- Javelin Takes Litigation Aim at Hospira: Potentially another Opportunity for Delaware Courts to Rule on MAC Clauses
- June 16, 2010
- Law Firm: Alston & Bird LLP - Atlanta Office
Javelin Pharmaceuticals, Inc. filed a lawsuit on Tuesday against Hospira, Inc., seeking to compel Hospira to consummate the acquisition of Javelin common stock pursuant to a tender offer as set forth in a merger agreement dated April 17, 2010. The lawsuit follows Hospira’s second extension of the closing date and its assertion that a MAC is reasonably expected.
In May 2010, Javelin disclosed that its U.K. licensee was experiencing a manufacturing issue with a product it supplies in the U.K. The company reported that it had become aware of a white particulate matter in some vials of the product, and that its licensee was recalling all batches of the product from the U.K. market. On June 2, Hospira sent a letter to Javelin in which Hospira stated that it believes the issue has caused certain of Javelin’s reps and warranties in the merger agreement to be breached, without specifying which reps and warranties it was referring to. Hospira further stated that it “believes the occurrence of the particulate issue, which directly affects [Javelin’s] sole viable drug product, would reasonably be expected to result in a Material Adverse Effect, as defined in the Merger Agreement.” Hospira then announced that it is extending the closing date of the tender offer for two additional weeks, with an intent to close then “if all conditions of the tender offer have been met.”
The merger agreement has a typical closing condition requiring that Javelin’s reps and warranties be true and correct, except where the failure would not reasonably be expected to have a “Company Material Adverse Effect.” The agreement defines “Company Material Adverse Effect” in a fairly standard way, to mean “an effect, event, occurrence, development or change” that has “a material adverse effect on the business, results of operations or financial condition” of Javelin and its subsidiaries.
Javelin has requested an expedited trial, which could potentially give the Delaware Chancery Court an opportunity to address another case involving a buyer’s desire to terminate an acquisition agreement in reliance on the MAC clause. To date, the Delaware courts have not been willing to approve of such a situation. As stated by Vice Chancellor Lamb in 2008 in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., “[a] buyer faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its obligation to close. Many commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement. This is not coincidence.” In Hexion, the court reiterated that an adverse change should be deemed material only “ ‘when viewed from the longer-term perspective of a reasonable acquirer,’ ” quoting In re IBP, Inc. Shareholders Litigation [789 A.2d 14, 68 (Del. Ch. 2001)]. According to the Hexion court, “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.”
Facts in the case at hand apparently make a resolution of the issues urgent, however. According to its complaint in the lawsuit, Javelin is relying on pre-closing loans from Hospira to provide necessary working capital. At the time that Javelin and Hospira reached agreement on the tender offer and follow-on merger, Javelin also negotiated for Hospira to provide it with up to approximately $17 million in loans pending the consummation of the acquisition. Javelin alleges, however, that Hospira has refused to make any further loans, leaving open the question of how long Javelin will be able to sustain its business during the dispute.