 A.2d at 53 (“Under both New

                                           117
       In any M&A transaction, a significant deterioration in the selling company’s

business between signing and closing may threaten the fundamentals of the deal. “Merger

agreements typically address this problem through complex and highly-negotiated

‘material adverse change’ or ‘MAC’ clauses, which provide that, if a party has suffered a

MAC within the meaning of the agreement, the counterparty can costlessly cancel the

deal.”524

       Despite the attention that contracting parties give to these provisions, MAE clauses

York and Delaware law, a defendant seeking to avoid performance of a contract because
of the plaintiff’s breach of warranty must assert that breach as an affirmative defense.”).
       524
           Robert T. Miller, The Economics of Deal Risk: Allocating Risk Through MAC
Clauses in Business Combination Agreements, 50 Wm. & Mary L. Rev. 2007, 2012 (2009)
(footnote omitted); accord Andrew A. Schwartz, A “Standard Clause Analysis” of the
Frustration Doctrine and the Material Adverse Change Clause, 57 UCLA L. Rev. 789,
820 (2010) (“[T]he MAC clause allows the acquirer to costlessly avoid closing the deal if
the target’s business suffers a sufficiently adverse change during the executory period.”);
see Jeffrey Manns & Robert Anderson IV, The Merger Agreement Myth, 98 Cornell L.
Rev. 1143, 1153 (2013) (“The MAC/MAE Clause gives teeth to the closing conditions in
specifying what type of events would entitle the acquiring company to call the deal off if
events occur between signing and closing that make the deal less advantageous than
expected.”).

       “Although the phrase ‘material adverse effect’ (MAE) is more commonly used in
merger agreements, MAC and MAE are generally understood to be synonymous.” Miller,
supra, at 2012 n.2; see Ronald J. Gilson & Alan Schwartz, Understanding MACs: Moral
Hazard in Acquisitions, 21 J.L. Econ. & Org. 330, 331 (2005) (characterizing an MAE
clause as the “equivalent” of a MAC clause). This decision uses the terms interchangeably.
That said, one commentator has argued (in my view, persuasively) that the “material
adverse change” formulation facilitates greater drafting clarity. See Legal-Usage Analysis,
supra, at 17–20.

                                           118
typically do not define what is “material.”525 Commentators have argued that parties find

it efficient to leave the term undefined because the resulting uncertainty generates

productive opportunities for renegotiation.526 Parties also risk creating more problems

       525
           See Frontier Oil, 2005 WL 1039027, at *33 (“It would be neither original nor
perceptive to observe that defining a ‘Material Adverse Effect’ as a ‘material adverse
effect’ is not especially helpful.”); Y. Carson Zhou, Essay, Material Adverse Effects as
Buyer–Friendly Standard, 91 N.Y.U. L. Rev. Online 171, 173 (2016) (noting that in the
typical MAE provision, the core concept of materiality is “left undefined”),
http://www.nyulawreview.org/sites/default/files/NYULawReviewOnline-91-Zhou.pdf;
Steven M. Davidoff & Kristen Baiardi, Accredited Home Lenders v. Lone Star Funds: A
MAC Case Study 17 (Wayne State Univ. Law Sch. Legal Studies Research Paper Series,
Paper No. 08-16, 2008), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1092115
(“MAC clauses are typically defined in qualitative terms and do not describe a MAC in
quantitative terms.”); Albert Choi & George Triantis, Strategic Vagueness in Contract
Design: The Case of Corporate Acquisitions, 119 Yale L.J. 848, 854 (2010) (“[T]he typical
MAC provision is not quantitative and remains remarkably vague.”); Schwartz, supra, at
826 (“A few MAC clauses include a quantitative definition of materiality, but the
overwhelming majority offer no definition for the key term ‘material.’”) (footnote
omitted); Kenneth A. Adams, A Manual of Style for Contract Drafting 229 (4th ed. 2017)
[hereinafter, Contract Drafting] (“[Q]uantitative guidelines are little used.”). One
commentator sees no reason to criticize the MAE definition for its self-referential quality.
See Legal-Usage Analysis, supra, at 22 (“It has been suggested that there is some
circularity or tautology involved in using the phrase material adverse change in the
definition of MAC. . . . [I]n contracts it is routine, and entirely appropriate, for a definition
to include the term being defined.”) (footnotes omitted); Contract Drafting, supra, at 169
(“Dictionaries shouldn’t use in a definition the term being defined, as that constitutes a
form of circular definition. . . . In a contract, a defined term simply serves as a convenient
substitute for the definition, and only for that contract. So repeating a contract defined term
in the definition is unobjectionable.”).
       526
           See Choi & Triantis, supra, at 888–892 (arguing that vague MAE clauses are
efficient partly because uncertainty facilitates renegotiation); Eric L. Talley, On
Uncertainty, Ambiguity, and Contractual Conditions, 34 Del. J. Corp. L. 755, 788 (2009)
(“A number of practitioners . . . suggested that, in addition to concerns about uncertainty,
one of the key reasons for a MAC/MAE provision is to provide a backdrop for possible
deal restructuring should market conditions change.”); ABA Mergers and Acquisitions
Committee, Model Stock Purchase Agreement with Commentary 268 (2d ed. 2010)
[hereinafter, Model Stock Purchase Agreement] (explaining that a buyer may prefer a price

                                              119
when they attempt to include specific quantitative thresholds, both during the

negotiations527 and for purposes of subsequent litigation.528 “What constitutes an MAE,

then, is a question that arises only when the clause is invoked and must be answered by the

presiding court.”529

renegotiation rather than engaging in costly litigation over a “subjective” and “vague”
MAE clause); see also Davidoff & Baiardi, supra, at 19 (reasoning that if a buyer credibly
asserts an MAE, then both parties have incentives to renegotiate to a lower price to avoid
an all-or-nothing litigation outcome); Katherine Ashton et al., MAC Clauses in the U.K.
and U.S.: Much Ado About Nothing?, The M&A Lawyer (LegalWorks), Mar. 2014 (“[T]he
lack of clear standards for determining whether a material adverse change has occurred
may inure to [the buyer’s] benefit . . . as the ambiguity might allow the buyer to use the
threat of litigation concerning the MAC clause . . . to pressure the seller to renegotiate the
deal.”).
       527
           See Claire A. Hill, Bargaining in the Shadow of the Lawsuit: A Social Norms
Theory of Incomplete Contracts, 34 Del. J. Corp. L. 191, 198 (2010) (“[A]chieving clarity
[in an MAE clause] may simply be exceedingly difficult: as a practical, and perhaps,
theoretical, matter, defining ex ante such a change in a manner that commands assent by
the parties and applies cleanly to a significant number of circumstances may be
impossible.”); Kling & Nugent, supra, § 11.04[9], at 11-66.2 (“The problem is that it is
very difficult in most cases for the parties to reach agreement on a particular percentage or
dollar decrease in sales, earnings or net worth.”); Contract Drafting, supra, at 228
(“[E]stablishing one or more numerical thresholds for materiality can complicate the
negotiation process.”). That said, achieving agreement on a specific metric is not
impossible. See, e.g., Nip v. Checkpoint Sys, Inc., 154 S.W.3d 767, 769–70 (Tex. App.
2004) (enforcing MAE clause that set monetary threshold for materiality; affirming jury
determination that target suffered an MAE when its second-largest customer attempted to
cancel all orders from target’s Far East factories).
       528
           Contract Drafting, supra, at 228 (“Setting a [quantitative] threshold for all
possible [adverse changes] would seem impractical, and addressing only a limited number
could be arbitrary.”); id. (“[I]f the quantitative indicia are illustrative rather than exclusive,
adding them to the definition of MAC would increase the risk that a court wouldn’t
consider to be a MAC a change that doesn’t resemble the examples.”).
       529
          Zhou, supra, at 173; see Frontier Oil, 2005 WL 1039027, at *34 (“The parties
chose to use the term ‘Material Adverse Effect’ and it is the Court’s function to discern

                                              120
       Rather than devoting resources to defining more specific tests for materiality, the

current practice is for parties to negotiate exceptions and exclusions from exceptions that

allocate categories of MAE risk.530 “The typical MAE clause allocates general market or

industry risk to the buyer, and company-specific risks to the seller.”531 From a drafting

perspective, the MAE provision accomplishes this by placing the general risk of an MAE

on the seller, then using exceptions to reallocate specific categories of risk to the buyer.532

what they intended. . . . The notion of an MAE is imprecise and varies both with the context
of the transaction and its parties and with the words chosen by the parties.”); Choi &
Triantis, supra, at 876–77 (“The definition of material adverse event and the related
material adverse change condition leave broad interpretive discretion to the court. For
example, the definitions leave open the scope of changes that affect ‘business’ or
‘operations.’”).
       530
          See Miller, supra, at 2013 n.7 (“There is virtually universal agreement, among
both practitioners and academics, that MAC clauses allocate risk between the parties.”);
Gilson & Schwartz, supra, at 339–54 (analyzing how MAE clauses allocate risk).
       531
             Zhou, supra, at 173; accord Choi & Triantis, supra, at 867 (“The principal
purpose of carve outs from the definition of material adverse events or changes seems to
be to remove systemic or industry risk from the MAC condition, as well as risks that are
known by both parties at the time of the agreement.”). “A possible rationale” for this
allocation “is that the seller should not have to bear general and possibly undiversifiable
risk that it cannot control and the buyer would likely be subject to no matter its investment.”
Davidoff & Baiardi, supra, at 15; see also Gilson & Schwartz, supra, at 339 (arguing that
“an efficient acquisition agreement will impose endogenous risk on the seller and
exogenous risk on the buyer”). As with any general statement, exceptions exist, and
“different agreements will select different exogenous risks to shift to the counterparty, and
in stock-for-stock and cash-and-stock deals, parties may shift different exogenous risks to
each other.” Miller, supra, at 2070.
       532
          See Miller, supra, at 2073 (“Because of the drafting conventions used in MAC
Definitions—all the risks are on the party except for those shifted to the counterparty by
the MAC Exceptions—this class of risks would, strictly speaking, probably be best defined
negatively.”); Schwartz, supra, at 822 (“[T]he risk of a target MAC resulting from a
carved-out cause is allocated to the acquirer, while the risk of a target MAC resulting from

                                             121
Exclusions from the exceptions therefore return risks to the seller. A standard exclusion

from the buyer’s acceptance of general market or industry risk returns the risk to the seller

when the seller’s business is uniquely affected. To accomplish the reallocation, the relevant

exceptions are “qualified by a concept of disproportionate effect.”533 “For example, a buyer

might revise the carve-out relating to industry conditions to exclude changes that

disproportionately affect the target as compared to other companies in the industries in

which such target operates.”534

       A more nuanced analysis of the types of issues addressed by MAE provisions

reveals four categories of risk: systematic risks, indicator risks, agreement risks, and

business risks.535

 Systematic risks are “beyond the control of all parties (even though one or both parties
  may be able to take steps to cushion the effects of such risks) and . . . will generally
  affect firms beyond the parties to the transaction.”536

any other cause is allocated to the target.”). See generally Hexion, 965 A.2d at 737 (“The
plain meaning of the carve-outs found in [the MAE clause’s] proviso is to prevent certain
occurrences which would otherwise be MAE’s being found to be so.”).
       533
             Model Merger Agreement, supra, at 242.
       534
           Model Merger Agreement, supra, at 242; accord Miller, supra, at 2048; see Choi
& Triantis, supra, at 867 (“The most common carve outs remove from the MAC definition
changes in the general economic, legal, or political environment, and conditions in the
target’s industry, except to the extent that they have ‘disproportionate’ effects on the
target.”).
       535
             See generally Miller, supra, at 2071–91.
       536
         Id. at 2071; see Richard A. Brealey & Stewart C. Myers, Principles of Corporate
Finance 168 & n.22 (7th ed. 2003) (explaining that market risk, also known as systematic

                                             122
 Indicator risks signal that an MAE may have occurred. For example, a drop in the
  seller’s stock price, a credit rating downgrade, or a failure to meet a financial projection
  is not itself an adverse change, but rather evidence of such a change.537

 “Agreement risks include all risks arising from the public announcement of the merger
  agreement and the taking of actions contemplated thereunder by the parties.”538
  Agreement risks include endogenous risks related to the cost of getting from signing to
  closing, e.g., potential employee flight.539

 Business risks are those “arising from the ordinary operations of the party’s business
  (other than systematic risks), and over such risks the party itself usually has significant
  control.”540 “The most obvious” business risks are those “associated with the ordinary
  business operations of the party—the kinds of negative events that, in the ordinary
  course of operating the business, can be expected to occur from time to time, including
  those that, although known, are remote.”541

Generally speaking, the seller retains the business risk. The buyer assumes the other

risks.542

risk, “stems from the fact that there are . . . economywide perils that threaten all
businesses”).
       537
             Miller, supra, at 2072, 2082–83.
       538
             Id. at 2087.
       539
             Id.
       540
             Id. at 2073.
       541
             Id. at 2089.
       542
           See, e.g., id. at 2073 (explaining that “(a) systematic risks and agreement risks
are usually, but not always, shifted to the counterparty, (b) indicator risks are so shifted in
a significant minority of cases, and (c) business risks are virtually always assigned to the
party itself”).

                                                123
       In this case, as a condition to Fresenius’s obligation to close, Akorn must not have

suffered a General MAE. Section 6.02 of the Merger Agreement, titled “Conditions to the

Obligations of [Fresenius Kabi] and Merger Sub,” states:

       The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger
       shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if
       permissible under applicable law) on or prior to the Closing Date of the
       following conditions:

                                          *    *    *

              (c) No Material Adverse Effect. Since the date of this Agreement there
       shall not have occurred and be continuing any effect, change, event or
       occurrence that, individually or in the aggregate, has had or would reasonably
       be expected to have a Material Adverse Effect.

The effect of this condition is to place the general risk of an MAE on Akorn.

       The Merger Agreement defines the concept of a “Material Adverse Effect” in

customary albeit complex and convoluted prose. The following reproduction of the

definition adds formatting to enhance legibility:

       “Material Adverse Effect” means any effect, change, event or occurrence
       that, individually or in the aggregate

               (i) would prevent or materially delay, interfere with, impair or hinder
       the consummation of the [Merger] or the compliance by the Company with
       its obligations under this Agreement or

              (ii) has a material adverse effect on the business, results of operations
       or financial condition of the Company and its Subsidiaries, taken as a whole;

       provided, however, that none of the following, and no effect, change, event
       or occurrence arising out of, or resulting from, the following, shall constitute
       or be taken into account in determining whether a Material Adverse Effect
       has occurred, is continuing or would reasonably be expected to occur: any
       effect, change, event or occurrence

       (A) generally affecting (1) the industry in which the Company and its
       Subsidiaries operate or (2) the economy, credit or financial or capital

                                              124
markets, in the United States or elsewhere in the world, including changes in
interest or exchange rates, monetary policy or inflation, or

(B) to the extent arising out of, resulting from or attributable to

       (1) changes or prospective changes in Law or in GAAP or in
accounting standards, or any changes or prospective changes in the
interpretation or enforcement of any of the foregoing, or any changes or
prospective changes in general legal, regulatory, political or social
conditions,

        (2) the negotiation, execution, announcement or performance of this
Agreement or the consummation of the [Merger] (other than for purposes of
any representation or warranty contained in Sections 3.03(c) and 3.04),
including the impact thereof on relationships, contractual or otherwise, with
customers, suppliers, distributors, partners, employees or regulators, or any
litigation arising from allegations of breach of fiduciary duty or violation of
Law relating to this Agreement or the [Merger],

        (3) acts of war (whether or not declared), military activity, sabotage,
civil disobedience or terrorism, or any escalation or worsening of any such
acts of war (whether or not declared), military activity, sabotage, civil
disobedience or terrorism,

       (4) pandemics, earthquakes, floods, hurricanes, tornados or other
natural disasters, weather-related events, force majeure events or other
comparable events,

       (5) any action taken by the Company or its Subsidiaries that is
required by this Agreement or at [Fresenius Kabi’s] written request,

       (6) any change or prospective change in the Company’s credit ratings,

       (7) any decline in the market price, or change in trading volume, of
the shares of the Company or

       (8) any failure to meet any internal or public projections, forecasts,
guidance, estimates, milestones, budgets or internal or published financial or
operating predictions of revenue, earnings, cash flow or cash position

(it being understood that the exceptions in clauses (6), (7) and (8) shall not
prevent or otherwise affect a determination that the underlying cause of any
such change, decline or failure referred to therein (if not otherwise falling
within any of the exceptions provided by clause (A) and clauses (B)(1)
through (8) hereof) is a Material Adverse Effect);

                                      125
       provided further, however, that any effect, change, event or occurrence
       referred to in clause (A) or clauses (B)(3) or (4) may be taken into account
       in determining whether there has been, or would reasonably be expected to
       be, a Material Adverse Effect to the extent such effect, change, event or
       occurrence has a disproportionate adverse affect [sic] on the Company and
       its Subsidiaries, taken as a whole, as compared to other participants in the
       industry in which the Company and its Subsidiaries operate (in which case
       the incremental disproportionate impact or impacts may be taken into
       account in determining whether there has been, or would reasonably be
       expected to be, a Material Adverse Effect).543

As is common, the definition starts with a general statement of what constitutes an MAE.

It next carves out certain types of events that otherwise could give rise to an MAE. It then

creates two broad exceptions to the carve-outs. One is that while the carve-outs confirm

that certain evidentiary indicators of an MAE will not themselves constitute an MAE, such

as a decline in the seller’s market price or an adverse change in its credit rating, those carve-

outs do not foreclose the underlying cause of the negative events from being used to

establish an MAE, unless it otherwise falls within a different carve-out. The other is that

four of the identified carve-outs will give rise to an MAE if the effect, change, event or

occurrence has had a disproportionately adverse effect on the Company.

       Fresenius relies on subpart (ii) of the MAE definition, which establishes (subject to

the carve-outs and their exceptions) that an MAE means “any effect, change, event or

occurrence that, individually or in the aggregate that . . . (ii) has a material adverse effect

on the business, results of operations or financial condition of the Company and its

Subsidiaries, taken as a whole.” This aspect of the MAE definition adheres to the general

       543
             JX 1 at 58.

                                              126
practice and defines “Material Adverse Effect” self-referentially as something that “has a

material adverse effect.”

       The subsequent exceptions to the definition and exclusions from the exceptions

implement a standard risk allocation between buyer and seller. Through the exceptions in

subparts (A)(1) and (A)(2), Fresenius accepted the systematic risks related to Akorn’s

industry and “the economy, credit or financial or capital markets, in the United States or

elsewhere in the world, including changes in interest or exchange rates, monetary policy

or inflation.”544 Through the exceptions in subparts (B)(3) and (B)(4), Fresenius also

accepted the systematic risks related to acts of war, violence, pandemics, disasters, and

other force majeure events. Each of these allocations is subject to a disproportionate-effect

exclusion that returns the risk to Akorn to the extent that an event falling into one of these

categories disproportionately affects Akorn “as compared to other participants in the

industry.”545 Under subpart (B)(1), Fresenius also assumes the systematic risk relating to

changes in GAAP or applicable law. This exception is not subject to a disproportionate-

effect exclusion and therefore would remain with Fresenius in any event.

       The exceptions in subparts (B)(2) and (B)(5) identify agreement risks. Through

these exceptions, Fresenius assumes these risks.

       544
             Id.
       545
             Id.

                                             127
       The exceptions in subparts (B)(6), (B)(7), and (B)(8) identify indicator risks. The

MAE definition explicitly treats these risks as indicators, first by excluding them through

the exceptions, then by confirming that although these indicators would not independently

give rise to an MAE, the underlying cause of a change in the indicators could give rise to

an MAE.

       What remains is business risk, which Akorn retains. Scholars view this outcome as

economically efficient because the seller “is better placed to prevent such risks (i.e., is the

cheaper cost avoider) and has superior knowledge about the likelihood of the

materializations of such risks that cannot be prevented (i.e., is the superior risk bearer).”546

              1.      Whether The Magnitude Of The Effect Was Material

       The first step in analyzing whether a General MAE has occurred is to determine

whether the magnitude of the downward deviation in the affected company’s performance

is material: “[U]nless the court concludes that the company has suffered an MAE as defined

in the language coming before the proviso, the court need not consider the application of

       546
           Miller, supra, at 2091; see also id. (arguing that it “would be ludicrous to suggest,
for example, that the [buyer] would be a cheaper risk avoider or superior risk bearer with
respect to, say, design or manufacturing defects in the [seller’s] products or with respect to
hidden liabilities resulting from the [seller’s] operations long ago”); Gilson & Schwartz,
supra, at 357 (arguing that an MAE definition with carve-outs “allocates transaction risks
to the party that can most efficiently bear them”).

                                             128
the . . . carve-outs.”547 Whether the party asserting the existence of an MAE has adduced

sufficient evidence to carry its burden of proof is a question of fact.548

       “A buyer faces a heavy burden when it attempts to invoke a material adverse effect

clause in order to avoid its obligation to close.”549 “A short-term hiccup in earnings should

not suffice; rather the Material Adverse Effect should be material when viewed from the

longer-term perspective of a reasonable acquiror.”550 “In the absence of evidence to the

       547
             Hexion, 965 A.2d at 737.
       548
           See ChyronHego Corp. v. Wight, 2018 WL 3642132, at *9 (Del. Ch. July 31,
2018) (“At this pleading stage, the Plaintiffs have met their burden to allege a knowingly
false representation of the absence of an MAE, the proof of which is inherently fact-
intensive.”); Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *7
(Del. Ch. Nov. 19, 2013) (finding it reasonably conceivable that the defendants’ “alleged
practice of billing and shipping excess product, without applying the proper credits or
discount, could have a materially adverse effect on the financial condition of the Company
when the excess product is returned and revenues are reduced.”); H–M Wexford LLC v.
Encorp, Inc., 832 A.2d 129, 144 (Del. Ch. 2003) (“If Wexford’s allegations are accepted
as true, then it could show that there was a material adverse change in Encorp’s financial
position between the Balance Sheet Date and the date the Purchase Agreement was
executed.”); see also Pine State Creamery Co. v. Land-O-Sun Dairies, Inc., 201 F.3d 437,
1999 WL 1082539, at *3–6 (4th Cir. 1999) (per curiam) (TABLE) (holding that whether
severe operating losses over a two-month period constituted an MAE was a question of
fact for the jury where there was evidence that the business was seasonal and that
downturns were expected each fall); RUS, Inc. v. Bay Indus, Inc., 322 F. Supp. 2d 302, 314
(S.D.N.Y. 2003) (“[M]aterial issues of fact exist as to whether the need for the Phase II
investigation, when considered in light of the transaction as a whole and the nature of the
environmental issues involved, constituted a material adverse effect that caused the
representations in § 4.8 to be untrue.”).
       549
            Hexion, 965 A.2d at 738; see also Kling & Nugent, supra, § 11.04[9], at 11-69
(“[I]t is much tougher to prove the existence of a material adverse effect than clients
realize.”).
       550
             IBP, 789 A.2d at 68.

                                             129
contrary, a corporate acquirer may be assumed to be purchasing the target as part of a long-

term strategy.”551 “The important consideration therefore is whether there has been an

adverse change in the target’s business that is consequential to the company’s long-term

earnings power over a commercially reasonable period, which one would expect to be

measured in years rather than months.”552

       This, of course, is not to say that evidence of a significant decline in earnings
       by the target corporation during the period after signing but prior to the time
       appointed for closing is irrelevant. Rather, it means that for such a decline to
       constitute a material adverse effect, poor earnings results must be expected
       to persist significantly into the future.553

Put differently, the effect should “substantially threaten the overall earnings potential of

the target in a durationally-significant manner.”554

       The Hexion decision teaches that when evaluating the magnitude of a decline, a

company’s performance generally should be evaluated against its results during the same

quarter of the prior year, which minimizes the effect of seasonal fluctuations.555 The Hexion

       551
           Hexion, 965 A.2d at 738. Commentators have suggested that “the requirement of
durational significance may not apply when the buyer is a financial investor with an eye to
a short-term gain.” Choi & Triantis, supra, at 877; see Genesco, Inc. v. The Finish Line,
Inc., 2007 WL 4698244, at *19 (Tenn. Ch. Dec. 27, 2007) (finding that two quarters of bad
performance would be material to a buyer in a highly leveraged acquisition).
       552
             Hexion, 965 A.2d at 738.
       553
             Id.
       554
             IBP, 789 A.2d at 68.

         Hexion, 965 A.2d at 742 (“The proper benchmark . . . (and the analysis the court
       555

adopted here) is to examine each year and quarter and compare it to the prior year’s
equivalent period.”).

                                             130
court declined to find an MAE where the seller’s 2007 EBITDA was only 3% below its

2006 EBITDA, and where according to its management forecasts, its 2008 EBITDA would

be only 7% below its 2007 EBITDA. Even using the buyer’s more conservative forecasts,

the seller’s 2008 EBTIDA would still be only 11% below its 2007 EBITDA.556 The average

of analyst estimates for the seller’s 2009 EBITDA was only 3.6% below the seller’s

average results during the prior three years. The court noted that the buyer had

contemplated scenarios consistent with these results.557

       In their influential treatise, Lou R. Kling and Eileen T. Nugent observe that most

courts which have considered decreases in profits in the 40% or higher range found a

material adverse effect to have occurred.558 Chancellor Allen posited that a decline in

       556
             Id.
       557
             Id. at 743.
       558
           Kling & Nugent, supra, § 11.04[9], at 11-66. Both the Delaware Supreme Court
and this court regularly rely on this treatise as an authoritative source on M&A practice.
See, e.g., Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 921
& nn.32, 34 (Del. 2017) (citing Kling & Nugent as authority on post-closing
indemnification); ev3, Inc. v. Lesh, 114 A.3d 527, 530–31 & nn.6, 8 (Del. 2014) (citing
Kling and Nugent as authority on letters of intent); Martin Marietta Materials, Inc. v.
Vulcan Materials Co., 68 A.3d 1208, 1219 & n.45 (Del. 2012) (citing Kling & Nugent as
authority on NDAs); Ford v. VMWare, Inc., 2017 WL 1684089, at *13 & n.8 (Del. Ch.
May 2, 2017) (citing Kling & Nugent as authority on the purpose of representations and
warranties); Alliance Data Sys. Corp. v. Blackstone Capital P’rs V L.P., 963 A.2d 746, 763
n.60 (Del. Ch.) (Strine, V.C.) (citing Kling & Nugent as authority on best efforts
covenants), aff’d, 976 A.2d 170 (Del. 2009) (TABLE); ABRY P’rs V, L.P. v. F & W Acq.
LLC, 891 A.2d 1032, 1042, 1044 & nn.9, 14 (Del. Ch. 2006) (Strine, V.C.) (citing Kling
& Nugent as authority on representations regarding financial statements and bring-downs).
See generally GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *12 (Del. Ch.
July 11, 2011) (Strine, C.) (“[Y]oung lawyers are now often pointed to the sections of
Negotiated Acquisitions of Companies, Subsidiaries and Divisions, by Lou R. Kling and

                                           131
earnings of 50% over two consecutive quarters would likely be an MAE.559 Courts in other

jurisdictions have reached similar conclusions.560 These precedents do not foreclose the

possibility that a buyer could show that percentage changes of a lesser magnitude

constituted an MAE. Nor does it exclude the possibility that a buyer might fail to prove

that percentage changes of a greater magnitude constituted an MAE.

