Delaware Court of Chancery Vice Chancellor J. Travis Laster.

The Delaware Court of Chancery on Monday allowed Fresenius SE to walk away from its planned $4.3 billion deal to acquire generic drugmaker Akorn Inc., ruling that a series of regulatory compliance issues at Akorn had allowed Fresenius to terminate the merger.

The post-trial ruling, from Vice Chancellor J. Travis Laster, was the first in Delaware to find that a series of missteps amounted to a “material adverse change” in a seller's business that justified a buyer withdrawing from a merger.

Fresenius had pulled out of the merger agreement in April, after Akorn reported steep losses in revenue and other financial metrics. The company also cited serious doubts about the validity of Akorn's data and misleading statements to federal regulators as reasons for abandoning the deal.

At trial, Akorn argued that Fresenius and its executives were suffering from a typical case of buyer's remorse, and asked Laster to force Fresenius to complete the merger.

Laster, however, noted that the case was “markedly different” from other cases that have raised similar allegations of queasy executives. In a 246-page memorandum opinion, he said Fresenius had responded to a “dramatic, unexpected and company-specific downturn in Akorn's business” and that its ”remorse was justified.”

“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,” Laster wrote.

In a statement Monday, Akorn vowed to appeal the ruling to the Delaware Supreme Court.

“We are disappointed by the ruling by the Delaware Chancery Court determining not to force Fresenius to close and we continue to believe Fresenius' attempt to terminate the transaction is in breach of our binding merger agreement,” the Illinois-based company said. “We intend to appeal, in an effort to vigorously enforce our rights and continue to protect the interests of our company and our shareholders.”

Attorneys for Fresenius were not immediately available to comment on Tuesday.

Akorn and Fresenius last April agreed to the $34 per share deal, which required both sides to use their reasonable best efforts to complete the merger. Under the agreement, Akorn made numerous promises about its compliance with regulatory requirements, and promised to operate in the ordinary course of business between signing and closing, according to the opinion.

In the quarter after signing, Laster said, Akorn's performance “fell off a cliff,” as the company reported significant declines in its revenue, amid problems in its generic pipeline. In July 2017, the company reported that revenue had dropped 29 percent from the same time a year ago, and operating income was down 84 percent. It's reported earnings of $0.02 per share represented a year-over-year decline of 96 percent, according to Laster's opinion.

Last year, Fresenius received letters from anonymous whistleblowers, raising major concerns about Akorn's quality compliance programs and its failure to meet regulatory requirements. Fresenius conducted its own investigation of the whistleblower allegations, revealing that Akorn executives, including its head of quality control either altered data or provided false test data to the U.S. Food and Drug Administration in applications for new generic drugs.

A later probe by the FDA resulted in Akorn recalling its sterile eye drop after they failed quality testing.

Laster said in his ruling that Fresenius tried to move ahead with the deal and had consulted with Akorn to conduct its investigation after receiving the whistleblower letters. He found no material breaches of the merger agreement by Fresenius or its officials, which would have prevented the company from canceling the merger agreement.

The ruling was a first in Delaware, where the burden for proving a material adverse change is high, and judges are typically inclined to hold buyers to their merger deals.

Pretrial rulings have found that the contractual provisions may have been violated in merger disputes, said Lawrence Hamermesh, a corporate law professor at Widener University Delaware Law School. However, Hamermesh said Monday's decision was the first to rely on a material adverse change in allowing a prospective buyer to walk away from a deal.

Fresenius was represented by Lewis R. Clayton, Andrew G. Gordon, Susanna M. Buergel, Jonathan Hurwitz, Daniel H. Levi and Paul A. Paterson of Paul, Weiss, Rifkind, Wharton & Garrison in New York and Stephen P. Lamb, Daniel Mason and Brendan Sullivan in the firm's Wilmington office.

Akorn was represented by Robert H. Baron, Daniel Slifkin, Michael A. Paskin and Justin C. Clarke of Cravath, Swaine & Moore in New York and William M. Lafferty, Thomas W. Briggs Jr., John P. DiTomo of Morris, Nichols, Arsht & Tunnell in Wilmington.

The case was captioned Akorn v. Fresenius.