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Akorn, Inc. v. Fresenius Kabi AG

Court of Chancery of Delaware

October 1, 2018

AKORN, INC., Plaintiff and Counterclaim Defendant,
v.
FRESENIUS KABI AG, QUERCUS ACQUISITION, INC., and FRESENIUS SE & CO. KGAA, Defendants and Counterclaim Plaintiffs.

          Submitted Date: September 25, 2018

          William M. Lafferty, Thomas W. Briggs, Jr., John P. DiTomo, Richard Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Robert H. Baron, Daniel Slifkin, Michael A. Paskin, Justin C. Clarke, CRAVATH, SWAINE & MOORE LLP, New York, New York; Counsel for Plaintiff and Counterclaim Defendant.

          Donald J. Wolfe, Jr., Michael A. Pittenger, T. Brad Davey, Matthew F. Davis, Jacob R. Kirkham, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Stephen P. Lamb, Daniel A. Mason, Brendan W. Sullivan, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Lewis R. Clayton, Andrew G. Gordon, Susanna M. Buergel, Jonathan H. Hurwitz, Daniel H. Levi, Paul A. Paterson, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Counsel for Defendants and Counterclaim Plaintiffs.

          MEMORANDUM OPINION

          LASTER, V.C.

         Pursuant to an agreement and plan of merger dated April 24, 2017 (the "Merger Agreement"), Fresenius Kabi AG agreed to acquire Akorn, Inc. In the Merger Agreement, Akorn made extensive representations about its compliance with applicable regulatory requirements and committed to use commercially reasonable efforts to operate in the ordinary course of business between signing and closing. Both Fresenius and Akorn committed to use their reasonable best efforts to complete the merger, and Fresenius committed to take all actions necessary to secure antitrust approval, without any efforts-based qualification. The parties agreed to a contractually defined "Outside Date" for closing, set initially at April 24, 2018. If the need for antitrust approval was the only condition to closing that had still not been met at that point, then the Outside Date would extend automatically to July 24, 2018.

         If the merger closed, then each share of Akorn common stock would be converted into the right to receive $34 per share. Closing, however, was not a foregone conclusion. First, Fresenius's obligation to close was conditioned on Akorn's representations having been true and correct both at signing and at closing, except where the failure to be true and correct would not reasonably be expected to have a contractually defined "Material Adverse Effect." If this condition was not met and could not be cured by the Outside Date, then Fresenius could terminate the Merger Agreement. Fresenius could not exercise this termination right, however, if Fresenius was in material breach of its own obligations under the Merger Agreement.

         Second, Fresenius's obligation to close was conditioned on Akorn having complied in all material respects with its obligations under the Merger Agreement. Once again, if this condition was not met and could not be cured by the Outside Date, then Fresenius could terminate the Merger Agreement. Here too, Fresenius could not exercise the termination right if Fresenius was in material breach of its own obligations under the Merger Agreement.

         Third, Fresenius's obligation to close was conditioned on Akorn not having suffered a Material Adverse Effect. The failure of this condition did not give Fresenius a right to terminate. Once the Outside Date passed, however, either Fresenius or Akorn could terminate, as long as the terminating party's own breach of the Merger Agreement had not been a principal cause of or resulted in the parties' failure to close before the Outside Date.

         Akorn and Fresenius entered into the Merger Agreement shortly after announcing their results for the first quarter of 2017. During the second quarter of 2017, Akorn's business performance fell off a cliff, delivering results that fell materially below Akorn's prior-year performance on a year-over-year basis. The dismal results shocked Fresenius, because on the same date that the parties signed the Merger Agreement, Akorn had reaffirmed its full-year guidance for 2018 at Fresenius's request. Akorn's performance fell well below the guidance, forcing management to adjust Akorn's full-year guidance downward. Fresenius consulted with Akorn about the reasons for the sudden decline, which Akorn attributed to unexpected competition and the loss of a key contract.

         Akorn's CEO reassured Fresenius that the downturn was temporary, but Akorn's performance continued to slide in July and again in August 2018. By September, Fresenius's management team had become concerned that Akorn had suffered a Material Adverse Effect, although its legal counsel was not certain at that point that Fresenius could satisfy the high burden imposed by Delaware law.

         In October 2017, Fresenius received a letter from an anonymous whistleblower who made disturbing allegations about Akorn's product development process failing to comply with regulatory requirements. In November 2017, Fresenius received a longer version of the letter that provided additional details and made equally disturbing allegations about Akorn's quality compliance programs. The letters called into question whether Akorn's representations regarding regulatory compliance were accurate and whether Akorn had been operating in the ordinary course of business.

         Fresenius provided the letters to Akorn. Although Fresenius understood that Akorn would have to investigate the allegations in the ordinary course of business, Fresenius informed Akorn that Fresenius also needed to conduct its own investigation into the allegations. Under the Merger Agreement, Fresenius had bargained for a right of reasonable access to Akorn's officers, employees, and information so that Fresenius could evaluate Akorn's contractual compliance and determine whether the conditions to closing were met. Invoking this right, Fresenius had expert attorneys and advisors investigate the issues raised by the whistleblower letters.

         Fresenius's investigation uncovered serious and pervasive data integrity problems that rendered Akorn's representations about its regulatory compliance sufficiently inaccurate that the deviation between Akorn's actual condition and its as-represented condition would reasonably be expected to result in a Material Adverse Effect. During the course of the investigation, tensions escalated between the parties. Matters came to a head after Akorn downplayed its problems and oversold its remedial efforts in a presentation to its primary regulator, the United States Food and Drug Administration ("FDA"). As one of Akorn's own experts recognized at trial, Akorn was not fully transparent with the FDA. Put more bluntly, the presentation was misleading. From Fresenius's standpoint, Akorn was not conducting its operations in the ordinary course of business, providing an additional basis for termination.

         During this same period, Akorn's business performance continued to deteriorate. In mid-April 2018, Fresenius sent Akorn a letter explaining why conditions to closing could not be met and identifying contractual bases for terminating the Merger Agreement. Fresenius nevertheless offered to extend the Outside Date if Akorn believed that further investigation would enable Akorn to resolve its difficulties. Akorn declined.

         On April 22, 2018, Fresenius gave notice that it was terminating the Merger Agreement. Fresenius asserted that Akorn's representations regarding regulatory compliance were so incorrect that the deviation would reasonably be expected to result in a Material Adverse Effect. Fresenius also cited Akorn's failure to comply in all material respects with its contractual obligations under the Merger Agreement, including Akorn's obligation to use commercially reasonable efforts to operate in the ordinary course of business in all material respects. Fresenius also cited the section in the Merger Agreement that conditioned Fresenius's obligation to close on Akorn not having suffered a Material Adverse Effect.

         Akorn responded by filing this action, which seeks a declaration that Fresenius's attempt to terminate the Merger Agreement was invalid and a decree of specific performance compelling Fresenius to close. Fresenius answered and filed counterclaims, contending it validly terminated the Merger Agreement and is not required to close.

         This post-trial decision rules in favor of Fresenius and against Akorn. First, 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. Second, Fresenius validly terminated because Akorn materially breached its obligation to continue operating in the ordinary course of business between signing and closing. Third, Fresenius properly relied on the fact that Akorn has suffered a Material Adverse Effect as a basis for refusing to close.

         If Fresenius had been in material breach of its own obligations under the Merger Agreement, then Fresenius could not have exercised either of the termination rights on which it relied. Akorn tried to prove that Fresenius failed to use its reasonable best efforts to complete the merger and breached its obligation to take all actions necessary to obtain antitrust approval. By piecing together bits of documents and testimony, Akorn's skilled counsel weaved a tale of buyer's remorse. I have taken this theory seriously, and there is some evidence to support it.

         Having weighed the evidence and evaluated the credibility of the witnesses, I find that Fresenius fulfilled its contractual obligations. In prior cases, this court has correctly criticized buyers who agreed to acquisitions, only to have second thoughts after cyclical trends or industrywide effects negatively impacted their own businesses, and who then filed litigation in an effort to escape their agreements without consulting with the sellers. In these cases, the buyers claimed that the sellers had suffered contractually defined material adverse effects under circumstances where the buyers themselves did not seem to believe their assertions.

         This case is markedly different. Fresenius responded to a dramatic, unexpected, and company-specific downturn in Akorn's business that began in the quarter after signing. After consulting with Akorn about the reasons for the decline and receiving unconvincing answers, Fresenius appropriately began evaluating its contractual rights under the Merger Agreement. While doing so, Fresenius continued to move forward with the transaction. Later, Fresenius received whistleblower letters that made alarming allegations about data integrity issues at Akorn. Once again, Fresenius consulted with Akorn, then relied on an informational access covenant in the Merger Agreement to conduct an investigation. That too was proper, because buyers obtain informational rights so they can continue to evaluate the seller after signing and determine whether to close.

         Akorn did prove that for approximately a one-week period during February 2018, Fresenius embarked on a strategy for achieving antitrust approval that would have breached its contractual obligation to take all steps necessary to satisfy that condition to closing. Fresenius promptly reversed course, and the parties were on the cusp of receiving antitrust approval when Fresenius terminated the Merger Agreement. If all other conditions to closing had been met on the initial Outside Date such that it would have extended automatically to June 24, 2018, then the parties easily would have obtained antitrust approval. Fresenius technically breached its contractual obligation, but it was not a material breach sufficient to deprive Fresenius of its ability to exercise the termination rights on which it relied.

         Any second thoughts that Fresenius had about the Merger Agreement were justified by unexpected events at Akorn. The parties agreed to provisions in the Merger Agreement that addressed those events, and Fresenius properly exercised its rights under those provisions. As a result, the Merger Agreement terminated on April 22, 2018.

         I. FACTUAL BACKGROUND

         A five-day trial took place on July 9-13, 2018. The parties introduced 1, 892 exhibits into evidence and lodged fifty-four deposition transcripts-forty from fact witnesses and fourteen from experts. Nine fact witnesses and seven experts testified live at trial.

         The parties prepared for trial during eleven weeks of highly expedited litigation. Despite the massive effort this entailed, the parties required assistance with only one significant discovery dispute, which involved contentious privilege issues. This case exemplifies how professionals can simultaneously advocate for their clients while cooperating as officers of the court. The parties were aided in this effort by a discovery facilitator who helped them craft and live by a detailed discovery plan.

         My task is to make factual findings based on the record the parties generated. For that purpose, Fresenius bore the burden of proving by a preponderance of the evidence the facts supporting the exercise of its termination rights. Akorn bore the burden of proving by a preponderance of the evidence the facts necessary to establish its claim that Fresenius could not exercise those rights because Fresenius was in material breach of its own obligations. Akorn bore the burden of proving by clear and convincing evidence the facts necessary to justify a decree of specific performance.

         Fresenius would have borne the burden of proving the facts necessary to establish its affirmative defense of unclean hands. In this case, however, there was no meaningful distinction between its contractual arguments and its unclean hands defense. Fresenius simply repackaged its contractual arguments as an equitable theory. In my view, the Merger Agreement governs the parties' relationship. If there were issues or actions that could support a defense of unclean hands and which did not come within the analytical framework of the Merger Agreement, then I would have analyzed that defense. In this case, however, the facts fit neatly within the analytical framework of the Merger Agreement and point to a contract-based outcome. Under those circumstances, applying the doctrine of unclean hands would either duplicate the contractual outcome or create uncertainty by departing from the result that the parties sought to achieve for themselves. This decision therefore does not address the defense of unclean hands.

         Based on these allocations of the burden of proof, the evidence supported the following findings of fact.

         A. Fresenius

         Defendant Fresenius Kabi AG is a pharmaceutical company headquartered in Germany.[1] It employs approximately 37, 000 people worldwide, has seventy manufacturing sites around the world, and is worth about 6.5 billion.[2] Its particular areas of focus lie in clinical nutrition, injectable drugs, IV solutions, and medical devices.[3] Fresenius Kabi is a signatory to the Merger Agreement.

         Fresenius Kabi is the parent corporation of defendant Quercus Acquisition, Inc., a wholly owned acquisition subsidiary. Under the Merger Agreement, Quercus would merge with and into Akorn in a reverse triangular merger (the "Merger"). Although a necessary party for purposes of Akorn's request for specific performance, Quercus does not play a meaningful role in the dispute.

         Fresenius Kabi is also the parent corporation of non-party Fresenius Kabi USA, LLC ("Fresenius USA"), another wholly owned subsidiary.[4] In the United States, Fresenius Kabi operates through Fresenius USA. Fresenius Kabi viewed the Merger as a way to expand its business in the United States, and personnel from Fresenius USA figure prominently in the record.

         Fresenius Kabi is itself a wholly owned subsidiary of defendant Fresenius SE & Co. KGaA ("Fresenius Parent"), a German company whose shares trade publicly on the Frankfurt Stock Exchange.[5] Through various business segments, Fresenius Parent offers products and services for hospitals, dialysis, and outpatient treatment.[6] Fresenius Parent has been in existence for more than a century, operates in more than 100 countries, and employs approximately 277, 000 people worldwide.[7] For its fiscal year 2017, Fresenius Parent had sales of approximately 34 billion and an operating profit of nearly 5 billion.[8]Fresenius Parent is a signatory to the Merger Agreement for the purpose of causing Fresenius Kabi to comply with its obligations.[9]

         The resulting three-tiered corporate structure puts Fresenius Parent at the top, then Fresenius Kabi, then Fresenius USA. The corresponding human hierarchy starts with the Supervisory Board of Fresenius Parent, which plays the same role as the board of directors of a Delaware corporation. Because it is a German company, Fresenius Parent also has a Management Board, consisting of the senior executives of that entity. Since July 2016, Stephan Sturm has served as the top executive at Fresenius Parent and Chairman of the Management Board.[10] Since 2013, Mats Henriksson has served as CEO of Fresenius Kabi.[11] He also serves as a member of the Management Board of Fresenius Parent.[12] For many years, John Ducker has served as President and CEO of Fresenius USA.[13]

         Although critically important for many purposes, distinguishing among the Fresenius entities is generally not necessary in this decision. It therefore refers only to Fresenius, unless context requires a more specific referent.

         B. Akorn

         Plaintiff Akorn is a specialty generic pharmaceuticals company organized under the laws of the State of Louisiana and headquartered in Lake Forest, Illinois.[14] Akorn's stock trades publicly on NASDAQ under the symbol "AKRX."[15] Akorn is defined as the "Company" in the Merger Agreement, and this decision sometimes uses that term. During the events giving rise to this litigation, Raj Rai was its President and CEO.