       An example of the latter scenario is IBP, where Chief Justice Strine held while

serving as a Vice Chancellor that a 64% drop in quarterly earnings did not constitute a

material adverse effect. There, a major producer of beef suffered a large quarterly decline

Eileen T. Nugent, which address in even more depth than Freund, just how complex
acquisition agreements work.”); id. at *12–13 (describing Kling & Nugent as among the
“leading works” and “most incisive learned commentary” on M&A practice).
       559
           Raskin v. Birmingham Steel Corp., 1990 WL 193326, at *5 (Del. Ch. Dec. 4,
1990) (Allen, C.) (“While it is possible that on a full record and placed in a larger context
one might conclude that a reported 50% decline in earnings over two consecutive quarters
might not be held to constitute a material adverse development, it is . . . unlikely to think
that that might happen.”).
       560
          See Allegheny Energy v. DQE, Inc., 74 F. Supp. 2d 482, 518 (W.D. Pa. 1999)
(finding an MAE and permitting termination of merger agreement where write-off
exceeded company’s annual net income and regulatory action denied company “a large
stream of guaranteed future revenues that it had been receiving prior to deregulation”),
aff’d, 216 F.3d 1075 (3d. Cir. 2000) (TABLE); Peoria Sav. & Loan Ass’n v. Am. Sav.
Ass’n, 441 N.E.2d 853, 854–55, 858–59 (Ill. App. Ct. 1982) (affirming trial court decision
finding an MAE and preliminarily enjoining merger where after signing counterparty
acquired two troubled savings and loan associations but failed to obtain expected federal
financial assistance); Genesco, 2007 WL 4698244, at *16–20 (in the context of highly
leveraged transaction where short-term losses were durationally significant, finding that
weak performance in consecutive quarters would have constituted an MAE if not for carve-
out for materially adverse effects that are not “materially disproportionate” to those
suffered by similarly situated industry participants).

                                            132
in performance primarily due to widely known cycles in the meat industry, exacerbated by

a harsh winter that also affected the buyer.561 After the bad quarter and the onset of spring,

“IBP began to perform more in line with its recent year results.” 562 The Chief Justice

concluded that “IBP remain[ed] what the baseline evidence suggests it was—a consistently

but erratically profitable company struggling to implement a strategy that will reduce the

cyclicality of its earnings.”563 The Chief Justice nevertheless noted that “the question of

whether IBP has suffered a Material Adverse Effect remains a close one” 564 and that he

was “confessedly torn about the correct outcome.”565 He further posited that

       [i]f IBP had continued to perform on a straight-line basis using its first
       quarter 2001 performance, it would generate earnings from operations of
       around $200 million. This sort of annual performance would be
       consequential to a reasonable acquiror and would deviate materially from the
       range in which IBP had performed during the recent past [thus giving rise to
       an MAE].566

       561
           IBP, 789 A.2d at 22 (“During the winter and spring of 2001, Tyson’s own
business performance was dismal. Meanwhile, IBP was struggling through a poor first
quarter. Both companies’ problems were due in large measure to a severe winter, which
adversely affected livestock supplies and vitality. As these struggles deepened, Tyson’s
desire to buy IBP weakened.”).
       562
             Id. at 70.
       563
             Id. at 71.
       564
             Id. at 68.
       565
           Id. at 71; accord id. (“I admit to reaching this conclusion [that no MAE occurred]
with less than the optimal amount of confidence.”).
       566
             Id. at 69.

                                             133
IBP’s prior year earnings from operations during the preceding five years were $528

million (1999), $374 million (1998), $227 million (1997), $323 million (1996), and $480

million (1995).567 An annual performance of $200 million would have represented a 52%

decline from IBP’s five-year average of $386 million. The Chief Justice also noted that the

buyer’s arguments were “unaccompanied by expert evidence that identifies the diminution

in [the seller’s] value or earnings potential as a result of its first quarter performance” and

observed that “[t]he absence of such proof is significant.”568

       In this case, Fresenius made the showing necessary to establish a General MAE. At

trial, Professor Daniel Fischel testified credibly and persuasively that Akorn’s financial

performance has declined materially since the signing of the Merger Agreement and that

the underlying causes of the decline were durationally significant.569 The factual record

supports Fischel’s opinions.

       567
             Id. at 66.
       568
             Id. at 69–70.
       569
          See Fischel Tr. 1352 (describing the “collapse in Akorn’s stand-alone value from
the time of the signing of the merger agreement to the termination and collapse that’s
expected to continue into the future”). In contrast to Fischel’s testimony, I did not find the
testimony of Akorn’s rebuttal witness, Professor Anil Shivdasani, to be helpful or, in some
instances, credible. In one telling example, Shivdasani would not even agree that Akorn’s
share price at the time of trial was supported to some degree by the possibility of the
transaction closing. Shivdasani Tr. 1412.

                                             134
       As contemplated by Hexion, the following table depicts the year-over-year declines

that Akorn suffered during each of the three quarters of FY 2017 that took place after

signing, plus full-year results for FY 2017, plus first quarter results for FY 2018:

                  Year-Over-Year Change In Akorn’s Performance570
                         Q2 2017 Q3 2017 Q4 2017 FY 2017                     Q1 2018
      Revenue             (29%)      (29%)     (34%)      (25%)               (27%)
      Operating Income    (84%)      (89%)    (292%)     (105%)              (134%)
      EPS                 (96%)     (105%)    (300%)     (113%)              (170%)

Akorn did not report EDBITA or adjusted EBITDA figures on a quarterly basis for 2017.571

It reported full-year EBITDA of $64 million, a year-over-year decline of 86%. Akorn

reported full-year adjusted EBITDA of $241 million, a year-over-year decline of 51%.572

As these figures show, Akorn’s performance declined dramatically, year over year, with

positive operating income and positive earnings per share turning to losses.

       In addition to representing a dramatic decline on a year-over-year basis, Akorn’s

performance in FY 2017 represented a departure from its historical trend. Over the five-

year span that began in 2012 and ended in 2016, Akorn grew consistently, year over year,

when measured by revenue, EBITDA, EBIT, and EPS.573 During 2017, Akorn’s

       570
         See JX 1250 ¶¶ 8–9, 11, 19. To be clear, quarterly declines are measured against
performance in the same quarter the previous year.
       571
             Id. ¶ 11 n.17.
       572
             Id. ¶ 11.
       573
             Fischel Tr. 1353–55; JX 1250 ¶¶ 26–30, Exs. 1–4.

                                            135
performance fell dramatically when measured by each metric.574 For example, Akorn’s

EBITDA and EBIT grew each year from 2012 to 2016, but in 2017, fell by 55% and 62%,

respectively.575 Fischel prepared the following chart that illustrates the percentage change

from year to year in Akorn’s EBITDA.

Notably, Akorn’s performance during the first quarter of 2017—before the Merger

Agreement was signed—did not exhibit the downturn that the ensuing three quarters did.576

       574
             See Fischel Tr. 1354; JX 1250 Exs. 1–4.
       575
             Fischel Tr. 1354; JX 1250 ¶¶ 28–29, Exs. 2 & 3.
       576
             JX 1250 ¶ 26 & n.44.

                                             136
But immediately after the signing of the Merger Agreement, Akorn’s performance dropped

off a cliff.

        Akorn’s dramatic downturn in performance is durationally significant. It has already

persisted for a full year and shows no sign of abating.577 More importantly, Akorn’s

management team has provided reasons for the decline that can reasonably be expected to

have durationally significant effects.578 When reporting on Akorn’s bad results during the

second quarter of FY 2017, Rai attributed Akorn’s poor performance to unexpected new

market entrants who competed with Akorn’s three top products—ephedrine, clobetasol,

and lidocaine.579 He noted that Akorn also faced a new competitor for Nembutal, another

important product, which Akorn management had not foreseen.580 As Rai testified, “There

were way more [competitors] than what [Akorn] had potentially projected in [its] forecast

for 2017,”581 and the new competition resulted in unexpected price erosion.582 Akorn also

unexpectedly lost a key contract to sell progesterone, resulting in a loss of revenue where

          See Rai Tr. 545–46 (agreeing that he has no reason to think that any of Akorn’s
        577

unexpected competitors will withdraw); Portwood Dep. 64–65 (Akorn’s CFO testifying
that he was not aware of any factors indicative of an “uptick”).
        578
              See JX 1250 ¶ 23.
        579
              Rai Tr. 542–44.
        580
              Id. at 545.
        581
              Id.

         Id. at 542; see JX 693 at 35 (attributing poor performance to “more significant
        582

than expected declines in net revenue”).

                                            137
Akorn had been forecasting growth.583 When explaining its third quarter results, Akorn

described its poor performance as “[d]riven mostly by unanticipated supply interruptions

and unfavorable impact from competition across [the] portfolio.”584 Akorn also noted that

its “[a]verage product pricing [was] lower than expected due to [an] unfavorable

customer/contract mix and price erosion [that was] not considered in our forecast.”585 There

is every reason to think that the additional competition will persist and no reason to believe

that Akorn will recapture its lost contract.

       Additional support for the collapse in Akorn’s value and its durational significance

can be found in recent analyst valuations. In connection with the Akorn board’s approval

of the Merger, the board’s financial advisor, J.P. Morgan, submitted a discounted cash flow

valuation for Akorn with a midpoint of $32.13 per share.586 Based on Akorn’s post-signing

performance, analysts have estimated that Akorn’s standalone value is between $5.00 and

$12.00 per share.587 Analysts also have dramatically reduced their forward-looking

estimates for Akorn.588 For example, as of the date of termination, analysts’ estimates for

Akorn’s 2018, 2019, and 2020 EBITDA were lower than their estimates at signing by

       583
             Rai Tr. 546–47.
       584
             JX 688 at ‘606.
       585
             Id. at ‘607.
       586
             See JX 520 at ‘841.
       587
             See Fischel Tr. 1352–53; JX 1505; JX 1508; JX 1250 ¶ 45.
       588
             See Fischel Tr. 1362–65.

                                               138
62.6%, 63.9%, and 66.9% respectively.589 Analysts’ estimates for Akorn’s peers have

declined by only 11%, 15.3%, and 15%, respectively, for those years.590 Analysts thus

perceive that Akorn’s difficulties are durationally significant.591

       To contest this powerful evidence of a Material Adverse Effect, Akorn contends

that any assessment of the decline in Akorn’s value should be measured not against its

performance as a standalone entity, but rather against its value to Fresenius as a synergistic

buyer.592 In my view, the plain language of the definition of an MAE makes clear that any

MAE must be evaluated on a standalone basis. First, the broad definition of an MAE refers

to any “material adverse effect on the business, results of operations or financial condition

of the Company and its Subsidiaries, taken as a whole.” If the parties had contemplated a

       589
             See id. at 1363–1365; JX 1250 ¶ 39, Ex. 7.
       590
             See Fischel Tr. 1364–65; JX 1250 ¶ 39, Ex.7.
       591
           See Fischel Tr. 1365–66 (“[I]f there was an expectation of a big reversal, the
stand-alone values wouldn’t be what they are.”). Akorn misleadingly argues that the mean
of analyst consensus forecasts for Akorn’s EPS from 2018 to 2020 is 46% higher than the
mean of Akorn’s historical EPS from 2011 to 2013. Dkt. 186 at 123. This comparison
leaves out four years of results: 2014, 2015, 2016, and 2017. Akorn attempts to justify its
cherry-picking by claiming that Akorn should be compared to a prior period when it
struggled, but the record does not support a finding that Akorn struggled during this period,
only that it was a smaller company. What is necessary is to evaluate a company’s
performance over a meaningful time horizon to take into account trends, such as cyclicality.
See IBP, 789 A.2d at 71 (noting that analyst EPS forecasts for the seller “for the next two
years would not be out of line with its historical performance during troughs”). Here,
Akorn’s performance improved steadily over the past five years across all of the metrics
that Fischel examined, only to reverse dramatically after the parties signed the Merger
Agreement.
       592
             See Dkt. 186 at 122–23 n.607.

                                             139
synergistic approach, the definition would have referred to the surviving corporation or the

combined company. Second, subpart (B)(2) of the definition carves out any effects

resulting from “the negotiation, execution, announcement or performance of this

Agreement or the consummation of the [Merger,]” and the generation of synergies is an

effect that results from the consummation of the Merger. A review of precedent does not

reveal any support for Akorn’s argument; every prior decision has looked at changes in

value relative to the seller as a standalone company.593 Akorn’s desire to include synergies

is understandable—it increases the denominator for purposes of any percentage-based

comparison—but it is not supported by the Merger Agreement or the law.

       Akorn also argues that as long as Fresenius can make a profit from the acquisition,

an MAE cannot have occurred.594 The MAE definition does not include any language about

the profitability of the deal to the buyer; it focuses solely on the value of the seller.

Assessing whether Fresenius can make a profit would introduce a different, non-

contractual standard. It would effectively require that Fresenius show a goodwill

impairment before it could prove the existence of an MAE. The parties could have

bargained for that standard, but they did not. Requiring a loss before a buyer could show

       593
           See Hexion, 965 A.2d at 740–42 (analyzing quarter-over-quarter and year-over-
year changes in EBITDA without referring to synergies); id. at 745 (“[U]nder the terms of
the merger agreement, an MAE is to be determined based on an examination of Huntsman
[the seller] taken as a whole.”); IBP, 789 A.2d at 66 (comparing IBP as it existed as of
December 25, 1999, and as portrayed in the merger agreement, with IBP’s later condition).
       594
             See Dkt. 186 at 122.

                                            140
an MAE also would ignore the fact that acquirers evaluate rates of return when choosing

among competing projects, including acquisitions. A buyer might make money on an

absolute basis, but the opportunity cost on a relative basis would be quite high.

       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.”595 This common law doctrine

“provides an escape for an acquirer if the target experiences a catastrophe during the

executory period.”596 “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.”597 In lieu of the default rule

that performance may be excused only where a contract’s principal purpose is completely

       595
           Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106, 113 (Del. 2006)
(quoting Restatement (Second) of Contracts § 265 (Am. Law Inst. 1981)); see also 14
Corbin on Contracts § 77.1, at 242 (2001 ed.) (“If a frustration of both parties’ respective
purposes were necessary to invoke the [frustration of purpose] doctrine, discharge would
be rare.”); id. § 77.10, at 286 (“The frustration of a contractor’s purpose may be either
complete or only partial. A partial frustration by subsequent events is less likely to
discharge a contractor from its duties.”).
       596
             Schwartz, supra, at 828.
       597
          Id.; see id. at 829 (“Although the standard required to invoke a MAC clause is ‘a
high one, the test does not require the offeror to demonstrate frustration in the legal sense.’”
(quoting Takeover Panel, Practice Statement No. 15: Note 2 on Rule 13 – Invocation of
Conditions      3      (Apr.     28,     2004),      http://www.thetakeoverpanel.org.uk/wp-
content/uploads/2008/12/2004-13.pdf.)).

                                             141
or nearly completely frustrated,598 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.”599 That is what the parties did in this case.

It should not be necessary for Fresenius to show a loss on the deal before it can rely on the

contractual exit right it negotiated.

       The record in this case established the existence of a sustained decline in business

performance that is durationally significant and which would be material to a reasonable

buyer. Akorn suffered a General MAE.600

                2.     Whether The Reason For The Effect Falls Within An Exception

       Akorn’s litigation counsel attributes Akorn’s dismal performance to “industry

headwinds” that have affected the generic pharmaceutical industry since 2013. 601 One

       598
           Wal–Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 621 (Del. Ch. 2005),
aff’d in part, rev’d in part on other grounds, 901 A.2d 106 (Del. 2006).
       599
            Schwartz, supra, at 807; see, e.g., Gilson & Schwartz, supra, at 336 (arguing that
when a merger agreement “has a traditional MAC, the acquirer . . . no longer commits to
purchase the bottom half of a probability distribution, but instead only commits to purchase
if the realized value is close to the negotiated price”); id. at 331 n.5 (“We define a MAC as
‘traditional’ if the acquisition agreement omits setting out explicit exceptions to the
acquirer’s right to cancel in the event of a material adverse change or effect.”).
       600
         In substance, Akorn and its expert do not contest that Akorn suffered a General
MAE on a standalone basis. Instead, they try to sidestep that reality by arguing that (i)
Akorn’s value should be measured with synergies and (ii) Akorn’s decline in value was
not disproportionate to its peers. For reasons discussed elsewhere, neither of those
arguments succeeds. This outcome leaves Fischel’s opinion that Akorn suffered a General
MAE on a standalone basis effectively uncontested.
       601
             See Dkt. 186 at 8–9, 123–24.

                                             142
headwind has been a “consolidation of buyer power,” which has “led to large price

reductions.”602 Another headwind has been the FDA’s efforts to approve generic drugs,

“leading to increasing numbers of new entrants and resultant additional price erosion.”603

Akorn’s lawyers also cite “legislative attempts to reduce drug prices” and the FDA’s

requirement that every product have a unique serial number, called serialization.604

According to Akorn, “Fresenius and the market were well aware of these challenges at the

time [Fresenius] agreed to buy Akorn—and that if the headwinds were greater than

expected, Akorn would likely underperform relative to its competitors.”605 Akorn claims

that Fresenius cannot claim the existence of an MAE because everyone, including

Fresenius, knew about these “industry headwinds.”606

      Consistent with standard practice in the M&A industry, the plain language of the

Merger Agreement’s definition of a Material Adverse Effect generally allocates the risk of

endogenous, business-specific events to Akorn and exogenous, systematic risks to

Fresenius. The definition accomplishes this by placing the general risk of an MAE on

Akorn, using exceptions to reallocate specific categories of risk to Fresenius, then using

      602
            Id. at 8.
      603
            Id.
      604
            Id. at 8–9.
      605
            Id. at 9.
      606
         Id. at 120 (arguing that “[t]he risks of industry headwinds that ultimately caused
Akorn to underperform were known before signing”).

                                           143
exclusions from the exceptions to return risks to the Akorn. Through the exceptions in

subpart (A)(1), Fresenius accepted the systematic risks “generally affecting (1) the industry

in which the Company and its Subsidiaries operate.”607 But this allocation was subject to a

disproportionate-effect exclusion that returned the risk to Akorn to the extent that an event

falling into one of these categories disproportionately affects Akorn “as compared to other

participants in the industry.”608

       Under the risk allocation established by the Merger Agreement, Akorn’s argument

about “industry headwinds” fails because the causes of Akorn’s adverse performance were

actually business risks allocated to Akorn. The primary driver of Akorn’s dismal

performance was unexpected new market entrants who competed with Akorn’s three top

products—ephedrine, clobetasol, and lidocaine.609 Akorn also unexpectedly lost a key

contract to sell progesterone.610 These were problems specific to Akorn based on its product

mix. Although Akorn has tried to transform its business-specific problems into “industry

headwinds” by describing them at a greater level of generality, the problems were

endogenous risks specific to Akorn’s business.

       607
             JX 1 at 58.
       608
             Id.
       609
             Rai Tr. 542–44.
       610
             Id. at 546–47.

                                            144
       Assuming for the sake of argument that these were industry effects, they

disproportionately affected Akorn. As a result, under the structure of the contractual

definition of a Material Adverse Effect, these risks were allocated to Akorn.

       The record evidence shows that Akorn’s business has suffered a decline that is

disproportionate to its industry peers.611 Ironically, Akorn concedes the point by asserting

that “Akorn was particularly exposed to the risk of these [industry] headwinds.”612

Regardless, to analyze the relative effects of industry-wide conditions, Fischel compared

Akorn’s performance against the performance of the industry peers selected by J.P.

Morgan, Akorn’s financial advisor, when preparing its fairness opinion.613 In each case,

Fischel looked at Q2 2017, Q3 2017, Q4 2017, FY 2017, and Q1 2018 results and compared

Akorn’s actual performance relative to consensus analyst estimates with the actual

performance of the peer companies relative to their consensus analyst estimates. For

revenue, EBITDA, EBIT, and EPS, Akorn’s underperformance in each period was

       611
          See Hexion, 965 A.2d at 737 (noting that the seller performed “significantly
worse than the mean, and in most, in the bottom decile” when compared to two sets of
benchmark companies in the industry and that “[t]his potentially would be compelling
evidence if it was necessary to reach the carve-outs”).
       612
             Dkt. 186 at 9.
       613
          Akorn used the same peer group when crafting the allegations of its complaint.
See Dkt. 1 ¶ 6. Shivdasani did not propose any different peer companies. Shivdasani Tr.
1402.

                                            145
substantially worse than the median and mean of its peers.614 Fischel prepared the following

chart to illustrate the divergence in EBTDA performance:

       Fischel also compared the changes in analysts’ forward-looking estimates for Akorn

with the changes in analysts’ forward-looking estimates for the peer companies used by

J.P. Morgan. He found that analyst estimates of Akorn’s revenue, EBITDA, EBIT, and

EPS for 2018, 2019, and 2020 have declined disproportionately more than their estimates

for Akorn’s peers.615 Fischel prepared the following chart to illustrate the divergence in

EBTDA estimates:

       614
             JX 1250 ¶¶ 33–36.
       615
             JX 1250 ¶¶ 37–41, Exs. 7 & 8.

                                             146
      Based on his analysis, Fischel testified that with “one or two minor exceptions,

Akorn not only vastly underperform[ed] the median and the mean of comparable firms, but

it underperform[ed] every single one of the comparable firms on all time periods, on all

metrics, which is really dramatic underperformance.”616 Akorn’s expert recognized that

Akorn underperformed the generics industry generally and its peers.617 He offered no

opinion on whether the performance was disproportionate.618

      616
            Fischel Tr. 1361.
      617
            Shivdasani Tr. 1400; see Grabowski Dep. 59–60.
      618
            Shivdasani Tr. 1400.

                                          147
       This decision finds that Akorn’s dismal performance resulted from Company-

specific factors, not industry-wide effects. Assuming for the sake of analysis that the causes

were industry-wide effects, this decision credits Fischel’s analysis and finds that Akorn

was disproportionately affected by the industry-wide effects.619 For these two independent

reasons, Akorn’s “industry headwinds” argument fails.

       619
             For purposes of the analysis in this section, I have assumed that Fresenius bore
the burden of proof as part of the general allocation to Fresenius of the burden to establish
a General MAE. In my view, a preferable and more nuanced allocation would require
Fresenius to bear the burden of showing a material decline in Akorn’s performance. At that
point, Akorn would have the burden of proving that the cause of the decline fell into one
of the exceptions in the MAE definition. See 29 Am. Jur. 2d Evidence § 176 (“A party
seeking to take advantage of an exception to a contract is charged with the burden of
proving facts necessary to come within the exception.”); accord Westlake Vinyls, Inc. v.
Goodrich Corp., 518 F. Supp. 2d 947, 951–52 (W.D. Ky. 2007) (collecting cases);
Zebrowski & Assocs., Inc. v. City of Indianapolis, 457 N.E.2d 259, 262 (Ind. Ct. App. 1983)
(“[A] common rule of contract and insurance law states that when performance is promised
in general terms, followed by specific exceptions and limitations, the obligor has the burden
of proving that the case falls with the exception.”); see, e.g., Hollinger Int’l, Inc. v. Black,
844 A.2d 1022, 1070 (Del. Ch. 2004) (Strine, V.C.) (“Black bears the burden to establish
that this contractual exception applies.”); see also, e.g., E.I. du Pont de Nemours & Co. v.
Admiral Ins. Co., 1996 WL 111133, at *1 (Del. Super. Feb. 22, 1996) (“The undisputed
application of Delaware law in an insurance coverage suit requires the insured . . . to prove
initially . . . that the loss is within a policy’s coverage provisions. Once the insured meets
that burden, the burden shifts to the insurer to establish a policy exclusion applies.”); E.I.
du Pont de Nemours & Co. v. Admiral Ins. Co., 711 A.2d 45, 53–54 (Del. Super. 1995)
(placing burden of proof on insured to prove exception to exclusion from coverage; noting
that the insured had better access to information about whether the exception to the
exclusion applied and was better positioned to prevent events that might trigger coverage);
Restatement of the Law of Liability Insurance § 32 cmt. e (Am. Law. Inst. 2018) (“It is the
insurer that has identified the excluded classes of claims and will benefit from being able
to place a specific claim into an excluded class. Thus, assigning the insurer the burden of
proving that the claim fits into the exclusion is appropriate.”). If Akorn met its burden, then
the same authorities would support placing the burden on Fresenius to show that Akorn’s
performance was disproportionate to its peers, bringing the case within an exclusion from
the exception.

                                             148
       Akorn has also argued that its poor performance resulted from the restrictions that

the Merger Agreement imposed on its ability to continue growing through acquisitions. In

subpart (B)(2), the definition of Material Adverse Effect excludes effects resulting from

“the . . . performance of this Agreement.” In other words, the definition allocates

agreement-related risks to Fresenius. As Akorn sees it, Fresenius cannot criticize its poor

results when the Merger Agreement prevented Akorn from buying other companies.

       This argument fails for multiple reasons. First, Akorn suffered a Material Adverse

Effect because of the sharp downturn in its existing business. It was the performance of

that business that fell off a cliff shortly after the parties signed the Merger Agreement. The

question is not whether Akorn might have been able to hide that downturn and post overall

growth by buying other companies. The problem is what happened to the business that

Fresenius agreed to buy. Second, the downturn happened so quickly as to defeat the

suggestion that it was caused by the Merger Agreement’s restrictions on acquisitions.

Acquisitions take time. It was Akorn’s legacy business that took a nosedive. Third, Akorn

has not only grown through acquisitions. Akorn historically grew both organically and

through acquisitions.620 Fourth, if Akorn wanted to pursue an acquisition, it could have

sought consent from Fresenius. Akorn has not pointed to any acquisition that Fresenius

blocked. The no-acquisitions argument does not bring Akorn within an exception to the

definition of a Material Adverse Effect.

       620
          See Rai Tr. 455; JX 38 at ‘428-30, ‘444-50; JX 98 at ‘035, ‘040; JX 188 at 9, 11;
JX 204 at ‘021-24.

                                             149
                3.     Whether Fresenius Knowingly Accepted The Risks That Led To
                       The General MAE.

       Akorn contends most vigorously that Fresenius cannot claim an MAE based on any

risks that Fresenius (i) learned about in due diligence or (ii) generally was on notice about

because of its industry knowledge and did not thoroughly investigate in due diligence.

