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An attorney for Fresenius SE & Co. on Wednesday defended a landmark Chancery Court ruling that allowed the German health care firm to walk away from its $4.3 billion deal to buy generic drugmaker Akorn Inc. based on a material adverse change in Akorn's business, saying the decision was well-rooted in evidence presented during an expedited trial.

Paul, Weiss, Rifkind, Wharton & Garrison partner Lewis R. Clayton told a five-judge panel of the Delaware Supreme Court that Akorn had “collapsed” under the weight of regulatory compliance issues after the two companies agreed to the $34-per-share buyout in early 2017.

“Every time someone looked, there were more and more problems,” Clayton said.

The argument came on Akorn's appeal of Vice Chancellor J. Travis Laster's Oct. 1 opinion—the first in Delaware to rely on a material adverse change, or MAE, in allowing a prospective buyer to escape a merger. In Delaware, the bar for proving a MAE is high, and judges have historically been inclined to hold buyers to their deals.

However, Laster held in his 246-page ruling that the case was “markedly different” from others involving similar accusations regarding queasy executives. Laster wrote that 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,” he said.

Akorn, which is represented by Cravath, Swaine & Moore, argued on appeal that Fresenius was actively looking for a way out the deal and that Laster's ruling essentially “rewrote” Delaware law by loosening the materiality standard to permit known risks to constitute an MAE and adopting a “less onerous” standard for material breach of a covenant.

But Clayton said Akorn's post-signing collapse was material because it was specific to problems at Akorn and not indicative of a industry-wide issues of increased competition that were generally known when the companies agreed to the deal. He pointed to significant declines in Akorn's operating performance that helped send the company's stock below $7-per-share as of Tuesday night

“It's a disaster, and that's why the market is not looking at Akorn and seeing anything but a huge, huge issue,” Clayton said

Clayton said that Laster had also identified the correct standard for a material of Akorn's obligation to continue conducting its business in the “ordinary course” in finding that the problems at Akorn likely would have been viewed by the reasonable investor as having significantly altered the “total mix” of the information available to the buyer before closing.

Fresenius 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.

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, which revealed that Akorn executives, including its head of quality control, had 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.

“I respectfully submit it would be an awful message to send to say that this kind of conduct is permissible under ordinary course in Delaware or in any other state,” Clayton said.

Daniel Slifkin, a partner with Cravath, meanwhile refuted Clayton's assertion that Akorn had fallen apart in the year since agreeing to the merger.

“We're now seven months after the termination notice was delivered to my client. The FDA hasn't shut anything down. Fresenius, we submit, believed it was buying a generics company, with some regulatory issues, facing increased competition, and that is precisely what they get if this court requires them to close,” he told the justices.

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

Fresenius' team also included Andrew G. Gordon, Susanna M. Buergel, Jonathan Hurwitz, Daniel H. Levi and Paul A. Paterson of Paul Weiss and Stephen P. Lamb, Daniel Mason and Brendan Sullivan in the firm's Wilmington office.

The case is captioned Akorn v. Fresenius.