         Akorn's business model focuses on selectively targeting products with complex manufacturing processes or that are deliverable in alternative dose forms, such as injectables, eye drops, oral liquids, inhalants, and nasal sprays.[16] Akorn's management team believes this strategy carries less risk and generates more consistent profit margins than other generic drug company strategies.[17] Akorn has manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, India. Akorn has research and development centers in Vernon Hills, Illinois, and Cranbury, New Jersey.[18]

         Akorn's primary regulator is the FDA.[19] Akorn's quality operations function is responsible for ensuring that Akorn's plants and R&D centers meet FDA requirements.[20]To carry out this function, Akorn's Global Quality Compliance ("GQC") team conducts periodic audits; Akorn also retains consultants who evaluate its sites and processes.[21]

         Akorn's quality operations function is also responsible for ensuring that Akorn complies with FDA requirements when making submissions to the FDA, such as when filing an Abbreviated New Drug Application ("ANDA") to seek approval for a new generic drug.[22] When reviewing an ANDA, the FDA relies on data submitted by the applicant. To ensure that data is reliable, the FDA imposes rigorous data integrity requirements on pharmaceutical companies.[23] From the FDA's standpoint, "ensuring data integrity is an important component of [the pharmaceutical] industry's responsibility to ensure the safety, efficacy, and quality of drugs, and of [the] FDA's ability to protect the public health."[24]

         The FDA's data integrity requirements place the burden on the pharmaceutical company to "prove the origin, transmission, and content of the company's data and that data is what it is purported to be."[25] "A properly designed and managed data integrity program strives to mitigate the risk of purposeful data manipulation or fraud by putting controls in place that limit to the greatest extent possible the opportunities to manipulate data . . . ."[26] To minimize those risks, the FDA's data integrity requirements impose strict requirements that data regarding testing and manufacturing be attributable, legible, contemporaneously recorded, original or a true copy, and accurate ("ALCOA"), as well as complete, consistent, enduring, and available.[27] The FDA's data integrity requirements are part of its current Good Manufacturing Practices ("cGMP"), which are designed to ensure the systematic safety, quality, and reliability of drug products.[28] These requirements are set out in federal regulations and clarified by FDA guidance.[29]

         A critical component of a modern data integrity system is the company's IT infrastructure.[30] The FDA requires that computer systems have adequate "access controls" that restrict who may access electronic data, as well as "change controls" designed to "ensure that no unnecessary changes are made, that all changes are documented, and that the possible effect of a change is evaluated prior to its implementation."[31] The FDA also requires that lab equipment have "audit trails" to document who uses the equipment, when, and for what purpose.[32]

         Data integrity also requires ensuring the authenticity of entries in laboratory notebooks.[33] Notebooks contain original source data that should be contemporaneously recorded by chemists. Notebooks must be preserved, and missing notebooks are "an important data integrity issue" because "that data is no longer available" and cannot be verified.[34] At Akorn, each notebook is assigned to a particular individual; making unsigned entries in another analyst's notebook violates fundamental principles of data integrity.[35]

         The FDA's data integrity rules require that all test data-both failing results and passing ones-be properly recorded.[36] The FDA forbids the practice of "testing into compliance," or running tests again and again until passing results are secured and recording only the passing results.[37]

         FDA regulations require that potential data integrity violations be promptly investigated and remediated. FDA guidance calls for "potential data falsification" to be "fully investigated" by the firm's "quality system to determine the effect of the event on patient safety, product quality, and data reliability; to determine the root cause; and to ensure the necessary corrective actions are taken."[38]

         The FDA is required to inspect manufacturing facilities on a risk-based schedule[39]and typically inspects Akorn's sites at least once a year.[40] The FDA may also conduct directed "for cause" inspections.[41] At the conclusion of an inspection, the FDA holds a close-out meeting and shares its observations.[42] The FDA may provide only oral observations, or it may document observations in a Form 483, which is a written report from the FDA documenting "observations [that] are intended to denote significant conditions that constitute violations of cGMPs."[43] The company has an obligation to respond to the FDA's observations within fifteen business days with a root cause analysis, impact assessment, and a set of corrective and preventative actions ("CAPAs").[44] If the FDA determines that the company has proposed adequate CAPAs, it will typically classify the inspection as voluntary action indicated ("VAI").[45] If the FDA determines that the remedial measures are insufficient, it may classify the inspection as official action indicated ("OAI").[46] An OAI classification can lead to further regulatory action, such as follow-up inspections or the issuance of a Warning Letter.[47] After the issuance of a Warning Letter, the FDA typically will not approve new product applications from the facility until the observations are remediated.[48] If the FDA has concerns about a company's data or a submission, it may send the company a Complete Response Letter ("CRL") which, as its name indicates, requires a complete response.[49]

         Data integrity violations are particularly serious because they "break trust" between the offending company and the FDA.[50] The FDA may require the withdrawal of an ANDA if the FDA finds that it contains an untrue statement of material fact.[51] In cases of repeated, intentional submission of inaccurate data, the FDA may invoke its Application Integrity Policy ("AIP"), which "halts all ongoing scientific review of pending applications to the agency until specific milestones are accomplished by the company."[52] Exiting from the AIP is a time-consuming and expensive process that involves an independent investigation, corrective action plan, recall or retesting of products, and withdrawal and resubmission of applications.[53] If systemic issues remain uncorrected, the FDA may seek a court-enforced permanent injunction. In extreme cases, the FDA may bar a company from making submissions, exclude it from other federal programs, or refer matters for criminal prosecution.[54]

         At the time the Merger Agreement was signed, Mark Silverberg was the head of Akorn's quality function, holding the title of Executive Vice President, Global Quality Affairs.[55] Silverberg had been Akorn's most senior quality official for over ten years. In that role, he reported directly to Rai, Akorn's CEO.

         The record demonstrated that Silverberg was not a suitable individual to be responsible for Akorn's quality efforts. One year before the Merger Agreement was signed, Akorn's board of directors and Rai concluded that Silverberg was not up to task of carrying out his duties and needed to retire.[56] Silverberg nevertheless remained at his post until nearly one year after the signing of the Merger Agreement, on March 1, 2018, when Kim Wasserkrug, previously the head of quality at Akorn's Decatur site, took over the quality function. Silverberg was shifted to the role of "Quality Advisor."[57] His new role had no substantive responsibilities (other than to help with this litigation), came with a 20% diminution in pay, and was originally to last for the lesser of 90 days or until the Merger closed. It was a constructive termination for cause.[58]

         Akorn took employment action against Silverberg only after learning that in August 2017, during the period between signing and closing, Silverberg submitted a response to a CRL that he had been told-and I believe knew-would result in the submission of fabricated data to the FDA.[59] If he had not signed off on the CRL, Akorn would have had to withdraw the ANDA, which would have been a red flag for Fresenius that could have put the Merger in jeopardy. In my judgment, Silverberg submitted the false CRL in an effort to avoid inviting any scrutiny of Akorn's data integrity deficiencies until after the Merger closed, when it would be Fresenius's problem.[60] Akorn ultimately withdrew the ANDA in March 2018.[61] But for an investigation that Fresenius was conducting into two whistleblower letters it received, Akorn would not have withdrawn the ANDA or taken any action against Silverberg. After constructively firing Silverberg, Akorn did not use the opportunity to deliver any type of message to its employees about the importance of data integrity or its intolerance for inaccurate submissions to the FDA.[62]

         During his ten years heading up the quality compliance function, Silverberg placed "a lot of pressure" on employees "to just get things done and get products out [the] door."[63] In an employee survey conducted in January 2016 that went to Rai and other members of senior management, a whistleblower submitted the following comment:

Our current Executive Vice President of Quality Assurance is not fostering a willingness to change the current Akorn culture. Instead of acknowledging and embracing our compliance gaps and working collaboratively with other groups to change and mature our quality systems, he actively works to prevent collaboration and transparency. He has actually counselled his staff to not speak to Global Quality Compliance staff and to not share information with GQC. This is not in line with our new mission and values statement. He has also provided misleading information to regulatory bodies including the U.S. FDA.[64]

         The comment was exceptional both in its content and its source: it came from someone who worked in Akorn's headquarters in Lake Forest, where Silverberg himself worked along with Rai and the executive team. Yet Akorn did not investigate it. During the same period when the problems with the azithromycin CRL were unfolding, Silverberg instructed the head of quality at Akorn's Swiss site not to open an investigation into a quality issue he reported, not to put Silverberg's response in any file relating to the matter, and not to put FDA-sensitive subjects in emails.[65]

         On Silverberg's watch, Akorn did very little to address data integrity issues. In June 2016, Ron Johnson, an Akorn board member with FDA experience, [66] wrote to Silverberg to express concerns about Akorn's state of compliance:

I continue to be concerned that our position always seems to be that FDA got it wrong and we are just fine. I do not think we are fine, I think there are signals that we are missing. As the leader of the quality function, I do not understand how you can tolerate the continued non-compliance by employees, supervisors and quality assurance staff. . . . We have dogged [sic] a bullet a number of times, but at some point, our number will be up unless we, once and for all, fix the underlying reasons why our people do not adhere to procedures. Why do we not see an effort to do this?[67]

         Silverberg's initial response was "I think we should communicate live (on the phone)."[68]In December 2016, during a meeting of the board of directors' Quality Oversight Committee, Johnson again "expressed his concern around the repetitiveness of issues between sites and across sites identified during audits & external inspections."[69]

         Also in December 2016, Akorn received a "Compliance Gap Analysis Summary and Recommendation Report" for its Decatur facility from John Avellanet of Cerulean Associates LLC, who had inspected the facility during a four-day visit in September 2016.[70] The report was blunt: "Overall, the review found that the data integrity controls at . . . Akorn's Decatur, Illinois site . . . are insufficient to support compliance with current data integrity expectations and [FDA] regulatory requirements."[71] The report warned that "[a]s a result, Akorn currently shoulders significant regulatory and negative public perception risk."[72]

         Cerulean identified seven critical, seven major, and at least five minor nonconformities at the Decatur site.[73] The report defined a critical nonconformity as one that is "reasonably likely to directly impact (e.g., either immediately cause, enable, or be a non-compliance) the regulatory compliance status of the organization."[74] The report warned that "[h]istorically, these findings have consistently resulted in public enforcement actions (e.g. FDA Warning Letter, product recall, etc.) and have been significant factors in product liability litigation."[75] The report also warned that "[r]epeat non-conformities . . . pose an increased risk because they are indicators that an organization did not take adequate corrective actions and thus may not treat its responsibilities as seriously as appropriate."[76]

         The seven critical findings were:

• "Failure to exercise sufficient controls to prevent data loss."[77]
• "Insufficient data integrity controls (both procedural and technical) to prevent unauthorized changes to electronic data."[78]
• "Insufficient registered record archival controls and retention for records involved in drug product manufacture, testing and release, and quality records."[79]
• "Failure to have sufficient controls over computerized equipment used in regulated processes and used to create, manipulate, edit, [and] store . . . regulated data for drug product safety and quality testing and release."[80]
• "Inadequate validation of computerized systems to ensure the ongoing suitability of systems for Akorn processes, data, and personnel."[81]
• "Inadequate control over approved specifications for drug product and raw materials, and failure to ensure that product testing data is derived from compliance with established specifications and standards."[82]
• "Inadequate corrective action and preventative action and out-of-specification investigations, explanations, and corrective actions."[83]

         Specific deficiencies included that any Akorn employee could add, delete, or modify electronic data, which undermined "all of the test data [and] all of the production data" at the Decatur site, [84] thereby "call[ing] into serious question the identity, strength, quality, safety, purity, and sterility of Akorn's drug products."[85] Cerulean also found that Akorn had failed to use an audit trail function that would have enabled Akorn to determine whether employees had exploited their unlimited access, which also "rais[ed] questions over the integrity of the laboratory's data since initial usage of the instruments."[86]

         In January 2017, Cerulean conducted a similar assessment at the Somerset site. Cerulean was not able to complete its inspection because of inadequate IT support.[87] In May 2017, Cerulean provided Akorn with a preliminary report on the Somerset facility, which identified three additional critical findings and three major findings.[88] This time, Avellanet believed that some of the violations were so severe that Akorn's senior management should be concerned about potential criminal liability under the Park doctrine.[89] Cerulean found that senior management had failed "to ensure an effective quality system" and that the IT department failed to "ensure the reliability of the controls around data used to make, test, [and] release" sterile drug products.[90] As at Decatur, Cerulean determined that the latter deficiency raised "serious questions about the reliability of any data integrity controls and thus the trustworthiness of any electronic information used throughout Akorn to make safety, efficacy and quality decisions."[91] Cerulean also identified additional "critical" computer access and audit trail deficiencies at Somerset similar to those it found at Decatur.[92]

         Akorn made "no effort" to schedule a date for Cerulean to complete the inspection at the Somerset site.[93] Akorn cancelled Cerulean's previously scheduled assessment of its Amityville site.[94] Silverberg and other members of senior management identified the Merger as the reason for not having Cerulean do any more work.[95] I infer that they did not want Cerulean to identify any more data integrity gaps that could jeopardize their efforts to sell the Company. The only interest that Akorn's executives showed in the Cerulean report was a request by Joseph Bonaccorsi, Akorn's Executive Vice President, General Counsel, and Corporate Secretary, that Cerulean remove the reference to potential criminal liability for Akorn's executives.[96]

         Avellanet testified that Akorn's data integrity issues were among the "top three worst" of the 120 pharmaceutical companies that he has assessed, [97] a notorious status given that his practice only involves companies that "have problems."[98] Avellanet testified that some of Akorn's data integrity failures were so fundamental that he would not even expect to see them "at a company that made Styrofoam cups," let alone a pharmaceutical company manufacturing sterile injectable drugs.[99] He believed that the "FDA would get extremely upset" about Akorn's lack of data integrity "because this literally calls into question every released product [Akorn has] done for however many years it's been this way."[100]

         Roughly contemporaneously, in June 2016, Akorn's GQC team identified a critical data integrity failure at the Vernon Hills site that paralleled the problems identified by Cerulean: a failure to establish proper computer access controls and audit trials.[101] In December 2017 and January 2018, an investigation by Lachman Consulting Services, a consultant hired by Fresenius, identified similar issues at all of the sites that Lachman visited. Beginning in March 2018, an investigation conducted by NSF International, a consultant hired by Akorn, found extensive issues at the sites it examined.

         Akorn did not do anything meaningful to address the issues raised by Cerulean until March 2018, after the investigation that Fresenius conducted into the whistleblower letters led to Akorn uncovering Silverberg's false CRL response, self-reporting to the FDA, and committing to address its data integrity problems. Until Fresenius's investigation forced its hand, Akorn was not devoting resources to data integrity. It is true that Silverberg facilitated the preparation of a data integrity plan for Decatur in August 2017, but he made clear in his contemporaneous communications that it was just so Akorn would have a document to show the FDA. When Akorn's IT department opposed the plan, Silverberg reassured them that it was not meant to be implemented. In his jargon, it "serves to represent to outside authorities our cognizance of the subject, without committing IT to any near term work or responsibility."[102] In late 2017, Patty Franke, Decatur's Quality Assurance Manager for Data Integrity and Compliance, [103] told Cerulean that Akorn was "making 0 progress on our DI remediation efforts" at Decatur, which she attributed to "the culture and the message from management."[104] Wasserkrug testified that she was told that "a lot of this stuff would wait until the Fresenius merger occurred," which was an excuse "we heard . . . actually quite often" in late 2017.[105]

         To reiterate, Akorn only started making a concerted effort to address its data integrity issues in March 2018, after Fresenius had flagged Akorn's data integrity problems and prompted Akorn to uncover Silverberg's false CRL response, and after Akorn felt it had to try to get ahead of the problem by going to the FDA and committing to address its data integrity issues. At that point, Akorn formed an executive steering committee on data integrity remediation, which held its kickoff meeting on April 19, 2018.[106] It took until June 7, 2018 for Akorn to assemble a list of the hundreds of deficiencies it had accumulated, many of which went back years.[107] Over a year after receiving the Cerulean report, the Somerset facility had not taken any action to address the deficiencies it identified.[108] Decatur had only completed "32% of the corrective actions thus far."[109] By the time of trial, Akorn still did not have a remediation plan because it was still in the process of figuring out all of the deficiencies that the Company needed to address.[110]

         In its post-trial briefs, Akorn attempted to paint a picture of compliance at Akorn that differed radically from what the evidence showed at trial. Notably absent from the witness list at trial was any representative from Akorn's quality function who could speak to Company-wide conditions before March 2018. Wasserkrug testified, but she took over the company-wide quality function from Silverberg in March 2018 and could not speak to matters preceding her tenure, except at the Decatur site where she had been the site quality director.[111] Silverberg was the obvious candidate, but neither he nor Jaspreet Gill, the head of Akorn's GQC team, nor any other senior member of the quality function testified at trial. Rai made claims about quality, but having considered his answers and evaluated his demeanor while he was being cross-examined about his commitment to quality, I am forced to conclude that he does not regard it as a priority.[112] Bonaccorsi gave testimony about the overall structure of Akorn's quality function, but he is not a quality expert, nor is he part of the quality department.[113]

         The evidence at trial demonstrated that Akorn took the steps necessary to establish the formal structure of a quality function. The evidence also revealed a gulf between appearance and reality.[114] The extensive and recurring quality and data integrity problems at Akorn convinced me that Akorn did not have a well-functioning quality system and lacked a meaningful culture of compliance.