Akorn relies for its position on Chief Justice Strine’s observation in IBP that “[m]erger

contracts are heavily negotiated and cover a large number of specific risks explicitly,” and

that consequently, even a “broadly written” MAE provision “is best read as a backstop

protecting the acquiror from the occurrence of unknown events that substantially threaten

the overall earnings potential of the target in a durationally-significant manner.”621 In my

view, Akorn goes too far by transforming “unknown events” into “known or potentially

contemplated risks.” The legal regime that Akorn argues for would replace the enforcement

of a bargained-for contractual provision with a tort-like concept of assumption of risk,

where the outcome would turn not on the contractual language, but on an ex-post sifting of

what the buyer learned or could have learned in due diligence.

       The “strong American tradition of freedom of contract . . . is especially strong in

our State, which prides itself on having commercial laws that are efficient.” 622 “Delaware

courts seek to ensure freedom of contract and promote clarity in the law in order to facilitate

       621
             IBP, 789 A.2d at 68 (emphasis added); accord Hexion, 965 A.2d at 738.
       622
          ABRY, 891 A.2d at 1059–60; see GRT, Inc., 2011 WL 2682898, at *12 (“Under
Delaware law, which is more contractarian than that of many other states, parties’
contractual choices are respected . . . .”).

                                             150
commerce.”623 “When parties have ordered their affairs voluntarily through a binding

contract, Delaware law is strongly inclined to respect their agreement, and will only

interfere upon a strong showing that dishonoring the contract is required to vindicate a

public policy interest even stronger than freedom of contract.”624 Requiring parties to live

with “the language of the contracts they negotiate holds even greater force when, as here,

the parties are sophisticated entities that bargained at arm’s length.”625 “The proper way to

allocate risks in a contract is through bargaining between parties. It is not the court’s role

to rewrite the contract between sophisticated market participants, allocating the risk of an

agreement after the fact, to suit the court’s sense of equity or fairness.”626

       623
           ev3, Inc., 114 A.3d at 529 n.3; see Aspen Advisors LLC v. United Artists Theatre
Co., 843 A.2d 697, 712 (observing “Delaware law’s goal of promoting reliable and
efficient corporate and commercial laws”) (Del. Ch. 2004) (Strine, V.C.), aff’d, 861 A.2d
1251 (Del. 2004); see, e.g., Elliott Assocs. L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del.
1998) (commending a “coherent and rational approach to corporate finance” and
“uniformity in the corporation law”).
       624
           Libeau v. Fox, 880 A.2d 1049, 1056 (Del. Ch. 2005) (Strine, V.C.), aff’d in
pertinent part, 892 A.2d 1068 (Del. 2006); see also Related Westpac LLC v. JER Snowmass
LLC, 2010 WL 2929708, at *6 (Del. Ch. July 23, 2010) (Strine, V.C.) (“Delaware law
respects the freedom of parties in commerce to strike bargains and honors and enforces
those bargains as plainly written.”); NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 35
(Del. Ch. 2009) (“Delaware upholds the freedom of contract and enforces as a matter of
fundamental public policy the voluntary agreements of sophisticated parties.”); Personnel
Decisions, Inc. v. Bus. Planning Sys., Inc., 2008 WL 1932404, at *6 (Del. Ch. May 5, 2008)
(Strine, V.C.) (“Delaware is a freedom of contract state, with a policy of enforcing the
voluntary agreements of sophisticated parties in commerce.”).
       625
          Progressive Int’l Corp. v. E.I. Du Pont de Nemours & Co., 2002 WL 1558382,
at *7 (Del. Ch. July 9, 2002) (Strine, V.C.).
       626
         Wal–Mart Stores, 872 A.2d at 624; see Nemec v. Shrader, 991 A.2d 1120, 1126
(Del. 2010) (“[W]e must . . . not rewrite the contract to appease a party who later wishes

                                             151
       The MAE definition in this case uses exceptions and exclusions to allocate risks

between the parties. The MAE definition could have gone further and excluded “certain

specific matters that [the seller] believes will, or are likely to, occur during the anticipated

pendency of the agreement,”627 or matters disclosed during due diligence, or even risks

identified in public filings.628 Or the parties could have defined an MAE as including only

to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter
into good and bad contracts, the law enforces both.”) (footnote omitted); Allied Capital
Corp. v. GC–Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006) (Strine, V.C.)
(explaining that Delaware courts “will not distort or twist contract language” because “[b]y
such judicial action, the reliability of written contracts is undermined, thus diminishing the
wealth-creating potential of voluntary agreements”); DeLucca v. KKAT Mgmt., L.L.C.,
2006 WL 224058, at *2 (Del. Ch. Jan. 23, 2006) (Strine, V.C.) (“[I]t is not the job of a
court to relieve sophisticated parties of the burdens of contracts they wish they had drafted
differently but in fact did not. Rather, it is the court’s job to enforce the clear terms of
contracts.”). See generally 11 Williston on Contracts § 31:5 (4th ed. 2003) (“A contract is
not a non-binding statement of the parties’ preferences; rather, it is an attempt by market
participants to allocate risks and opportunities. [The court’s role] is not to redistribute these
risks and opportunities as [it sees] fit, but to enforce the allocation the parties have agreed
upon.”) (alterations in original).
       627
          Kling & Nugent, supra, § 11.04[9], at 11-59 to -60 (identifying examples such
as “the loss or anticipated loss of a significant customer, specific operational problems,
change in government regulation, a favorable contract that won’t survive the closing, write-
downs of assets or adverse business trends”).
       628
           According to a survey of merger, stock purchase, and asset agreements executed
between June 1, 2016 and May 31, 2017, 28% of deals valued at $1 billion or more involved
an MAE carve-out for developments arising from facts disclosed to the buyer or in public
filings. See Nixon Peabody LLP, NP 2017 MAC Survey 5, 13, https://www.nixonpeabody.
com/-/media/Files/PDF-Others/mac-survey-2017-nixon-peabody.ashx; cf. Talley, supra,
at 789 (opining that Nixon Peabody’s annual MAC survey’s methodology “has become
sufficiently consistent to be usable in empirical investigations”).

                                              152
unforeseeable effects, changes, events, or occurrences.629 They did none of these things.

Instead, for purposes of a General MAE, they agreed upon a condition that turned on

whether an effect, change, event, or occurrence occurred after signing and constituted or

would reasonably be expected to constitute an MAE. 630 The contractual language is

forward-looking and focuses on events. It does not look backwards at the due diligence

process and focus on risks.

       As discussed later in this decision, the evidence shows that the events that resulted

in a General MAE at Akorn were unexpected. But assuming for the sake of argument that

Akorn was correct and Fresenius had foreseen them, I do not believe that would change

the result given the allocation of risk under the definition of a Material Adverse Effect set

forth in the Merger Agreement. The IBP decision interpreted a broad MAE clause that did

not contain lengthy lists of exceptions and exclusions, and then-Vice Chancellor Strine did

not suggest that he was prescribing a standard that would govern all MAE clauses,

regardless of what the parties specifically bargained for in the contract. Nor did Hexion,

which adhered closely to IBP on this point. Instead, both cases held that buyers could not

       629
           See Schwartz, supra, at 834 (“[T]he MAC clause says nothing about
foreseeability. It includes other characteristics of the change—“material” and “adverse”—
but does not mention unforseeability. Inclusio unius est exclusio alterius—the expression
of one thing is the exclusion of another.”); see also id. (providing additional arguments
why MAE provisions should not be interpreted to contain an implied foreseeability term).
       630
           See JX 1 § 6.02(c) (“Since the date of this Agreement there shall not have
occurred and be continuing any effect, change, event or occurrence that, individually or in
the aggregate, has had or would reasonably be expected to have a Material Adverse
Effect.”) (emphasis added).

                                            153
rely on the manifested consequences of widely known systematic risks. In IBP, the

financial performance of the seller (a beef producer) suffered due to cyclical effects in the

meat industry, exacerbated by a harsh winter that put even greater pressure on the

performance of the buyer (a chicken producer).631 In Hexion, the performance of the seller

(a chemical company) suffered due to macroeconomic challenges, including “rapidly

increased crude oil and natural gas prices and unfavorable foreign exchange rates.”632

Although the decisions framed the analysis in terms of known versus unknown risks, both

cases actually allocated systemic risks to the buyers, consistent with general contracting

practice and the clause at issue in this case.

       Assuming for the sake of argument that IBP and Hexion did establish an overarching

standard for analyzing every MAE, those decisions speak in terms of “unknown events,”

not contemplated risks.633 As Akorn’s management admitted, the events that gave rise to

       631
           See IBP, 789 A.2d at 22 (“During the winter and spring of 2001, Tyson’s own
business performance was dismal. Meanwhile, IBP was struggling through a poor first
quarter. Both companies’ problems were due in large measure to a severe winter, which
adversely affected livestock supplies and vitality. As these struggles deepened, Tyson’s
desire to buy IBP weakened.”); id. at 26 (“Cattle and hog supplies go through cycles that
can be tracked with some general precision using information from the United States
Department of Agriculture. . . . Livestock supply is also heavily weather driven.”); id. at
45 (citing public statements by acquirer acknowledging the cyclical factors that affect
commodity meat products); id. at 47–48 (“Tyson’s anxiety was heightened by problems it
and IBP were experiencing in the first part of 2001. A severe winter had hurt both beef and
chicken supplies, with chickens suffering more than cows.”).
       632
             Hexion, 965 A.2d at 743.
       633
             IBP, 789 A.2d at 68; Hexion, 965 A.2d at 738.

                                                 154
Akorn’s dismal performance were unexpected.634 Indeed, when announcing the Merger

Agreement on April 24, 2017, Akorn reaffirmed the sales and earnings guidance that

management had provided on March 1, 2017, which projected revenue of $1,010-$1,060

million and adjusted EBITDA of $363-$401 million.635 Akorn underperformed the low end

of its revenue guidance by 17% and the low end of its EBITDA guidance by 31%. If Akorn

management had anticipated the competition and price erosion that was on the horizon,

they would not have reaffirmed their guidance.

       Finally, Fresenius did not know about the specific events that resulted in Akorn’s

collapse. Fresenius expected that Akorn would not meet its internal projections and adopted

lower forecasts of its own, but Akorn dramatically underperformed Fresenius’s less

       634
          See Rai Tr. 467 (citing “more competition than [Akorn] had projected”); id. at
542 (citing “price erosion [for ephedrine] that we had not factored in”); id. at 544 (“Q.
Okay. Now, in fact, you had unexpected competition in 2017 for all of your top three
products, and the competition was way more than what you had projected; isn’t that right?
A. That is correct.”); id. at 545 (“The[re] were way more [competitors] than what [Akorn]
had potentially projected in [its] forecast for 2017.”); id. at 546–47 (discussing the
unexpected loss of a key contract to sell progesterone); JX 688 at ‘606 (Akorn presentation
describing its poor performance as “[d]riven mostly by unanticipated supply interruptions
and unfavorable impact from competition across [the] portfolio”); id. at ‘607 (“Average
product pricing [was] lower than expected due to [an] unfavorable customer/contract mix
and price erosion [that was] not considered in our forecast.”); JX 693 at 35 (Akorn’s Form
10-Q for Q3 2017 discussing “more significant than expected declines in net revenue”).
       635
             See JX 341; JX 481.

                                           155
optimistic estimates.636 Bauersmith was the resident pessimist on the Fresenius deal team,

and Akorn even performed worse than he anticipated.637

       In my view, Fresenius did not assume the risk of the problems that resulted in a

General MAE at Akorn. Instead, the General MAE Condition allocated those risks to

Akorn.

              4.     The Finding Regarding A General MAE

       Fresenius proved that Akorn suffered a General MAE. Fresenius carried its heavy

burden and showed that the decline in Akorn’s performance is material when viewed from

the longer-term perspective of a reasonable acquirer, which is measured in years. Fresenius

also showed that Akorn’s poor performance resulted from Company-specific problems,

rather than industry-wide conditions. Nevertheless, assuming for the sake of argument that

the results could be attributed to industry-wide conditions, those conditions affected Akorn

disproportionately. Neither Akorn nor Fresenius knew about the events that caused

Akorn’s problems, which were unforeseen. Because Akorn suffered a General MAE, the

condition in Section 6.02(c) has not been met, and Fresenius cannot be forced to close.

       636
          Bauersmith Tr. 595–596 (explaining that Akorn’s performance was “much,
much worse” than Fresenius’s projections); Henriksson Tr. 953 (“[T]he [ephedrine]
decline was bigger than what we had in the original plan.”).
       637
          Bauersmith Tr. 596 (describing Akorn’s performance as “even worse than what
[he personally] had thought”).

                                            156
B.     The Failure Of The Bring-Down Condition

       The next question is whether Fresenius validly terminated the Merger Agreement

under Section 7.01(c)(i) because the Bring-Down Condition could not be met. The Bring-

Down Condition permits Fresenius to refuse to close if Akorn’s representations are not true

at closing, except where the deviation from Akorn’s as-represented condition would not

reasonably be expected to constitute a Material Adverse Effect. To defeat the Bring-Down

Condition, Fresenius relies on the Regulatory Compliance Representations, so the analysis

boils down to whether Akorn would reasonably be expected to suffer a Regulatory MAE.

Once again, because Fresenius sought to excuse its performance under the Merger

Agreement, Fresenius bore the burden of proof.638

       In a public-company acquisition, it is standard practice to require that the seller’s

representations be true at signing and to condition the buyer’s obligation to close on the

seller’s representations also being true at closing.639 “From a business point of view, the

condition that the other party’s representations and warranties be true and correct at closing

is generally the most significant condition for Buyers . . . . This is what protects each party

       638
          See Hexion, 965 A.2d at 739; Frontier Oil, 2005 WL 1039027, at *35; IBP, 789
A.2d at 53.
       639
           See Kling & Nugent, supra, § 1.05[2], at 1-40.2 to -41; Legal-Usage Analysis,
supra, at 10–12.

                                             157
from the other’s business changing or additional, unforeseen risks arising before

closing.”640

       Section 7.01(c)(i) gives Fresenius the right to terminate if the Bring-Down

Condition cannot be met. Formatted for greater legibility, Section 7.01(c)(i) states:

       This Agreement may be terminated and the [Merger] abandoned at any time
       prior to the Effective Time (except as otherwise expressly noted), whether
       before or after receipt of the Company Shareholder Approval: . . .

               (c) by [Fresenius Kabi]: (i) if the Company shall have breached any
       of its representations or warranties . . ., which breach . . .

                      (A) would give rise to the failure of a condition set forth in
               Section 6.02(a) [the Bring-Down Condition] . . . and

                      (B) is incapable of being cured . . . by the Outside Date . . .

                       provided that [Fresenius Kabi] shall not have the right to
               terminate this Agreement pursuant to this Section 7.01(c)(i) if
               [Fresenius Kabi] or Merger Sub is then in material breach of any of
               its representations, warranties, covenants or agreements hereunder . .
               ..

Whether Fresenius could terminate the Merger Agreement pursuant to Section 7.01(c)(i)

therefore turns on three questions: (i) whether Akorn breached a representation in a manner

that would cause the Bring-Down Condition to fail, (ii) whether the breach could be cured

by the Outside Date, and (iii) whether Fresenius was otherwise in material breach of its

obligations under the Merger Agreement. The answer to the third question also determines

       640
           Kling & Nugent, supra, § 14.02[1], at 14-9; accord id. § 1.05[2], at 1-41; §
1.05[4], at 1-41.

                                             158
whether Fresenius may terminate based on the failure of the Covenant Compliance

Condition, so this decision addresses it separately.

                 1.     The Operation Of The Bring-Down Condition

          Section 6.02(a) is the Bring-Down Condition. Formatted for greater legibility, it

states:

          The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger
          shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if
          permissible under applicable law) on or prior to the Closing Date of the
          following conditions:

          (a) Representations and Warranties. The representations and warranties of
          the Company

                  (i) set forth in Section 3.01(a), Section 3.02(a), Section 3.02(b),
          Section 3.03(a)-(c), Section 3.14 and Section 3.20 shall be true and correct
          in all material respects as of the date hereof and as of the Closing Date, with
          the same effect as though made as of such date (except to the extent expressly
          made as of an earlier date, in which case as of such earlier date) and

                 (ii) set forth in this Agreement, other than in those Sections
          specifically identified in clause (i) of this paragraph, shall be true and correct
          (disregarding all qualifications or limitations as to “materiality”, “Material
          Adverse Effect” and words of similar import set forth therein) as of the date
          hereof and as of the Closing Date with the same effect as though made as of
          such date (except to the extent expressly made as of an earlier date, in which
          case as of such earlier date), except, in the case of this clause (ii), where the
          failure to be true and correct would not, individually or in the aggregate,
          reasonably be expected to have a Material Adverse Effect. . . .

The Bring-Down Condition in the Merger Agreement thus requires Akorn’s

representations to have been true “as of the date hereof,” viz., at signing, and “as of the

Closing Date.”

          In this case, Fresenius asserts that Akorn breached the Regulatory Compliance

Representations found in Section 3.18 of the Merger Agreement. In that section, Akorn

                                                159
made extensive representations regarding its compliance with regulatory requirements.

Each of the relevant representations contained specific materiality or MAE qualifiers that

applied for purposes of evaluating the accuracy of those representations in their own right,

such as if Fresenius had asserted a fraud claim. For purposes of testing the Bring-Down

Condition, the language of the condition scrapes away those specific qualifiers in favor of

an aggregate MAE qualifier.641 Formatted for greater legibility, the following reproduction

of the Regulatory Compliance Representations omits the specific qualifiers and the

portions that are not at issue in this case:

             (a) The Company and its Subsidiaries are and, to the Knowledge of
       the Company, since July 1, 2013, (1) have been in compliance with

                     (A) all applicable Laws (including all rules, regulations,
               guidance and policies) relating to or promulgated by the U.S. Food
               and Drug Administration (the “FDA”), DEA, EMEA and other
               Healthcare Regulatory Authorities and

                      (B) all Healthcare Regulatory Authorizations, including all
               requirements of the FDA, DEA, the EMEA and all other Healthcare
               Regulatory Authorities, in each case that are applicable to the
               Company and its Subsidiaries, or by which any property, product,
               filing, submission, registration, declaration, approval, practice
               (including without limitation, manufacturing) or other asset of the
               Company and its Subsidiaries is bound, governed or affected . . . .

              (b) All . . . reports, documents, claims and notices required or
       requested to be filed, maintained, or furnished to any Healthcare Regulatory
       Authority by the Company and its Subsidiaries since July 1, 2013, have been
       so filed, maintained or furnished and, to the Knowledge of the Company,
       were complete and correct . . . on the date filed (or were corrected in or
       supplemented by a subsequent filing) . . . .

       641
          See Kling & Nugent, supra, § 14.02[3], at 14-12 to -13 (discussing materiality
scrape as a solution to the double materiality problem).

                                               160
              The Company and its Subsidiaries are and have been, since July 1,
       2013, in compliance with current good manufacturing practices and have
       maintained appropriate mechanisms, policies, procedures and practices to
       ensure the prompt collection and reporting of adverse event or any other
       safety or efficacy data, notifications, corrections, recalls and other actions
       required by Law related to their products . . . .

                                          *    *    *

               (d) Since July 1, 2013, neither the Company nor any of its Subsidiaries
       (i) have made an untrue statement of . . . fact or fraudulent statement to the
       FDA or any other Governmental Authority, (ii) have failed to disclose a . . .
       fact required to be disclosed to the FDA or other Governmental Authority,
       (iii) have committed any other act, made any statement or failed to make any
       statement, that (in any such case) establishes a reasonable basis for the FDA
       to invoke its Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
       Gratuities Final Policy or (iv) have been the subject of any investigation by
       the FDA pursuant to its Fraud, Untrue Statements of Material Facts, Bribery,
       and Illegal Gratuities Final Policy . . . .

When Section 3.18 and the Bring-Down Condition are read together, the operative question

becomes whether Fresenius proved by a preponderance of the evidence that (i) the

Regulatory Compliance Representations were inaccurate and (ii) the deviation between

Akorn’s as-represented condition and its actual condition was so great that it would

reasonably be expected to result in a Material Adverse Effect.642

       642
           See IBP, 789 A.2d at 66 (evaluating whether breach of contractual representation
gave rise to an MAE by comparing IBP’s condition “against the December 25, 1999
condition of IBP as adjusted by the specific disclosures of the Warranted Financials and
the [Merger] Agreement itself. This approach makes commercial sense because it
establishes a baseline that roughly reflects the status of IBP as Tyson indisputably knew it
at the time of signing the Merger Agreement.”); see also Kling & Nugent, supra, §
11.01[1], at 11-3 (“[T]he seller’s representations . . . . ‘paint a picture,’ as of the moment
that the parties become contractually bound, of the business being acquired. It is the target
company as so described that the Buyer believes it is paying for, and much of the remainder
of the acquisition agreement deals with the consequences of this picture either proving in
retrospect to have been inaccurate or changing prior to the closing.”) (footnote omitted);

                                              161
       The “reasonably be expected to” standard is an objective one.643 When this phrase

is used, “[f]uture occurrences qualify as material adverse effects.”644 As a result, an MAE

“can have occurred without the effect on the target’s business being felt yet.”645 Even under

this standard, a mere risk of an MAE cannot be enough. “There must be some showing that

there is a basis in law and in fact for the serious adverse consequences prophesied by the

party claiming the MAE.”646 When evaluating whether a particular issue would reasonably

be expected to result in an MAE, the court must consider “quantitative and qualitative

see also E. Thom Rumberger, Jr., The Acquisition and Sale of Emerging Growth
Companies: The M & A Exit § 9:14 (2d ed. 2017) (“[I]t is through target’s representations
and warranties that acquirer contractually sets forth the underlying assumptions for its
investment decision. In effect, acquirer is saying that it is willing to pay the agreed upon
purchase price if the business has the attributes described in the representations and
warranties of target set forth in the merger agreement. The representations and warranties,
in other words, act as a benchmark for acquirer’s investment in target.”).
       643
             Frontier Oil, 2005 WL 1039027, at *33.
       644
             Model Merger Agreement, supra, at 268.
       645
             Kling & Nugent, supra, § 11.04[9], at 11-60 n.102.
       646
            Frontier Oil, 2005 WL 1039027, at *36 n.224 (addressing claim that risk of
litigation could reasonably be expected to result in an MAE); see also Kling & Nugent,
supra, § 11.04[10], at 11-69 (“[W]hether a material adverse change has occurred depends
in large part on the long-term impact of the event in question (a somewhat speculative
analysis).”). One commentator argues that the “would reasonably be expected” formulation
is best thought of as meaning “‘likely to happen,’ with likely, in turn, meaning ‘a degree
of probability greater than five on a scale of one to ten.’” Legal-Usage Analysis, supra, at
16 (first quoting The New Oxford American Dictionary 597 (2001) and then quoting Bryan
A. Garner, A Dictionary of Modern Legal Usage 597 (2d ed. 1995)). In other words, it
means more likely than not.

                                             162
aspects.”647 “It is possible, in the right case, for a party . . . to come forward with factual

and opinion testimony that would provide a court with the basis to make a reasonable and

an informed judgment of the probability of an outcome on the merits.”648

                 2.        Qualitative Significance

       The qualitative dimension of the MAE analysis strongly supports a finding that

Akorn’s regulatory problems would reasonably be expected to result in a Material Adverse

Effect. There is overwhelming evidence of widespread regulatory violations and pervasive

compliance problems at Akorn. These problems existed at signing and got worse, rather

than better, during the period between signing and when Fresenius served its termination

notice. Akorn does not dispute that it has problems, only their extent and seriousness.

       As a generic pharmaceutical company, Akorn must comply with the FDA’s

regulatory requirements. This is no small thing; it is an essential part of Akorn’s business.

It was also essential to Fresenius, which cared a great deal about Akorn’s pipeline of

       647
           Frontier Oil, 2005 WL 1039027, at *37; see also id. at *34 (“The notion of an
MAE is imprecise and varies both with the context of the transaction and its parties and
with the words chosen by the parties.”); Hexion, 965 A.2d at 738 & n.53 (“For the purpose
of determining whether an MAE has occurred, changes in corporate fortune must be
examined in the context in which the parties were transacting.”); IBP, 789 A.2d at 68 n.154
(discussing federal court decision finding a MAC “in a context where the party relying on
the MAC clause was providing funding in a work-out situation, making any further
deterioration of [the company’s] already compromised condition quite important”);
Genesco, 2007 WL 4698244, at *18 (considering “whether the change relates to an
essential purpose or purposes the parties sought to achieve by entering into the merger”).
       648
             Id. at *36.

                                                163
ANDAs and new products. The value of Akorn’s pipeline depended on Akorn’s ability to

comply with the FDA’s regulatory requirements.

         Under the FDA’s data integrity requirements, Akorn must be able “to prove the

origin, transmission, and content of the company’s data and that data is what it is purported

to be.”649 Data must meet be attributable, legible, contemporaneously recorded, original or

a true copy, and accurate, as well as complete, consistent, enduring and available.650 A

properly functioning data integrity system, including an effective IT infrastructure, is

essential for meeting these requirements.651

         Akorn has pervasive data integrity and compliance problems that prevent Akorn

from being able to meet these standards. As discussed in the Factual Background, Akorn

hired Cerulean in 2016 to assess its data integrity systems. Avellanet testified that some of

Akorn’s data integrity failures were so fundamental that he would not even expect to see

them “at a company that made Styrofoam cups,” let alone a pharmaceutical company

manufacturing sterile injectable drugs.652 In his opinion, Akorn’s data integrity issues were

         649
               See JX 143 at 1; accord Kaufman Tr. 323; Kaufman Dep. 196; see Wasserkrug
Tr. 9.
         650
               Wasserkrug Tr. 8, 12; Franke Dep. 33–36; JX 1247 ¶ 35.
         651
               See JX 1252 ¶ 2.1; JX 439 at ‘435–36; Pramik Dep. 26.
         652
          Avellanet Dep. 173; see also id. at 111–12 (testifying that he had never before
seen a company where any employee could make changes to electronic data “willy-nilly
with no traceability or accountability”).

                                              164
among the “top three worst” of the 120+ pharmaceutical companies that he has assessed,653

a notorious status given that his practice only involves companies that “have problems.”654

He believed that the “FDA would get extremely upset” about Akorn’s lack of data integrity

“because this literally calls into question every released product [Akorn has] done for

however many years it’s been this way.”655

       As discussed at greater length in the Factual Background, Cerulean’s report on the

Decatur facility identified seven critical, seven major, and at least five minor

nonconformities.656 Cerulean’s report on the Somerset facility was never completed

because Akorn’s IT department failed to provide adequate support,657 but the preliminary

report identified three critical findings and three major findings.658 Avellanet believed that

some of the violations were so severe that Akorn’s senior management should be concerned

about potential criminal liability.659 Akorn made “no effort” to schedule a date to complete

       653
             Avellanet Dep. 172–73.

         Kaufman Tr. 317–19; accord Avellanet Dep. 301. It was Akorn’s expert, Zena
       654

Kaufman, who pointed out the dubious exclusivity of Cerulean’s clientele. See Kaufman
Tr. 282.
       655
             Avellanet Dep. 116–17.
       656
             JX 231 at ‘062, ‘067.
       657
             Wasserkrug Tr. 131; see JX 439 at ‘430.
       658
             JX 439 at ‘430.
       659
             Id. at ‘435–36.

