In Bardy Diagnostics, Inc. v. Hill-Rom, Inc., the Delaware Court of Chancery once again had to apply a Material Adverse Effect clause to determine whether an acquirer was required to close an acquisition. The case develops the law of MAEs in several important ways. First, the agreement between the parties substituted for the customary MAE objects (e.g., the company’s business, financial condition, and results of operations) a bespoke defined term. The court interpreted the definition of that term in a way that made it functionally equivalent to more customary MAE objects; then, consistent with an unacknowledged trend in Delaware law, the court ignored the MAE objects and inquired into the effect of the alleged MAE on the value of the company as reasonably understood in accordance with accepted principles of corporate finance. Second, in performing that inquiry, the court faced a situation in which, although the target’s cashflows had decreased substantially, it was unclear whether they would soon rebound to historical levels. Although the court focused on whether the reduction in cashflows would be “durationally significant,” this article argues that the question would better be framed in terms of how the event alleged to be a Material Adverse Effect affected a reasonable understanding of the probability distribution of the company’s future cashflows and their present value. Third, and probably most important, the court’s opinion expressly acknowledges and consistently applies a distinction between events and effects, that is, between a capitalized “Material Adverse Effect,” which is an event that has or would reasonably be expected to have a material adverse effect on the target, and that material adverse effect itself, which is caused by the event. Unlike Akorn and KCake, Bardy thus makes clear that exceptions in MAE definitions apply to events, not the effects they cause. Finally, the opinion in Bardy makes important points about disproportionality exclusions in MAE definitions, including with respect to determining the control group against which adverse effects on the company should be measured and with respect to construing the “to the extent” language in such exclusions. While agreeing that the court’s interpretation of the contract reflected the intentions of the parties, this article argues that the typical contract language, read literally, involves the same confusion of events and effects so common in discussions of MAE clauses and suggests that drafters should replace the typical language with language that more accurately reflects the intentions of the parties.
Robert T. Miller,
Bardy Diagnostics v. Hill-Rom: New Lessons on Material Adverse Effect Clauses,
16 Brook. J. Corp. Fin. & Com. L.
Available at: https://brooklynworks.brooklaw.edu/bjcfcl/vol16/iss2/2