         C. Akorn Explores Strategic Alternatives.

         In February 2016, Akorn's board of directors consulted with management and J.P. Morgan Securities LLC about strategic opportunities.[115] The board decided that Akorn should explore strategic alternatives once it completed a restatement of its 2014 financial information and became current with its financial reporting.[116]

         In July 2016, Akorn's then-Chairman of the Board and largest stockholder, John N. Kapoor, met with Rai and J.P. Morgan to develop a preliminary list of potential buyers.[117]During a meeting later in July, the board decided to "commence a process to solicit proposals to acquire the Company from potential strategic and financial counterparties."[118]

         In August 2016, J.P. Morgan approached Alexander Dettmer, Head of Corporate Business Development/M&A and Senior Vice President of Fresenius Parent, to explore whether Akorn would be a good fit for Fresenius Kabi.[119] In early October 2016, Rai and J.P. Morgan met with Ducker and gave him a presentation about Akorn.[120] During the same period, J.P. Morgan approached other potential strategic acquirers and private equity funds.[121] At later points, other potential acquirers dipped in and out of the process.[122]

         D. Fresenius's Initial Evaluation Of Akorn

         After being approached by Akorn, Fresenius evaluated Akorn with assistance from Moelis & Company. A Moelis presentation identified positive attributes, including:

• "Attractive portfolio of niche, high-value generics focused primarily on ophthalmic and sterile injective products"[123]
• "[Production expertise across difficult-to-manufacture alternative dosage forms (i.e., other than oral solid dose)"[124]
• "Deep pipeline of 85% filed ANDAs representing ~$9bn in brand revenue"[125]
• "Management expects 25 approvals (~$1bn in brand revenue) by March 2017"[126]
• "Management expects to file at least 20 ANDAs during 2017"[127]At the same time, the Moelis presentation highlighted risks:
• "Ephedrine challenges - Akorn is the sole supplier for an unapproved product that drives ~20% of revenues; however, Flamel has launched the first FDA-approved version and other entrants (e.g., Endo/Par) could emerge"[128]
• "Akorn's Ephedrine NDA has been impacted by Form 483 deficiencies at its Decatur, IL facility"[129]
• "However, 483 issues do not impact products outside of Ephedrine"[130]An internal Fresenius assessment identified similar pros and cons.[131]

         On November 4, 2016, Akorn announced its financial results for the third quarter.[132]Akorn management spoke about the threat of competition for ephedrine and said their market share and revenue remained stable.[133] Moelis sent Fresenius an updated presentation that provided additional detail on ephedrine, including by modeling base, downside, and upside cases for that product.[134] Fresenius also obtained and reviewed a redacted version of a Form 483 for Decatur.[135] James Bauersmith, a Fresenius employee charged with evaluating Akorn's pipeline, [136] expressed concern about the Form 483, noting that it was the site where Akorn manufactured ephedrine.[137]

         On November 8, 2016, Akorn and Fresenius USA entered into two confidentiality agreements, one covering due diligence generally and the second permitting a "clean team" to review competitively sensitive information that might have antitrust implications.[138] On November 11, Akorn management gave a lengthy presentation to representatives of Fresenius and provided them with a forecast.[139] Among other things, the presentation addressed Akorn's developmental pipeline, [140] the steps Akorn was taking to improve quality control at Decatur, [141] and the actions Akorn had taken to remediate its financial reporting and controls after its financial restatement.[142]

         After the presentation, Fresenius looked more closely at the Form 483 for Decatur and two earlier Form 483's that Decatur received in 2013 and 2014.[143] A Fresenius executive reported that "[t]he 483 shows weaknesses in the quality system but it does not look [like] a not working quality system. . . . In summary the 483 does not indicate any topic which should lead to further regulatory measures."[144]

         E. Fresenius's Initial Proposal

         On November 23, 2016, Fresenius proposed to acquire Akorn for $30.00 per share plus a contingent value right ("CVR") that would pay up to $5.00 per share based on cumulative ephedrine sales over the next three years.[145] The proposal was conditioned on satisfactory due diligence and acceptable deal documents. On the day Fresenius made its proposal, Akorn's stock closed at $22.40 per share.[146]

         On December 5, 2016, Rai met with Ducker, stressed the value of Akorn's pipeline and pending ANDAs, and told him that Fresenius's proposal was too low.[147] He said Fresenius would need to improve its bid to gain access to the data room.[148]

         F. Fresenius Improves Its Bid.

         On January 9, 2017, Rai met with Sturm and reiterated the message about improving Fresenius's bid.[149] Ducker wanted to improve the bid, [150] but he encountered resistance internally: Bauersmith was heading up a group that was analyzing Akorn's pipeline, [151] and they questioned Akorn's ability to obtain FDA approval for as many new products as they planned, then launch those products as scheduled.[152] Bauersmith regarded Akorn's schedule for launching new products as "the definition of insanity."[153] Bauersmith and his team wanted to use more conservative assumptions.[154] Ducker disagreed, describing the more conservative assumptions as "a sure way to kill this project."[155]

         On January 30, 2017, the FDA granted approval for a third competitor to sell ephedrine.[156] Akorn's stock price fell on the news, closing at $18.40 per share.[157] After this development, Fresenius considered restructuring the proposed CVR to focus on revenue growth.[158] As Bauersmith explained, "We were buying an ephedrine company with a pipeline, now we are buying a pipeline company."[159] Bauersmith suggested a CVR that paid out if Akorn achieved its projections for FDA approvals in 2017.[160] Ducker agreed with a CVR tied to revenue, but wanted to base the improved bid on more optimistic assumptions than Bauersmith's group would endorse.[161] Over the years, Ducker had developed a high level of credibility with his superiors because he consistently beat his forecasts.[162] When push came to shove, the Management Board supported Ducker.

         On February 3, 2017, Fresenius increased the cash component of its bid to $32.00 per share and modified the CVR to pay up to $4.00 per share based on Akorn's sales in 2018.[163] Ducker told Rai that the CVR would "mitigate the risk inherent in the ambitious product launch projections contained in [Akorn's] business plan."[164] On the day Fresenius made its proposal, Akorn's stock closed at $20.08 per share.[165]

         After receiving guidance from Akorn's directors, Rai told Ducker on February 4, 2017 that Akorn would give Fresenius access to the data room, but with the expectation that Fresenius would improve its bid and drop the CVR.[166] Ducker agreed to proceed on those conditions.[167]

         On February 13, 2017, Akorn gave Fresenius access to its data room.[168] Fresenius conducted detailed due diligence that included an examination of Akorn's product portfolio and regulatory issues.[169]

         On March 1, 2017, Akorn announced its financial results for the quarter and fiscal year that ended on December 31, 2016.[170] Akorn also issued annual guidance for 2017.[171]On March 2, Akorn announced that it had received approval from the FDA for a new drug application involving ephedrine.[172] Later that day, Rai spoke with Ducker about the product, Akorn's guidance, and the regulatory and tax environment.[173]

         By March 2, 2017, the Fresenius due diligence team had been working for just over two weeks. A presentation prepared as of that date identified a "preliminary red flag DD finding" under the heading of "Sales & Marketing": "Risk to achieve forecasts due to stronger competition, especially for Ephedrine, Lidocaine ointment, clobetasol, Fluticasone."[174] The presentation identified two "Preliminary red flag DD findings" under the heading of "I&D Regulatory": (i) "Regulatory Affairs organization appears to be under-resourced" and (ii) "2016 and 2017 R&D budgets do not substantiate the ambitious pipeline."[175] The presentation did not identify any data integrity issues. The presentation concluded: "So far, no deal breakers identified."[176] A Fresenius management presentation reported that "[t]he level of access being given/promised by [Akorn] is above average for a public company target."[177] Subsequent versions of the presentations largely offered the same assessments.[178]

         During this period, Fresenius developed its own projections for Akorn's product portfolio and pipeline. Once again, Ducker's team was more optimistic;[179] Bauersmith's group was more conservative.[180] Fresenius's final numbers were a mix of their views.[181]

         Fresenius had largely finalized its due diligence by March 17, 2017.[182] During a meeting that same day, Ducker told Rai that Fresenius would increase its bid.[183] On March 20 and 21, Rai and Ducker had further discussions about Fresenius's due diligence and Akorn's financial results for the quarter ending March 31.[184] Fresenius reported that Akorn personnel indicated that "it was a 'solid' quarter; and they are on track to meet their full year expectations."[185]

         On March 23, 2017, Fresenius increased its bid to $33 per share and eliminated the CVR. In its offer letter, Fresenius stated that it had largely completed its due diligence and was prepared to begin negotiating a merger agreement, but that senior management wanted to conduct site visits and that Fresenius would need additional information about the Company's efforts to comply with FDA serialization requirements.[186] On the day when Fresenius made its proposal, Akorn's stock closed at $22.30 per share.[187]

         On March 25, 2017, Akorn's advisors posted a proposed merger agreement to the data room.[188] On March 30, Rai, Kapoor, Ducker, Henriksson, and Sturm met in person.[189]Rai said that the Akorn board needed Fresenius to increase its proposal. On March 31, Kapoor spoke with Sturm and reiterated the need for an improved proposal.[190]

         On April 2, 2017, Fresenius increased its price to $34 per share and said this was the highest it would go.[191] On the day Fresenius made its proposal, Akorn's stock closed at $23.69 per share.[192] The Akorn board accepted the $34 per share price.[193]

         When the Supervisory Board of Fresenius Parent formally approved the bid, the final presentation they received from management cited Akorn's strengths as including "92 ANDAs under FDA review and over 75 additional ANDAs in various stages of development."[194] Management noted that Fresenius would need to integrate and modernize Akorn's production network, which would involve closing two Akorn plants and providing "supplementary capex investment to bring [Akorn] up to [Fresenius] standards while minimizing compliance risks."[195] In the "Key DD items summary," the presentation identified a high risk of a potential exposure of $100 million from the postponement of product launches.[196] The presentation also cited high risk of a potential exposure of $100 million from cGMP "deficiencies related to premises and equipment" in the Amityville and Decatur facilities.[197] The presentation projected a need for capital expenditures of $127 million for Amityville and $21 million for Decatur, with the Decatur facility to be closed once products were transitioned to other sites.[198] The presentation did not identify a risk from data integrity issues.

         G. The Merger Agreement

         After the agreement on price, the parties negotiated the terms of the transaction documents.[199] On April 24, 2017, they executed the Merger Agreement.[200]

         In the Merger Agreement, the parties allocated risks through detailed representations, warranties, covenants, and conditions:

• Akorn made extensive representations about its compliance with FDA regulations, including (i) "compliance with . . . all applicable Laws . . . relating to or promulgated by the" FDA, [201] (ii) "compliance with current good manufacturing practices[, ]"[202](iii) that all studies or tests had "been conducted in compliance with standard medical and scientific research procedures and applicable Law, "[203] (iv) that Akorn had not "made an untrue statement of a material fact or a fraudulent statement to the FDA, "[204] and (v) that all "ANDAs submitted by [Akorn] . . . are true, complete and correct, "[205] in each case except where failure of the representation to be true and correct would not reasonably be expected to have a Material Adverse Effect.
• Akorn committed to "use . . . commercially reasonable efforts to carry on its business in all material respects in the ordinary course of business" between signing and closing.[206]
• Akorn agreed to "afford to [Fresenius and Fresenius's representatives] reasonable access" to information about its business.[207]
• Fresenius agreed to take "all actions necessary" to secure antitrust clearance.[208]
• Fresenius had the right to terminate the Merger Agreement if any of Akorn's representations or warranties were not true and correct at signing or at closing, except, in the case of certain representations and warranties (including those at issue in this case), where "the failure to be true and correct would not individually or in the aggregate, reasonably be expected to have a Material Adverse Effect."[209]
• Fresenius had the right to terminate the Merger Agreement if Akorn "failed to perform any of its covenant or agreements" "in all material respects" and the breach was "incapable of being cured . . . ."[210]
• Fresenius could refuse to close the Merger if Akorn had suffered "any effect, change, event or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect."[211]
• Fresenius could not exercise its termination right for an inaccurate representation or breach of covenant if Fresenius was "then in material breach of any of its representations, warranties, covenants or agreements" under the Merger Agreement.[212]
• Both sides had the ability to terminate if the Merger was not completed by the Outside Date, defined initially as April 24, 2018, but if antitrust approval had not been received by April 24 and all other conditions to closing were met, then the Outside Date would extend automatically to July 24.[213]

         This decision addresses the pertinent provisions in greater detail in the Legal Analysis.

         After the close of trading on April 24, 2017, Akorn and Fresenius announced the Merger.[214] The total purchase price was $4.75 billion, comprising $4.3 billion in cash plus assumption of approximately $450 million in debt.[215] Fresenius stated in a press release that "Akorn brings to Fresenius Kabi specialized expertise in development, manufacturing and marketing of alternate dosage forms, as well as access to new customer segments like retail, ophthalmology and veterinary practices. Its pipeline is also impressive, with approximately 85 ANDAs filed and pending with the FDA and dozens more in development."[216]

         When committing Fresenius to the transaction, Sturm asked Akorn to reaffirm its guidance for 2017. Sturm viewed guidance as a promise to the markets, and he felt a public reaffirmation would confirm that Akorn management had committed to its numbers and would continue to perform post-signing.[217] As part of its announcement of the transaction, Akorn reaffirmed its full-year guidance, projecting $1, 010-$1, 060 million for revenue and $363-$401 million in EBITDA.[218]

         Fresenius Parent held a conference call with its investors to discuss the Merger. During the call, Sturm described the due diligence process as follows:

[W]e performed a detailed due diligence [with] access to a comprehensive data room, held countless expert sessions, and were able to address all our questions and concerns. Have we overlooked anything material? Possible, but unlikely. The due diligence also included plant visits, by me and much better qualified experts, as well as a detailed review of Akorn's product portfolio. That led to us building a solid bottom-up business plan, which formed then the basis of our decision to make a bid.[219]

         Sturm stated that during due diligence, Fresenius found Akorn operating at a "generally good regulatory standard."[220] He noted that while Akorn had received a Form 483 for Decatur, Fresenius had "received quite a number of form 483s also in the past" and therefore "should be humble and avoid any form of arrogance" regarding regulatory issues."[221]

         During a special meeting on July 19, 2017, Akorn's stockholders approved the Merger by a wide margin.

         H. Akorn Management Makes Changes In Response To The Merger.

         Under the Merger Agreement, Akorn was required to continue operating in the ordinary course of business between signing and closing.[222] This obligation included, among other things, investigating and remediating quality issues and data integrity violations as they were identified.[223]

         Instead of operating in the ordinary course, Akorn changed how its quality function and IT function approached their jobs.[224] Employees in these groups were told that "[p]riorities have been revised, and some 2017 initiatives will be stopped[, ]" with the cited reason being the "implications of the pending Fresenius Kabi transaction."[225]

         For the quality function, Akorn replaced certain regular internal audits scheduled for the end of 2017 with "verification" audits that would only assess Akorn's progress in addressing prior audit findings.[226] One of the sites that switched to verification audits was Decatur, the site Cerulean had visited.[227] The shift to verification audits meant that Akorn would not be identifying any new problems at those sites that might cause difficulties for the Merger. Akorn also used the Merger as grounds for stopping Cerulean's engagement.[228]Fresenius never gave approval for Akorn to change its audit and investigatory practices pending closing.[229]

         For the IT function, Wasserkrug testified at trial that "[a]ny [IT] projects that we wanted to put in place were deferred by the merger or had to be approved."[230] In light of the freeze, Akorn's IT department could not provide resources for data integrity projects.[231]In July 2017, Tammy Froberg, Executive Director of R&D and Quality Compliance Systems, told a quality manager at Vernon Hills that "we are not actioning any Data Integrity activities in 2017."[232] In August, Misbah Sherwani, the head of quality at Somerset, reported to Silverberg that even though Akorn was "on the cusp of the FK" merger, Somerset was "in a state of jeopardy as it relates to data integrity[, ]" and IT was refusing to provide resources.[233] Also in August, Kathy Pramik, Akorn's acting Chief Information Officer, told Silverberg and other executives that she was "not authorizing" IT resources for Decatur's Data Integrity Site Master Compliance Plan, the first plan Akorn ever developed.[234] She admonished that it was "not appropriate" to "establish[] Data Integrity Plans" because "Fresenius Kabi Quality & IT Leaders will drive any actions in this area."[235] That same month, Froberg refused a data integrity project, stating bluntly that "[e]xecutive leadership have discussed and aligned that data integrity changes are not actionable in 2017 in regards to adding responsibilities to cross functional teams."[236] In December 2017, Franke complained to another employee that "DI remediation activities are not something that we are resourced to address at the moment."[237] There is no evidence that Fresenius ever gave approval for Akorn to stop working on data integrity projects.[238]

         I. The Downturn In Akorn's Business

         After the signing of the Merger Agreement, Akorn's business performance fell dramatically. On July 21, 2017, two days after Akorn's stockholders approved the Merger, Akorn gave Fresenius a preview of their second quarter results. The headline was revenue of $199 million, compared to a business plan of $243 million.[239] Management attributed $12 million of the miss to competition for ephedrine, but told Fresenius that "[m]arket share in Q2 is meeting expectations."[240] Management lowered its revenue forecast for the year from $1 billion to $930 million.[241] Management also reduced expectations for revenue from Akorn's pipeline, which fell to $24 million, down from the $80 million projected earlier in 2017.[242]