                                             165
the Somerset inspection660 and cancelled Cerulean’s previously scheduled assessment at

Amityville.661

      Akorn’s internal quality experts confirmed the validity of the critical deficiencies

that Cerulean identified.662 They also determined that Akorn essentially ignored them. In

March 2018, the GQC team found that Akorn had not yet addressed the vast majority of

the deficiencies.663 Somerset had done absolutely nothing to address its deficiencies.664

Decatur likewise had “failed to appropriately investigate and remediate” Cerulean’s

findings, having only completed “32% of the corrective actions.”665 These findings are

consistent with a contemporaneous email written by Franke, who told Avellanet in late

      660
           Wasserkrug Tr. 32; see Avellanet Dep. 139; see also JX 507 at ‘317 (“executive
leadership” decided “that IT resources would not be engaged in the third party data
integrity audit [Cerulean]”).
      661
            Avellanet Dep. 47, 164–65; see JX 509 at ‘746.
      662
            See JX 1077 at ‘143–47; Wasserkrug Tr. 155–56.
      663
            JX 1077 at ‘065; Wasserkrug Tr. 151–54.
      664
          See JX 1077 at ‘065–66 (“Somerset . . . while having received the draft audit
report on 31 May 2017, decided to wait for the final report received on 3 March 2018 and
failed to initiate formal corrective actions or have a documented plan to date.”);
Wasserkrug Tr. 153–54 (“[I]n 2017, after getting the Somerset Cerulean report, no actions
were taken in response.”).
      665
          JX 1094 at ‘623; see Wasserkrug Dep. 204–06; see Franke Dep. 239 (testifying
that 11 of the 12 items scheduled for Q1 2018 on the Decatur data integrity plan had not
been completed).

                                           166
2017 that Akorn was “making 0 progress on our DI remediation efforts,” which she

attributed to “the culture and the message from management.”666

      As discussed in the Factual Background, during the same time frame that Cerulean

was conducting its reports, Akorn’s GQC team identified similar data integrity violations.

 At Lake Forest, in April 2016, GQC found that audit trails were not being reviewed for
  even “minimum criteria,” including “data deletion” and “data manipulation.” 667 GQC
  also found that “multiple Akorn staff members” had unauthorized “system access
  allowances” that enabled them to modify data and to delete audit trails.668 When GQC
  visited Lake Forest again in December 2017, the problems had not been remediated.669

 At Vernon Hills, in June 2016, a GQC audit identified a critical data integrity failure
  that permitted unauthorized personnel to “make changes in master production and
  control records.”670 The internal audit also found that laboratory equipment was “unable
  to record audit trails” and could not identify the users performing tests.671 More than a
  year later, a September 2017 GQC audit found exactly the same problems.672 The report
  observed that corrective actions had “been halted and remain incomplete,” and noted
  that Akorn’s failure to remediate these deficiencies “presents undue risk to the site’s
  ongoing operations.”673 By the time of trial, the problems had still not been fixed, and
  Vernon Hills did not even have a data integrity compliance plan.674

      666
            JX 754 at ‘740.
      667
            JX 124 at ‘764.
      668
            Id. at ‘769.
      669
            JX 782 at ‘799–802.
      670
            JX 136 at ‘344.
      671
            Id.
      672
            JX 655 at ‘479–80.
      673
            Id. at ‘472.
      674
            Wasserkrug Tr. 118, 136.

                                           167
 At Somerset, in April 2017, GQC identified critical problems involving access controls
  and audit trail reviews.675 When GQC returned in December 2017, the problems had
  not been remediated.676 By the time of trial, Somerset still did not have an approved
  data integrity compliance plan.677

In 2017, GQC identified numerous other data integrity deficiencies at Akorn’s sites, with

seventeen at Hettlingen, fifteen at Cranbury, five at Amityville, and five at Lake Forest.678

In addition to these reports, the factual record contains extensive evidence of other,

widespread quality problems at Akorn.

       After the signing of the Merger Agreement, Akorn’s exacerbated its compliance

problems. As discussed in the Factual Background, Silverberg authorized a response to a

CRL for azithromycin in August 2017 that contained two sets of fabricated data.679 I am

forced to conclude that Silverberg knew that the CRL would rely on fabricated data but

authorized it anyway because he did not want to withdraw the ANDA and wave a red flag

in front of Fresenius that would call attention to Akorn’s data integrity problems while the

Merger was pending. Akorn and its advisors immediately recognized the seriousness of the

       675
             JX 515 at ‘115.
       676
             JX 801 at ‘663–64.
       677
             Wasserkrug Tr. 136.
       678
             See JX 1318.019–31; Wasserkrug Tr. 118, 122–24.
       679
             JX 1068 at ‘014.

                                            168
issue and expressed concern that the FDA would invoke the AIP or take other significant

action against Akorn.680

       Akorn then aggravated the situation by providing the FDA with a misleading

description of the investigation, its views on whether Silverberg acted knowingly, and the

state of Akorn’s data integrity efforts. Akorn also concealed a troubling incident in which

Silverberg sought to coordinate stories with Sherwani about the azithromycin incident and

destroy evidence of the coordination. Even Akorn’s FDA expert agreed that Akorn was

“not fully transparent” with the FDA.681 She suggested that Akorn had subsequently

become transparent by providing the FDA with Cerulean’s reports and correspondence

from Sidley, but in reality, Akorn never provided the FDA with Cerulean’s reports, and

Akorn’s regulatory counsel primed the FDA to discount anything Sidley said.682

       As part of its effort to get ahead of the issue with the FDA, Akorn retained NSF to

conduct data integrity audits at six Akorn facilities (excluding Somerset). NSF would

review a limited number of ANDAs from the Somerset facility and a sampling of product

batch records. NSF quickly identified numerous major deficiencies that were consistent

with the problems that Cerulean and Akorn’s GQC team had identified. As soon as the

       680
             See JX 884 at ‘068; JX 908 at ‘831; see also Stuart Tr. 853–54.
       681
          Kaufman Tr. 378; see also id. at 391 (agreeing that Akorn should have disclosed
Silverberg’s efforts to coordinate stories).

        See JX 1066 at ‘893–94; Stuart Tr. 840–44. Compare Kaufman Tr. 402, 414 with
       682

Wasserkrug Tr. 40 and JX 1063 at ‘004–05.

                                             169
NSF reports began coming in, Akorn’s representatives worried about severe regulatory

consequences, including the possibility that the FDA would impose the AIP.683 As NSF’s

investigation continued, its data integrity reports largely confirmed the existence of

widespread problems at Akorn’s facilities.684 By the time of trial, NSF had examined eight

ANDAs involving currently marketed products that had been prioritized for review.685 NSF

found two critical deficiencies involving the submission of intentionally manipulated data

to the FDA and over 200 major deficiencies.686 NSF also found numerous trial injections

       683
            See JX 1127 (expressing concern that “the FDA is likely to have a very negative
reaction to our report” and indicating that possible responses included the AIP, “suspension
of review of all pending submissions,” and “mandat[ory] review by a third party of product
released for the market”); JX 1496 at ‘055–56 (Akorn’s regulatory counsel observing that
“[i]f audit reports make it look like there are similar issues across the company, FDA might
see need to get whole company under decree” and that the “[s]heer number of issues across
all sites audited by NSF . . . could raise concern”); JX 1493 (“[A]s other audit reports roll
out,” the FDA “may see it as the whole corporation/multiple sites under decree.”).
       684
            See JX 1141 at ‘081 (Vernon Hills: “Data entry into notebooks does not appear
to always be contemporaneous. In a large number of instances in every notebook reviewed,
the date of the technician’s work in the notebook is a week or more later than the date that
the HPLC sequences were run.”); id. (Vernon Hills: “Review and verification of notebook
activities is not always timely. In a large number of instances in every notebook reviewed,
the verified date is months later, and in some cases more than a year after the work was
performed.”); id. (Vernon Hills: “The adequacy of notebook verification is questionable
since the equations for some calculations are not described in the notebook.”); id. at ‘079
(Vernon Hills: “User access levels are not appropriate to protect data from deletion or
further manipulation.”); JX 1190 at ‘712–13 (finding that laboratory notebooks at Cranbury
were “lacking in traceability, legibility, [and] authenticity”); JX 1178 at ‘356 (observing
that analysts at Amityville could “delete or modify” data on “[a]ll stand-alone
instruments”); id. (noting that many laboratory instruments at Amityville did not have audit
trails).
       685
             See JX 1516 at ‘595–96; Wasserkrug Tr. 175–76.
       686
             See JX 1156; JX 1157; JX 1185; JX 1196; JX 1201; JX 1204; JX 1221; JX 1224.

                                            170
that appeared to have been used in FDA submissions over a five-year period involving

multiple Akorn analysts and products.687 NSF advised Akorn that this issue had major

regulatory significance and was one of its “most serious observations.”688

       At trial, Fresenius presented fact testimony from Sheers, the lawyer who led the

Sidley team that investigated the whistleblower allegations. He testified credibly that

Sidley’s interviews with Akorn employees revealed a “lack of awareness of compliance

issues, with a lack of understanding as to what the FDA requires and why [Akorn’s]

deficient practices would be problematic to the FDA.”689 He also testified credibly that the

Sidley team identified “serious fundamental flaws in the way [Akorn] managed their data

such that there was no data integrity, essentially,” at Decatur, Vernon Hills, or Somerset.690

Based on its investigation, Sidley concluded that “all of the data that was generated was

not reliable, and the FDA would consider all of the products that were made in those

facilities adulterated.”691

       687
          JX 1141 at ‘090; see Wasserkrug Tr. 183 (testifying that the trial injections
involved “approximately 20” analysts and multiple products).
       688
           JX 1141 at ‘090, ‘092; see JX 1164 at ‘421 (talking points prepared by Akorn’s
counsel for a call with Akorn’s directors noting that “the Company has identified many
[chromatography sequences] that are the type of problematic, unreported trial injections
FDA has warned of”); JX 1127 (Akorn’s counsel acknowledging that the “problematic
practice [of trial injections] went on for four years and involved about 25 chemists”).
       689
             Sheers Tr. 1037.
       690
             Id. at 1036–39.
       691
             Id. at 1039.

                                             171
       Lachman assisted Sidley and conducted onsite assessments at Vernon Hills,

Somerset, Cranbury, and Decatur. Lachman identified “major, systemic data integrity

gaps” at every location.692 Lachman determined that “cGMP compliance deficiencies” at

Akorn’s sites “call[] into serious question” the reliability of Akorn’s testing data, the

effectiveness of its quality system, the accuracy of its regulatory submissions, “and thus

the safety and efficacy of Akorn’s products.”693 At trial, George gave highly credible

testimony about these issues, including his assessment of the extreme nature of Akorn’s

problems:

       Everywhere that Lachman looked at policies, procedures, practices and data,
       we found noncompliance. And the unusual thing is, is when we go into a
       client’s site, we might find one area where they’re weak in compliance. But
       at Akorn, across the board, everything we looked at had significant
       noncompliance associated with it.694

He reiterated that “a lot of clients may have one particular deficiency in compliance, but

not the broad scope of systemic issues that we identified at the Akorn sites.”695 When asked

       692
           See JX 1252 ¶ 2.3. Like Cerulean and Akorn’s GQC team, Lachman observed
that Akorn’s computer and laboratory systems at multiple sites were “not secure from
unauthorized change.” See George Tr. 1133–34 (explaining that users of Akorn’s
Chromeleon system—used for chromatography testing—were able “to access data, to
modify data, to move data, to delete data, [and] to generate data” in hidden folders, which
was “obviously a major concern” and meant that “the data itself is not trustworthy”); id. at
1135 (testifying that he had never before seen “this kind of a complete system failure across
all the electronic systems in the laboratory”).
       693
          JX 1252 ¶ 2.2; see George Tr. 1127–1128 (“[T]he trustworthiness of the data
supporting [Akorn’s regulatory] submissions is -- it’s not there.”)
       694
             George Tr. 1126–27.
       695
             Id. at 1127.

                                            172
to rank Akorn among the laboratories he had seen, George said he “would put them with

the worst.”696 George opined that Akorn’s “problems were systematic in nature and the

reliability of all the data should be questioned.”697

       David L. Chesney also testified as an expert for Fresenius. Chesney previously

served at the FDA for twenty-three years and subsequently spent twenty-three years as a

regulatory consultant. In his assessment, “Akorn has a number of very serious data integrity

issues” which are “widespread” and “pervasive.”698 In his forty-six-year career, in which

he has visited hundreds of companies, Chesney had “rarely seen integrity issues that exist

at the scope and scale we see” at Akorn.699 He opined that in light of the severity of Akorn’s

issues, the FDA has sufficient grounds to invoke the AIP.700 He further opined that even if

the FDA did not formally impose the AIP, the FDA likely would take action that would

       696
          Id.; see JX 1252 ¶ 2.5 (opining that quality conditions at Akorn represented “one
of the poorest states of compliance that I have encountered”).
       697
           George Tr. 1127–28. Akorn has attacked the credibility of George and Lachman,
arguing that they were hired guns retained by Sidley to manufacture a case for Fresenius.
Having seen George testify, I reject those assertions. At heart, George is a scientist, and he
is clearly dedicated to data and the facts. He does not seem capable of shading the truth.
       698
             Chesney Tr. 1241.
       699
             Id. at 1249.
       700
          Id. at 1254 (“[T]he test for imposition of the AIP has been met.”); see JX 1251 ¶
15. Although Fresenius retained Chesney as an expert in this case, Akorn previously
retained Chesney to give a presentation to its board of directors on FDA matters and to
provide regulatory training for Akorn’s employees at Decatur and Somerset. See Chesney
Tr. 1234–35.

                                             173
halt the approval of Akorn’s ANDAs until Akorn proves that its data is reliable.701 Chesney

explained that when evaluating what action to take, the FDA will view Silverberg’s

intentional misconduct as an aggravating factor calling for more severe enforcement

action.702 Chesney’s testimony was cogent and credible.

       Akorn’s expert, Zena Kaufman, attempted to normalize the problems at Akorn by

opining that they resemble problems found across the industry and at Fresneius. Kaufman

appears to be a person of integrity, and as a result, aspects of her testimony supported

Fresenius’s position.

       Kaufman’s expertise in quality compliance stems primarily from a three-year stint

between 2012 and 2015 as head of global quality for Hospira, Inc., a company that faced

pervasive compliance problems when she joined.703 When she left, Hospira still had not

completed its remediation efforts; it had resolved the issues at its U.S. plants, but its foreign

plants still had outstanding Warning Letters.704 Despite having spent three years overseeing

       701
          Chesney Tr. 1254, 1256–57; JX 1249 ¶¶ 59, 61. Akorn’s expert, David Adams,
did not testify at trial and did not offer an opinion on whether Akorn had met the test for
the AIP. JX 1289; Adams Dep. 83–85. Adams agreed that the FDA could suspend Akorn’s
product approvals without invoking the AIP. Adams Dep. 126–28. I found Chesney’s
opinions more credible and rely on his views.
       702
          See Chesney Tr. 1244–45 (testifying that Akorn’s violations are “not simply the
result of innocent lapses, mistakes, sloppy procedures, [or] unclear forms, but have a
deliberate element to them, which is definitely an aggravating factor in the FDA’s view”).
One of Akorn’s experts, Kaufman, agreed that these facts are likely to lead to more severe
action by the FDA. See Kaufman Tr. 374–75.
       703
             See Kaufman Tr. 257–62, 307–08, 312; see also JX 1388.
       704
             Kaufman Tr. 261–62.

                                              174
quality at a deeply troubled generic manufacturer, Kaufman had never before encountered

some of the data integrity problems that Akorn exhibited, including a senior quality officer

who made misrepresentations to the FDA, company-wide computer access issues that

allowed any employee to make changes to files without any traceability or accountability,

and the pervasive backdating of lab entries.705 She agreed that the FDA would be “quite

concerned” about Akorn’s lack of access controls because it undermined the security of

Akorn’s data.706 She agreed that this concern would affect both Akorn’s ANDAs and

“product released into the market.”707

       Kaufman’s primary technique for normalizing Akorn’s problems was to analyze

publicly available Form 483s and warning letters for other companies, then compare the

“types of observations, the categories” raised in those filings with the types of observations

at Akorn.708 Kaufman did not persuade me that her methodology enabled her to assess

reliably the relative significance or pervasiveness of the problems.709 Compared to

Fresenius’s experts, Kaufman had less experience with quality issues and data integrity

       705
             Id. at 315, 317, 355, 362.
       706
             Id. at 315–17, 322–24.
       707
             Id. at 324.
       708
             See id. at 266–79.
       709
           See id. at 349–55 (identifying omissions from her data set observations; noting
that observations were limited to critical finding and excluded major findings); id. at 372–
74 (failing to consider whether and to what extent Akorn had responded to the observations
or how long they had been outstanding); id. at 441 (agreeing that she provided different
explanations for how her data set was compiled).

                                             175
issues. She had never performed a data integrity audit or conducted a data integrity

investigation.710 She did not claim to be an expert in data remediation plans.711 Unlike

Fresenius’s experts, she did not visit any Akorn sites or speak to any Akorn personnel.712

When rendering her opinions, Kaufman also did not take into account Akorn’s failure to

be transparent with the FDA.713

       In its post-trial briefs, Akorn relied on its history of past inspections with the FDA

to argue that it must not have serious quality or data integrity issues. But as Kaufman

recognized, “you can get an FDA inspection with zero issues but then significant problems

are discovered.”714 From the FDA’s standpoint, “you are . . . only as good as your last

inspection.”715

       Since trial, Akorn has received lengthy and detailed Form 483s for Decatur and

Somerset, both of which identify data integrity issues. The FDA sent Akorn two CRLs that

conditioned the approval of ANDAs for products from Decatur on “[s]atisfactory

       710
             Id. at 304.
       711
             Id. at 267–68, 343.
       712
             Id. at 304.
       713
          See id. at 379 (“Q. You did not say in either of those two reports that Akorn was
not transparent. Correct? A. Correct.”).
       714
             Id. at 437.
       715
             Klener Dep. 79–80; accord Klener Tr. 1321.

                                            176
resolution of the observations” in its Form 483.716 Akorn has not received any new ANDA

approvals for any of its sites since May 4, even though approval for many of the ANDAs

is now overdue.717 By letter dated August 9, 2018, the FDA formally classified Decatur as

OAI and informed Akorn that “[t]he facility may be subject to a CGMP regulatory or

enforcement action based on this inspection, and FDA may withhold approval of any

pending applications or supplements in which this facility is listed.”718

       Perhaps most strikingly, by letter dated September 3, 2018, Akorn reported to the

court that on August 22, during the later stages of the FDA’s investigation, someone had

erased the database at Somerset for a high accuracy liquid particle counter along with the

local backup file and the associated electronic security logs. FDA inspectors had been on

site at Somerset intermittently between July 23 and August 30.719 Akorn has reported the

incident to law enforcement. Given the timing of the deletion, it is reasonable to infer that

the perpetrator may have been trying to hide information from the FDA, or from personnel

who would follow up on the deficiencies that the FDA identified in its Form 483.

       716
             See JX 1223; JX 1226; JX 1198; JX 1249 ¶¶ 122–23.
       717
           JX 491. The two approvals from early May would have been “in the late, final
stages of the review process” by the time Akorn disclosed its data integrity issues,
indicating that “the FDA simply allow[ed]” the review process “to complete.” Chesney
Tr. 1260–61. The only other approvals since that time have involved changes to labeling
and the addition of new third-party manufacturers for already-approved Akorn drugs,
neither of which concerns Akorn’s data. See Sheers Tr. 1061; Chesney Tr. 1262.
       718
             Dkt. 191, Ex. D.
       719
             Dkt. 199 at 1.

                                            177
       The systemic failures at Akorn raise questions about the accuracy and reliability of

all of its data, regardless of site or product. As a result, Akorn cannot meet its burden to

prove to the FDA that its data is accurate. To the contrary, Akorn’s products and facilities

are known not to comply with cGMP and FDA requirements, as shown by the reports of

its own internal audit team. Akorn does not make products where quality issues can be

overlooked until problems arise. As Henriksson testified, “[W]e are talking about drugs

which are used by people . . . who are critically ill . . . [and] many of those products . . . .

are going to be injected into people.”720

       In my view, the regulatory situation at Akorn is qualitatively “material when viewed

from the longer-term perspective of a reasonable acquiror.”721 Akorn has gone from

representing itself as an FDA-compliant company with accurate and reliable submissions

from compliant testing practices to a company in persistent, serious violation of FDA

requirements with a disastrous culture of noncompliance. The qualitative aspect of the

MAE analysis warrants a finding that the regulatory issues would reasonably be expected

to result in a Material Adverse Effect.

                3.     Quantitative Significance

       The quantitative aspect of the MAE analysis likewise warrants a finding that

Akorn’s regulatory issues would reasonably be expected to result in a Material Adverse

       720
           Henriksson Tr. 974; see Sturm Tr. 1196 (“[T]here is zero tolerance to exposing
patients to known risks.”).
       721
             IBP, 789 A.2d at 68.

                                             178
Effect. Akorn and Fresenius have each provided estimates of the economic impact of the

data integrity problems. Akorn’s estimate contemplates direct outlays of $44 million with

no other effect on Akorn’s value.722 Fresenius’s estimate contemplates direct outlays of

$254 million plus a valuation hit of up to $1.9 billion from suspending on-market products

and pushing out pipeline products while Akorn’s data is verified.723 As might be expected

given their respective positions in the litigation, Akorn’s estimate is a best case scenario.

It contemplates a world in which consultants complete a limited process to correct Akorn’s

protocols and confirm that everything is OK, but where nothing else is uncovered, no data

needs to be revalidated, and no products need to be withdrawn or deferred. Fresenius’s

estimate is a worst case scenario. It contemplates rebuilding Akorn’s quality systems,

validating the data for its twenty-four leading products, obtaining new approvals for those

products from the FDA, and not selling any products until Akorn’s data can be verified.

       In my view, Akorn’s figure is not credible. Akorn did not present any fact witness

at trial who could testify about the accuracy of the $44 million estimate or how it was

developed. Wasserkrug read the figure off the page during her direct testimony, but she

admitted that she had “no idea” whether the “number is correct or incorrect.”724 Kaufman

thought the overall dollar figure felt right as a “benchmark,” but she focused on whether

       722
             JX 1318.
       723
             JX 1152 at 19–20, 25; see Henriksson Tr. 978–82.
       724
             Wasserkrug Tr. 115–16.

                                            179
Akorn had the right “compliance aspects” in the plan, such as IT systems, and admitted

that she did not have the expertise to determine what the amounts should be.725

       More significantly, Akorn’s estimate assumed that Akorn would continue with the

relatively limited investigation that it proposed after reporting to the FDA on the

azithromycin issue in March 2018. The estimate assumed that the investigation would not

uncover any additional problems with Akorn’s data, would not result in any additional

ANDAs being withdrawn, would not have any effect on Akorn’s pipeline, and would not

result in any product recalls. Given Akorn’s pervasive data integrity issues and its

obligation to prove the reliability of its data to the FDA, this seems highly unlikely.

Wasserkrug agreed that Akorn will need to “pull a product off the market” if it cannot

support the data on which the ANDA was based,726 and the evidence at trial indicates that

Akorn cannot currently prove the accuracy of its data. Any suspensions of existing products

or delays of new products will obviously have a negative effect on Akorn’s value. 727 Since

trial, Akorn has been forced to expand the scope of its remediation efforts dramatically.728

       725
             Kaufman Tr. 292–93.
       726
             Wasserkrug Tr. 69.
       727
           See JX 1253; JX 1254; Bowles Dep. 19–22, 67–68. Kaufman only was able to
assert that Akorn’s remediation plan was adequate because she assumed that Akorn had
committed to conduct “for any instrument or equipment found to have inadequate access
control levels or permissions, a retrospective review of associated data and a root cause
assessment.” JX 1295 ¶ 113. In other words, she assumed that if Akorn found problems,
Akorn would do more. Kaufman declined to opine on “how many Akorn products and
Akorn ANDAs have been affected” by data integrity issues. See Kaufman Tr. 324–25.
       728
             See Dkt. 234, Exs. A & B.

                                            180
       Unlike Akorn’s estimate, Fresenius’s estimate takes into account the need to

conduct a complete investigation and the strong likelihood that such an investigation will

uncover additional problems with Akorn’s data, will result in additional ANDAs being

withdrawn, will have effects on Akorn’s pipeline, and could result in product recalls.

Sturm, Henriksson, and Bauersmith testified to the detailed analysis and care that went into

preparing Fresenius’s plan. The views of Fresenius’s management team on this subject are

particularly credible, because Fresenius has direct experience remediating serious data

integrity issues at one of its facilities in India and understands what a project of this nature

entails.729 Fresenius’s management team developed the plan so that the Supervisory Board

could understand Fresenius’s potential exposure if Fresenius closed the Merger, and the

Supervisory Board relied on the document when deciding whether to terminate the Merger

Agreement. Sturm testified publicly that Fresenius stands behind the analysis and will

undertake those steps if Fresenius is forced to close.

       Henriksson testified that to properly remediate the data integrity issues at Akorn,

there must be a temporary halt on the release of Akorn products until additional safety

measures can be instituted.730 Akorn’s R&D department must be comprehensively

restructured to “build a culture of [] compliance,” implement IT systems with proper

       729
             See Henriksson Tr. 1022–23.
       730
             Id. at 975.

                                             181
controls, and retrain personnel.731 He projected that these initial steps will take

approximately one year. After that, Akorn will need to redevelop its products using reliable

data, then obtain approval from the FDA for those products.732 Fresenius anticipates

redeveloping Akorn’s twenty-four leading products, with a simple product taking one year

and a complex product taking two years, followed in each case by an additional year to

receive FDA approval. As a result, the overall remediation of Akorn’s data integrity issues

would take at least four years. During the first year of this period, Akorn’s ability to

generate revenue would stop, then come back on line gradually as its products were

reformulated and reapproved.

