Andrew G. Gordon, left, and Jaren Elizabeth Janghorbani, right, with Paul, Weiss, Rifkind, Wharton & Garrison.

Our Litigators of the Week are Paul, Weiss, Rifkind, Wharton & Garrison partners  Andrew Gordon and Jaren Elizabeth Janghorbani  for their high-stakes win in a case that fills in a newly-uncertain area of the law: When can a company walk away from a pending merger without penalty?

Almost exactly a year ago, Paul Weiss partner Lewis Clayton won Litigator of the Week for representing Fresenius SE & Co. in a landmark case in Delaware. Clayton's client had agreed to acquire Akorn, an American generic pharmaceutical manufacturer, for $4.75 billion, only to discover substantial evidence that Akorn was violating FDA rules and regulations.

Fresenius claimed this was a material adverse event that justified scuttling the deal. The court agreed—the first time a Delaware court ever made such a finding.

Fast-forward a year. This time, a Paul Weiss team led by Gordon and Janghorbani was on the other side, representing Channel Medsystems, which had struck a $275 million deal to be acquired by Boston Scientific. 

Evidence emerged that Channel—like Akorn— deceived the FDA, and Boston Scientific—citing Fresenius—wanted to kill the deal.

Arguing the opposite side of the same legal issue, the Paul Weiss team persuaded Chancellor Andre Bouchard that this time, this deal should go through.

Gordon and Janghorbani discussed the case with Lit Daily.

Who was your client and what was at stake?

Jaren Janghorbani: Our client Channel Medsystems is a startup medical device company that developed a game-changing device for endometrial ablation, a procedure to treat heavy menstrual bleeding. Hundreds of thousands of women undergo this procedure every year, normally under general anesthesia in a hospital because it's so painful. 

Channel's device, Cerene, can be used in a doctor's office without anesthesia. But to get this treatment, Channel's sole product, into the hands of physicians and available broadly to women in need of this procedure, Channel wanted a larger, established company as a partner. So for Channel, a lot was at stake.

In November 2017, Channel agreed to be acquired by Boston Scientific for $275 million. A few weeks later, however, our client discovered that a rogue employee, Channel's head of quality, had been stealing from the company using fraudulent billing practices. This employee had covered up the fraud by creating false documents that ended up being included in various submissions to the FDA. 

In May 2018, months after learning of these facts, Boston Scientific announced that it was pulling out of the deal, alleging that the employee's fraud was a Material Adverse Event entitling it to terminate the agreement, and further, that Channel had defrauded it into making earlier investments in the company. Our client filed suit shortly thereafter.

 

In this case, Boston Scientific alleged that the facts were similar to the recently-decided Fresenius case, and therefore that it was likewise justified in terminating the agreement.  How did that impact your strategy?

Andrew Gordon: Notwithstanding Boston Scientific's allegations about the similarities with the Fresenius decision, the facts were only similar on the surface. In each case, shortly after the deal was announced, the acquirer learned that the head of quality of the target company had caused false statements to be submitted to the FDA. 

The Channel executive was actually indicted for embezzlement and convicted. 

But, unlike in the Fresenius case, the target here, Channel, took immediate action to investigate the fraud, remediate the problem, inform the FDA, and notify Boston Scientific. In fact, unlike Akorn, Channel did everything that the Fresenius court said a company should do in this type of situation. That was very helpful to our case. 

 

Andrew, you were involved in both the Fresenius/Akorn MAE litigation and this one. Did it feel odd to be on opposites sides? 

Andrew: Actually, while it is always odd to be on opposite sides of the same legal issue, in this case, it didn't really feel all that odd because, once we dug into the facts, the cases were not that similar at all – no matter what the other side was saying in Channel Medsystems. 

We've handled a number of these MAE cases over the past few years for one side or the other: Alere, Fresenius and now Channel. Each one has its own set of unique facts and we tailor our litigation strategy accordingly.

 

Who was opposing counsel? 

Andrew: Boston Scientific retained Arnold & Porter's Matthew Wolf, Edward Han and Amy DeWitt, all very experienced and professional counsel. 

 

What was your primary theme in presenting your case? 

Jaren: Through our witnesses' testimony and documentary evidence, we demonstrated that our client had handled this situation exactly the way that you would have expected a responsible company to handle it. 

Channel had remediated the problem, and there was never any real doubt about Channel's ability to secure FDA approval for Cerene; in fact, Channel ultimately secured FDA approval a few weeks before trial – a big problem for Boston Scientific. 