         On July 31, 2017, Akorn publicly announced its results. The reported revenue number of $199 million represented a year-over-year decline of 29%. Akorn's reported operating income of $15 million represented a year-over-year decline of 84%. Akorn's reported earnings of $0.02 per share represented a year-over-year decline of 96%.[243]

         Rai attributed the bad results to unexpected new market entrants who competed with Akorn's three top products-ephedrine, clobetasol, and lidocaine.[244] Akorn also faced a new competitor for Nembutal, another important product, which Akorn management had not foreseen.[245] As Rai testified, "There were way more than what [Akorn] had potentially projected in [its] forecast for 2017."[246] The new competition resulted in unexpected price erosion.[247] Akorn also unexpectedly lost a key contract to sell progesterone, resulting in a loss of revenue where Akorn had been forecasting growth.[248]

         Ducker described the results bluntly, "Not very pretty I'm afraid."[249] Sturm was "very unhappy."[250] He asked his executive team whether they thought Fresenius "had been defrauded."[251] They did not think so. Sturm "also asked if there was a way to cancel the deal."[252] His team said "not at this point."[253]

         Sturm and Henriksson flew to Lake Forest, Illinois to meet in person with Ducker and the Akorn executives.[254] Sturm told Rai that the "complete drop" in Akorn's business post-signing was "the most embarrassing personal or professional thing" that had happened to him.[255] Sturm could not understand how the parties had signed up a deal, only to have Akorn's results fall "off the cliff."[256] Rai told Sturm that "[m]any, if not most" of the reasons for the poor performance were "temporary in nature."[257] Sturm was not satisfied. He felt that Akorn management exhibited "a complete lack of commitment" and that the guidance for 2017 "had been forgotten and was a thing of the very long past."[258] He did not perceive any sense of urgency to rectify the underperformance.[259]

         After the meeting in Lake Forest, Sturm had his team analyze Fresenius's options. He tasked Henriksson and Ducker with finding new synergies and developing a business plan that would offset Akorn's problems.[260] Sturm also had his legal department look into whether Akorn's terrible financial performance qualified as a Material Adverse Effect.[261]Although Akorn has asserted that Fresenius decided at this point to find a way to terminate the deal, I do not agree. Sturm testified credibly that he wanted "to get myself knowledgeable about my options under the merger agreement, but also my responsibility, my fiduciary duties in serving my shareholders, and hence I was asking my colleagues on the legal side to get us appropriate legal advice."[262]

         As part of this process, the Fresenius team looked at precedent deals gone bad. One involved Abbott Laboratories's attempt to terminate its acquisition of Alere Inc. Paul, Weiss, Rifkind, Wharton & Garrison LLP had represented Alere, and Fresenius began consulting with Paul Weiss.[263]

         Fresenius also began looking closely at Akorn's monthly results to determine whether the second quarter performance was an isolated occurrence, as Rai maintained, or the harbinger of deeper problems. Akorn's preliminary results for July did not show any improvement, but Rai claimed that Akorn was on track to deliver $80 million in sales in August.[264] If Akorn hit that figure and repeated the performance in September, then Akorn would meet its lowered forecast for the third quarter.[265]

         In mid-September 2017, Fresenius heard that Akorn would fall short of its August revenue target.[266] Akorn later confirmed that it had achieved only $70 million.[267] Sturm was furious: "10m less within a few days? Without any sense of embarrassment? . . . These guys are shameless. I'm afraid we've got to build our legal case."[268] At trial, Sturm noted that over the same period, Fresenius USA exceeded expectations.[269]

         Nor was the revenue miss Akorn's only bad news. The FDA issued a CRL for Difluprednate, a key pipeline product, and Akorn had to push back its launch from 2017 until 2019.[270]

         Fixating on Sturm's email about "build[ing] our legal case," Akorn argues that Fresenius set out to manufacture a basis for termination. At trial, Sturm testified credibly to a more nuanced and responsible view. He candidly admitted that at this point, he personally wanted to terminate the transaction. He was "very unhappy" with Akorn's performance, believed that "the underperformance was more likely to be longer-lasting," and felt that Fresenius had overpaid.[271] At the same time, he knew that Fresenius had signed a contract, and "[t]he last thing [he] wanted to do was to . . . to go to court . . . without a valid case."[272] He also recognized that if Akorn had a stronger performance in the fourth quarter, then the situation would be different, although he was "not very optimistic."[273]

         Sturm is a sophisticated international businessman. He speaks English fluently, but it is not his native language, and I therefore do not draw the inference that by "build our legal case," he meant to manufacture one. At trial, his testimony was direct and credible. I accept his explanation that in September 2017, he was "in an exploratory phase."[274] He no longer liked the deal, and he would seek to terminate it if Akorn's performance continued to deteriorate, but Fresenius also would live up to its obligations.

         Consistent with this testimony, the contemporaneous evidence shows that Fresenius continued to assess how it could close the Merger and make the numbers work.[275] Fresenius also tasked a team with reviewing Akorn's most significant product launches to determine whether any of them could be accelerated to replace lost pipeline revenue.[276] Instead, Fresenius learned that three other launches would be delayed.[277] At the same time, Fresenius began examining whether there were grounds to assert a Material Adverse Effect.[278] Based on advice from Paul Weiss, Fresenius concluded that it did not have clear grounds for termination.[279] Given the Delaware precedent, this was hardly surprising.

         J. Akorn's Third Quarter Results

         On October 30, 2017, Akorn provided Fresenius with a presentation describing the quarterly results that Akorn expected to announce the next day.[280] Akorn would report revenue of $202 million, representing a miss from its reduced forecast of $225 million.[281]Akorn described the results as "[d]riven mostly by unanticipated supply interruptions and unfavorable impact from competition across [the] portfolio (Ephedrine, lack of new awards, unfavorable customer contract mix . . .)."[282] Akorn also noted that its "[a]verage product pricing [was] lower than expected due to [an] unfavorable customer/contract mix and price erosion [that was] not considered in our forecast."[283]

         On October 31, 2017, Akorn informed Fresenius that Kapoor had resigned from the Akorn board.[284] Five days earlier, federal law enforcement had arrested Kapoor and charged him with criminal fraud in connection with his leadership of another pharmaceutical company.[285]

         On November 1, 2017, Akorn announced its financial results.[286] Akorn's reported revenue of $202 million represented a year-over-year decline of 29%. Akorn's operating income of $9 million represented a year-over-year decline of 89%. Akorn reported a loss of $0.02 per share, a year-over-year decline of 105%.[287]

         In addition to another poor quarter, Akorn fell further behind in its product launches. Akorn had anticipated thirty-four launches in 2017; by mid-November it had launched only fourteen, with another six planned by year end. The fourteen launches netted only $3.3 million in sales. Akorn originally had projected $60 million from new product launches in 2017.[288] These results were far worse than what even Bauersmith, the biggest critic of Akorn's pipeline, had anticipated.[289] He viewed the performance of Akorn's launches as "almost comical," because it did not make commercial sense to launch a drug if that was the expected return.[290]

         In spite of the bad news from Akorn, Sturm maintained a positive outlook about the Merger when speaking with Fresenius Parent's investors. He described Akorn's results as "for sure not what we had hoped for, but at least a sequential stabilization."[291] He also stated that "the reasons for the disappointing financial performance are broadly unchanged from the second quarter," citing three factors:

A, more pronounced competition. Akorn continues to experience price pressure and market share losses on some of its key molecules. And while increased competition was generally anticipated, the impact has was [sic] unfortunately been greater than expected. . . .
B, supply disruptions. And while some supply issues from the second quarter were resolved, new constraints have occurred, leading again to higher than normal backorders and inability to supply charges. Frankly, [we] can't wait to assume management control, so we can help with our expertise and our financial power.
C, new product launches. And even though Akorn has launched a respectable 13 new products year-to-date, it had even higher expectations. So launch delays, including to some significant molecules, contributed to the shortfall versus projected revenues. We have reviewed these delays with Akorn's management, and we believe that the opportunities are essentially postponed rather than significantly diminished.[292]

         Notwithstanding these problems, Sturm said that Fresnius Parent would not revise its expectations for Akorn's performance in 2018, explaining:

First, let me remind you that our 2018 expectations came[, ] by our standards[, ] extremely early and were based on the comprehensive but still outside[-]in due diligence process. Couple that with injectable generics, arguably Fresenius' most volatile business, and so we called it very consciously an expectation rather than a guidance. Now, in light of Akorn's year-to-date performance, it appears likely the 2017 base will be lower than assumed. And as a consequence, the stretch required to reach our 2018 expectations is clearly larger.
But as I just said, this is a highly volatile business with limited visibility, notoriously hard to predict, and where you just cannot extrapolate from a quarterly run rate, where individual drugs and launches can make and have made a major difference. So I'm not ready to revise those expectations for next year. Please bear with us until February. By then, we will be Akorn's controlling owner and we'll provide you with a guidance of a reliability level that you're used to.[293]

         My impression is that Sturm knew that expectations would have to be lowered, but he did not have numbers that he trusted and would not have them until his own people were running the Company.

         After Akorn and Fresenius announced their third quarter results, Fresenius updated its business plan for Akorn. During a teleconference on November 12, 2017, Ducker presented the plan to the Management Board.[294]

         Ducker's presentation noted that the "[s]trategic rationale for the Akorn acquisition remains compelling."[295] The compelling strategic rationale was Fresenius Kabi's desire to expand its North American footprint, which acquiring Akorn facilitated.[296]

         The Akorn deal, by contrast, had become far from compelling. The presentation observed that Akorn's "2017 business performance has been disappointing and has fallen well short of guidance"[297] To partially address the shortfall, "[c]ost reduction opportunities well in excess of the deal model are now planned."[298] Even with these additions, the changes in the 2018 business plan were striking:

Original Plan[299]

November Update

% Change

Revenue

$1, 061

$783

(26%)

Gross Profit

$612

$414

(32%)

EBITDA

$397

$241

(39%)

EBIT

$239

$125

(47%)

Net Income

$33

$(38)

(215%)

         Akorn's performance was so bad, and the situation in such flux, that the Management Board excluded Akorn from their 2018 budget, which they presented to the Supervisory Board in December 2017.[300] The presentation explained the omission:

Akorn is not included in the budget. We see some deviations to the original business plan and we are working on counter measures to mitigate these effects. This process will be ongoing until early February 2018. Until then we will also have better clarity about when closing will happen and we will only then seek for approval for the Akorn budget.[301]

         This explanation is consistent with Sturm's earlier refusal to change his Akorn-related guidance to the market: the Management Board did not have any numbers they trusted for Akorn. I believe they also considered the possibility that Fresenius would terminate the Merger Agreement and either never own Akorn at all, or at least not own it during 2018, while the litigation over a broken deal would be ongoing.

         Despite the senior management team's powerful internal misgivings, Fresenius did not change its public stance on the Merger. In roadshow materials dated November 27, 2017, Fresenius told investors the following:

• "[Akorn] Q3 performance below expectations."[302]
• "Achievement of 2018 expectation challenging."[303]
• "Strategic rationale unchanged: Deal offers offensive and defensive merits."[304]
• "Substantial cost and growth synergies paired with limited integration complexity."[305]
• "Accretive to Group net income from 2018."[306]

         Fresenius described the Merger in similar terms in a presentation to investors at conferences in December 2017 and January 2018.[307]

         K. The Whistleblower Letters

         On October 5, 2017, Fresenius received an anonymous letter from a whistleblower who raised allegations about Akorn's product development processes at Vernon Hills, Decatur, and Somerset.[308] On November 2, Fresenius received a longer version of the letter that added more detail about the problems and included assertions about flaws in Akorn's quality control processes.[309]

         During a teleconference on November 12, 2017, the senior executives of Fresenius Parent discussed the November letter. When circulating his presentation, Ducker noted that he had asked Jack Silhavy, the general counsel of Fresenius USA, "to join us for the first part of the call to brie[f] everyone on the letter just received from an Akorn employee, and the possible implications and next steps."[310] On November 13, the Fresenius executives had a call with Paul Weiss.[311] After the call, Fresenius personnel began looking into the information Akorn provided during due diligence about its R&D facilities and past FDA inspections.[312]

         Having considered the evidence, I believe that during the teleconference on November 12, 2017, the Fresenius executives decided that they did not want to proceed with the Merger as negotiated and would seek to terminate the Merger Agreement if they had a valid contractual basis for doing so. They had ample grounds to reach this conclusion. My sense is that they regarded Akorn's disastrous performance as falling within a businessperson's understanding of what should qualify as a material adverse effect, but their legal advisors were not confident that they could prove to the satisfaction of a court applying Delaware law that Akorn had suffered a Material Adverse Effect within the meaning of the Merger Agreement.

         The whistleblower allegations about regulatory problems were yet another blow to the deal. The letters called into question the accuracy of Akorn's representations regarding regulatory compliance. They also called into question whether Akorn was operating in the ordinary course of business.[313] It was not clear yet whether the allegations were true, but the whistleblower letters gave Fresenius good cause to investigate.

         In the Merger Agreement, Fresenius had bargained for a customary right of reasonable access to Akorn's "officers, employees, agents, properties, books, Contracts, and records."[314] The purpose of that covenant is to enable a buyer to investigate issues that arise between signing and closing. The Fresenius executives decided to use their information right for its intended purpose.

         L. Fresenius Notifies Akorn.

         On November 16, 2017, Ducker and Henriksson called Rai, informed him about the whistleblower letters, and conveyed Fresenius's view that both companies needed to investigate the allegations.[315] Ducker followed up with a formal notice letter, which stated:

[P]ursuant to Section 5.05 of the [Merger Agreement] and for other reasons, Fresenius Kabi will be providing Akorn with requests for documents, information and access to potentially knowledgeable individuals regarding the allegations in these letters and related issues. We are in the process of identifying and retaining a team of third party experts with the skills and experience to properly investigate these matters expeditiously, and we ask that Akorn immediately take steps to begin to gather all related documentary material.[316]

         The letter closed by noting that Fresenius "reserve[d] all of our rights under the merger agreement."[317]

         After receiving the whistleblower letters from Fresenius, Akorn shared them with its board members. Johnson, a director with substantial FDA experience, described them as "very worrisome," noting that "[i]f they were to get to FDA, we should expect an intensive investigation" and that "[m]ost data integrity issues are surfaced through whistleblowers going to FDA."[318] He advised that Akorn needed to conduct a "responsive and credible" investigation that "would require a review of named applications including product development files and lab notebooks" as well as "[i]nterviews of those involved, in any way, with the named submissions . . . ."[319] He advised that if the investigation uncovered problems, then "a much broader investigation following FDA guidance would be necessary."[320]

         On November 17, 2017, Silhavy told Bonaccorsi that Fresenius could not simply rely on the investigation that he expected Akorn to conduct, but rather Fresenius would have to do its own investigation as well.[321] As it turned out, Akorn decided not to conduct its own investigation into the whistleblower letters because Akorn did not want to uncover anything that would jeopardize the Merger.

         In the ordinary course of business, an FDA-regulated company confronted with a detailed whistleblower letter would conduct an investigation using counsel experienced in data integrity issues and knowledgeable about FDA compliance. Akorn chose to rely on its deal counsel, Cravath, Swaine & Moore LLP. Cravath's job was not to conduct an investigation, but rather to monitor Fresenius's investigation and head off any problems.[322]

         David M. Stuart, a litigation partner, led the Cravath team.[323] Stuart previously worked for the SEC and had experience conducting internal investigations.[324] He is clearly a skilled and careful attorney, but he had never conducted a data integrity investigation for a pharmaceutical company, had never appeared before the FDA, and had no familiarity with FDA rules, regulations, or administrative guidance.[325]

         Fresenius, by contrast, conducted a real investigation. Fresenius turned to the FDA Enforcement and Compliance Group at Sidley Austin LLP.[326] Nathan Sheers, a Sidley partner who specializes in FDA enforcement and compliance, led the team.[327] The Sidley team also included Jeff Senger, the former acting chief counsel at the FDA.[328] Fresenius and Sidley determined that they needed technical expertise from a firm that could evaluate the integrity of the data Akorn used to support its drug applications.[329] For that task, they hired Lachman.[330] The Lachman team was led by Ron George, a scientist with over 40 years of experience in the pharmaceutical industry and who now specializes in data integrity audits and remediation.[331] Having heard George testify at trial, I judge him to be among the most credible witnesses I have seen in court.