       The evidence persuades me that a responsible remediation plan would be much

closer to what Fresenius has proposed than what Akorn currently intends to pursue. Given

the widespread problems at all of Akorn’s sites and the evidence implicating Akorn’s

senior quality officer in data falsification, Akorn should be conducting a complete

review.733 So far, NSF’s narrow review has identified two additional ANDAs that were

       731
             Id. at 976–77.
       732
             Id. at 977–78.
       733
           JX 1298 ¶ 39 (“The investigation should . . . include a retrospective review of all
test results . . . .”); see Henriksson Tr. 976 (“They have already looked at nine ANDAs.
They have found severe data manipulation on three. You know, when do you stop sampling
and when do you say that, okay, I’ve seen enough. We’ve got to check it all.”); Sheers Tr.
1064 (“[T]hey should be doing a complete review. There are now several instances,
confirmed instances, of data falsification and fabrication, and the [FDA] expects in those
circumstances for a complete review to be conducted. And it’s not just enough to look at
what is currently being done. You have to do a retrospective review, because there’s

                                             182
based on fabricated data and two additional persons of interest. A complete review is highly

likely to uncover more problems with data integrity that will call ANDAs and products into

question and push out the timing of Akorn’s pipeline. Even under Akorn’s more limited

approach, its witnesses have agreed that the effort is “going to take about three years.”734

       Fresenius developed a credible plan for a complete review and remediation of the

serious problems at Akorn. It nevertheless represents a worst-case scenario in which every

product at Akorn has to be fixed. What seems more likely, in my view, is that a complete

investigation would determine that only some of Akorn’s products will require re-

validation and that the level of disruption and delay will not be quite so extensive as

Fresenius projects. Rajiv Gokhale submitted an expert report that addresses the impact of

shorter deferrals of Akorn’s cash flows. Using the discounted cash flow model that

Fresenius generated in the ordinary course of business to evaluate the Merger, he calculated

that a delay of one-and-a-half years would have a negative impact on Akorn’s value of

$604 million, and a two-year delay would have a negative impact on Akorn’s value of $808

million.735 Gokhale observed that in April 2017, when the Merger Agreement was

executed, Akorn had a standalone equity value of approximately $3.9 billion. The valuation

product that’s still in the market that is supported by that data, and there’s product that’s
going out the door today that is supported by data that is questionable.”).
       734
            Wasserkrug Tr. 68–69; see Avellanet Dep. 78–79 (“[I] have never seen a firm be
able . . . to remediate all of its issues in less than three years.”); JX 1295 ¶ 61 (Kaufman
relying on estimate of two to three years).
       735
             JX 1254 ¶ 6.

                                            183
impact of a one-and-a-half or two-year delay therefore represented, respectively, 16% and

21% of Akorn’s standalone equity value.736

      It is not possible to define with precision the financial impact of Akorn’s data

integrity issues. In an ideal world, I would run a series of Monte Carlo simulations using

varying assumptions. Lacking that ability and having considered the record evidence, I

suspect the most credible outcome lies in the vicinity of the midpoint of the parties’

competing submissions, at approximately $900 million. This rough estimate is also close

to the $800 million that Gokhale calculated for a two-year delay, particularly when one

adds to Gokhale’s estimate amounts for out-of-pocket remediation costs. Using the equity

value of $4.3 billion that is implied by the Merger Agreement, a valuation hit of $900

million represents a decline of 21%. That range of valuation consequence makes intuitive

sense to me given the seriousness of Akorn’s regulatory problems and the ever-expanding

efforts that Akorn has been forced to make to remediate them.737

      736
           Id. Gokhale also opined as to the effect of comparable delays on Akorn’s value
in April 2018, when Fresenius terminated the Merger. In that analysis, the lost value from
the deferred cash flows is higher and the standalone value of Akorn is lower, so the
percentage decline is materially larger. See id. ¶¶ 8–9. To be conservative, this decision
uses the lower values. In my judgment, that approach also makes sense for the Regulatory
MAE, which compares the as-represented value of the seller with its value in light of the
deviations from the representation. See IBP, 789 A.2d at 66. The measure of Akorn’s equity
value at the time of signing pre-dated the dramatic downturn in Akorn’s business and the
discovery of much of the information about Akorn’s data integrity problems. It therefore
provides a better measure of Akorn’s as-represented value.
      737
            See Dkt. 234, Exs. A & B.

                                           184
       Unfortunately, the parties have not provided much assistance in determining

whether remediation costs equal to approximately 20% of the target’s standalone value

would constitute an amount that would “be material when viewed from the longer-term

perspective of a reasonable acquiror.”738 In Hexion, the court agreed that materiality for

purposes of an MAE should be viewed as a term of art that drew its meaning from

Regulation S-K and Item 7, “Management’s Discussion and Analysis of Financial

Condition and Results of Operations.”739 It would have been helpful to have access to

expert testimony or studies about the thresholds companies generally use when reporting

material events, such as material acquisitions. It also would have been helpful to understand

the thresholds that Fresenius and Akorn have used. No one addressed these issues.

       Although both the factual record and the corpus of available authority are limited, I

believe that for Akorn, this expense would be “material when viewed from the longer-term

perspective of a reasonable acquiror.”740 In making this finding, I have primarily weighed

       738
             IBP, 789 A.2d at 68.
       739
             Hexion, 965 A.2d at 742.
       740
           IBP, 789 A.2d at 68. Some readers may get hung up on a perceived difference
between this decision’s earlier discussion of a General MAE in terms of percentage
declines in revenue and profitability, where Kling and Nugent highlighted 40% as a range
where courts often find the existence of an MAE, see Part II.A.1, supra, and this section’s
discussion of a Regulatory MAE in terms of remediation costs, which concludes that a loss
in the vicinity of 21% of Akorn’s standalone value constituted a Material Adverse Effect.
No one should fixate on a particular percentage as establishing a bright-line test. No one
should interpret this decision as suggesting that there is one set of percentages for revenue
and profitability metrics and another for liabilities. No one should think that a General
MAE is always evaluated using profitability metrics and an MAE tied to a representation
is always evaluated relative to the entity’s valuation. In this case, the parties briefed the

                                            185
the evidence in the record against my own intuition and experience (admittedly as a lawyer

and judge rather than as a buyer or seller of businesses).

       Among other things, the record demonstrates that Akorn pushed Fresenius to pay

top dollar for Akorn, extracting every cent that Fresenius was willing to pay. When a deal

is priced for perfection, a reasonable acquirer has less ability to accommodate an expense

that equates to a substantial portion of the seller’s value. In this case, the record indicates

that Fresenius remained willing to close despite identifying a high risk of a potential

exposure in the amount of approximately $100 million due to postponement of product

launches,741 as well as another high risk exposure of a similar amount related to cGMP

“deficiencies related to premises and equipment” in the Amityville and Decatur

facilities.742 The data integrity violations represent an incremental loss in value

General MAE question based on profitability metrics and the Regulatory MAE question
using remediation costs, so that is what the decision analyzed. In the context of this case,
the narrower focus for the Regulatory MAE makes sense and gives effect to the contract-
driven requirement that there be a sufficient connection between the breach of the
Regulatory Compliance Representations and the Regulatory MAE. The General MAE
Condition does not have an equivalent causal linkage to a particular issue. The question is
simply whether a General MAE had occurred.
       741
          JX 428 at ‘673; see JX 422 at ‘001 (“Akorn has an aggressive product launch
plan, which leads to risk of postponement for several products . . . and an estimated
exposure above $100m. [Fresenius] prepared a bottom-up model for each model and
adjusted the launch plan, R&D costs and revenues accordingly in the business plan.”).
       742
           JX 428 at ‘673; see JX 422 at ‘001 (“Site visit at Amityville and Decatur revealed
[good manufacturing practice] deficiencies related to premises and equipment, which could
result in negative outcome of regulator inspections and a mix of gross profit loss and capex
need amounting to a maximum exposure over $100m. This finding is mitigated via the
business plan.”).

                                             186
approximately four to five times greater than the combined exposure from both of these

risks.

         As a cross-check, I have considered external sources which, to my mind, might

suggest how a reasonable buyer would view the situation. First, there is the general

magnitude of a 20% change. By one common definition, a bear market occurs when stock

prices fall at least 20% from their peak,743 which suggests a broad cultural sense that this

level of losses is viewed as material. On a percentage basis, a 20% decline would be the

second largest single-day drop in the history of Dow Jones Industrial Average, exceeded

only by Black Monday in 1987, when the market fell by 22.61%.744

         Second, there are the levels at which parties renegotiate after one side asserts an

MAE. One unpublished study found that “[w]hen the target experiences a firm-specific

         743
           See, e.g., Adrian R. Pagan & Kirill A. Sossounov, A Simple Framework for
Analysing Bull and Bear Markets, 18 J. Appl. Econ. 23, 30 (2003) (“[M]ost bull markets
rise more than 20% while a much smaller fraction of bear markets culminate in a fall of
more than 20%.”); Asger Lunde & Allan Timmermann, Duration Dependence in Stock
Prices: An Analysis of Bull and Bear Markets, 22 J. Bus. & Econ. Stat. 253, 253–55 (2004)
(discussing definition of bear market where “the stock market switches from a bull state to
a bear state if stock prices have declined by a certain percentage since their previous (local)
peak within that bull state” and observing that a 20% decrease “is conventionally used in
the financial press”); E.S. Browning, Bear Sightings on Wall Street: Is This Really a Bear
Market, or Some Other Animal?, Wall St. J., Jan. 16, 2001, at C1 (“If a bear market is a
20% drop from a high—and that is the most common definition—the Nasdaq is in a nasty,
growling bear.”); John R. Dorfman, If It Looks Like a Bear and Walks Like a Bear, Chances
Are That the Bear Market Has Arrived, Wall St. J., Sept. 27, 1990, at C1 (chart of “[h]ow
stocks have performed in bear markets (declines of 20% or more) since 1919”).
         744
          See Dow Jones Industrial Average All-Time Largest One Day Gains and Losses,
Wall St. J., http://www.wsj.com/mdc/public/page/2_3024-djia_alltime.html (last visited
Sept. 19, 2018).

                                             187
MAE, the subsequent renegotiation reduces the price by 15%, on average.”745 The fact that

acquirers force renegotiations and then reach agreement (on average) at the 15% level

suggests that an acquirer would regard a drop in value of 20% as material.

       Third, there are the ranges that parties generally use for the upper and lower bounds

of collars in deals involving stock consideration.746 Two academic studies find that parties

agree, on average, to a lower bound for the collar at a price approximately 10% below the

initial deal consideration.747 Practitioners observe that the upper and lower bounds for

collars generally fall within 10% to 20% of the consideration at signing.748 In other words,

       745
          Antonio J. Macias, Risk Allocation and Flexibility in Acquisitions: The Economic
Impact of Material-Adverse-Change (MACs) Clauses 27 (Apr. 17, 2009), http:/ssrn.com/
abstract=1108792; see also, e.g., JX 641 at ‘595, ‘599 (discussing negotiated 8.9%
decrease in deal price after Abbott Labs asserted an MAE at Alere).
       746
           Collars come in two broad types: (i) a fixed-consideration version in which the
exchange ratio adjusts between an upper and lower bound to keep the value of the
consideration constant, but floats above and below the lower bound, and (ii) a floating-
consideration version in which the exchange ratio remains constant between an upper and
lower bound, thereby allowing the value of the consideration to float, then becomes fixed
if the value rises above the upper bound or falls below the lower bound. See generally
Rumberger, supra, § 5:48 (describing collars). For the basic directional inference that I
seek to draw, the difference between these structures seems unlikely to be material.
       747
          See Micah S. Officer, The Market Pricing of Implicit Options in Merger Collars,
79 J. Bus. 115, 128–29 (2006); Kathleen P. Fuller, Why Some Firms Use Collar Offers in
Mergers, 38 Fin. Rev. 127 (2003).
       748
           See Rumberger, supra, § 5:48 (“Typically, the collar is set at plus or minus 10%
or 20% of acquirer’s stock price at the signing of the acquisition agreement, although the
upper and lower prices are not always symmetrical.”); Craig M. Wasserman, Dealing With
Market Risks in Stock-for-Stock Mergers, The M&A Lawyer (LegalWorks), Oct. 1998
(noting that a collar “is often set at 10% to 15% up and down from the acquiror’s stock
price at the time the deal is signed”). Wasserman likewise notes that agreements also often
include walk-away rights that are triggered when the value changes by 15% or 20%,

                                            188
parties (on average) view a 10% change in value as a material breakpoint that results in the

deal consideration being handled differently. I recognize that this is a noisy proxy for

materiality, because parties who use collars typically also include MAE-based termination

provisions.749 My point is not to argue that one type of provision is a substitute for the

other, nor to offer any fine-grained opinions about their relative roles in different types of

deals. The only inference I seek to draw is far more basic: If parties establish a lower bound

for collars (on average) around 10% below the initial deal consideration and cause the deal

pricing to change significantly at that point, then this suggests that they view a drop in

value of 10% as material and would therefore also view a drop of more than 20% as

material.750

       Fourth, there is the magnitude of reverse termination fees. A reverse termination fee

is an amount the buyer agrees to pay the seller if the buyer cannot or does not complete an

effectively creating an objectively determined MAE. See id.; accord Lou R. Kling et al.,
Summary of Acquisition Agreements, 51 U. Miami L. Rev. 779, 811 (1997) (“At the outer
limits of the collar (or, alternatively, at other, wider limits), parties may have termination
rights.”); Officer, supra, at 128 (finding that the median termination right for a collar is
approximately 20% below the initial deal consideration).
       749
          See Joel F. Houston and Michael D. Ryngaert, Equity Issuance and Adverse
Selection: A Direct Test Using Conditional Stock Offers, 52 J. Fin. 197, 203–04 (1997)
(noting that collar deals virtually always have material adverse change clauses). By the
same token, in deals where parties negotiate walk rights that are triggered when the deal
consideration floats outside of the collar, the materiality signal is even stronger.
       750
          Cf. Micah S. Officer, Collars and Renegotiation in Mergers and Acquisitions, 59
J. Fin. 2719, 2722–23 (2004) (arguing that collars represent a form of ex ante price
renegotiation based on changes in the relative value of bidder and target).

                                             189
acquisition. In its purest form, the seller’s sole remedy against the buyer is the payment of

the reverse termination fee. That structure effectively creates an option for the buyer and

establishes a floor for the loss in value that a buyer needs to contemplate: If the potential

loss in value exceeds the amount of the termination fee, the buyer can pay the fee and walk

away.751 A law firm study in 2011 found median reverse termination fees equal to 6.36%

of transaction value.752 Studies of reverse termination fees during the period leading up to

the financial crisis found fees hovering at the much lower level of approximately 3%.753

Even more so than collars, reverse termination fees provide a noisy indication of

materiality because many are tied to contractual conditions, should be priced as options,

and are frequently used in private equity deals rather than in strategic acquisitions. Taking

all those distinctions into account, to the extent these amounts provide a rough indication

of the point where certain buyers have bargained for the right to walk, they suggest a point

at which transacting parties regard a change in value as material. Given that the amounts

are far lower than the remediation expense in this case, they suggest that an expense

amounting to 20% of Akorn’s value would be material to a reasonable acquirer.

       751
         See Steven M. Davidoff, The Failure of Private Equity, 82 S. Cal. L. Rev. 481,
483, 497–98, 515 (2009).
       752
         See Matthew D. Cain et al., Broken Promises: The Role of Reputation in Private
Equity Contracting, 40 J. Corp. L. 565, 593–94 (2015) (citing study).
       753
          See Brian JM Quinn, Optionality in Merger Agreements, 35 Del. J. Corp. L. 789,
811 (2010) (3.29%); Elizabeth Nowicki, Reverse Termination Fee Provisions in
Acquisition Agreements 6 (Jul. 5, 2009), http:/ssrn.com/abstract=1121241 (2.7%).

                                            190
       To reiterate, I do not pretend that any of these indicators is directly on point. I have

considered them as cross-checks when attempting to evaluate my intuitive belief that the

remediation expense would be material to a reasonable strategic acquirer. In this case, I am

persuaded that the quantitative aspect of the MAE analysis warrants a finding that the

regulatory issues would reasonably be expected to result in a Material Adverse Effect.

              4.     Whether Fresenius Knowingly Accepted The Risk

       As it did when arguing against the existence of a General MAE, Akorn contends

that Fresenius cannot claim that its regulatory issues would be reasonably likely to result

in a Material Adverse Effect because Akorn knew about the risk of potential issues and

signed the Merger Agreement anyway. I agree that Fresenius knew broadly about the risk

of regulatory non-compliance; that is precisely why Fresenius bargained for

representations on this subject. I do not agree, however, that Fresenius’s general knowledge

about potential regulatory issues or questions about the extent to which it conducted due

diligence into these issues means that Fresenius cannot now rely on the representation it

obtained.

       Writing as a Vice Chancellor in Cobalt Operating, LLC v. James Crystal

Enterprises, LLC, Chief Justice Strine addressed whether a buyer who had reason to be

concerned about the accuracy of a representation and had the ability to conduct due

diligence to confirm whether or not it was accurate could nevertheless rely on the

                                             191
representation for purposes of asserting its contractual rights.754 The seller argued that the

buyer could not have relied on the representation and therefore should not be able to

recover for breach. The Chief Justice rejected this argument:

       [A] breach of contract claim is not dependent on a showing of justifiable
       reliance. That is for a good reason. Due diligence is expensive and parties to
       contracts in the mergers and acquisitions arena often negotiate for contractual
       representations that minimize a buyer’s need to verify every minute aspect
       of a seller’s business. In other words, representations like the ones made in
       [the agreement] serve an important risk allocation function. By obtaining the
       representations it did, [the buyer] placed the risk that [the seller’s] financial
       statements were false and that [the seller] was operating in an illegal manner
       on [the seller]. Its need then, as a practical business matter, to independently
       verify those things was lessened because it had the assurance of legal
       recourse against [the seller] in the event the representations turned out to be
       false. . . .

       [H]aving given the representations it gave, [the seller] cannot now be heard
       to claim that it need not be held to them because [the buyer’s] due diligence
       did not uncover their falsity. . . . Having contractually promised [the buyer]
       that it could rely on certain representations, [the seller] is in no position to
       contend that [the buyer] was unreasonable in relying on [the seller’s] own
       binding words.755

Other Delaware decisions reach the same conclusion.756

        2007 WL 2142926 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008)
       754

(TABLE).
       755
             Id. at *28 (footnotes omitted).
       756
           See Gloucester Hldg. Corp. v. U.S. Tape & Sticky Prods., LLC, 832 A.2d 116,
127–28 (Del. Ch. 2003) (“Reliance is not an element of a claim for indemnification” for
“breach of any of the representations or warranties in [the agreement] . . . .”); id. at 127
(rejecting contention that justifiable reliance was an element of breach of contract as
“simply incorrect”); Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del.
Super.) (“No such reasonable reliance is required to make a prima facie claim for breach.”),
aff’d, 886 A.2d 1278 (Del. 2005) (TABLE). See generally Victor P. Goldberg, Protecting
Reliance, 114 Colum. L. Rev. 1033, 1080 (2014) (“The weight of authority, and practice,
is with the pro-sandbagging side.”). Commentators often use the term “sandbagging” to

                                               192
       Chief Justice Strine’s analysis in Cobalt comports with how Kling and Nugent

describe the interaction between the due diligence process and the representations in the

transaction agreement. As they explain,

       a party may well ask for a specific representation and warranty on a certain
       topic because its investigation of the business being acquired has it convinced
       that such topic is particularly important to that business or has made it aware

refer to the practice of asserting a claim based on a representation despite having had reason
to suspect it was inaccurate. See, e.g., Charles K. Whitehead, Sandbagging: Default Rules
and Acquisition Agreements, 36 Del. J. Corp. L. 1081, 1087, 1092–93 (2011) (surveying
jurisdictions and acquisition agreements; concluding that New York and Delaware are pro-
sandbagging and that very few acquisition agreements have anti-sandbagging clauses).
This is a loaded and pejorative term: It “originates from the 19th century where gang
members would fill socks full of sand to use as weapons against unsuspecting opponents.
While at first glance, the socks were seemingly harmless, when used to their full potential
they became very effective and would inflict substantial damage on a ‘sandbagged’
victim.” Stacy A. Shadden, How to Sandbag Your Opponent in the Unsuspecting World of
High Stakes Acquisitions, 47 Creighton L. Rev. 459, 459 (2014) (footnote omitted). From
my perspective, the real question is whether the risk allocation in the contract controls, or
whether a more amorphous and tort-like concept of assumption of risk applies. To my
mind, the latter risks having cases routinely devolve into fact disputes over what was
provided or could have been provided in due diligence. The former seems more in keeping
with Delaware’s contractarian regime, particularly in light of Delaware’s willingness to
allow parties to restrict themselves to the representations and warranties made in a written
agreement. See ChyronHego, 2018 WL 3642132, at *4–7; Novipax Hldgs. LLC v. Sealed
Air Corp., 2017 WL 5713307, at *10–13 (Del. Super. Nov. 28, 2017); IAC Search, LLC v.
Conversant LLC, 2016 WL 6995363, at *4–8 (Del. Ch. Nov. 30, 2016); Prairie Capital
III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 50–51 (Del. Ch. 2015); Anvil Hldg. Corp.
v. Iron Acq. Co., Inc., 2013 WL 2249655, at *8 (Del. Ch. May 17, 2013); ABRY, 891 A.2d
at 1035–36, 1051–64; Homan v. Turoczy, 2005 WL 2000756, at *17 & n.53 (Del. Ch. Aug.
12, 2005) (Strine, V.C.); H–M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 142 & n.18
(Del. Ch. 2003); Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 555–56
(Del. Ch. 2001). See generally Steven M. Haas, Contracting Around Fraud Under
Delaware Law, 10 Del. L. Rev. 49 (2008).

                                             193
       of a specific problem or concern as to which it wants the added comfort of a
       specific representation.757

The identification of issues in due diligence thus does not simply lead to a binary go/no-go

decision on the acquisition; it also affects how the parties use representations in the

transaction agreement to allocate responsibility for those issues.

       Suppose the Buyer requests the Seller to represent that the Company being
       sold is not in material breach of any material contracts. The Company may
       in fact be in violation of three material agreements, two of which violations
       the Seller is sure are material and one of which it believes to probably be
       immaterial. What does the Seller do? It modifies the representation to state:
       “Except as set forth on the Disclosure Schedule, the Company is not in
       material breach of any material agreement.” The referenced schedule will
       then list the two or possibly all three of the agreements in question.758

From the seller’s perspective, the representation is now true, and the buyer will not be able

to claim an inaccuracy that would give the buyer a right not to close or, in a deal with post-

closing remedies, a potential right to recover damages.759 But if the parties do not qualify

the representation, then the party making the representation assumes the risk for a

deviation.

       Again relying on IBP’s statement that a “broadly written” MAE provision “is best

read as a backstop protecting the acquiror from the occurrence of unknown events,”760

Akorn argues that these principles do not apply when a representation contains an MAE

       757
             Kling & Nugent, supra, § 1.06, at 1-43.
       758
             Id. § 10.02, at 10-3.
       759
             See id. § 10.02, at 10-3.
       760
             IBP, 789 A.2d at 68; accord Hexion, 965 A.2d at 738.

                                             194
qualification. Akorn contends that adding an MAE qualification not only introduces a

measure of variance from a flat representation, but also incorporates a broad carve-out for

any risks that the buyer may have known about or issues which the buyer identified or

could have identified through due diligence.

       In my view, the analysis of the Regulatory MAE should take into account that the

Material Address Effect is tied to an issue that the parties have addressed in a

representation. The existence of the representation evidences the seller’s knowledge of a

risk, and the representation constitutes an effort by the parties to allocate that risk. 761 By

adding an MAE qualifier, the parties do not change the nature of the representation or its

risk allocation function; the qualifier instead addresses the degree of deviation from the

representation that is permissible before the representation would be deemed inaccurate. In

       761
           See, e.g., Model Merger Agreement, supra, at 27 (“The representations and
warranties . . . provide a mechanism for allocating between the buyer and the target the risk
of the occurrence of the events . . . described therein, whether before or (except for
representations and warranties made as of a specific date) after the signing of the definitive
agreement. Given this potential role of the representations and warranties, in some cases
the target may be asked to make representations that are not necessarily within the
knowledge of the target, but are matters that the parties believe present a potential risk that
should be addressed.”); JX 1239 ¶ 47 (Subramanian) (“The reps & warranties, when
combined with the bring-down condition, serve an important risk allocation purpose. In
effect, they provide downside protection on specific aspects of the deal. If those aspects
are not true at the closing, the buyer has the right to walk away. This can include events
that are outside the seller’s control. For example, if the target company represents that there
are no material legal proceedings against the company (beyond what is contained in the
disclosure schedule), but the target company is sued in a way that triggers a MAC between
signing and closing, the buyer will have a contractual right to walk away.”).

                                             195
this role, the MAE qualifier stands in for a specific dollar figure, replacing a specified

amount with an ex post judicial determination based on the facts and circumstances.

       To illustrate the difference, assume that one of the Regulatory Compliance

Representations was drafted using a dollar figure rather than an MAE qualifier.762 It might

read as follows:

       The Company and its Subsidiaries are and, to the Knowledge of the Company
       since July 1, 2013, have been in compliance with all applicable Laws relating
       to or promulgated by Healthcare Regulatory Authorities, except where
       noncompliance would not, individually or in the aggregate, reasonably be
       expected to result in a loss of more than $10 million.

Assume that at the time of signing, the seller had a data integrity issue that would cost $15

million to remediate, and the buyer learns of it between signing and closing. The magnitude

of this issue would render the representation inaccurate. In my view, the buyer should be

able to pursue any rights it has under the merger agreement based on the inaccuracy of the

representation. Under the rationale of the Cobalt decision and other Delaware cases, it

should not matter that the buyer may have had concern about potential regulatory

compliance issues and likely conducted some degree of due diligence into those issues.

Indeed, the existence of the representation by itself evidences the fact that the buyer did

have concerns about potential regulatory compliance issues. What should matter is that the

parties allocated the risk of any regulatory compliance issues through the representation,

       762
           See generally Kling & Nugent, supra, § 11.03[1], at 11-21 (discussing
representations qualified by “the dollar level of an item or problem necessary to result in a
representation being false”).

                                            196
qualified by a dollar figure so that the representation would only be inaccurate and give

rise to contractual rights if an issue exceeded the threshold.

       To my mind, an MAE qualifier serves the same purpose; it just replaces the specific

dollar figure with a threshold that turns on facts and circumstances.763 Drafted with an

MAE qualifier, the same representation might read as follows:

       The Company and its Subsidiaries are and, to the Knowledge of the Company
       since July 1, 2013, have been in compliance with all applicable Laws relating
       to or promulgated by Healthcare Regulatory Authorities, except where
       noncompliance would not, individually or in the aggregate, reasonably be
       expected to have a Material Adverse Effect.

