I recently mentioned in this post that my works were cited liberally in the Delaware Chancery Court’s high-profile opinion in Akorn, Inc. v. Fresenius Kabi AG (PDF here). I’ve now had occasion to look through the opinion; here are some thoughts. They reflect my interests: you can find no end of commentary if instead you’re interested in the broader implications of this case.
Paying a Price for Vagueness
Vagueness is an essential drafting tool, but you should use it only when you’re not able to be specific: because what’s required to meet a vague standard is a function of the circumstances, people can get into fights over vagueness.
And because fights over vagueness require exploring the circumstances in question, that can get expensive and messy. That Vice Chancellor Laster’s opinion in Akorn weighs in at 246 pages is a good indication of that.
Yes, Material Is Ambiguous
I’ve gone out of my way to say that material is ambiguous. MSCD discusses what it calls the “affects-a-decision” meaning of material, which is the meaning associated with the phrase material adverse change. MSCD ¶ 9.7 goes on as follows:
According to Black’s Law Dictionary, another meaning of material is “significant”—in other words, important enough to merit attention. This meaning encompasses a broader range of significance than the affects-a-decision meaning—in this sense of the word, for something to be material to a contract party, it would simply have to be of more than trivial significance.
MSCD recommends that to express this other meaning of material, you use nontrivial.
The elite material-is-ambiguous club has now been joined by Vice Chancellor Laster. Here’s what he says at pages 209–11 of the Akorn opinion:
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. The language seeks to exclude small, de minimis, and nitpicky issues that should not derail an acquisition. …
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.
So you have all the more reason to use nontrivial to avoid ambiguity.
Preserving the Efforts Status Quo
Consistent with Delaware caselaw and a mountain of other caselaw, the Akorn opinion says as follows:
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.”
In other words, Vice Chancellor Laster declined the opportunity to hold that different efforts standards impose obligations of different levels of onerousness.
But given the chatter surrounding this part of the Akorn opinion, I realize I have further work to do on efforts. In the next two months I plan on writing the efforts article to end all efforts articles. Wish me luck.
The following is from page 212 of the Akorn opinion:
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.
This is the first time I’ve seen double materiality mentioned in a court opinion. In this 2013 post I established to my satisfaction that double materiality is a figment of practitioner imagination. It’s perhaps time for me to try to air this argument more broadly.
Execute Is Ambiguous
This is from page 72 of the Akorn opinion:
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.
Akorn argued that executing the agreement only meant signing it. but Vice Chancellor Laster agreed with the Sidley attorneys.
But contract drafting isn’t about winning fights: if people fight over the meaning of execute, then don’t use execute! MSCD recommends that if you mean to refer to signing a contract, then use sign! If you mean to refer to performance under a contract, then use perform!
For now, that’s the extent of my Akorn thoughts.