         Sidley started its investigation by examining the materials on regulatory compliance that Akorn posted to the virtual data room.[332] Before doing so, Sidley considered whether anything in the confidentiality agreement between Fresenius and Akorn prevented them from using the information. After reviewing the agreement, Sidley concluded that they were "Representatives" of Fresenius who could receive the "Evaluation Material" in the virtual data room without prior written consent from Akorn. The Sidley attorneys noted that the Evaluation Material could be used "solely for the purpose of evaluating, negotiating, and executing" a transaction. Sidley concluded that their investigation was part of the process of executing (i.e., carrying out) the transaction, and hence they could use the Evaluation Material in their investigation.[333] I agree with that interpretation.

         Next, Fresenius provided Akorn with a request for access, information, and documents to conduct its investigation.[334] Demonstrating the importance of the investigation to Fresenius, Sturm and his fellow senior executives at Fresenius Parent were personally involved in reviewing and revising the requests.[335]

         After receiving the requests, Cravath spoke with Sidley about how to proceed.[336]During these discussions, Sidley learned that Cravath would not be conducting its own investigation, but rather facilitating Fresenius's investigation, sitting in on interviews, and generally "shadowing" Sidley.[337] The lawyers also discussed "whether the interviews would be conducted under a 'common interest privilege.'"[338] Internally, Sidley expressed concern that "the only common interest at this point is the solicitation of information from the interviewees and to conduct a thorough investigation," but that how the resulting information was used "likely is outside the scope of any common interest."[339]

         To support the common interest privilege, Cravath proposed a draft agreement which recited that Sidley and Cravath were conducting "a privileged joint investigation for the purpose of assisting our clients close the acquisition."[340] The draft elaborated that the

mutual interest arises from the desire of both Fresenius and Akorn to consummate the pending merger between the two companies and prepare a defense for the surviving entity in anticipation of any litigation that might arise, including by the FDA, another interested government entity or private litigant, based on the substance or fact of the allegations in the anonymous communications.[341]

         Proposing this language was a clever way to try to box in Fresenius and prevent them from using any information to evaluate Akorn's compliance with its representations. For precisely this reason, the Fresenius executives reacted negatively to this language.[342]

         The parties ended up agreeing to a modified version of the common interest agreement that struck the concept of a joint investigation and stated in its place that "[t]he investigation may include joint interviews, document collection and review and sharing of information related to Akorn's processes, procedures and controls."[343] The final agreement also changed the language on mutual interest to state that it "arises from and under the Merger Agreement dated April 24, 2017 between Fresenius (and certain affiliates) and Akorn, and additionally because of the possibility of claims made by third parties."[344] The final agreement stated expressly that "either party shall be free to use or disclose the fact of, and any and all information learned or obtained during, the referenced investigation, including information exchanged hereunder, in any dispute between them."[345] These changes put Akorn on notice that Fresenius could use the fruits of the investigation to evaluate its rights and obligations under the Merger Agreement and not merely for the purpose of closing the Merger.

         M. The Site Visits Begin.

         Between December 11 and December 15, 2017, the Fresenius team visited Vernon Hills. Sidley interviewed nineteen employees, and Fresenius's consultants toured the laboratory and questioned employees about equipment, software, controls, processes, and procedures. The Fresenius team identified serious data integrity issues.[346]

         Between December 18 and December 21, 2017, the Fresenius team visited Somerset and Cranbury. Sidley interviewed ten employees while the consultants toured the laboratory. The Fresenius team again identified serious data integrity issues.[347]

         From January 2 until January 5, 2018, the Fresenius team visited Decatur. They interviewed eleven employees while the consultants toured the laboratory facilities. The Fresenius team again identified serious data integrity issues.[348]

         On January 5, 2018, Fresenius received a third whistleblower letter, which alleged that Vernon Hills personnel had concealed information from Fresenius.[349] Fresenius sent the letter to Akorn.[350] Based on the letter's allegations and its own concerns, Fresenius questioned whether Akorn was providing Fresenius with reasonable access to information. Akorn provided a pointed and detailed response.[351]

         On December 18, 2017, while the Fresenius team was starting its visit at the Somerset site, Cravath commenced the only investigatory work that it did on its own, in contrast to simply shadowing Sidley.[352] While preparing witnesses for their interviews, Cravath learned about problems with the data supporting Akorn's ANDA for azithromycin and about Silverberg's submission in August 2017 of a response to a CRL that relied on false data.[353] Cravath started investigating what had happened.[354]

         Two days after Cravath started investigating, on December 20, 2017, Silverberg went to Misbah Sherwani, Executive Director of Quality at Somerset, to try to coordinate their stories. Sherwani immediately called an associate at Cravath, telling the associate that

she is uncomfortable being in the same room with Mark right now because he is telling her to do things with respect to opening a [T]rackwise investigation that she is seriously concerned about (including inaccurate justifications for why an investigation was not opened earlier and telling her he will "eat" the drafts of the language about that).[355]

         The associate called Stuart, who spoke by phone with Silverberg and Sherwani.[356]

         Stuart claimed at trial that the phrase "eat the draft" did not mean anything to him.[357]It sounds to me like a fairly obvious reference to coordinating stories, documenting the coordinated story in Trackwise, the software Akorn uses to track quality issues and investigations, then concealing the evidence of the coordination. This is exactly how Sherwani understood it.[358] She said Silverberg told her that they should agree on a description of the investigation and then Silverberg would "get rid of" what they had drafted.[359] Stuart "very quickly" dismissed this as a "fleeting issue" by deciding that Silverberg and Sherwani simply had a miscommunication.[360]

         Cravath's investigation took approximately four weeks. The resulting record supports the following findings:

• In 2012, Akorn began developing a topical ophthalmic form of azithromycin, a prescription antibiotic, at its Somerset site, but could not perform particulate matter stability testing due to its viscosity.[361]
• In September 2012, an Akorn lab supervisor at Somerset named Jim Burkert entered stability testing data into the lab notebook of an Akorn chemist. There is no evidence that he had the data; he seems to have made it up.[362]
• In December 2012, Akorn submitted to the FDA an AND A for azithromycin which included the false data.[363]
• In fall 2014, the stability testing issue came up again, and the chemist discovered the entries in her notebook. She also noticed other entries in the same notebook and in two other notebooks that were not in her handwriting. She reported it to Burkert, who did not ask any questions or follow up. The chemist next brought the issue to the attention of a quality manager who instructed all scientists to review their notebooks. The review discovered numerous instances of altered and missing data. In addition, two of Burkert's notebooks were missing.[364]
• On December 30, 2014, Burkert resigned voluntarily.[365]
• In July 2016, Silverberg visited Somerset. He interviewed the chemist and told her to note in her notebooks where the writing was not hers. She identified six additional products where the writing was not hers. After learning about the missing notebooks, Silverberg instructed that going forward, all notebooks would be stored in the quality manager's office and checked in and out. Employees expressed concern that Silverberg was not addressing the issues properly. [366]
• In August 2017, Somerset was attempting to respond to a CRL that asked questions about the stability testing for azithromycin, albeit not specifically the fabricated test. When preparing the response, Akorn personnel identified the problems with the data and brought them to Sherwani's attention. She and a colleague, Michael Stehn, concluded that Akorn would need to withdraw the AND A, and they elevated the issue to Silverberg.[367]
• During Silverberg's discussion with Sherwani and Stehn, Silverberg was told that it was highly likely that there was false or fabricated data in the initial ANDA submitted to the FDA.[368]
• During a meeting on August 17, 2017, Silverberg told Sherwani and Stehn that Akorn would not withdraw the ANDA and should instead pull samples and test them to see if the samples passed the test.[369] Silverberg subsequently instructed Sherwani and Stehn to respond to the CRL, not to ask for an extension, and not to open an investigation in the data issues.[370]
• Sherwani believed it was essential to conduct an investigation and to obtain an extension from the FDA. Sherwani asked Silverberg whether he was "allowing Regulatory Affairs to continue to submit inaccurate information" to the FDA.[371]Silverberg argued that the FDA was asking about different data.[372]
• Sherwani disagreed with Silverberg's positon and declined to sign the CRL.[373]
• Silverberg instructed Sherwani that there should be "[n]o more emails."[374]
• Silverberg signed the CRL on Sherwani's behalf while she was out of the office.[375]
• By signing off on the CRL, Silverberg validated the attachments, which were not yet attached to the form he signed. The attachments included the false stability data.[376] Sherwani had made clear to Silverberg that signing the CRL would constitute a resubmission of the false data.[377]

         N. Cravath Reports To Sidley On Its Investigation.

         On January 12, 2018, Stuart gave Sidley a preliminary report on Cravath's investigation.[378] At that point Cravath had interviewed twenty-four employees and reviewed 6, 000 emails. Stuart told Sidley that the investigation would take another three to four weeks.[379]

         After receiving the preliminary report, Fresenius sent Akorn a letter identifying "extremely serious data integrity concerns."[380] Internally, Fresenius started a project to determine what it would cost to remediate the data integrity issues at Akorn so they could evaluate whether the issues constituted a Material Adverse Effect.[381]

         On January 22, 2018, Stuart, Bonaccorsi, and members of the Cravath team gave a follow-up report to Silhavy and Sidley.[382] Stuart stated that Silverberg's explanations "were not satisfactory, they didn't hang together."[383] He also said that he would not be relying on Silverberg's explanation "in an attempt to defend the [C]ompany before the FDA."[384] Although Stuart did not say this to the Fresenius team, he believed that there was "a high likelihood that [the FDA] would conclude, given the document trail that they'll conclude [Silverberg] did act with intent."[385] Stuart did not report on (or ever tell Sidley about) the incident between Silverberg and Sherwani in which Silverberg attempted to coordinate their stories and suggested he would "eat the draft" if necessary.[386]

         Bonaccorsi and other senior executives at Akorn thought the situation was serious, and they worried that if they disclosed the azithromycin incident to the FDA and withdrew the ANDA, then the FDA would invoke the AIP.[387] To help them navigate dangerous waters, they decided to hire a law firm with specific FDA expertise. They selected Hyman, Phelps & McNamara, P.C., although this firm had also done work for Fresenius and therefore faced a potential conflict. They also decided to hire an outside consultant to conduct a review of Akorn's procedures and potentially tainted submissions. Akorn later chose NSF to conduct the investigation.[388]

         After consulting with Hyman Phelps, Akorn decided that they should go to the FDA relatively soon, disclose the problems they had discovered, and explain how the false CRL came to be submitted.[389] Akorn also decided that Silverberg should no longer head up its quality function.[390] Effective March 1, 2018, they removed him from his position of Executive Vice President, Global Quality Affairs and placed him in the new role of "Quality Advisor."[391] His new position paid $250, 000 per year, a reduction from his prior salary of $318, 000, and he was not eligible for any bonus. The initial placement was for 90 days or until the Merger closed. He was "[n]ot to initiate any contact with Akorn employees at any level except for inquiries to the CHRO or General Counsel."[392] He was "[n]ot to have any contact with the U.S. FDA or other regulatory facilities."[393] He was "[n]ot to physically report to any Akorn location unless specifically requested or directed by his manager, CHRO or General Counsel."[394] Akorn took these steps with the understanding that the FDA would expect to see this type of disciplinary outcome in a case of "deliberate misconduct."[395] As of trial, Silverberg remained in his new role.

         To fill the hole this created at the top of Akorn's quality function, Akorn promoted Wasserkrug to the position of Vice President, Quality Operations. Although historically the head of quality reported directly to the CEO, she would report to the head of pharmaceutical operations, where the entire quality assurance function would reside.[396]

         Akorn also decided that it would be a good idea to start working on some data integrity projects. Bonaccorsi had Pramik start planning for IT to address some projects in this area.[397] The IT department also began responding to the issues raised in the Cerulean audits from December 2016 and May 2017.[398]

         O. Tensions Escalate.

         By the second half of February 2018, tensions between the parties had escalated.[399] On February 16, Sidley sent Cravath a letter attaching an extensive list of FDA submissions where Lachman had not been able to locate the underlying data. Sidley asked for the data or, alternatively, an explanation for why it was missing.[400] Three days later, on February 19, Bonaccorsi sent Silhavy a lengthy email in which he accused Fresenius of foot-dragging before the FTC and failing to use its reasonable best efforts to obtain antitrust clearance.[401] Four days later, on February 23, Silhavy sent Bonaccorsi an email informing him that Fresenius would be making the following statement about the Merger on February 27, when Fresenius Parent held it earnings call:

Fresenius is conducting an independent investigation, using external experts, into alleged breaches of FDA data integrity requirements relating to the product development at Akorn, Inc.
In addition to FTC clearance, closing of the acquisition will now depend on the outcome of this investigation and the assessment of such outcome by the management and supervisory boards of Fresenius.[402]

         Silhavy also sent Bonaccorsi an email complaining that Cravath had not yet provided Sidley with the emails from Cravath's investigation into the fabricated-data issues and expressing concern that "Akorn has not been and is not acting in good faith to fulfill its obligation to provide prompt and reasonable access to information under Section 5.05 of the Merger Agreement."[403]

         The very next day, on February 24, 2018, a Cravath litigation partner sent a letter to Fresenius's outside deal counsel asserting that Fresenius had "made clear that it does not intend to perform its obligations under the Merger Agreement."[404] The letter cited Fresenius's positions regarding antitrust clearance and its planned disclosure about closing depending on the outcome of its investigation.[405]

         Over the weekend, Cravath produced a portion of the emails to Sidley, and Bonaccorsi promised that the balance would be coming soon.[406] On February 26, 2018, Akorn's newly retained regulatory counsel at Hyman Phelps reached out to the FDA to advise them about the potential data integrity issues involving fabricated data.[407] The FDA agreed to a "listening only meeting" on March 7.[408]

         P. The Earnings Calls

         On February 27, 2018, Fresenius held its quarterly earnings call. Sturm announced that Fresenius was investigating "information which originated from an anonymous source alleging deficiencies and misconduct regarding the product development process for new drugs at Akorn."[409] He stated that during due diligence, Fresenius had "examined and audited [Akorn] as intensively, carefully, and conscientiously as possible," and he described the due diligence as "the most intensive and comprehensive that I have experienced during my time at Fresenius," but he added that "when you wish to acquire a competitor, there are restrictions," and "[t]here are areas where you simply are not allowed to look, including product development and drug approval processes."[410]

So how do you protect yourself in these areas? You ask the seller for assurances, representations [and] warranties, to use the legal term, on certain key facts and issues. The task now is to verify whether these assurances provided by the seller actually hold true. . . . [S]hould the allegations prove to be of a nonmaterial nature, then we will complete the acquisition, as planned, and together make it a success . . . .
If, however, the allegations are proved and prove to be so serious that we must question the very basis of the takeover agreement, then in the interest of our shareholders, we may use our rights to withdraw from the transaction.[411]

         Akorn's stock price plummeted on the news.[412]

         On February 29, 2018, Akorn reported its financial results for the final quarter of 2017, along with annual results for 2017.[413] For the quarter, Akorn reported revenue of $186 million, representing a year-over-year decline of 34%. Akorn reported operating income of negative $116 million, representing a year-over-year decline of 292%. Akorn reported a loss of $0.52 per share, representing a year-over-year decline of 300%.[414]

         For 2017 as a whole, Akorn reported revenue of $841 million, representing a year-over-year decline of 25%. Akorn reported operating income of $18 million, representing a year-over-year decline of 105%. Akorn reported a loss of $0.20 per share, representing a year-over-year decline of 113%.[415] Akorn reported EBITDA of $64 million for 2017, down 86% from 2016, and adjusted EDBITA of $249 million, down 51% from 2016.[416] Akorn's actual revenue declined by 17% from the low end of the guidance of $1, 010-$1, 060 million that Akorn reaffirmed when announcing the Merger Agreement. Akorn's adjusted EBDITA declined by 31% from the low end of Akorn's reaffirmed guidance of $363-$401 million.[417]

         Q. The FDA Meeting

         During the weeks leading up to Akorn's meeting with the FDA, Akorn withdrew the ANDA for azithromycin, [418] and the parties butted heads over several issues. When Fresenius realized that Hyman Phelps would be attending the meeting, they asserted a conflict based on Hyman Phelps's contemporaneous representation of Fresenius.[419] Akorn complained that Fresenius was trying to harm its ability to present its case to the FDA, but Fresenius had a legitimate concern that Akorn was going to whitewash its problems, and Hyman Phelps was contemporaneously appearing for Fresenius in matters before the FDA. Fresenius did not want any blowback from a misleading depiction to hurt its own counsel's credibility. Akorn replaced Hyman Phelps with Ropes & Gray LLP.[420] The meeting was rescheduled for March 16, and the change in counsel does not appear to have made any difference.