From my standpoint, it still should not matter whether or not the buyer had concerns about

potential regulatory compliance issues (which the representation evidences) or conducted

some degree of due diligence. The parties allocated the risk of those issues through the

representation, qualified so that the representation would only be inaccurate if an issue

arose that was sufficiently serious that it would reasonably be expected to have a Material

Adverse Effect.764

       If parties wish to carve out anything disclosed in due diligence from the scope of a

representation, then they can do so. If parties wish to carve out specific items or issues

       763
           Cf. id. § 11.03[1], at 11-21 to -24 (discussing qualification of representations by
the adjective “material” in lieu of a dollar value; noting that parties may also use the higher
standard of “having a materially adverse effect on”).
       764
            Cf. id. § 11.03[2], at 11-25 (noting that with a materiality-qualified
representation, “the Buyer will have the ability to walk from the transaction”; however,
“[t]he only difference, which may be of some economical [sic] significance, is that none of
these rights will be triggered unless there is a ‘material’ problem”).

                                             197
from the scope of a representation, then they can use the common technique of qualifying

the representation so that it excludes items listed on a corresponding schedule.765 A seller

could, for example, represent that it was in compliance with all regulatory requirements

except for those listed on Schedule 3.18(a), and on that schedule identify data integrity

issues. In this case, the Regulatory Compliance Representations are not qualified by any

carve-outs or scheduled exceptions, but only by an MAE qualification for purposes of the

Bring-Down Condition. As Akorn’s counsel candidly conceded during post-trial argument,

a regime which holds that a buyer cannot assert a breach of an MAE-qualified

representation if the buyer learned or could have learned about aspects of the risk covered

       765
            See, e.g., IBP, 789 A.2d at 39–40 (quoting examples of representations qualified
by scheduled exceptions); Kling & Nugent, supra, § 10.01, at 10-2 (“[T]he disclosure
schedule serves either to expand, or more commonly, to set forth exceptions to, the various
representations. . . . Such schedules may affect whether the Buyer is required to close the
acquisition of the Company as well as its ability to seek indemnification from the Seller
for problems which may come to light after the closing.”); id. § 11.03[2], at 11-25 (“[I]n a
large transaction the choice in many instances may be between use of materiality
exceptions and long disclosure schedules containing endless lists of exceptions to the
representations. In the situation where speed and secrecy are essential, the use of
materiality qualifiers becomes critical.”) (footnote omitted); id. (“[T]he addition of a
materiality standard to a representation is not necessarily fatal to any of the three functions
generally served by representations and warranties portions of the agreement. The due
diligence role is still performed, albeit to a lesser extent; the Buyer won’t learn about the
business with the level of detail that would be the case absent the qualification, but it should
still find out about the serious problems. Similarly, the Buyer will have the ability to walk
from the transaction as well as enjoy the benefit of any indemnification provisions.”).

       See also, e.g., id. § 11.04[9], at 11-69 (“[A]n acquiror’s pre-signing knowledge
about trends and possible events, including what is learned in due diligence and disclosed
on the schedules to the agreement, could diminish its ability to successfully claim that a
material adverse effect has occurred.”) (discussing IBP).

                                             198
by the representation during due diligence turns an MAE-qualified representation into the

functional equivalent of a scheduled representation that schedules everything provided in

due diligence.766 One could likewise say that Akorn’s argument turns an MAE-qualified

representation into the functional equivalent of a representation with an expansive

knowledge-based exception framed in terms of everything the buyer knew or should have

known. To my mind, that reading is not consistent with the plain language of the Merger

Agreement.

       Assuming for the sake of argument that a buyer who knew about a specific fact that

rendered a seller’s representation inaccurate should not be permitted to close a transaction

and then recover damages based on that specific fact, it does not necessarily follow that a

buyer should be prevented from relying on a representation simply because the buyer knew

about a risk. It also does not necessarily follow that a buyer should be prevented from

relying on a representation when exercising a right not to close. As the Chief Justice

observed in IBP,

       [t]he public policy reasons for denying relief to the buyer [when it seeks
       damages] are arguably much different than are implicated by a decision
       whether to permit a buyer simply to walk away before closing in reliance on
       a specific contractual representation that it had reason to suspect was untrue
       as of the time of signing.767

       766
             Dkt. 220 at 123–28.
       767
             IBP, 789 A.2d at 82 n.200.

                                            199
In this case, Fresenius did not know about the data integrity issues that would reasonably

be expected to result in a Regulatory MAE. Fresenius obtained and reviewed a redacted

Form 483 for Decatur, but it identified manufacturing issues, not data integrity concerns.768

During an early pitch meeting in November, where Rai introduced Silverberg to Fresenius

as Akorn’s head of quality, no one mentioned that Silverberg had overstayed his welcome

at Akorn and was scheduled to retire in January 2017.769 Akorn did not provide Fresenius

with its GQC audit reports on data integrity issues or the Cerulean gap assessments. Akorn

has pointed out that Fresenius did not ask for them, but this also shows that Fresenius did

not know about these issues.770

       During due diligence, Fresenius did identify significant regulatory compliance and

other business risks at Akorn, including risks related to Akorn’s product launch plan, its

manufacturing and quality functions, and its ability to comply with FDA serialization

requirements.771 But Fresenius’s comprehensive risk assessment did not reference data

       768
             See JX 199; Bauersmith Dep. 217.
       769
             Rai Dep. 156–57; see JX 137.
       770
          See Ducker Dep. 269 (expressing regret that Fresenius did not request “internal
and external audit reports” that “might have given us prior knowledge of their data integrity
problems, because obviously they were well aware of those problems but had chosen not
to inform us”); see also JX 882.
       771
           See JX 422 at ‘000–002 (discussing twelve leading risks uncovered in due
diligence); JX 428 at ‘673, ‘682, ‘710–14; JX 399 at 8–9; JX 431 (“Red Flag Tax Due
Diligence Report”); see also JX 412 (“Quality Related Aspects in Due Diligence
Activities”). Throughout due diligence, Fresenius kept track of “red flag DD findings.” See
JX 331; JX 401 at 9; see also JX 416 ‘388–408 (final due diligence slide deck addressing

                                            200
integrity as a risk.772 The final presentation to the Supervisory Board also did not identify

risks related to data integrity.773 In any case, many of the events giving rise to the

Regulatory MAE had not yet occurred at the time of signing. Even with full knowledge of

the data integrity risks, Fresenius could not have foreseen Silverberg’s false CRL

submission or Akorn’s misleading presentation to the FDA. Even under Akorn’s view of

the law, the Merger Agreement allocates these unknowable risks to Akorn.

       In my view, the combination of the Regulatory Compliance Representations and the

Bring-Down Condition allocated to Akorn the risk that Akorn would suffer a Regulatory

MAE. Akorn cannot now seek to re-trade that contractual allocation by arguing that

Fresenius knew or should have known about those risks.

                5.    The Possibility Of Cure

       Section 7.01(c)(i) permits Fresenius to terminate if the failure of a condition

       is incapable of being cured or, if capable of being cured by the Outside Date,
       the Company (x) shall not have commenced good faith efforts to cure breach
       or failure to perform within 30 calendar days following receipt by the
       Company of written notice of such breach or failure to perform from
       [Fresenius Kabi] stating [Fresenius Kabi’s] intention to terminate this
       Agreement pursuant to this Section 7.01(c)(i) and the basis for such
       termination . . . .

“Areas of concern”). These files presumably would reference widespread data integrity
issues if Fresenius knew about them.
       772
           See Henriksson Tr. 945 (testifying that Fresenius’s observations about quality
and equipment had “nothing to do with data integrity”). The exception was data integrity
risk at Akorn’s India site, which Fresenius identified based on a June 2014 FDA inspection.
JX 331 at ‘680.
       773
             See JX 428.

                                            201
Under the plain language of this provision, Section 7.01(c)(i) permits Fresenius to

terminate if the failure of a condition cannot be cured before the Outside Date.

        Section 7.01(b)(i) defines the Outside Date as part of the right that both sides have

to terminate the Merger Agreement if the closing does not occur before the Outside Date.

Formatted for greater legibility, the provision states that either side may terminate

        if the Effective Time shall not have occurred on or prior to April 24, 2018
        (as such date may be expected pursuant to the immediately succeeding
        proviso, the “Outside Date”);

        provided that if on the Outside Date [1] any of the conditions set forth in
        Section 6.01(b) or Section 6.01(a) (to the extent relating to the matters set
        forth in Section 6.01(b)) shall not have been satisfied but [2] all other
        conditions set forth in Article VI shall have been satisfied or waived . . . then
        the Outside Date shall be automatically extended to July 24, 2018 . . .;

        provided, further, that if the Outside Date shall have been extended pursuant
        to the preceding proviso and on the extended Outside Date any of the
        conditions set forth in Section 6.01(b) or Section 6.01(a) (to the extent
        relating to the matters set forth in Section 6.01(b)) shall not have been
        satisfied but all other conditions set forth in Article VI shall have been
        satisfied or waived . . ., and [Fresenius Kabi] is then actively engaged in
        actions required to discharge its obligations under the second sentence of
        Section 5.03(c), then [Fresenius Kabi] shall have the right to extend the
        Outside Date to October 24, 2018 . . . .

Under this provision, the Outside Date starts out as April 24, 2018, can extend

automatically to July 24, 2018, and can be extended at Fresenius’s option to October 24,

2018.

        As determined in the previous section, Akorn had experienced a General MAE

before April 24, 2018, so “all other conditions set forth in Article VI” were not “satisfied

or waived.” Therefore, the Outside Date did not extend beyond April 24. When the Outside

Date came and went, Akorn was only beginning to attempt to determine what it needed to

                                              202
do to remediate its data integrity issues. NSF was in the early stages of its investigation.

PwC was just getting started on its master list of deficiencies.

       Even if the Outside Date had extended, Akorn could not have cured its regulatory

problems in time. The evidence at trial demonstrated that Akorn had pervasive regulatory

issues that would require years to fix. Akorn’s witnesses coalesced around three years.

Fresenius posited four years. Accepting Akorn’s estimate, the problems would not be fixed

until 2021.

       Akorn argues that if the breaches were curable in the abstract, then Fresenius had to

give Akorn notice and an opportunity to cure and could not exercise its termination right

while Akorn was engaged in good faith efforts to cure. Under Akorn’s interpretation,

Akorn could hold Fresenius to the Merger Agreement for the four years that Fresenius

believes it will take to remediate Akorn’s regulatory issues, as long as Akorn is engaged in

good faith efforts to cure. But that is not what the Merger Agreement says. Section

7.01(c)(i) only requires notice and gives Akorn an opportunity to cure if the failure of a

condition is “capable of being cured by the Outside Date.” In this case, Akorn’s breaches

were not capable of being cured by the Outside Date. Consequently, Fresenius did not have

to wait to give Akorn an opportunity to cure. Fresenius could terminate immediately.

              6.     The Finding Regarding The Bring-Down Condition

       Fresenius proved that Akorn’s breach of the Regulatory Compliance

Representations would be reasonably be expected to result in a Regulatory MAE, causing

the failure of the Bring-Down Condition. In making this showing, Fresenius established

that Akorn’s regulatory difficulties have such qualitative and quantitative significance that

                                            203
the effect on Akorn’s business is material when viewed from the longer-term perspective

of a reasonable acquirer, which is measured in years. Fresenius also showed that Akorn

could not cure the failure of the Bring-Down Condition by the Outside Date. Because the

Bring-Down Condition has not been met, Fresenius cannot be forced to close. More

importantly, Fresenius had the right to terminate the Merger Agreement, provided that

Fresenius was not then in material breach of its own contractual obligations.

C.     The Failure Of The Covenant Compliance Condition

       The next question is whether Fresenius validly terminated the Merger Agreement

under Section 7.01(c)(i) because the Covenant Compliance Condition could not be met.

The answer to this question turns on whether Akorn incurably breached the Ordinary

Course Covenant. Yet again, because Fresenius sought to excuse its performance under the

Merger Agreement, Fresenius bore the burden of proof.774

       In addition to providing a termination right based on an incurable failure to comply

with the Bring-Down Condition, Section 7.01(c)(i) gives Fresenius the right to terminate

if Akorn incurably breached the Covenant Compliance Condition. Formatted for greater

legibility, Section 7.01(c)(i) states:

       This Agreement may be terminated and the [Merger] abandoned at any time
       prior to the Effective Time (except as otherwise expressly noted), whether
       before or after receipt of the Company Shareholder Approval: . . .

             (c) by [Fresenius Kabi]: (i) if the Company shall have . . . failed to
       perform any of its covenants or agreements . . ., which failure to perform

       774
          See Hexion, 965 A.2d at 739; Frontier Oil, 2005 WL 1039027, at *35; IBP, 789
A.2d at 53.

                                           204
                     (A) would give rise to the failure of a condition set forth in . . .
              Section 6.02(b) [the Covenant Compliance Condition] and

                     (B) is incapable of being cured . . .;

                      provided that [Fresenius Kabi] shall not have the right to
              terminate this Agreement pursuant to this Section 7.01(c)(i) if
              [Fresenius Kabi] or Merger Sub is then in material breach of any of
              its representations, warranties, covenants or agreements hereunder . .
              ..

Whether Fresenius had a termination right under this aspect of Section 7.01(c)(i) therefore

turns on three questions: (i) whether Akorn failed to perform any of its covenants or

agreements in a manner that would cause the Covenant Compliance Condition to fail, (ii)

whether the failure could be cured, and (iii) whether Fresenius was otherwise in material

breach of its obligations under the Merger Agreement. Whether Fresenius breached its

obligations is the same analysis under both the Covenant Compliance Condition and the

Bring-Down Condition, so this decision addresses that issue separately.

              1.     The Operation Of The Covenant Compliance Condition

       Formatted for greater legibility, the Covenant Compliance Condition states:

       The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger
       shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if
       permissible under applicable law) on or prior to the Closing Date of the
       following conditions:

                                          *    *    *

       (b) Compliance with Covenants. The Company shall have complied with or
       performed in all material respects its obligations required to be complied with
       or performed by it at or prior to the Effective Time . . . .

                                              205
Notably, the Merger Agreement does not condition closing on an absolute requirement that

Akorn have complied with or performed all of its obligations. Instead, Akorn need only

have complied with or performed its obligations “in all material respects.”

       In this case, Fresenius asserts that Akorn failed to comply with the Ordinary Course

Covenant. Parties include ordinary-course covenants in transaction agreements to add an

additional level of protection for the buyer beyond the Bring-Down Condition and help

ensure that “the business [the buyer] is paying for at closing is essentially the same as the

one it decided to buy at signing . . . .”775 “For a variety of reasons, reliance on the target’s

representations, as they are brought down to test the condition of closing that the

representations remain substantially true and correct on the closing date, will not provide

the buyer adequate assurance as to the target’s maintenance of its business.”776 “Most

importantly, representations do not provide a remedy with respect to conduct during the

       775
           Kling & Nugent, supra, § 13.03, at 13-19; see Model Stock Purchase Agreement,
supra, at 202 (“Generally, a buyer has an interest in assuring that the business of the target
will be substantially the same as closing as it was on the date the purchase agreement was
signed.”); see also JX 1239 ¶¶ 39, 41 (Professor Subramanian explaining that an ordinary-
course covenant seeks “to mitigate or eliminate the moral hazard problem that exists for
the target’s management between the signing and the closing of the deal,” which “involves
the incentive for the seller to act opportunistically between signing and closing, because if
the deal closes the cost of this opportunistic behavior will be borne by the buyer, who does
not yet have control over the target’s assets”).
       776
             Model Merger Agreement, supra, at 120.

                                             206
interim period between signing and closing. If the target does not remain appropriately

motivated to close, reliance on the bring-down condition would be ineffective.”777

       In this case, the Ordinary Course Covenant consists of a broad affirmative covenant

and sixteen categories of prohibited acts. Section 5.01(a) sets out the broad affirmative

covenant. Formatted for legibility, it states:

       (a) Except as required by applicable Law, Judgment or a Governmental
       Authority, as expressly contemplated, required or permitted by this
       Agreement or as set forth in Section 5.01 of the Company Disclosure Letter,
       during the period from the date of this Agreement until the Effective Time
       (or such earlier date on which this Agreement is terminated pursuant to
       Section 7.01), unless [Fresenius Kabi] otherwise consents in writing (such
       consent not to be unreasonably withheld, delayed or conditioned),

              (i) the Company shall, and shall cause each of its Subsidiaries to, use
       its and their commercially reasonable efforts to carry on its business in all
       material respects in the ordinary course of business, and

              (ii) to the extent consistent with the foregoing, the Company shall, and
       shall cause its Subsidiaries to, use its and their commercially reasonable
       efforts to preserve its and each of its Subsidiaries’ business organizations
       (including the services of key employees) substantially intact and preserve
       existing relations with key customers, suppliers and other Persons with
       whom the Company or its Subsidiaries have significant business
       relationships substantially intact, in each case, substantially consistent with
       past practice;

       provided that no action by the Company or any of its Subsidiaries with
       respect to matters specifically addressed by Section 5.01(b) shall be deemed
       to be a breach of this Section 5.01(a) unless such action would constitute a
       breach of Section 5.01(b).778

       777
             Id.
       778
             JX 1 § 5.01(a).

                                             207
Two aspects of the Ordinary Course Covenant jump out. First, the Ordinary Course

Covenant contains the same type of materiality qualification found in the Covenant

Compliance Condition: Akorn need not carry on its business in the ordinary course in every

respect, only “in all material respects.” Second, Akorn did not promise to maintain

compliance with the Ordinary Course Covenant. It only committed to use “commercially

reasonable efforts” to try to maintain compliance.

                       a.     “In All Material Respects”

       For starters, both the Covenant Compliance Condition and the Ordinary Course

Covenant require compliance “in all material respects.” The parties debate the meaning of

this term.

       Akorn argues that this phrase adopts the common law doctrine of material breach,

under which “[a] party is excused from performance under a contract if the other party is

in material breach thereof.”779 As a matter of common law, “[a] breach is material if it goes

to the root or essence of the agreement between the parties, or touches the fundamental

purpose of the contract and defeats the object of the parties in entering into the contract.”780

Under this doctrine, whether a breach is material “is determined by weighing the

consequences in the light of the actual custom of men in the performance of contracts

       779
             BioLife Sols., Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003).
       780
         Mrs. Fields Brand, Inc. v. Interbake Foods LLC, 2017 WL 2729860, at *28 (Del.
Ch. June 26, 2017) (internal quotation marks omitted), clarified on denial of reargument
2017 WL 3863893 (Del. Ch. July 27, 2017).

                                              208
similar to the one that is involved in the specific case.”781 The Restatement (Second) of

Contracts provides five guiding factors: (i) “the extent to which the injured party will be

deprived of the benefit which he reasonably expected,” (ii) “the extent to which the injured

party can be adequately compensated for the part of that benefit of which he will be

deprived,” (iii) “the extent to which the party failing to perform or to offer to perform will

suffer forfeiture,” (iv) “the likelihood that the party failing to perform or to offer to perform

will cure his failure, taking account of all the circumstances including any reasonable

assurances,” and (v) “the extent to which the behavior of the party failing to perform or to

offer to perform comports with standards of good faith and fair dealing.”782

“[N]onperformance will attain this level of materiality . . . when the covenant not

performed is of such importance that the contract would not have been made without it.”783

       Treatises on M&A agreements suggest a different purpose for including the phrase

“in all material respects.” Drafters use this language to eliminate the possibility that an

immaterial issue could enable a party to claim breach or the failure of a condition.784 The

       781
           BioLife Sols., 838 A.2d at 278 (internal quotation marks omitted); accord 23
Williston on Contracts § 63:3 (4th ed. 2003).
       782
          Restatement (Second) of Contracts § 241 (Am. Law Inst. 1981). “Courts in
Delaware look to Section 241 of the Restatement (Second) of Contracts for guidance
regarding materiality of a breach.” Medicalgorithmics S.A. v. AMI Monitoring, Inc., 2016
WL 4401038, at *24 (Del. Ch. Aug. 18, 2016).
       783
             14 Williston on Contracts § 43:6 (4th ed. 2003) (footnotes omitted).
       784
           See Kling & Nugent, supra, § 14.02[3], at 14-12 (“[T]here are clearly
representations where a minor mistake should not give the other party a walk-right.”); id.
§ 14.02[7], at 14-17 (contrasting compliance “in all material respects” with “absolute

                                              209
language seeks to exclude small, de minimis, and nitpicky issues that should not derail an

acquisition. Consistent with this interpretation, the Restatement (Second) of Contracts

recognizes that parties can depart from the common law doctrine of material breach, under

which only a material breach excuses performance, by including express conditions to a

party’s performance in the agreement.785 The Covenant Compliance Condition is one of

those conditions. As Kling and Nugent observe, “It is precisely to avoid these types of

compliance”); Contract Drafting, supra, at 213 (“An important drafting tool is the adjective
material, as in Widgetco is not a party to any material litigation. Drafters use it, and the
adjective materially . . . to narrow an otherwise overly broad provision so it covers only
what really matters.”).
       785
            See Restatement (Second) of Contracts § 241 cmt. a (Am. Law Inst. 1981)
(discussing the “the situation where the parties have, by their agreement, made an event a
condition”); id. § 226 (“An event may be made a condition either by the agreement of the
parties or by a term supplied by the court.”); id. § 241 cmt. a (“A determination that a
failure is not material means only that it does not have the effect of the non-occurrence of
a condition under §§ 237 and 238.”); id. § 237 cmt. a (“[A] material failure of performance,
including defective performance as well as an absence of performance, operates as the non-
occurrence of a condition.”); see, e.g., Williams Cos. v. Energy Transfer Equity, L.P., 159
A.3d 264, 273 (Del. 2017) (analyzing whether breach of a covenant “materially
contribute[d] to the failure of [a] closing condition”); Sarissa Capital Domestic Fund LP
v. Innoviva, Inc., 2017 WL 6209597, at *24 n.263 (Del. Ch. Dec. 8, 2017) (“Th[e]
distinction between ‘condition precedent’ and ‘covenant’ is significant . . . . The press
release as a ‘condition precedent’ would allow Innoviva to walk away from the settlement
if Sarissa failed to perform; the press release as ‘covenant’ would allow Innoviva to sue for
breach of contract if Sarissa failed to perform. Non-performance of the ‘covenant,’
however, would not provide a basis for Innoviva to walk away from the deal (unless, of
course, Sarissa committed a material breach of the press release term after the parties
engaged in good faith negotiations of the press release language).”) (citation omitted). See
generally 2 Farnsworth on Contracts § 8.2, at 415 (3d ed. 2004) (“Although a condition is
usually an event of significance to the obligor, this need not be the case. In exercising their
freedom of contract the parties are not fettered by any test of materiality or reasonableness.
If they agree, they can make even an apparently insignificant event a condition.”).

                                             210
issues [viz., arguments over the common law doctrine of material breach] that parties

carefully draft acquisition agreements (although the condition is typically qualified by

materiality), and provide for a ‘bring down’ condition, including as it relates to covenants

in the acquisition agreement.”786

       Based on these authorities, the plain meaning of “in all material respects” in the

Covenant Compliance Condition and the Ordinary Course Covenant calls for a standard

that is different and less onerous than the common law doctrine of material breach. Relying

on Frontier Oil, Fresenius argues that the phrase “in all material respects” requires only a

“substantial likelihood that the . . . fact [of breach] would have been viewed by the

reasonable investor as having significantly altered the ‘total mix’ of information.”787 This

test builds on the standard for materiality under disclosure law. Despite the oddity of

relying on a disclosure-based standard to evaluate contractual compliance, the Frontier Oil

test (as conceived by Fresenius) fairly captures what I believe the “in all material respects”

       786
          Kling & Nugent, supra, § 14.01, at 14-3 n.3; see Cooper Tire & Rubber Co. v.
Apollo (Mauritius) Hldgs. Pvt. Ltd., 2014 WL 5654305, at *13–17 (Del. Ch. Oct. 31, 2014)
(analyzing whether party had complied “in all material respects” with a contractual
covenant; the court did not cite the common law doctrine of material breach); Model Stock
Purchase Agreement, supra, at 253 (discussing condition for covenant compliance and
finding that “if Sellers breach any of their pre-closing covenants in a material respect,
Buyer will have a ‘walk right’ in addition to its right to sue and recover damages from
Sellers because of the breach”).
       787
           See Frontier Oil, 2005 WL 1039027, at *38 (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)); see also Contract Drafting, supra, at 213 (“In
an M&A context, and from the buyer’s perspective, this meaning of material refers to
information that would have caused the buyer not to enter into the agreement or would
cause the buyer not to want to close the transaction.”).

                                             211
language seeks to achieve. It strives to limit the operation of the Covenant Compliance

Condition and the Ordinary Course Covenant to issues that are significant in the context of

the parties’ contract, even if the breaches are not severe enough to excuse a counterparty’s

performance under a common law analysis.

       It bears noting when analyzing the Covenant Compliance Condition that the

presence of the “in all material respects” qualifier in both the condition and the underlying

covenant results in two levels of materiality. To my mind, the double-materiality standard

simply emphasizes that the breach of the Ordinary Course Covenant cannot be immaterial.

It has to matter both as a departure from a generic pharmaceutical company’s operations

in the ordinary course of business and as a deviation from the buyer’s reasonable

expectations regarding what it would receive at closing.

                       b.     “Commercially Reasonable Efforts”

       The other key qualifier in the Ordinary Course Covenant—“commercially

reasonable efforts”—is an example of an efforts clause. Clauses of this type mitigate the

rule of strict liability for contractual non-performance that otherwise governs. Generally

speaking, “[i]f a party agrees to do something, he must do it or be liable for resulting

damages” (or potentially be subject to an order compelling specific performance). 788 At

times, however, a party’s ability to perform its obligations depends on others or may be

       788
             Kling & Nugent, supra, § 13.06, at 13-44.

                                             212
hindered by events beyond the party’s control.789 In those situations, drafters commonly

add an efforts clause to define the level of effort that the party must deploy to attempt to

achieve the outcome.790 The language specifies how hard the parties have to try. “In

acquisition transactions, the parties will generally bind themselves to achieve specified

results with respect to activities that are within their control . . . and reserve [an efforts]

standard for things outside of their control or those dependent upon the actions of third

parties.”791

       Deal practitioners have a general sense of a hierarchy of efforts clauses.792 The ABA

Committee on Mergers and Acquisitions has ascribed the following meanings to

commonly used standards:

              Best efforts: the highest standard, requiring a party to do essentially
               everything in its power to fulfill its obligation (for example, by
               expending significant amounts or management time to obtain
               consents).
              Reasonable best efforts: somewhat lesser standard, but still may
               require substantial efforts from a party.

       789
           See Model Stock Purchase Agreement, supra, at 212 (“An absolute duty to
perform covenants or similar obligations relating to future actions will often be
inappropriate or otherwise not acceptable to one or more parties to the agreement, as, for
instance, when a party’s ability to perform depends upon events or third-party acts beyond
that party’s control. In such circumstances, parties typically insert ‘efforts’ provisions.”).
       790
          See id. at 212 (“‘Efforts’ clauses are commonly used to qualify the level of effort
required in order to satisfy an applicable covenant or obligation.”).
       791
             Kling & Nugent, supra, § 13.06, at 13-44.
       792
             See id. § 13.06, at 13-46 to -47; Model Stock Purchase Agreement, supra, at 212.