Moreover, our client had a clear record showing that the product was safe and effective. In fact, one of Boston Scientific's employees sat on Channel's board of directors, and during his deposition, he admitted he thought the fraud was "more or less a non-issue" given Channel's thorough investigation and remediation work. That was our strongest argument countering their position that the employee's fraud had caused an MAE. 

Second, we wanted to show the converse: that Boston Scientific's decision to terminate wasn't really motivated by the rogue employee's fraud. As the court noted, if Boston Scientific had been truly concerned about the fraud, they would have been expected to consult experts, consult with our client, try to understand the issues and potential costs, meet with our client to ask questions, and memorialize those efforts in writing. 

But Boston Scientific did none of that; for example, when I cross-examined Tony Carr, the Boston Scientific quality employee involved in the decision to terminate, he admitted that Boston Scientific did not even discuss steps that it could take to remediate any issues at Channel. 

Instead, Boston Scientific behaved like they had buyer's remorse. And, through discovery, we showed that the company had other reasons for their decision to cancel the deal: Boston Scientific wanted out in part because they wanted to sell the women's health division and realized that this merger and the $275 million price tag would pose an impediment to that sale, as the court noted in its opinion.

 

In his opinion, Chancellor Bouchard wrote that Boston Scientific "attempted to elicit testimony from each of its own fact witnesses concerning oral statements Channel made that allegedly were false, but their testimony strained credibility and collapsed into admissions that they were relying only on written documents." What happened? Tell us about your cross-examinations.

Jaren: Boston Scientific took the position at trial that our client had made oral statements to fraudulently induce them to sign the merger agreement, and to induce them into making certain preliminary investments even prior to the agreement. But we showed on cross that these alleged oral statements were a complete fiction. 

When we pressed the Boston Scientific witnesses, both in their depositions and during cross-examination, to identify specific statements, when they were made and to whom they were made, they were unable to supply those answers. So by drilling down on this, we demonstrated persuasively that no credible oral statements had actually been made, and that written statements that surfaced in discovery, as well as their own depositions, directly contradicted their testimony on the stand. 

To take one example, David Pierce, Boston Scientific's most senior executive, testified at trial on direct that, in meetings he attended before the deal was signed, Channel made various representations about its quality system. 

On cross-examination, Andrew confronted Pierce with his deposition testimony, where he testified that he could only recall attending one meeting with Channel, and the only thing he recalled about that meeting was leaving it. Pierce then conceded to Andrew that he did not really recall anything that was said about Channel's quality system in the sole meeting he attended. 

Andrew: It was a great moment for us in the trial!

 

What other aspects of Bouchard's opinion stand out to you?

Andrew: From a practitioner's standpoint, we often focus on the MAE clause, and what the target company did or didn't do that caused an alleged MAE. But one of the real takeaways here is that it's not enough to spot something that may be an MAE. 

Courts are looking at whether acquirers work in good faith with their merger partners to try to consummate the merger, and if there is a problem, whether they have made every effort to investigate and resolve that problem. 

In his decision, Chancellor Bouchard makes clear that people alleging breaches have their own obligations under these contracts, often, as here, including obligations "to take all reasonable steps to solve problems and consummate the transaction." 

The Chancellor took Boston Scientific to task for not being commercially reasonable and for failing to evaluate whether an MAE had actually occurred. If Boston Scientific had done so, they would have had to concede that no MAE occurred. In the end, he found that not only had our client not had an MAE, but that furthermore, Boston Scientific had breached its obligation to proceed in good faith, and instead, in his words, "simply pulled the ripcord."

The opinion sends a signal to merger parties who are contemplating this type of claim that 'hey, you better do a little homework, not just because you might lose the MAE claim, but because you yourself might be found to have breached your own obligations under the contract." 

 

The Fresenius decision triggered some hand-wringing, with commentators expressing concern that it represented a sea change in Delaware law. What message does this decision send?

Jaren: The Fresenius decision was one of the most discussed decisions over the past year, with many commentators and practitioners wondering if the case meant that the Delaware courts might start allowing buyers to get out of deals more readily under an MAE. 

But I think that what this decision reflects is that each case stands on its unique facts. It is clear that termination of a merger under an MAE clause will still be a steep hill to climb, and the decisions together reflect that both targets and acquirers need to be sure to take their contractual obligations very seriously when faced with unexpected challenging circumstances. 

See Also:  Take a Bow: Here Are the 2019 Litigators of the Week Winners