         Akorn took similar stances towards Fresenius. When Sidley asked to attend the meeting, Akorn said no.[421] When Sidley asked to interview Avellanet, the author of the Cerulean reports, Akorn again said no.[422] Akorn also instructed Sidley that they could not interview any former Akorn employees without Akorn's approval.[423] Akorn also instructed Sidley that no one other than Fresenius's outside consultants could review the documents Akorn was providing unless Akorn gave prior consent to provide specific documents to specific individuals.[424]

         In advance of the in-person meeting on March 16, 2018, a lawyer from Ropes & Gray had a "sidebar" call with an FDA representative in which he denigrated Fresenius's motives and suggested that Fresenius would try to call Akorn's presentation into question.[425] During the subsequent in-person meeting, eight Akorn representatives, including Stuart and Bonaccorsi, met with sixteen FDA representatives, with four participating by phone.[426]

         As Akorn's expert conceded at trial, Akorn was "not fully transparent" with the FDA during the meeting.[427] First, Akorn presented the overall investigation into the whistleblower letters as one conducted jointly by Akorn and Fresenius.[428] In reality, Akorn did not conduct an investigation into the whistleblower letters. Fresenius expected Akorn to conduct an investigation, but Akorn chose to have Cravath shadow the Sidley investigation instead. Akorn's presentation cited investigatory work that Sidley and Lachman had performed in a manner that implied that Akorn had been responsible for it.[429]Akorn also described its production of emails to Sidley in a manner that implied it had happened months earlier, at the start of the investigation and as part of a joint effort, [430]when in fact the emails had been provided only three weeks before in response to pressure from Fresenius. Akorn likewise presented the investigation into the azithromycin ANDA as a joint investigation, when Cravath had conducted that investigation on its own.[431] Akorn also represented that Cravath's investigation into the azithromycin issue was "supported by Akorn GQC, "[432] without disclosing that Akorn GQC had been kept in a constrained and limited role.

         Even more problematic, Akorn's presentation endorsed as valid Silverberg's claimed justification for signing the CRL with fabricated test results. Under the heading, "Investigative Findings," the presentation stated:

Silverberg authorized submission of AET data without knowing stability table containing particulate matter data would be submitted because stability table not attached to CRL response Silverberg authorized for submission.[433]

         This statement to the FDA adopted Silverberg's explanation for his actions. Stuart gave the presentation and called the FDA's attention to this statement during the meeting, [434] yet Stuart had said previously that "he did not find Silverberg's explanations satisfactory."[435]He also believed that there was "a high likelihood that [the FDA] would conclude, given the document trail that they'll conclude [Silverberg] did act with intent."[436] Most important, he had told the Sidley team that he would not be relying on Silverberg's explanation "in an attempt to defend the Company before the FDA."[437] Yet that is what the presentation did.

         Finally, Akorn told the FDA that it had placed an "emphasis . . . on improving data integrity controls in the last few years, "[438] and the presentation cataloged a number of steps Akorn had taken. Akorn in fact historically prioritized other matters over data integrity and only began making a serious effort on data integrity after Sidley and Lachman identified pervasive problems. Moreover, while highlighting favorable information for the FDA, Akorn omitted the many deficiencies identified by Cerulean and Akorn's internal audit function. This approach resulted in a one-sided, overly sunny depiction. Akorn's witnesses have stressed that the FDA usually does not ask for or receive internal audit reports or consultant reports when it conducts an inspection, [439] but that is a different scenario than a company approaching the FDA voluntarily and purporting to come clean.[440]

         After the meeting, Akorn provided Fresenius with a summary of the meeting and a copy of the presentation.[441] On March 22, 2018, Sidley sent Cravath a letter accusing Akorn of having given the FDA "false, incomplete and misleading information."[442] Sidley's leading criticism was the presentation's description of Silverberg's reason for approving the response to the CRL.[443] Although Sidley's language was strident, that was a fair criticism of the presentation. Sidley also criticized the presentation's portrayal of Akorn's "many supposed improvements in its data integrity practices."[444] The language was again quite strong, but the criticism was a fair one.[445]

         Akorn's regulatory counsel at Ropes & Gray sent Sidley's letter to the FDA.[446] He also sent the FDA copies of letters from Sidley to Cravath in which Sidley identified various data integrity issues, along with Cravath's response to those letters. He followed up with a call with an FDA representative, during which he sought to undermine Fresenius's criticisms.[447] He correctly noted that "the heated tone of the correspondence was somewhat embarrassing."[448]

         R. Fresenius Terminates The Merger Agreement.

         On March 16, 2018, Sturm raised with the Supervisory Board of Fresenius Parent the possibility of terminating the Merger Agreement. He cited the results of Fresenius's data integrity investigation, which he noted was still ongoing, but which had revealed evidence of breaches of representations in the Merger Agreement.[449] He told the Supervisory Board that they did not yet have to make a decision.[450]

         On April 13, 2018, the senior executives at Fresenius Kabi decided to recommend terminating the Merger Agreement to their superiors at Fresenius Parent. They based their decision on the data integrity problems at Akorn, the costs of remediation, and the decline in Akorn's business performance.[451]

         On April 17, 2018, the Supervisory Board met. Management gave the directors a presentation that detailed (i) the downward revisions in the business plan for Akorn made necessary by Akorn's dismal business performance, (ii) the cost of data integrity remediation, and (iii) the lost value from suspending sales of existing products and delaying production of pipeline products until data could be verified.

• For 2018, Akorn's projected EBIT fell from $239 million in the signing case to $14 million in the updated case. Of the total, a decline of $221 million was attributable to on-market products and a decline of $127 million to pipeline products, with these declines partially offset by deal-related factors.[452]
• For 2018, data integrity remediation would cost another $48 million, with a decline in EBIT of $272 million attributable to suspending on-market products pending data verification. With these effects, Akorn's adjusted EBIT in 2018 would be negative $313 million.[453]
• Over a ten-year period, Akorn would incur $254 million in direct costs to redevelop the twenty-four most commercially valuable Akorn products.[454]
• The biggest valuation hit to Akorn would come from suspending on-market products and pushing out pipeline products while data was verified. Depending on the assumptions used, the loss in value from the deferral could reach $1.6 billion, excluding the direct remediation costs.[455]
• Taking into account both the direct remediation costs and the lost value from product suspensions and deferrals, Akorn's value fell from $5.236 billion at the time of the Merger to $3.307 billion, representing a decline of 37%.[456]

         The estimates were developed by a team of Fresenius personnel that included senior executives and staff who had first-hand experience based on Fresenius's efforts to remediate data integrity issues at one of its sites in India.[457]

         Although Sturm and his colleagues were prepared to terminate the Merger Agreement, they recommended that Fresenius offer Akorn the choice of extending the outside date for the Merger to the end of August to facilitate further investigation into the data integrity issues, including the investigations by NSF that Akorn had pledged to the FDA to conduct. In a letter dated April 18, 2018, Paul Weiss surfaced for the first time and communicated this offer. The letter asserted that Akorn had breached various provisions in the Merger Agreement, including its representations regarding regulatory compliance. The letter noted that "[i]f Akorn believes Fresenius is mistaken in its assessment of the facts and that Akorn's own investigation, when complete, would support its position, then extending the Outside Date could be advantageous to both parties."[458] Akorn declined.

         On April 22, 2018, Fresenius gave notice that it was terminating the Merger Agreement. Fresenius cited its right to terminate under Section 7.01(c)(i) based on (i) Akorn's breaches of representations and warranties, including those related to regulatory compliance, and (ii) Akorn's breaches of its covenants, including its obligation to operate in the ordinary course of business. Fresenius also cited its right not to close under Section 6.02(c) because Akorn had suffered a General MAE, which would give rise to a right to terminate two days later, on April 24, 2018, when the initial Outside Date in the Merger Agreement was reached.[459]

         S. This Litigation

         On April 23, 2018, Akorn filed this action. Fresenius answered and asserted counterclaims. Akorn sought an expedited trial on or before July 24, 2018.[460] Over Fresenius's opposition, I granted the request and scheduled trial for July 9-13.[461]

         While the litigation was ongoing, factual developments continued apace. On May 2, 2018, Akorn announced its financial results for the first quarter of 2018. Akorn reported revenue of $184 million, representing a year-over-year decline of 27%. Akorn reported operating income of negative $25 million, representing a year-over-year decline of 134%. Akorn reported a loss of $0.23 per share, a year-over-year decline of 170%. Akorn reported EBITDA of negative $6 million and Adjusted EBITDA of $24 million.[462]

         While the parties litigated, NSF moved forward with its investigation. The original plan consisted of (i) conducting data integrity audits at six facilities (but not Somerset), (ii) reviewing both the ANDAs where Burkert had some involvement and the ANDAs generated at Somerset since 2006, (iii) examining any lab notebooks to which Burkert had access and sampling other notebooks at Somerset, and (iv) reviewing sample manufacturing data for thirty-two products manufactured at Somerset.[463]

         By the time Fresenius issued its termination notice, NSF had only delivered its data integrity audit for one site (Vernon Hills). By the time of trial, NSF had completed its audits at four of the five other sites. NSF's inspection of the Decatur facility was postponed due to an FDA inspection that began on April 9, 2018, lasted through trial, and eventually ended on July 23. As noted, NSF did not plan to conduct a data integrity audit at Somerset.

         The following table identifies the facilities reports that NSF had conducted by the time of trial, along with the number and types of findings made by NSF.

Site

Date of Report

Major Findings

Minor Findings

Exhibit

Vernon Hills

April 13, 2018

7

7

JX 1141

Amityville

April 29, 2018

9

3

JX 1178

Lake Forest

May 7, 2018

2

7

JX 1189

Cranbury

May 9, 2018

10

8

JX 1190

Hettlingen

May 10, 2018

6

9

JX 1192

         Importantly, NSF's definition of a major deficiency resembled Cerulean's definition of a critical deficiency. For NSF, a major finding

documents a systematic failure of a regulatory requirement, correlates to product defects, and/or represents uncorrected repeat findings cited by FDA in previous inspections. These findings would appear on a form FDA 483 and may provide the basis for further enforcement action.[464]

         For NSF, a critical finding was more extreme: a "condition which has produced or leads to a significant risk of producing an unsafe or hazardous product which may be harmful and puts the consumer at risk of serious injury or death."[465] Minor findings were regulatory violations that fell short of these standards. A minor finding "would most likely appear on a Form FDA 483, but would not be a basis for further enforcement action unless it represents a repeated finding . . . ."[466]

         On May 16, 2018, part way through its investigation of Decatur, the FDA issued a twenty-four page Form 483 for that facility which identified thirteen categories of deficiencies.[467] Two of the categories addressed the types of data integrity problems that Fresenius had cited: one identified a "[f]ailure to maintain complete data derived from all testing and to ensure compliance with established specifications and standards pertaining to data retention and management;"[468] another identified a failure "to thoroughly investigate any unexplained discrepancy or failure of a batch or any of its components to meet any of its specifications, whether or not the batch has already been distributed."[469]The former category included five specific deficiencies; the latter included ten specific deficiencies, including "[r]epeat observation[s] from 11/2004, 9/2006, 8/2007, 6/2009, 5/2013, 6/2016."[470] This was not the only instance of repeat observations that the Form 483 raised. Another category of deficiencies identified "[r]epeat observations from 11/2004, 9/2006, 8/2007, 6/2009 & 2017."[471] Still another identified a "[r]epeat observation from 11/2004."[472] Based on the Form 483, Wasserkrug testified at trial to her belief that the FDA had placed Decatur on OAI status and that Akorn will not receive any product approvals until Decatur is cleared.[473] The two prior times when an Akorn facility was on OAI status, it took six months to a year to clear the facility.[474]

         In May 2018, while the FDA inspection at Decatur was ongoing, the FDA approved two of Akorn's pending ANDAs.[475] Akorn has cited these approvals to suggest that the FDA had no concerns about Akorn's facilities, but the more persuasive interpretation is that the ANDAs had been in the FDA pipeline for some time and were ready for approval when Akorn's issues arose. Consistent with the latter interpretation, the FDA subsequently declined to approve two other ANDAs, citing quality issues at Decatur.[476] Akorn also has received two CRLs for products that would be manufactured at Decatur.[477]

         In addition to the data integrity audits, NSF reviewed ANDAs from the Somerset facility. NSF was only able to review two ANDAs before Fresenius terminated the Merger Agreement. In the first, NSF found thirty-six major deficiencies and twenty-nine minor deficiencies.[478] In the second, NSF found eleven major deficiencies and three minor deficiencies.[479] After receiving the reports, the most Cravath felt it could say to Akorn's directors was that they did not believe that the approval of either product was in "immediate jeopardy," but that the process was still unfolding.[480] At the time, NSF still planned on reviewing another twenty-eight ANDAs.[481] Notably, Akorn was not planning to address the broader universe of products that Silverberg oversaw, precisely because it was everything the Company had produced during the preceding decade.

         By the time of trial, NSF had reviewed another six ANDAs. The following table summarizes the results:

Product

Critical

Major

Minor

Exhibit

Cyclopentolate Hydrochloride Ophthalmic Solution

1

34

8

JX 1185

Gentamicin Sulfate Opthalmic Ointment

0

30

5

JX 1196

Neomycin and Polymxin B Sulfate and Bacitracin Zinc Ophthalmic Ointment Sterile (Veterinary)

0

17

15

JX 1201

Epinastine HCI Opthalmic Solution 0.5%

0

22

19

JX 1204

Olopatadine Hydrochloride Opthalmic Solution

0

26

18

JX 1221

Olopatadine Ophtalmic Solution

1

34

23

JX 1224

         The two critical deficiencies involved data fabrication. One involved an employee from Vernon Hills who engaged in a deliberate act to force a passing result for cyclopentolate.[482] The other involved an employee from Cranbury who engaged in the practice of testing into compliance for olopatadine.[483] NSF's findings meant that the total number of individuals at Akorn involved in data fabrication had increased to four: Silverberg, Burkert, and the two additional employees. It also meant that the number of ANDAs that Akorn had submitted to the FDA based on false or misleading data had risen to three: azithromycin, cyclopentolate, and olopatadine.[484] NSF expanded its investigation based on its findings.

         During its investigation, NSF also found extensive evidence of Akorn employees performing trial injections, a prohibited practice.[485] In response to these findings, on April 5, 2018, Stuart expressed concern about the risk that the FDA would impose the AIP:

[G]iven how prevalent this bad practice was, the FDA is likely to have a very negative reaction to our report. . . . Potential FDA reactions include (1) suspension of review of all pending submissions; (2) mandating review by a third party of product released for the market; and-the worst-(3) "AIP" (Application Integrity Policy), which requires a third-party monitor to oversee all activity at Akorn's sites.[486]

         During a conference call the following day, Akorn's regulatory counsel expressed concern that "[i]f audit reports make it look like there are similar issues across the company, FDA might see need to get whole company under decree."[487] At trial, Wasserkrug testified that Akorn still had not yet been able to resolve fifty instances of trial injections involving approximately twenty analysts and multiple products.[488]

         Through the remediation process that Akorn initiated after its meeting with the FDA, Akorn identified so many open deficiencies from past internal audits and received so many new deficiencies flagged by NSF that it retained PricewaterhouseCoopers LLP as a program manager to keep track of them. PwC's task was to organize all of the findings so that they could be evaluated and addressed.[489] Before April 2018, no one had ever tried to create and maintain a master list of deficiencies at Akorn.[490]

         At trial, Akorn asserted that fully remediating its data integrity problems would take approximately three years.[491] Akorn estimated the cost at $44 million.[492] The estimate assumed that Akorn would not uncover any additional problems with data, that no other ANDAs would be withdrawn, that no products would be recalled, and that there would not be any effect on Akorn's pipeline.[493]

         T. Post-Trial Events

         On July 23, 2018, the FDA initiated an inspection at Akorn's Somerset facility. Between July 23 and August 30, 2018, the FDA spent a total of twenty-one days inspecting the site.[494]

         By letter dated August 3, 2018, Akorn reported to the FDA about NSF's expanded investigation into the work performed by the miscreant Vernon Hills employee. As part of this work, NSF found an additional critical deficiency involving fabricated data, this time for palonosetron hydrochloride.[495] NSF also identified major deficiencies related to data falsification involving six other products.[496] NSF found that the fabrication of data by the Vernon Hills employee was "not isolated but more systemic in nature" and "call[ed] into question the reliability of data" he had generated.[497] As a result, NSF concluded that "a further comprehensive assessment of [his] work and the work produced by the Vernon Hills facility in support of GMP activities" was necessary to determine "potential impact to marketed product, regulatory findings, and submission supporting data."[498] NSF also determined that it would need to sample "all GMP testing . . . conducted by the Cranbury R&D organization, since its relocation [from Somerset] in October, 2016."[499]

         By letter dated August 9, 2018, the FDA sent Akorn a letter formally classifying the Decatur facility as OAI. [500] The August 9 letter stated:

Based on [the FDA's] inspection, this facility is considered to be in an unacceptable state of compliance with regards to current good manufacturing practice (CGMP). The facility may be subject to a CGMP regulatory or enforcement action based on this inspection, and FDA may withhold approval of any pending applications or supplements in which this facility is listed.[501]

         The letter thus not only informed Akorn of Decatur's OIA status, but also noted the possibility of "regulatory or enforcement action."