                                              213
              Reasonable efforts: still weaker standard, not requiring any action
               beyond what is typical under the circumstances.
              Commercially reasonable efforts: not requiring a party to take any
               action that would be commercially detrimental, including the
               expenditure of material unanticipated amounts or management time.
              Good faith efforts: the lowest standard, which requires honesty in fact
               and the observance of reasonable commercial standards of fair
               dealing. Good faith efforts are implied as a matter of law.793

Kling and Nugent “believe that most practitioners treat ‘reasonable efforts,’ ‘commercially

reasonable efforts’ and ‘reasonable best efforts’ as all different from and as imposing less

of an obligation than, ‘best efforts.’”794 They also observe that “‘reasonable best efforts’

sounds as if it imposes more of an obligation than ‘commercially reasonable efforts.’”795

       Commentators who have surveyed the case law find little support for the distinctions

that transactional lawyers draw.796 Consistent with this view, in Williams Companies v.

       793
          Model Stock Purchase Agreement, supra, at 212 (citation omitted); see Ryan A.
Salem, Comment, An Effort to Untangle Efforts Standards Under Delaware Law, 122 Penn
St. L. Rev. 793, 800 (2018) (identifying five commonly used standards: good faith efforts,
reasonable efforts, best efforts, commercially reasonable efforts, and diligent efforts).
       794
          Kling & Nugent, supra, § 13.06, at 13-46 to -47 (footnote omitted); see Contract
Drafting, supra, at 195 (“Anecdotal evidence suggests that many who work with contracts
believe that best efforts obligations are more onerous than reasonable efforts obligations.
The distinction is often expressed like this: reasonable efforts requires only what is
reasonable in the context, whereas best efforts requires that you do everything you can to
comply with the obligation, even if you bankrupt yourself.”).
       795
             Kling & Nugent, supra, § 13.06, at 13-47.
       796
          See Kling & Nugent, supra, § 13.06, at 13-44 to -49 & nn.2–9, 11 (collecting
cases); Contract Drafting, supra, at 193 (observing that “[t]here’s widespread confusion
over phrases using the word efforts”; recommending that drafters use a single standard of
“reasonable efforts”); Salem, supra, at 800–21 (surveying case law; recommending that
Delaware resolve the ambiguity created by different efforts standards by adopting a single
standard of “reasonable efforts”); Zachary Miller, Note, Best Efforts?: Differing Judicial

                                             214
Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction

agreement that used both “commercially reasonable efforts” and “reasonable best efforts.”

Referring to both provisions, the high court stated that “covenants like the ones involved

here impose obligations to take all reasonable steps to solve problems and consummate the

transaction.”797 The high court did not distinguish between the two. While serving as a

member of this court, Chief Justice Strine similarly observed that even a “best efforts”

obligation “is implicitly qualified by a reasonableness test—it cannot mean everything

possible under the sun.”798 Another Court of Chancery decision—Hexion—also framed a

buyer’s obligation to use its “reasonable best efforts” to obtain financing in terms of

commercial reasonableness: “[T]o the extent that an act was both commercially reasonable

Interpretations of a Familiar Term, 48 Ariz. L. Rev. 615, 615 (2006) (“The judicial
landscape is littered with conflicting interpretations of efforts clauses”); see also Kenneth
A. Adams, Understanding “Best Efforts” And Its Variants (Including Drafting
Recommendations), 50 Prac. Law., Aug. 2004, at 11, 18–20 (arguing that courts should
only apply a single standard of “reasonable efforts”); 2 Farnsworth on Contracts § 7.17c,
at 405 n.13 (3d ed. 2004) (“The terms ‘best efforts’ and ‘reasonable efforts’ are generally
used interchangeably, although sometimes it is suggested that ‘best’ is more demanding
than ‘reasonable.’”).
       797
159 A.3d at 272. In a dissenting opinion, Chief Justice Strine maintained a
distinction between “best efforts” and “commercially reasonable efforts,” describing the
former as one that “can potentially lead to the party making the promise having to take
extreme measures to fulfill it” and the latter as “a strong, but slightly more limited,
alternative[.]” 159 A.3d at 276 & n.45 (Strine, C.J., dissenting).
       798
           Alliance Data Sys., 963 A.2d at 763 n.60 (quoting Coady Corp. v. Toyota Motor
Distribs., Inc., 361 F.3d 50, 59 (1st Cir. 2004)).

                                            215
and advisable to enhance the likelihood of consummation of the financing, the onus was

on Hexion to take that act.”799

                2.     Akorn’s Failure To Use Commercially Reasonable Efforts To
                       Operate In The Ordinary Course Of Business

       Under the Merger Agreement, Akorn was obligated to use commercially reasonable

efforts to operate in the ordinary course of business in all material respects. As interpreted

by the Delaware Supreme Court in Williams, this standard required that Akorn “take all

reasonable steps” to maintain its operations in the ordinary course of business. 800 The

record establishes that Akorn breached that obligation in multiple ways.

       First, a generic pharmaceutical company operating in the ordinary course of

business is obligated to conduct regular audits and to take steps to remediate deficiencies.

As discussed at length in the Factual Background, Akorn departed from this aspect of

ordinary course operations after the Merger Agreement was signed by cancelling regular

audits at four sites in favor of verification audits that would not look for additional

deficiencies. Fresenius also cancelled Cerulean’s assessment of Amityville and never

completed Cerulean’s inspection of Somerset, even though Akorn had planned for both to

take place before the Merger Agreement was signed. Akorn personnel stated that these

changes were made because of the Merger. Fresenius did not consent to these changes.

       799
             Hexion, 965 A.2d at 749.
       800
159 A.3d at 272.

                                             216
       Second, a generic pharmaceutical company operating in the ordinary course of

business is obligated to maintain a data integrity system that enables the company to prove

to the FDA that the data underlying its regulatory filings and product sales is accurate and

complete. As discussed at length in the Factual Background, Akorn did not do this. Despite

receiving the results of its internal GQC audits and the Cerulean assessments, Akorn senior

management instructed its IT department not to devote any resources to data integrity

projects. Akorn did not begin to address its data integrity issues until March 2018, just one

month before Fresenius terminated the Merger Agreement.801

       Third, a generic pharmaceutical company operating in the ordinary course of

business does not submit regulatory filings to the FDA based on fabricated data. As

discussed at length in the Factual Background, Akorn departed from this aspect of ordinary

course operations in August 2017 when Silverberg submitted the CRL for azithromycin

that relied on fabricated data. The evidentiary record convinces me that Silverberg knew

that the CRL relied on fabricated data and submitted it anyway because the only alternative

would have been to withdraw the ANDA and start an investigation. That would have been

a red flag for Fresenius. As Akorn’s expert recognized, one of the purposes of an ordinary-

       801
             See JX 1077 at ‘065–66; Wasserkrug Tr. 141–54.

                                            217
course covenant is to constrain the moral hazard problem that can lead to misconduct like

Silverberg’s.802

       Akorn also failed to act in the ordinary course of business when Fresenius provided

Akorn with the whistleblower letters. As an Akorn director with FDA expertise recognized,

Akorn should have conducted a “responsive and credible” investigation using counsel with

experience in regulatory matters.803 Akorn chose not to conduct an investigation of its own.

Instead, Akorn decided to have its deal counsel, Cravath, front run the investigation that

Fresenius intended to conduct and head off any problems that Fresenius otherwise might

uncover. As discussed in the Factual Background, Akorn did not make this decision

because Fresenius somehow directed Akorn not to investigate, but rather because Akorn

feared a broad investigation of its own would uncover widespread problems.

       Unfortunately for Akorn, it became clear when Cravath spoke with employees at

the Somerset site that Sidley would quickly uncover Silverberg’s fraud. At that point,

Cravath began investigating, but Akorn’s desire to tamp down that problem and prevent

the issue from derailing the Merger led to non-ordinary-course efforts at damage control.

These efforts included discounting the import of Silverberg’s efforts to coordinate his story

with Sherwani and destroy any evidence of their coordination, which failed only because

       802
          See generally JX 1239 ¶¶ 39–42 (Subramanian) (“[T]he ordinary course
covenant focuses on the conduct (actions) of the seller’s managers and prohibits
opportunistic behavior by those managers.”).
       803
             JX 761.

                                            218
Sherwani refused to go along. They also included making a misleading presentation to the

FDA. Even Akorn’s expert witness agreed that Akorn was “not fully transparent” during

the meeting on March 16, 2018.804

       Only after Akorn decided to try to get ahead of its problems by meeting with the

FDA about the azithromycin incident did Akorn start acting like a generic pharmaceutical

company operating in the ordinary course of business. At that point, Akorn retained expert

regulatory counsel (Ropes & Gray) and hired a consultant (NSF) to evaluate its data

integrity. After the meeting with the FDA, NSF conducted data integrity audits at five of

Akorn’s sites (excluding Somerset), reviewed ANDAs from Somerset, and reviewed a

sampling of batch records. NSF uncovered a slew of major deficiencies and two critical

findings involving the submission of inaccurate data to the FDA.

       When making decisions about not remediating deficiencies, not continuing its audit

program, not maintaining its data integrity system, and not conducting investigations,

Akorn chose consciously to depart from the ordinary course of business that a generic

pharmaceutical company would follow.805 As a result, Akorn did not use commercially

reasonable efforts to operate in the ordinary course. By contrast, the record does not permit

a similar finding with respect to the destruction of Akorn’s database for a high accuracy

       804
             Kaufman Tr. 377–78.
       805
          See Rai Tr. 525 (‘Q. Okay. And one of the things you knew that Akorn had to
do, and in the ordinary course of business on that stand-alone basis after the acquisition
agreement was signed, was to both investigate and remediate data integrity problems;
correct? A. Correct.”); accord Kaufman Tr. 371.

                                            219
liquid particle counter along with the local backup file and the associated electronic

security logs. That was not an ordinary course of business event, but it is one where the

“commercially reasonable efforts” modifier prevents a finding of breach. The destruction

of these files was an unexpected event outside of Akorn’s control, which is the

paradigmatic situation where an efforts clause comes into play. It is possible that by failing

to maintain its data integrity systems, Akorn created the conditions under which the

destruction of the files could occur, but the evidence in this case is not sufficient to support

a finding to that effect.

               3.     Akorn’s Failure To Use Commercially Reasonable Efforts Was
                      Material.

       Using the standard of materiality discussed above, Akorn’s breaches of the Ordinary

Course Covenant were material. In the context of the Merger Agreement, the breaches of

the Ordinary Course Covenant departed from what Fresenius could reasonably expect and

changed the calculus of the acquisition for purposes of closing.

       Akorn’s ordinary course violations after signing cost Akorn a year of what could

have been meaningful remediation efforts. After receiving reports about data integrity

issues from the GQC team during 2016, followed by Cerulean’s damning assessment of

Decatur in December 2016, Akorn should have prioritized the remediation of its data

integrity systems. Accepting for purposes of analysis that Akorn’s contractual obligation

to Fresenius only began in April 2017, Akorn’s failure to remediate from that point on cost

Akorn a full year. Based on Akorn’s own estimates that remediation would take three years,

Akorn could have completed one-third of its efforts. If Akorn had embarked on the steps

                                              220
that Fresenius contends are necessary, then Akorn would have verified its IT and testing

systems, retrained existing employees, hired new R&D employees, taken major steps

towards introducing a culture of compliance, and begun validating the data for its principal

products.

       Instead, Akorn made its regulatory situation immeasurably worse when its head of

quality submitted fraudulent data to the FDA in August 2017. Akorn then complicated

matters further by failing to be fully transparent with the FDA in March 2018 and instead

providing a misleading presentation to the agency.

       As shown by the inclusion of the Regulatory Compliance Representations in the

Merger Agreement, whether Akorn complied with its obligations to the FDA was an

important issue for the parties. While the combination of the Regulatory Compliance

Representations and the Bring-Down Condition gave Fresenius some protection on this

issue, the Merger Agreement also required that Akorn use commercially reasonable efforts

to continue to engage in regulatory compliance activities between signing and closing. By

using the phrase “in all material respects” in the Ordinary Course Covenant and the

Covenant Compliance Condition, the parties adopted a lower standard for those provisions

than the Regulatory MAE standard built into the Bring-Down Condition. As a result,

Fresenius could refuse to close if Akorn did not continue to operate in the ordinary course

of business with respect to regulatory compliance and the deviation from ordinary course

practice was significant. That was the case here, resulting in a breach of the Ordinary

Course Covenant.

                                            221
       Akorn’s breach of the Ordinary Course Covenant was also sufficiently significant

to implicate the Covenant Compliance Condition. The record convinces me that Fresenius

would not have agreed to buy Akorn if Fresenius understood that Akorn would not be

continuing to conduct full audits at all of its facilities, would not be addressing any of its

data integrity issues, and would be providing fabricated data to the FDA. Akorn is a generic

pharmaceutical company, so compliance with FDA regulations is essential. The parties

knew that closing the Merger could take an extended period of time, which is why the

Outside Date was originally set for a year after signing and would extend automatically for

another three months if the only impediment remaining was antitrust clearance. No

reasonable acquirer would have agreed that during this lengthy period, Akorn could stop

engaging in ordinary-course activities relating to quality compliance and data integrity,

much less that Akorn could trigger a major incident with the FDA by making a submission

that relied on fabricated data.

              4.      Whether The Covenant Breach Was Curable

       As previously discussed, Section 7.01(c)(i) permits Fresenius to terminate if the

failure of a condition is incapable of being cured by the Outside Date. As this decision has

already held, the Outside Date remained April 24, 2018; it did not automatically extend to

July 24.

       As of April 24, 2018, Akorn had finally started trying to remediate its data integrity

problems, but it was in the early stages of this effort and trying to get a handle on the many

data integrity deficiencies that dated back years. Akorn had not become transparent with

                                             222
the FDA. NSF was in the early stages of its investigation. Akorn could not have cured its

covenant breach by April 24.

       Once again, even if the Outside Date had extended, Akorn could not have cured its

regulatory problems in time. Akorn estimated it would take three years, well beyond what

the Merger Agreement contemplated.

              5.     The Finding Regarding The Covenant Compliance Condition

       Fresenius proved that Akorn failed to use commercially reasonable efforts to operate

in the ordinary course of business in all material respects, resulting in a breach of the

Ordinary Course Covenant. This breach was material and could not be cured by the Outside

Date, causing the Covenant Compliance Condition to fail. Because the Covenant

Compliance Condition has not been met, Fresenius cannot be forced to close. More

importantly, Fresenius had the right to terminate the Merger Agreement, provided that

Fresenius was not then in material breach of its own contractual obligations.

D.     Has Fresenius Breached?

       The final issue is whether Fresenius was barred from exercising its termination right

because of its own material breaches of the Merger Agreement. Section 7.01(c)(i) contains

a proviso which states that Fresenius cannot exercise its right to terminate “if [Fresenius]

is then in material breach of any of its representations, warranties, covenants or agreements

hereunder.” Akorn contends that Fresenius could not terminate the Merger Agreement

because it breached both the Reasonable Best Efforts Covenant and the Hell-or-High-

Water Covenant. Akorn bore the burden of proof on these issues because Akorn sought to

                                            223
invoke an exception to Fresenius’s termination right.806 The evidence shows that Fresenius

did not breach the Reasonable Best Efforts Covenant. The evidence shows that Fresenius

breached the Hell-or-High-Water Covenant, but that the breach was not material.

                1.     The Reasonable Best Efforts Covenant

       In the Reasonable Best Efforts Covenant, each party to the Merger Agreement

agreed to “cooperate with the other parties and use . . . their respective reasonable best

efforts to promptly . . . take . . . all actions . . . necessary, proper or advisable to cause the

conditions to Closing to be satisfied as promptly as reasonably practicable and to

consummate and make effective, in the most expeditious manner reasonably practicable,

the [Merger].”807      Under the Delaware Supreme Court’s decision in Williams, the

“reasonable best efforts” standard in this provision imposed an obligation on Fresenius “to

take all reasonable steps to solve problems and consummate the transaction.”808

       Importantly from my perspective, the parties agreed in the Reasonable Best Efforts

Covenant to seek “to consummate and make effective” the transaction that they had agreed

to in the Merger Agreement on the terms set forth in that contract. They were not

committing themselves to merge at all costs and on any terms. Instead, they were

       806
           See 29 Am. Jur. 2d Evidence § 176 (“A party seeking to take advantage of an
exception to a contract is charged with the burden of proving facts necessary to come within
the exception.”); Hollinger, 844 A.2d at 1070 (“Black bears the burden to establish that
this contractual exception applies.”).
       807
             JX 1 § 5.03(a).
       808
159 A.3d at 272.

                                              224
committing themselves to fulfill the contract they had signed, which contained

representations that formed the basis for the transaction, established conditions to the

parties’ performance, and gave both sides rights to terminate under specified

circumstances. As I see it, the Reasonable Best Efforts Covenant did not require either side

of the deal to sacrifice its own contractual rights for the benefit of its counterparty. The

concept of acting for the benefit of another is a fiduciary standard, not a contractual one.

       When evaluating whether a merger partner has used reasonable best efforts, this

court has looked to whether the party subject to the clause (i) had reasonable grounds to

take the action it did and (ii) sought to address problems with its counterparty. In Hexion

and IBP, this court criticized parties who did not raise their concerns before filing suit, did

not work with their counterparties, and appeared to have manufactured issues solely for

purposes of litigation.809 Kling and Nugent offer the following insightful commentary on

IBP:

       809
            See Hexion, 965 A.2d at 725 (“[P]erhaps realizing that the MAE argument was
not strong, Apollo and its counsel began focusing on insolvency.”); id. at 726 (criticizing
reliance on solvency opinion generated by consultants who “knew that their client had
litigation on its mind and still based their opinion their opinion on the same biased numbers
as the consulting team”); id. at 730 (criticizing solvency expert for not talking to seller’s
executives); id. (criticizing buyer for making “the deliberate decision not to consult with
[the seller] regarding the [solvency] analysis prior to filing the lawsuit”); IBP, 789 A.2d at
49 (“In an internal e-mail, Gottsponer explained Tyson’s renegotiation strategy: . . . ‘To
keep the pressure on their stock price. Based on the voice mails that have been left for me
(those seven) the street views these restatements as insignificant. We know these
accounting issues aren’t the biggest reason to renegotiate (i.e. beef margins). Lets remind
people of that (softly). To set the stage for other points that may help us to renegotiate.’”);
id. at 49 (“Don Tyson returned to the meeting and announced that Tyson should find a way
to withdraw. The problems at DFG apparently played no part in his decision, nor did the
comments from the SEC. Indeed, DFG was so unimportant that neither John nor Don

                                             225
       One gets the impression that Vice Chancellor Strine thought that Tyson itself
       did not believe there had been a material adverse effect, but, was, instead,
       suffering “buyer’s remorse.” Among the facts that supported this result were
       that Tyson’s bankers still thought the deal was fair to it with “tremendous
       strategic sense” and represented “great long term value.” In addition, Tyson
       did not even raise the material adverse effect claims in its correspondence
       with IBP, its announced reasons for terminating the merger agreement or,
       indeed, until the litigation started.810

The Hexion court similarly noted that the buyer “made the deliberate decision not to consult

with [the seller] . . . prior to filing [its] lawsuit.”811

Tyson knew about Schedule 5.11 of the Agreement until this litigation was underway.”)
(footnote omitted); id. at 51 (“Notably, the [termination] letter does not indicate that IBP
had suffered a Material Adverse Effect as a result of its first-quarter performance.”); id. at
65 (“[I]t is useful to be mindful that Tyson’s publicly expressed reasons for terminating the
Merger did not include an assertion that IBP had suffered a Material Adverse Effect. The
post-hoc nature of Tyson’s arguments bear on what it felt the contract meant when
contracting, and suggests that a short-term drop in IBP’s performance would not be
sufficient to cause a MAE.”); id. at 70 (“Even after Hankins generated extremely
pessimistic projections for IBP in order to justify a lower deal price, Merrill Lynch still
concluded that a purchase of IBP at $30 per share was still within the range of fairness and
a great long-term value for Tyson. The Merrill Lynch analysis casts great doubt on Tyson’s
assertion that IBP has suffered a Material Adverse Effect.”); id. at 71 (“[T]he analyst views
support the conclusion that IBP remains what the baseline evidence suggests it was—a
consistently but erratically profitable company struggling to implement a strategy that will
reduce the cyclicality of its earnings. Although IBP may not be performing as well as it
and Tyson had hoped, IBP’s business appears to be in sound enough shape to deliver results
of operations in line with the company’s recent historical performance. Tyson’s own
investment banker still believes IBP is fairly priced at $30 per share.”).
       810
           Kling & Nugent, supra, § 11.04[9], at 11-68 n.133 (citations omitted); accord
Schwartz, supra, at 827 n.220 (arguing that the absence of Delaware decisions finding an
MAE “may be partially due to the Delaware courts’ suspicion that acquirers use the MAC
clause as a pretext to avoid closing a suddenly unappealing acquisition”) (citing IBP, 789
A.2d at 65).
       811
965 A.2d at 730.

                                                 226
       In this case, Akorn’s dismal post-signing performance gave Fresenius good cause

to evaluate its rights and obligations under the Merger Agreement. The General MAE

Condition gave Fresenius the right to refuse to close if Akorn suffered a Material Adverse

Effect, and Fresenius was entitled to evaluate whether that condition was met. Fresenius

also was entitled to consult with Paul Weiss. As this court observed in Hexion, it is

“undoubtedly true” that a company can “seek[] expert advice to rely upon” when evaluating

its contractual alternatives.812 Importantly, Fresenius communicated directly with Akorn

about its performance. Sturm and Henriksson flew to Lake Forest, Illinois to meet in person

with Ducker and the Akorn executives.813 Fresenius also analyzed and remained committed

to fulfilling its obligations under the Merger Agreement if it was not entitled to terminate.

Sturm testified credibly that he was “in an exploratory phase.”     814
                                                                          Consistent with his

testimony, the contemporaneous evidence shows that at the same time Fresenius was

consulting with Paul Weiss, Fresenius was also working hard to figure out how the deal

could still work.815

       The whistleblower letters subsequently gave Fresenius good cause to evaluate

whether Akorn’s representations were accurate and whether Fresenius might have

       812
             Id. at 754.
       813
             Sturm Tr. 1178.
       814
           Id. at 1189; see id. at 1206 (“Q. Okay. And you started looking for a way to get
out of the transaction, did you not? A. No. I did not.”).

         See JX 605; JX 619; JX 620; JX 624; JX 627 at ‘498; JX 657; JX 658; JX 661;
       815

JX 664; JX 670 at 20; JX 684 at ‘911.

                                            227
contractual grounds to terminate. It was reasonable for Fresenius to use the informational

right it possessed under the Merger Agreement to evaluate these issues. A reasonable

access covenant “provides Buyer with the opportunity to confirm the accuracy of Sellers’

representations and verify the satisfaction of the other condition to Buyer’s obligation to

complete the acquisition, such as the absence of a Material Adverse Change with respect

to each Acquired Company.”816 The covenant exists “in order for the Buyer to continue the

‘due diligence’ process.”817 Fresenius used its reasonable access rights for that purpose.

Moreover, as when responding to Akorn’s poor business performance, Fresenius

communicated directly with Akorn about these issues.

       As discussed in the Factual Background, I believe that by November 12, 2017, the

senior executives at Fresenius had concluded that they did not want to proceed with the

Merger as negotiated. Akorn had performed too badly, and the regulatory problems raised

by the whistleblower letters were another blow. Even recognizing that the Fresenius

executives had a motive to get out of the deal, I do not believe that Fresenius breached the

Reasonable Best Efforts Covenant. In addition to having an obligation to work towards

       816
          See Model Stock Purchase Agreement, supra, at 198; see also, e.g., id. at 199
(“During its due diligence investigation, Buyer is likely to have access to extensive
information concerning the Acquired Companies. If, during the period between signing
and Closing, the information reveals a material inaccuracy in any of Sellers’
representations as of the date of the Model Agreement, Buyer has several options. If the
inaccuracy results in the inability of Sellers to satisfy the applicable closing condition . . .
Buyer can decide to terminate [the merger agreement].”).
       817
             Kling & Nugent, supra, § 13.02[1], at 13-6.

                                             228
closing, Fresenius also had the right to terminate the Merger Agreement if Akorn’s

Regulatory Compliance Representations were inaccurate and the deviation would

reasonably and incurably be expected to result in a Material Adverse Effect. Fresenius also

had the right to terminate the Merger Agreement if Akorn incurably failed to comply in all

material respects with the Ordinary Course Covenant. Fresenius was entitled to investigate

these issues and assert good faith positions based on its contractual rights.

       Akorn views Fresenius’s investigation cynically as an effort by Fresenius to

manufacture grounds for termination. There is some evidence to support that view.

Nevertheless, having considered the record and evaluated the credibility of the witnesses,

I believe that Fresenius acted legitimately and uncovered real problems. I believe that

Akorn knew about both the existence and magnitude of these problems and hoped that

Fresenius would not get the full story until after the deal closed. Instead, the investigation

caused Fresenius to learn about the pervasive nature of Akorn’s compliance and data

integrity issues before closing. In my view, as its investigation unfolded, Fresenius acted

reasonably, culminating ultimately in its decision to terminate the Merger Agreement.

Before doing so, Fresenius offered to extend the Outside Date for the Merger Agreement

so that Akorn could continue its investigation and remediation efforts and, if Akorn thought

it was possible, cure its breaches. Akorn declined.

       Akorn understandably has tried to cast Fresenius in the mold of the buyers in IBP

and Hexion by accusing Fresenius of having “buyer’s remorse.” In my view, the difference

between this case and its forebearers is that the remorse was justified. In both IBP and

Hexion, the buyers had second thoughts because of problems with their own businesses

                                             229
spurred by broader economic factors. In this case, by contrast, Fresenius responded after

Akorn suffered a General MAE and after a legitimate investigation uncovered pervasive

regulatory compliance failures.

       On a more granular level, this decision has already rejected many of the inferences

that Akorn draws when portraying Fresenius as a bad faith actor. The principal components

of Akorn’s tale run as follows:

      Akorn claims that Sturm instructed management in September 2017 to build a legal
       case to terminate the Merger Agreement. This decision has found that Sturm was
       not seeking to manufacture a case. He was focused on understanding Fresenius’s
       rights under the Merger Agreement so that Fresenius could exercise its rights if
       warranted. Otherwise, Fresenius would live up to its obligations.

      Akorn claims that Fresenius retained Paul Weiss to navigate a path towards
       termination. In my view, retaining expert counsel was prudent.

      Akorn asserts that Fresenius’s advisors tried to manufacture a record that would
       justify termination. There is some evidence to support this view, and the advisors
       undoubtedly understood that Fresenius was unhappy with the deal. On balance,
       however, I believe the advisors acted consistently with Fresenius’s rights under the
       Merger Agreement. In particular, I find that Sidley, Lachman, and E&Y conducted
       a professional investigation into the whistleblower letters that Fresenius had good
       cause to pursue.