         On August 30, 2018, the FDA issued a twenty-two page Form 483 for the Somerset site that detailed serious regulatory deficiencies, many of which echoed the evidence presented at trial.[502] The violations included the following:

• Akorn distributed batches of adulterated sterile eye drops that failed four separate stability tests. Akorn could not provide data for the batches at the beginning of the FDA's inspection, and the inspectors later witnessed Akorn employees retrospectively modifying the relevant laboratory notebooks.[503]
• Akorn conducted trial injections as a "widespread practice" dating back to 2015, and "[n]o corrective measures to prevent this practice were implemented until" May 2018. Akorn's prior investigation was inadequate and, as a result, "there is limited assurance in the reliability of data submitted to the Agency and generated for commercial batches."[504]
• Akorn failed to exercise "[appropriate controls . . . over computers or related systems to assure that changes in master production and control records are instituted only by authorized personnel."[505]
• Akorn "invalidated" negative test results in more than 70% of cases between January 2017 and July 2017 "without adequately supporting [the reasons for invalidation] with scientific evidence," and the investigations into these failing results did not "determine why the [issues] . . . kept on recurring nor were there effective CAPAs implemented to minimize these incidents going forward."[506]
• Akorn delayed investigating quality issues for months "without adequate justification."[507]
• Akorn failed to review laboratory notebook testing data for months, and an Akorn employee informed the FDA that "due to personnel resource issue[s], they could not review the notebooks in a timely manner."[508]

         By letter dated September 3, 2018, Akorn reported to the court that on August 22, during the later stages of the FDA's investigation, the database for a high accuracy liquid particle counter had been deleted along with the local backup file and the associated electronic security logs.[509] These databases contained all of Somerset's data for the relevant testing, which is designed to ensure that sterile intravenous products do not contain excessive amounts of undisclosed solids. Akorn's preliminary investigation suggested that the files were deleted intentionally using an electronic shredding utility.[510] Given the timing of the deletion, it is reasonable to infer that the perpetrator may have been trying to hide information from the FDA, or from personnel who would follow up on the deficiencies that the FDA identified in its Form 483.

         By letter dated September 21, 2018, Akorn submitted its response to the Somerset Form 483.[511] The response is lengthy, spanning seventy-three pages, and makes expansive claims about Akorn's commitment to quality and the steps it has taken or will take to address the problems that the FDA identified. In light of the record presented at trial, including my evaluation of the credibility of Akorn's witnesses, it is difficult to put much faith in Akorn's claims about its commitment to quality. Having seen the divergence between Akorn's representations to the FDA during the March 2018 meeting and what Akorn's internal documents and witness testimony showed, it is equally difficult to have confidence that Akorn is being fully transparent in describing the corrective actions that it has taken or will take. It would require an additional round of discovery and another merits hearing to assess the accuracy of Akorn's claims.

         Even taking Akorn's response at face value, the document evidences the deep and pervasive nature of Akorn's quality problems are at Akorn. In an effort to respond to the FDA's concerns, Akorn took a barrage of actions, including:

• Stripping the Head of Quality at Somerset of daily oversight responsibilities and assigning those duties to PwC;
• Stripping the Quality Control Laboratory Director at Somerset of daily oversight responsibilities responsibility and assigning those duties to NSF;
• Engaging NSF to provide supplemental oversight of the daily operation of the quality Control laboratory;
• Engaging NSF personnel to act as mentors for the Somerset Quality Control laboratory supervisory team;
• Engaging NSF to oversee Akorn's process for reviewing its laboratory data and to provide mentoring for Akorn's staff;
• Committing to retrain and certify all of its quality control laboratory personal, all data reviewers, and all investigators;
• Committing to review and revise all of its laboratory procedures including for titration, chromatography, and notebook handling;
• Committing to review all of its analytical testing methods;
• Recalling its Azelastine HCl Ophthalmic Solution and Gentamicin Ophthalmic Solution based on confirmed stability failures;
• Recalling its Ciprofloxacin Ophthalmic Solution based on concerns expressed by the FDA;
• Committing to investigate the use of trial injections at all Akorn sites;
• Committing to re-investigate all Out-of-Specification results generated in the past three years at all of its sites;
• Committing to address backlogs in reviewing and approving data in notebooks and procedures for handling notebook retention and storage;
• Committing to review user level access across all laboratory and manufacturing equipment;
• Committing to review each piece of Somerset laboratory equipment and the data associated with the equipment;
• Committing to conduct a complete review of all unsigned data and to investigate any instances that fail to meet acceptance criteria; and
• Recognizing that all of its sites would need to be assessed based on the issues identified at Somerset.

         After hearing the evidence at trial, I did not have any confidence that Akorn would be able to support its data if the FDA called upon Akorn to do so. Based on developments since trial, Akorn's situation has grown even worse.

         II. LEGAL ANALYSIS

         The disputes in this case are primarily contractual. Fresenius contends that it terminated the Merger Agreement in accordance with its terms. Akorn contends that Fresenius did not validly terminate the Merger Agreement and seeks an order of specific performance to compel Fresenius to close the Merger. Both parties are highly sophisticated and crafted the Merger Agreement with the assistance of expert counsel. The pertinent provisions are dense and complex.

         The analysis turns on three conditions that Akorn must meet before Fresenius is obligated to close the Merger:

• Under Section 6.02(a)(ii), Akorn's representations must be true and correct as of the Closing Date, except "where the failure to be true and correct would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect" (the "Bring-Down Condition").[512]
• Under Section 6.02(b), Akorn must have "complied with or performed in all material respects its obligations required to be complied with or performed by it at or prior to the Effective Time" (the "Covenant Compliance Condition").[513]
• Under Section 6.02(c), Akorn must not have suffered a Material Adverse Effect (the "General MAE Condition").[514]

         The failure of either the Bring-Down Condition or the Covenant Compliance Condition gives Fresenius a right to terminate the Merger Agreement, but only if (i) the breach that would give rise to the failure of the condition is incapable of being cured by the Outside Date and (ii) Fresenius is not "then in material breach of any of its representations, warranties, covenants, or agreements."[515] The failure of the General MAE Condition does not give Fresenius an independent right to terminate the Merger Agreement, but it does give Fresenius the right to refuse to close.[516]

         To establish a failure of the Bring-Down Condition, Fresenius relies on Section 3.18 of the Merger Agreement, where (in overly simplistic terms) Akorn represented that it was in full compliance with all of its regulatory obligations (the "Regulatory Compliance Representations").[517] To establish a failure of the Covenant Compliance Condition, Fresenius relies on Akorn's obligation to "use its . . . commercially reasonable efforts to carry on its business in all material respects in the ordinary course of business" (the "Ordinary Course Covenant").[518]

         To establish a failure of the Covenant Compliance Condition, Akorn relies on each party's agreement to "cooperate with the other parties and use . . . their respective reasonable best efforts . . . to cause the conditions to Closing to be satisfied as promptly as reasonably practicable and to consummate" the Merger (the "Reasonable Best Efforts Covenant").[519] Akorn also relies on Fresenius's specific commitment to "take all actions necessary" to secure antitrust clearance, which the Merger Agreement states shall require efforts that "shall be unconditional and shall not be qualified in any manner."[520] This level of commitment is generally called a "Hell-or-High-Water Covenant."

         Like many transaction agreements, the Merger Agreement deploys the concept of a Material Adverse Effect in multiple locations, including (i) in the General MAE Condition, (ii) in various representations for purposes of evaluating any inaccuracies in those representations at the time of signing, and (iii) in the Bring-Down Condition for purposes of evaluating any inaccuracies in Akorn's representations when determining whether Fresenius is obligated to close.[521] The General MAE Condition is not tied to a particular representation about a particular issue, leading this decision to describe the resulting event as a "General MAE." The Bring-Down Condition examines the inaccuracy of specific representations and uses as its measuring stick whether the deviation between the as-represented condition and the actual condition would reasonably be expected to constitute a Material Adverse Effect. The critical representations for this case are the Regulatory Compliance Representations, and this decision refers to a sufficient inaccuracy in those representations as a "Regulatory MAE."[522]

         Working through the pertinent provisions requires determining whether Akorn has suffered either a General MAE or a Regulatory MAE, whether Akorn complied in all material respects with the Ordinary Course Covenant, whether Akorn could cure, and whether Fresenius itself was in material breach of the Reasonable Best Efforts Covenant or the Hell-or-High-Water Covenant. This decision makes the following findings:

• The sudden and sustained drop in Akorn's business performance constituted a General MAE.
• Akorn's Regulatory Compliance Representations were not true and correct, and the deviation between Akorn's as-represented condition and its actual condition would reasonably be expected to result in a Regulatory MAE.
• Akorn materially breached the Ordinary Course Covenant.
• None of Akorn's breaches could be cured by the Outside Date, which remained April 24, 2018.
• Fresenius did not breach the Reasonable Best Efforts Covenant.
• Fresenius breached the Hell-or-High-Water Covenant, but the breach was not material. Based on these findings, Fresenius validly terminated the Merger Agreement under Section 7.01(c)(i) because of (i) a non-curable failure of the Bring-Down Condition and (ii) a non-curable failure of the Covenant Compliance Condition. Fresenius could validly exercise its termination rights because it was not in material breach of its obligations. Regardless, Akorn has suffered a General MAE, so Fresenius cannot be forced to close.

         A. The Failure Of The General MAE Condition

         From the standpoint of contract interpretation, the most straightforward issue is whether Akorn suffered a General MAE. Starting with this issue is also helpful because much of the commentary on MAE clauses has focused on General MAEs. Because Fresenius seeks to establish a General MAE to excuse its performance under the Merger Agreement, Fresenius bore the burden of proving that a General MAE had occurred.[523]This decision concludes that Akorn suffered a General MAE.

         In any M&A transaction, a significant deterioration in the selling company's business between signing and closing may threaten the fundamentals of the deal. "Merger agreements typically address this problem through complex and highly-negotiated 'material adverse change' or 'MAC' clauses, which provide that, if a party has suffered a MAC within the meaning of the agreement, the counterparty can costlessly cancel the deal."[524]

         Despite the attention that contracting parties give to these provisions, MAE clauses typically do not define what is "material."[525] Commentators have argued that parties find it efficient to leave the term undefined because the resulting uncertainty generates productive opportunities for renegotiation.[526] Parties also risk creating more problems when they attempt to include specific quantitative thresholds, both during the negotiations[527] and for purposes of subsequent litigation.[528] "What constitutes an MAE, then, is a question that arises only when the clause is invoked and must be answered by the presiding court."[529]

         Rather than devoting resources to defining more specific tests for materiality, the current practice is for parties to negotiate exceptions and exclusions from exceptions that allocate categories of MAE risk.[530] "The typical MAE clause allocates general market or industry risk to the buyer, and company-specific risks to the seller."[531] From a drafting perspective, the MAE provision accomplishes this by placing the general risk of an MAE on the seller, then using exceptions to reallocate specific categories of risk to the buyer.[532] Exclusions from the exceptions therefore return risks to the seller. A standard exclusion from the buyer's acceptance of general market or industry risk returns the risk to the seller when the seller's business is uniquely affected. To accomplish the reallocation, the relevant exceptions are "qualified by a concept of disproportionate effect."[533] "For example, a buyer might revise the carve-out relating to industry conditions to exclude changes that disproportionately affect the target as compared to other companies in the industries in which such target operates."[534]

         A more nuanced analysis of the types of issues addressed by MAE provisions reveals four categories of risk: systematic risks, indicator risks, agreement risks, and business risks.[535]

• Systematic risks are "beyond the control of all parties (even though one or both parties may be able to take steps to cushion the effects of such risks) and . . . will generally affect firms beyond the parties to the transaction."[536]
• Indicator risks signal that an MAE may have occurred. For example, a drop in the seller's stock price, a credit rating downgrade, or a failure to meet a financial projection is not itself an adverse change, but rather evidence of such a change.[537]
• "Agreement risks include all risks arising from the public announcement of the merger agreement and the taking of actions contemplated thereunder by the parties."[538]Agreement risks include endogenous risks related to the cost of getting from signing to closing, e.g., potential employee flight.[539]
• Business risks are those "arising from the ordinary operations of the party's business (other than systematic risks), and over such risks the party itself usually has significant control."[540] "The most obvious" business risks are those "associated with the ordinary business operations of the party-the kinds of negative events that, in the ordinary course of operating the business, can be expected to occur from time to time, including those that, although known, are remote."[541]

         Generally speaking, the seller retains the business risk. The buyer assumes the other risks.[542]

         In this case, as a condition to Fresenius's obligation to close, Akorn must not have suffered a General MAE. Section 6.02 of the Merger Agreement, titled "Conditions to the Obligations of [Fresenius Kabi] and Merger Sub," states:

The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if permissible under applicable law) on or prior to the Closing Date of the following conditions:
* * *
(c) No Material Adverse Effect. Since the date of this Agreement there shall not have occurred and be continuing any effect, change, event or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect.

         The effect of this condition is to place the general risk of an MAE on Akorn.

         The Merger Agreement defines the concept of a "Material Adverse Effect" in customary albeit complex and convoluted prose. The following reproduction of the definition adds formatting to enhance legibility:

"Material Adverse Effect" means any effect, change, event or occurrence that, individually or in the aggregate
(i) would prevent or materially delay, interfere with, impair or hinder the consummation of the [Merger] or the compliance by the Company with its obligations under this Agreement or
(ii) has a material adverse effect on the business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole;
provided, however, that none of the following, and no effect, change, event or occurrence arising out of, or resulting from, the following, shall constitute or be taken into account in determining whether a Material Adverse Effect has occurred, is continuing or would reasonably be expected to occur: any effect, change, event or occurrence
(A) generally affecting (1) the industry in which the Company and its Subsidiaries operate or (2) the economy, credit or financial or capital markets, in the United States or elsewhere in the world, including changes in interest or exchange rates, monetary policy or inflation, or
(B) to the extent arising out of, resulting from or attributable to
(1) changes or prospective changes in Law or in GAAP or in accounting standards, or any changes or prospective changes in the interpretation or enforcement of any of the foregoing, or any changes or prospective changes in general legal, regulatory, political or social conditions,
(2) the negotiation, execution, announcement or performance of this Agreement or the consummation of the [Merger] (other than for purposes of any representation or warranty contained in Sections 3.03(c) and 3.04), including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, partners, employees or regulators, or any litigation arising from allegations of breach of fiduciary duty or violation of Law relating to this Agreement or the [Merger],
(3) acts of war (whether or not declared), military activity, sabotage, civil disobedience or terrorism, or any escalation or worsening of any such acts of war (whether or not declared), military activity, sabotage, civil disobedience or terrorism,
(4) pandemics, earthquakes, floods, hurricanes, tornados or other natural disasters, weather-related events, force majeure events or other comparable events,
(5) any action taken by the Company or its Subsidiaries that is required by this Agreement or at [Fresenius Kabi's] written request,
(6) any change or prospective change in the Company's credit ratings,
(7) any decline in the market price, or change in trading volume, of the shares of the Company or
(8) any failure to meet any internal or public projections, forecasts, guidance, estimates, milestones, budgets or internal or published financial or operating predictions of revenue, earnings, cash flow or cash position
(it being understood that the exceptions in clauses (6), (7) and (8) shall not prevent or otherwise affect a determination that the underlying cause of any such change, decline or failure referred to therein (if not otherwise falling within any of the exceptions provided by clause (A) and clauses (B)(1) through (8) hereof) is a Material Adverse Effect);
provided further, however, that any effect, change, event or occurrence referred to in clause (A) or clauses (B)(3) or (4) may be taken into account in determining whether there has been, or would reasonably be expected to be, a Material Adverse Effect to the extent such effect, change, event or occurrence has a disproportionate adverse affect [sic] on the Company and its Subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and its Subsidiaries operate (in which case the incremental disproportionate impact or impacts may be taken into account in determining whether there has been, or would reasonably be expected to be, a Material Adverse Effect).[543]

         As is common, the definition starts with a general statement of what constitutes an MAE. It next carves out certain types of events that otherwise could give rise to an MAE. It then creates two broad exceptions to the carve-outs. One is that while the carve-outs confirm that certain evidentiary indicators of an MAE will not themselves constitute an MAE, such as a decline in the seller's market price or an adverse change in its credit rating, those carve-outs do not foreclose the underlying cause of the negative events from being used to establish an MAE, unless it otherwise falls within a different carve-out. The other is that four of the identified carve-outs will give rise to an MAE if the effect, change, event or occurrence has had a disproportionately adverse effect on the Company.