      Akorn claims that Fresenius instructed Akorn not to investigate the anonymous
       letters. In the Factual Background, I rejected this interpretation of the evidence,
       finding instead that Fresenius told Akorn that it could not rely on Akorn’s
       investigation and would have to also conduct one of its own. Akorn then chose not
       to conduct an independent investigation and instead have Cravath front run Sidley’s
       investigation in an attempt to head off any problems.

      Akorn claims Fresenius secretly strategized with Paul Weiss and Sidley about
       manufacturing “fraud on the FDA” allegations818 and “placing collateral pressure

       818
             JX 719 at ‘238.

                                           230
      on Akorn by communicating concerns to the regulatory agency,”819 then did just
      that in letters aimed at “stimulating the [FDA] to require a searching audit of Akorn
      and perhaps an FDA investigation” and “piqu[ing] the FDA’s interest.”820 Akorn
      accurately quotes from documents when making this argument. In my view,
      however, Fresenius had good cause to investigate the whistleblower letters. Once
      that investigation uncovered serious problems, Fresenius had good reason to be
      concerned that Akorn would present a misleading picture of its situation to the FDA
      in an effort to get to closing and stick Fresenius with the regulatory problems.
      Fresenius acted reasonably in response to Akorn’s conduct.

     Akorn claims that Fresenius drafted intentionally onerous information requests
      designed to induce Akorn to refuse access and supply an alternative basis for
      termination. I do not agree with this assessment. While Fresenius and its advisors
      drafted broad requests, the requests were reasonable in light of the seriousness of
      the charges in the whistleblower letters. After negotiations between counsel for the
      companies, Akorn largely complied.

     Akorn asserts that Sidley accessed confidential Akorn materials in the virtual data
      room, without Akorn’s knowledge or permission and in breach of the confidentiality
      agreement. In my view, Sidley carefully evaluated whether it could access the
      virtual data room and properly concluded that it could use the information in the
      data room for purposes of “executing” the Merger Agreement, in the sense of
      carrying out the parties’ contractual obligations. Those obligations did not require a
      single-minded drive to closing. They also contemplated the possibility of failed
      conditions and termination. Sidley properly used the information in the data room
      to evaluate Fresenius’s rights under the Merger Agreement.

     Akorn contends that Fresenius executed a fraudulent common interest agreement.
      The two sides negotiated a common interest agreement which reflected that they
      had a “mutual interest” in “join[ing] in an investigation,” and that “[t]his mutual
      interest arises from and under the Merger Agreement.”821 Fresenius was properly
      seeking to evaluate its rights under the Merger Agreement to determine whether the
      conditions to closing were met.

      819
            JX 738 at ‘297.
      820
            JX 1488 at ‘820.
      821
          JX 804 at ‘988; see Sturm Tr. 1220–21; Ducker Dep. 241–44; see also JX 798;
Sheers Tr. 1088.

                                           231
      Akorn contends that Fresenius lied to Akorn by falsely assuring Bonaccorsi that
       “the goal here was to investigate. . . . [T]his was not a litigation exercise.”822 In my
       view, Fresenius’s goal was to investigate. Fresenius did not want to litigate unless
       it had to and would not litigate unless it had valid claims. If the investigation into
       the whistleblower letters had not suggested grounds for termination, or if events had
       unfolded along any number of other paths, then litigation would not have ensued.

      Akorn observes that Fresenius disqualified Akorn’s FDA counsel because it did not
       want the FDA to get the impression of a “joint investigation,” notwithstanding
       representations in the common interest agreement.823 It is true that Fresenius refused
       to waive a conflict that Hyman Phelps faced, but Fresenius had good cause for doing
       so. At that point, Fresenius was justifiably concerned that Akorn would make a
       misleading presentation to the FDA, and Fresenius did not want its long-time
       regulatory counsel associated with a misleading presentation. That was a reasonable
       concern and borne out by events. The misleading nature of the presentation stemmed
       in part from Akorn’s claims that the investigation had been conducted jointly, when
       in fact Cravath simply had been front running Sidley until Cravath discovered the
       azithromycin fraud. Fresenius’s obligation to use its reasonable best efforts to fulfill
       its obligations under the Merger Agreement did not extend to assisting Akorn in
       misleading the FDA.

I give Akorn’s top-flight attorneys credit for assembling a credible account. I am not

suggesting that there is no evidence to support their position. Particularly after Akorn began

exhibiting performance that ultimately led this decision to find that the Company had

suffered a Material Adverse Effect, Fresenius did not want to go the extra mile. Fresenius

wanted to live by the Merger Agreement and do what it was obligated to do, while at the

same time protecting its own contractual rights and terminating the transaction if it had a

valid basis for doing so. In my judgment, Fresenius succeeded in doing what it was

       822
             Bonaccorsi Tr. 891–92.
       823
             Sturm Tr. 1224–26.

                                             232
obligated to do. Akorn has not shown by a preponderance of the evidence that Akorn

breached the Reasonable Best Efforts Covenant.

              2.     The Hell-Or-High-Water Covenant

       Section 5.03(c) of the Merger Agreement sets out a series of affirmative and

negative covenants relating to antitrust approval. The language that this decision refers to

as the Hell-Or-High-Water Covenant states:

       [Fresenius Kabi] shall promptly take all actions necessary to secure the
       expiration or termination of any applicable waiting period under the HSR
       Act or any other Antitrust Law and resolve any objections asserted with
       respect to the [Merger] under the Federal Trade Commission Act or any other
       applicable Law raised by any Governmental Authority, in order to prevent
       the entry of, or to have vacated, lifted, reversed or overturned, any Restraint
       that would prevent, prohibit, restrict or delay the consummation of the
       [Merger], including

              (i) (A) executing settlements, undertakings, consent decrees,
       stipulations or other agreements with any Governmental Authority or with
       any other Person, (B) selling, divesting or otherwise conveying or holding
       separate particular assets or categories of assets or businesses of [Fresenius
       Kabi] and its Subsidiaries, (C) agreeing to sell, divest or otherwise convey or
       hold separate any particular assets or categories of assets or businesses of the
       Company and its Subsidiaries contemporaneously with or subsequent to the
       Effective Time, (D) permitting the Company to sell, divest or otherwise
       convey or hold separate any of the particular assets or categories of assets or
       businesses of the Company or any of its Subsidiaries prior to the Effective
       Time, (E) terminating existing relationships, contractual rights or obligations
       of the Company or [Fresenius Kabi] or their respective Subsidiaries, (F)
       terminating any joint venture or other arrangement, (G) creating any
       relationship, contractual right or obligation of the Company or [Fresenius
       Kabi] or their respective Subsidiaries or (H) effectuating any other change or
       restructuring of the Company or [Fresenius Kabi] or their respective
       Subsidiaries (and, in each case, entering into agreements or stipulating to the
       entry of any Judgment by, or filing appropriate applications with, the Federal
       Trade Commission (the “FTC”), the Antitrust Division of the Department of
       Justice (the “DOJ”) or any other Governmental Authority in connection with
       any of the foregoing and, in the case of actions by or with respect to the
       Company, by consenting to such action by the Company (including any

                                             233
       consents required under this Agreement with respect to such action);
       provided that any such action may, at the discretion of the Company, be
       conditioned upon the Closing) and

              (ii) defending through litigation any claim asserted in court or
       administrative or other tribunal by any Person (including any Governmental
       Authority) in order to avoid entry of, or to have vacated or terminated, any
       Restraint that would prevent the Closing prior to the Outside Date.

       All such efforts shall be unconditional and shall not be qualified in any
       manner and no actions taken pursuant to this Section 5.03 shall be considered
       for purposes of determining whether a Material Adverse Effect has occurred
       or would reasonably be expected to occur. . . .

       The Company, [Fresenius Kabi] and Merger Sub and any of their respective
       Affiliates shall not take any action with the intention to, or that could
       reasonably be expected to, hinder or delay the expiration or termination of
       any waiting period under the HSR Act or the obtaining of approval of the
       DOJ or FTC as necessary (including, in the case of [Fresenius Kabi] and
       Merger Sub, acquiring or merging with any business, Person or division
       thereof, or entering into a definitive agreement with respect thereto, if doing
       so could reasonably be expected to have such effect). . . .824

In other words, Fresenius agreed to take “all actions necessary” to secure antitrust approval,

without any mitigating efforts obligation.825

       Somewhat in tension with the flat obligation to take “all actions necessary” to secure

antitrust approval, the Merger Agreement gave Fresenius sole control over the strategy for

securing antitrust approval (the “Strategy Provision”). Formatted for legibility, this aspect

of Section 5.03(c) states:

       824
             JX 1 § 5.03(c).
       825
          See Alliance Data Sys., 963 A.2d at 763 n.60 (describing a Hell-Or-High-Water
Covenant as “a much stronger and broader commitment” than a reasonable best efforts
obligation “with respect to a discrete regulatory subject: antitrust approval”).

                                             234
       [Fresenius Kabi] shall (x) control the strategy for obtaining any approvals,
       consents, registrations, waivers, permits, authorizations, orders and other
       confirmations from any Governmental Authority in connection with the
       [Merger] and

       (y) control the overall development of the positions to be taken and the
       regulatory actions to be requested in any filing or submission with a
       Governmental Authority in connection with the [Merger] and in connection
       with any investigation or other inquiry or litigation by or before, or any
       negotiations with, a Governmental Authority relating to the [Merger] and of
       all other regulatory matters incidental thereto;

       provided that [Fresenius Kabi] shall consult and cooperate with the Company
       with respect to such strategy, positions and requested regulatory action and
       consider the Company’s views in good faith. . . .826

The Strategy Provision inherently recognizes that there is no single and obvious answer as

to how to pursue antitrust approval and that Fresenius had the power to make those

decisions after consulting and cooperating with the Company.

       Akorn’s post-trial briefs placed great emphasis on antitrust issues, yet the trial

record on this point was comparatively sparse. During trial, only two witnesses made more

than a passing reference to FTC clearance.827 Bauersmith, who oversaw Fresenius’s

divestiture efforts, testified at trial that he was not asked to delay the process. 828 As noted

       826
          JX 1 § 5.03(c). Cravath’s initial draft of the Merger Agreement provided that
Fresenius and Akorn “shall jointly, and on an equal basis,” control the strategy for antitrust
clearance. JX 420 at ‘686. Fresenius requested sole control over strategy, and Akorn
accepted the change. Silhavy Dep. 24–25.
       827
             See Bauersmith Tr. 604–08; Bonaccorsi Tr. 912–21, 932.
       828
           Bauersmith Tr. 604; Bauersmith Dep. 128, 218; see also id. at 217 (describing
the FTC approval process as “a rigorous pace insofar as identifying the appropriate buyers,
striking the right value deal, and creating a set of agreements that we believed would be
acceptable to the FTC”).

                                             235
in the Factual Background, Bauersmith was a credible witness. At trial, Akorn’s counsel

never asked Bauersmith about the FTC or Fresenius’s divestment partner Alvogen. In its

briefing, Akorn relies heavily on the deposition of its corporate strategy official Jennifer

Bowles, who largely testified to her “perception” that Fresenius intentionally delayed FTC

approval for self-interested reasons.829 Bowles did not testify at trial.830

       There is no serious dispute that during the first six months after the Merger

Agreement was signed, Fresenius diligently pursued antitrust approval. Fresenius started

by assessing the degree to which its ANDAs overlapped with Akorn’s,831 then analyzed

the likelihood the FTC would require divestment.832 Working through these issues required

Fresenius to evaluate the number of competitors and relative market share for each

product.833 Once Fresenius had a sense of what it thought the FTC would want sold,

Fresenius worked with Moelis to structure a bidding process for potential buyers that

       829
          See Bowles Dep. 134–35; id. at 128–29 (discussing “opinions” Bowles formed
when FTC-related activities “should not have taken as long as they did”); see also Rai Dep.
247 (“I think the whole process of getting the FTC approval was slow and should have
been done sooner, based on my personal experience, because I’ve been through one before,
or a couple of times.”).
       830
          Because Bowles did not appear at trial and also lacked first-hand knowledge of
Fresenius’s negotiations with Alvogen, her deposition testimony receives limited weight.
See Bowles Dep. 130.
       831
             Bauersmith Dep. 149.
       832
             Id.
       833
             Id.

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included access to a data room.834 Alvogen was the winning bidder, and Fresenius began

working on a transaction agreement with Alvogen.

       In October 2017, Fresenius submitted a proposed divestiture agreement to the FTC,

consistent with the plan to submit by mid-November.835 In early November, the FTC threw

a wrench into the process by asking Fresenius to divest its versions of the overlapping

products rather than selling Akorn’s.836 The FTC also raised other objections to the

divesture package that the parties had not anticipated and which seemed to depart from

past agency practice.837

       The parties had not expected to receive FTC clearance until early 2018,838 so

Fresenius made the reasonable decision to ask the FTC to reconsider having Fresenius

       834
             Id. at 150.
       835
          Ducker Dep. 274; see Bauersmith Dep. 218 (“[A]lvogen and Fresenius . . .
submitted what we thought in October was an agreement and a proposal that the FTC
should accept.”); JX 524 at ‘416 (timeline calling for “[c]ontract finalization & supply and
tech transfer agreements, and final submission to FTC” between the third week of
September and the second week of November); see also Silhavy Dep. 47–48.
       836
             See JX 698 at ‘866–67; see also Bauersmith Dep. 154.
       837
          See Bauersmith Dep. 153–55; Bauersmith Tr. 605; accord Silhavy Dep. 165–67;
see also Ducker Dep. 274 (discussing Allen & Overy’s view that the switch on Fresenius’s
overlapping products “was a very unusual step for the FTC to take”); Empey Dep. 184–85.
       838
           See Silhavy Dep. 48–49; Sturm Tr. 1175 (noting that the Merger could close
“towards the end of 2017, at the earliest”); JX 524 at ‘416 (divestment timeline from June
2017 contemplating “FTC review of submission and final negotiations with FTC” between
the third week of November 2017 and the second week of January 2018).

                                            237
divest its version of the overlapping products rather than Akorn’s.839 Fresenius also began

considering whether it should sell the Decatur site as part of the divestiture package,

believing that if the FTC learned that Fresenius was considering selling Decatur, it would

want the plant included in the package of divestitures.840 Based on feedback from the FTC,

Fresenius came to believe that a sale of Decatur standing alone would enable the Merger

to obtain FTC clearance, without the need to divest other products.841 Under the Strategy

Provision, it was Fresenius’s job to consider these issues.

       The Fresenius team evaluated whether pursuing a sale of Decatur would create

problems by delaying FTC approval and concluded that although there was a risk of delay,

the benefits outweighed the risk.842 As of early January 2018, the Fresenius executives

believed that pursuing a divestiture strategy involving Decatur would result in FTC

approval in mid-April, within the timeframe contemplated by the Merger Agreement, as

opposed to potential approval in February without Decatur.843 Fresenius therefore decided

to pursue “parallel strategies” on divestiture: Option 1, which involved selling various

       839
             See Bowles Dep. 131–34.
       840
           See JX 816 at ‘971–72; Henriksson Dep. 67 (“We didn’t want to bring it to the
FTC, because we thought that that would then delay the clearance, but . . . I wanted to sell
that plant to Alvogen.”).
       841
           See Silhavy Dep. 169–70; JX 1456 at 2 (“Sale of Decatur facility would solve
virtually all FTC concerns”); Henriksson Dep. 314–15.
       842
             See Schulte-Noelle Dep. 185–89; Ducker Dep. 274–75; JX 816 at ‘971–72.
       843
             See JX 844 at ‘410–11; Silhavy Dep. 168–69.

                                            238
Fresenius ANDAs, and Option 2, which involved selling Decatur.844 In my view, this was

a reasonable approach that fell within the ambit of the Strategy Provision.

       The first documentary evidence of Akorn registering complaints about Fresenius’s

pursuit of regulatory approval emerges in minutes of a board meeting on January 5, 2018,

where Rai and Bowles “provided their opinions that FK is dragging its feet with respect to

the FTC clearance activities highlighting their unwillingness to accept FTC’s stated

positions with respect to divestitures.”845 The Akorn executives notably raised these issues

after multiple quarters of terrible business performance by Akorn, after the investigation

into the whistleblower letters had uncovered Silverberg’s submission of false data to the

FDA, and during a meeting where the board, management, and Cravath attorneys “engaged

in a robust and lengthy discussion regarding the status of investigation, MAE standard,

conditions of closing and whether Akorn can insist on FK taking accelerating [sic] its

efforts to obtain FTC clearance.”846 Akorn’s desire to raise these issues at this point seems

as much a defensive response to the pressure that Akorn was under as it was the product of

actual problems with Fresenius’s compliance. Internal Fresenius emails indicate that

       844
            See Silhavy Dep. 173; id. at 185 (“We knew that it would solve a number of the
issues outstanding with the FTC, but have the effect of perhaps taking longer than going
with the straight option of divesting the products without a . . . corresponding divestiture
of . . . Decatur.”); JX 959 at ‘498 (discussing Option 1 and Option 2).

         JX 1337 at ‘403; see also Bonaccorsi Tr. 915 (testifying that by late 2017, he and
       845

Bowles “felt [Fresenius was] beginning to slow-walk the FTC process”).
       846
             JX 1337 at ‘403.

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during January, Bauersmith was pressing forward to obtain FTC approval promptly for a

divestiture option that involved Decatur,847 and Fresenius’s attorneys were likewise

working with the FTC on aspects of the ANDA divestiture package.848

       For approximately a week in February 2018, Fresenius contemplated a path that

could have constituted a material breach of the Hell-or-High-Water Covenant had

Fresenius continued to pursue it. The Hell-or-High-Water Covenant forbids Fresenius from

taking any action that could be reasonably expected to delay FTC approval, and Fresenius

nearly adopted an FTC strategy that it knew would delay approval by two months or more.

       During a meeting on February 9, 2018, the Fresenius steering committee discussed

the two options for obtaining FTC clearance.849 Option 1 continued the ANDA divestiture

strategy.850 Under this option, the Merger could close in April.851 Option 2 involved a sale

of Decatur and obviated the need to resolve multiple longstanding disputes with the FTC

       847
             See JX 889 at ‘591.
       848
             See JX 886.
       849
             JX 959.
       850
           See id. at ‘498 (“Option 1: Negotiate a ‘reverse’ swap of FK Acetylcysteine
ANDAs to Alvogen.”); id. at ‘497 (“FTC is requesting FK to divest its acetylcysteine assets
instead of the original plan to invest Akorn’s assets.”).
       851
             Id. at ‘498.

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about Option 1.852 Option 2 would result in the Merger closing in June or July. 853 The

February 9 minutes indicated that “[p]ost-close integration teams are preparing for an

imminent closing including putting key support contracts in place.” 854 In an email sent to

the group of Fresenius executives who were overseeing the antitrust clearance process,

Ducker wrote:

      The key topic is how to proceed with Alvogen and FTC. If Stephan [Sturm]
      is likely to go nuclear on the closing we should instruct the team to follow
      Option 2. This avoids us having a potential closing event before we have a
      more developed legal position on the investigation. But if the Supervisory
      Board does not support the refusal to close we want the quickest option which
      is #1. I suggest we ask Jamie [Bauersmith] to explore both options with
      Alvogen. This will test their appetite for both and leaves both options open
      for potential negotiations of terms. It will buy us a couple of weeks to the
      Feb 22 or 23 decision point.855

      852
          See id. at ‘497–98; Ducker Dep. 275 (explaining that Option 2 “simplifies matters
significantly with the FTC and removes the need for escrow accounts, and we could remove
the requirement for us to divest our on-market acetylcysteine product”); Schoenhofen Dep.
196.
      853
         JX 959 at ‘498; see also Bauersmith Dep. 161–62 (explaining that the Option 2
schedule built in time for Alvogen to diligence Decatur); cf. JX 889 at ‘591 (January 19,
2018 email referencing Alvogen’s request for due diligence at Decatur).
      854
            JX 959 at ‘500.
      855
            JX 976 at ‘067.

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The executives picked Option 2,856 but Fresenius “quickly abandoned” it once Alvogen

made an unattractive offer for Decatur.857 After barely one week, Fresenius reverted to

Option 1, and the Merger stayed on track for an April closing.

       By choosing Option 2, which would delay antitrust clearance by two months,

Fresenius technically breached the Hell-or-High-Water Covenant. But because Fresenius

changed course in approximately a week and returned to Option 1, the breach was not

material. As of that point, Fresenius had positioned the parties to close the Merger in

conjunction with the original Outside Date of April 24, 2018, and months before the

extended Outside Date of July 24, which would have applied automatically if receipt of

antitrust approval was the only condition to closing that had not been met.

       Akorn makes much of Bonaccorsi’s testimony about his interactions with

Fresenius’s lead antitrust counsel, Elaine Johnston of Allen & Overy. Bonaccorsi testified

that Johnston told him that she was not in regular contact with Fresenius and could not

       856
             JX 959 at ‘498.
       857
            See Silhavy Dep. 173; Bauersmith Tr. 607–08 (testifying that Fresenius spent
“[a]bout a week or so” pursuing Option 2 before Alvogen “came in with an incredibly low
offer for the Decatur facility”); Ducker Dep. 275–76; Schulte-Noelle Dep. 189–90 (“[I]
think it was only a few days later we realized that there was no attractive offer and, hence,
the only option that would be left would be [Option 1].”). The steering committee’s
February 9 minutes reflect that it directed Bauersmith “to approach Alvogen . . . to gauge
their interest level” in Option 2. JX 959 at ‘498. Bauersmith explained that he “reached out
to Alvogen pretty much right away” to assess their interest but that they “offered something
that was not palatable, so we just pursued option 1.” Bauersmith Dep. 220–21.

                                            242
explain the delays in the FTC process.858 These communications appear to have taken place

during the brief period in February when Fresenius was deciding between the two options,

initially chose Option 2, then reverted to Option 1. It makes sense to me that Johnston and

Fresenius were not on same page during the brief period when Fresenius was making a

major decision about strategy. Akorn does not point to any evidence of miscommunications

between Fresenius and Johnston, or for that matter between Fresenius and Akorn, after

February 2018.

       During a meeting on March 23, 2018, Bowles advised the Akorn directors about the

timeline for receiving FTC approval and did not identify any problems. 859 On April 20,

the FTC sent Akorn and Fresenius a draft Decision and Order, which is one of the final

steps in the FTC review process before approval.860 When Akorn filed its complaint on

April 23, it alleged that FTC approval was expected in May 2018. 861 It appears that the

FTC is now reserving judgment until this litigation is resolved,862 but Fresenius cannot be

faulted for that.

       858
          Bonaccorsi Dep. 218–19; Bonaccorsi Tr. 918–19; see also JX 972 (Bonaccorsi
discussing February 13 call with Johnston); JX 1337 at ‘403 (Akorn February 23 board
minutes discussing dialogue with Johnston).
       859
          JX 1337 at ‘405; see also id. at ‘404–05 (March 2 and 9 board minutes
referencing “FTC related activities,” but no problems).
       860
          Dkt. 1 ¶ 118; see Bowles Dep. 146–47 (“Q. And so is it your understanding that,
as of April 23, antitrust approval was now close at hand? A. Yes.”).
       861
             Dkt. 1 ¶ 119.
       862
             See Dkt. 220 at 109–10.

                                           243
       The facts of this case differ markedly from Hexion, which Akorn cites for the settled

proposition that a party can breach a hell-or-high-water covenant by dragging its feet on

obtaining antitrust clearance.863 In Hexion, at the time of trial, the buyer still had not

“signed agreements with the proposed buyer of the assets to be divested” and still “had not

responded to certain interrogatories from the FTC” or “put itself in a position to do so . . .

.”864 The buyer in that case consciously delayed obtaining approval as a strategy to avoid

the transaction.865 Fresenius did not do that. Fresenius took steps to obtain timely antitrust

approval, but other conditions in the Merger Agreement failed before approval could be

received.

       There is also contemporaneous evidence indicating that Akorn recognized that

Fresenius could cure any breach of the Hell-or-High-Water Covenant by moving forward

on Option 1. In a letter dated February 24, 2018, Cravath accused Fresenius of breaching

its obligation to secure antitrust clearance and posited that Fresenius “cure its breach

immediately” by committing to “promptly agree to whatever terms are necessary to

complete the negotiations with Alvogen” over Option 1.866 By the time Fresenius received

the letter, Fresenius had abandoned its flirtation with Option 2 and was pursuing Option 1,

thereby curing its breach.

       863
             See Hexion, 965 A.2d at 756.
       864
             Id. at 735, 756.
       865
             Id. at 756.
       866
             JX 986 at ‘188.

                                             244
       I find that Fresenius breached the Hell-or-High-Water Covenant by briefly pursuing

Option 1, but Akorn failed to prove by a preponderance of the evidence that Fresenius

materially breached the Hell-or-High-Water Covenant. Under the Strategy Provision,

Fresenius had the exclusive right to “control the strategy” and “the overall development of

the positions to be taken” to obtain FTC clearance.867 Fresenius chose a strategy that

ultimately would have resulted in FTC approval well within the timeframe permitted by

the Merger Agreement. There also is ample evidence indicating that Fresenius could have

secured FTC clearance by the original Outside Date if the FTC had not wavered on aspects

of the original divestiture package. Under these circumstances, Akorn did not establish that

Fresenius materially breached the Hell-or-High-Water Covenant such that it should be

barred from exercising an otherwise valid termination right.

                               III.     CONCLUSION

       Akorn brought this action seeking a decree of specific performance that would

compel Fresenius to close. Akorn cannot obtain specific performance because three

conditions to closing failed: the General MAE Condition, the Bring-Down Condition, and

the Covenant Compliance Condition.

       Fresenius sought a declaration that it had validly terminated the Merger Agreement

on April 22, 2018. As of that date, Fresenius had not materially breached its obligations

under the Merger Agreement and therefore could exercise its termination rights.

       867
             JX 1 § 5.03(c).

                                            245
       Fresenius validly terminated the Merger Agreement because Akorn’s Regulatory

Compliance Representations were untrue, the deviation from the representations could not

be cured by the Outside Date, and the degree of deviation would reasonably be expected

to result in a Regulatory MAE. This scenario caused the Bring-Down Condition to fail in

an incurable manner and entitled Fresenius to terminate.

       Fresenius also validly terminated the Merger Agreement because Akorn had

materially breached the Ordinary Course Covenant and the breach could not be cured by

the Outside Date. This scenario caused the Covenant Compliance Condition to fail in an

incurable manner and entitled Fresenius to terminate.

       Within ten days, the parties shall submit a joint letter identifying any other matters

that need to be addressed to bring this matter to a conclusion at the trial level. If possible,

the parties shall submit a final order implementing this decision that has been agreed as to

form. If there are further issues to be resolved at the trial level, the parties shall propose a

schedule for addressing them.

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