         Fresenius relies on subpart (ii) of the MAE definition, which establishes (subject to the carve-outs and their exceptions) that an MAE means "any effect, change, event or occurrence that, individually or in the aggregate that . . . (ii) has a material adverse effect on the business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole." This aspect of the MAE definition adheres to the general practice and defines "Material Adverse Effect" self-referentially as something that "has a material adverse effect."

         The subsequent exceptions to the definition and exclusions from the exceptions implement a standard risk allocation between buyer and seller. Through the exceptions in subparts (A)(1) and (A)(2), Fresenius accepted the systematic risks related to Akorn's industry and "the economy, credit or financial or capital markets, in the United States or elsewhere in the world, including changes in interest or exchange rates, monetary policy or inflation."[544] Through the exceptions in subparts (B)(3) and (B)(4), Fresenius also accepted the systematic risks related to acts of war, violence, pandemics, disasters, and other force majeure events. Each of these allocations is subject to a disproportionate-effect exclusion that returns the risk to Akorn to the extent that an event falling into one of these categories disproportionately affects Akorn "as compared to other participants in the industry."[545] Under subpart (B)(1), Fresenius also assumes the systematic risk relating to changes in GAAP or applicable law. This exception is not subject to a disproportionate-effect exclusion and therefore would remain with Fresenius in any event.

         The exceptions in subparts (B)(2) and (B)(5) identify agreement risks. Through these exceptions, Fresenius assumes these risks.

         The exceptions in subparts (B)(6), (B)(7), and (B)(8) identify indicator risks. The MAE definition explicitly treats these risks as indicators, first by excluding them through the exceptions, then by confirming that although these indicators would not independently give rise to an MAE, the underlying cause of a change in the indicators could give rise to an MAE.

         What remains is business risk, which Akorn retains. Scholars view this outcome as economically efficient because the seller "is better placed to prevent such risks (i.e., is the cheaper cost avoider) and has superior knowledge about the likelihood of the materializations of such risks that cannot be prevented (i.e., is the superior risk bearer)."[546]

         1. Whether The Magnitude Of The Effect Was Material

         The first step in analyzing whether a General MAE has occurred is to determine whether the magnitude of the downward deviation in the affected company's performance is material: "[U]nless the court concludes that the company has suffered an MAE as defined in the language coming before the proviso, the court need not consider the application of the . . . carve-outs."[547] Whether the party asserting the existence of an MAE has adduced sufficient evidence to carry its burden of proof is a question of fact.[548]

         "A buyer faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its obligation to close."[549] "A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror."[550] "In the absence of evidence to the contrary, a corporate acquirer may be assumed to be purchasing the target as part of a long-term strategy."[551] "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."[552]

This, of course, is not to say that evidence of a significant decline in earnings by the target corporation during the period after signing but prior to the time appointed for closing is irrelevant. Rather, it means that for such a decline to constitute a material adverse effect, poor earnings results must be expected to persist significantly into the future.[553]

         Put differently, the effect should "substantially threaten the overall earnings potential of the target in a durationally-significant manner."[554]

         The Hexion decision teaches that when evaluating the magnitude of a decline, a company's performance generally should be evaluated against its results during the same quarter of the prior year, which minimizes the effect of seasonal fluctuations.[555] The Hexion court declined to find an MAE where the seller's 2007 EBITDA was only 3% below its 2006 EBITDA, and where according to its management forecasts, its 2008 EBITDA would be only 7% below its 2007 EBITDA. Even using the buyer's more conservative forecasts, the seller's 2008 EBTIDA would still be only 11% below its 2007 EBITDA.[556] The average of analyst estimates for the seller's 2009 EBITDA was only 3.6% below the seller's average results during the prior three years. The court noted that the buyer had contemplated scenarios consistent with these results.[557]

         In their influential treatise, Lou R. Kling and Eileen T. Nugent observe that most courts which have considered decreases in profits in the 40% or higher range found a material adverse effect to have occurred.[558] Chancellor Allen posited that a decline in earnings of 50% over two consecutive quarters would likely be an MAE.[559] Courts in other jurisdictions have reached similar conclusions.[560] These precedents do not foreclose the possibility that a buyer could show that percentage changes of a lesser magnitude constituted an MAE. Nor does it exclude the possibility that a buyer might fail to prove that percentage changes of a greater magnitude constituted an MAE.

         An example of the latter scenario is IBP, where Chief Justice Strine held while serving as a Vice Chancellor that a 64% drop in quarterly earnings did not constitute a material adverse effect. There, a major producer of beef suffered a large quarterly decline in performance primarily due to widely known cycles in the meat industry, exacerbated by a harsh winter that also affected the buyer.[561] After the bad quarter and the onset of spring, "IBP began to perform more in line with its recent year results."[562] The Chief Justice concluded that "IBP remain[ed] what the baseline evidence suggests it was-a consistently but erratically profitable company struggling to implement a strategy that will reduce the cyclicality of its earnings."[563] The Chief Justice nevertheless noted that "the question of whether IBP has suffered a Material Adverse Effect remains a close one"[564] and that he was "confessedly torn about the correct outcome."[565] He further posited that

[i]f IBP had continued to perform on a straight-line basis using its first quarter 2001 performance, it would generate earnings from operations of around $200 million. This sort of annual performance would be consequential to a reasonable acquiror and would deviate materially from the range in which IBP had performed during the recent past [thus giving rise to an MAE].[566]

         IBP's prior year earnings from operations during the preceding five years were $528 million (1999), $374 million (1998), $227 million (1997), $323 million (1996), and $480 million (1995).[567] An annual performance of $200 million would have represented a 52% decline from IBP's five-year average of $386 million. The Chief Justice also noted that the buyer's arguments were "unaccompanied by expert evidence that identifies the diminution in [the seller's] value or earnings potential as a result of its first quarter performance" and observed that "[t]he absence of such proof is significant."[568]

         In this case, Fresenius made the showing necessary to establish a General MAE. At trial, Professor Daniel Fischel testified credibly and persuasively that Akorn's financial performance has declined materially since the signing of the Merger Agreement and that the underlying causes of the decline were durationally significant.[569] The factual record supports Fischel's opinions.

         As contemplated by Hexion, the following table depicts the year-over-year declines that Akorn suffered during each of the three quarters of FY 2017 that took place after signing, plus full-year results for FY 2017, plus first quarter results for FY 2018:

Year-Over-Year Change In Akorn's Performance[570]

Q2 2017

Q3 2017

Q4 2017

FY 2017

Q1 2018

Revenue

(29%)

(29%)

(34%)

(25%)

(27%)

Operating Income

(84%)

(89%)

(292%)

(105%)

(134%)

EPS

(96%)

(105%)

(300%)

(113%)

(170%)

         Akorn did not report EDBITA or adjusted EBITDA figures on a quarterly basis for 2017.[571]It reported full-year EBITDA of $64 million, a year-over-year decline of 86%. Akorn reported full-year adjusted EBITDA of $241 million, a year-over-year decline of 51%.[572]As these figures show, Akorn's performance declined dramatically, year over year, with positive operating income and positive earnings per share turning to losses.

         In addition to representing a dramatic decline on a year-over-year basis, Akorn's performance in FY 2017 represented a departure from its historical trend. Over the five-year span that began in 2012 and ended in 2016, Akorn grew consistently, year over year, when measured by revenue, EBITDA, EBIT, and EPS.[573] During 2017, Akorn's performance fell dramatically when measured by each metric.[574] For example, Akorn's EBITDA and EB1T grew each year from 2012 to 2016, but in 2017, fell by 55% and 62%, respectively.[575] Fischel prepared the following chart that illustrates the percentage change from year to year in Akorn's EBITDA.

         (Image Omitted)

         Notably, Akorn's performance during the first quarter of 2017-before the Merger Agreement was signed-did not exhibit the downturn that the ensuing three quarters did.[576] But immediately after the signing of the Merger Agreement, Akorn's performance dropped off a cliff.

         Akorn's dramatic downturn in performance is durationally significant. It has already persisted for a full year and shows no sign of abating.[577] More importantly, Akorn's management team has provided reasons for the decline that can reasonably be expected to have durationally significant effects.[578] When reporting on Akorn's bad results during the second quarter of FY 2017, Rai attributed Akorn's poor performance to unexpected new market entrants who competed with Akorn's three top products-ephedrine, clobetasol, and lidocaine.[579] He noted that Akorn also faced a new competitor for Nembutal, another important product, which Akorn management had not foreseen.[580] As Rai testified, "There were way more [competitors] than what [Akorn] had potentially projected in [its] forecast for 2017, "[581] and the new competition resulted in unexpected price erosion.[582] Akorn also unexpectedly lost a key contract to sell progesterone, resulting in a loss of revenue where Akorn had been forecasting growth.[583] When explaining its third quarter results, Akorn described its poor performance as "[d]riven mostly by unanticipated supply interruptions and unfavorable impact from competition across [the] portfolio."[584] Akorn also noted that its "[a]verage product pricing [was] lower than expected due to [an] unfavorable customer/contract mix and price erosion [that was] not considered in our forecast."[585] There is every reason to think that the additional competition will persist and no reason to believe that Akorn will recapture its lost contract.

         Additional support for the collapse in Akorn's value and its durational significance can be found in recent analyst valuations. In connection with the Akorn board's approval of the Merger, the board's financial advisor, J.P. Morgan, submitted a discounted cash flow valuation for Akorn with a midpoint of $32.13 per share.[586] Based on Akorn's post-signing performance, analysts have estimated that Akorn's standalone value is between $5.00 and $12.00 per share.[587] Analysts also have dramatically reduced their forward-looking estimates for Akorn.[588] For example, as of the date of termination, analysts' estimates for Akorn's 2018, 2019, and 2020 EBITDA were lower than their estimates at signing by 62.6%, 63.9%, and 66.9% respectively.[589] Analysts' estimates for Akorn's peers have declined by only 11%, 15.3%, and 15%, respectively, for those years.[590] Analysts thus perceive that Akorn's difficulties are durationally significant.[591]

         To contest this powerful evidence of a Material Adverse Effect, Akorn contends that any assessment of the decline in Akorn's value should be measured not against its performance as a standalone entity, but rather against its value to Fresenius as a synergistic buyer.[592] In my view, the plain language of the definition of an MAE makes clear that any MAE must be evaluated on a standalone basis. First, the broad definition of an MAE refers to any "material adverse effect on the business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole." If the parties had contemplated a synergistic approach, the definition would have referred to the surviving corporation or the combined company. Second, subpart (B)(2) of the definition carves out any effects resulting from "the negotiation, execution, announcement or performance of this Agreement or the consummation of the [Merger, ]" and the generation of synergies is an effect that results from the consummation of the Merger. A review of precedent does not reveal any support for Akorn's argument; every prior decision has looked at changes in value relative to the seller as a standalone company.[593] Akorn's desire to include synergies is understandable-it increases the denominator for purposes of any percentage-based comparison-but it is not supported by the Merger Agreement or the law.

         Akorn also argues that as long as Fresenius can make a profit from the acquisition, an MAE cannot have occurred.[594] The MAE definition does not include any language about the profitability of the deal to the buyer; it focuses solely on the value of the seller. Assessing whether Fresenius can make a profit would introduce a different, noncontractual standard. It would effectively require that Fresenius show a goodwill impairment before it could prove the existence of an MAE. The parties could have bargained for that standard, but they did not. Requiring a loss before a buyer could show an MAE also would ignore the fact that acquirers evaluate rates of return when choosing among competing projects, including acquisitions. A buyer might make money on an absolute basis, but the opportunity cost on a relative basis would be quite high.

         More broadly, the black-letter doctrine of frustration of purpose already operates to discharge a contracting party's obligations when his "principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made."[595] This common law doctrine "provides an escape for an acquirer if the target experiences a catastrophe during the executory period."[596] "It is not reasonable to conclude that sophisticated parties to merger agreements, who expend considerable resources drafting and negotiating MAC clauses, intend them to do nothing more than restate the default rule."[597] In lieu of the default rule that performance may be excused only where a contract's principal purpose is completely or nearly completely frustrated, [598] a contract could "lower this bar to an achievable level by providing for excuse when the value of counterperformance has 'materially' (or 'considerably' or 'significantly') diminished."[599] That is what the parties did in this case. It should not be necessary for Fresenius to show a loss on the deal before it can rely on the contractual exit right it negotiated.

         The record in this case established the existence of a sustained decline in business performance that is durationally significant and which would be material to a reasonable buyer. Akorn suffered a General MAE.[600]

         2. Whether The Reason For The Effect Falls Within An Exception

         Akorn's litigation counsel attributes Akorn's dismal performance to "industry headwinds" that have affected the generic pharmaceutical industry since 2013.[601] One headwind has been a "consolidation of buyer power," which has "led to large price reductions."[602] Another headwind has been the FDA's efforts to approve generic drugs, "leading to increasing numbers of new entrants and resultant additional price erosion."[603]Akorn's lawyers also cite "legislative attempts to reduce drug prices" and the FDA's requirement that every product have a unique serial number, called serialization.[604]According to Akorn, "Fresenius and the market were well aware of these challenges at the time [Fresenius] agreed to buy Akorn-and that if the headwinds were greater than expected, Akorn would likely underperform relative to its competitors."[605] Akorn claims that Fresenius cannot claim the existence of an MAE because everyone, including Fresenius, knew about these "industry headwinds."[606]

         Consistent with standard practice in the M&A industry, the plain language of the Merger Agreement's definition of a Material Adverse Effect generally allocates the risk of endogenous, business-specific events to Akorn and exogenous, systematic risks to Fresenius. The definition accomplishes this by placing the general risk of an MAE on Akorn, using exceptions to reallocate specific categories of risk to Fresenius, then using exclusions from the exceptions to return risks to the Akorn. Through the exceptions in subpart (A)(1), Fresenius accepted the systematic risks "generally affecting (1) the industry in which the Company and its Subsidiaries operate."[607] But this allocation was subject to a disproportionate-effect exclusion that returned the risk to Akorn to the extent that an event falling into one of these categories disproportionately affects Akorn "as compared to other participants in the industry."[608]

         Under the risk allocation established by the Merger Agreement, Akorn's argument about "industry headwinds" fails because the causes of Akorn's adverse performance were actually business risks allocated to Akorn. The primary driver of Akorn's dismal performance was unexpected new market entrants who competed with Akorn's three top products-ephedrine, clobetasol, and lidocaine.[609] Akorn also unexpectedly lost a key contract to sell progesterone.[610] These were problems specific to Akorn based on its product mix. Although Akorn has tried to transform its business-specific problems into "industry headwinds" by describing them at a greater level of generality, the problems were endogenous risks specific to Akorn's business.

         Assuming for the sake of argument that these were industry effects, they disproportionately affected Akorn. As a result, under the structure of the contractual definition of a Material Adverse Effect, these risks were allocated to Akorn.

         The record evidence shows that Akorn's business has suffered a decline that is disproportionate to its industry peers.[611] Ironically, Akorn concedes the point by asserting that "Akorn was particularly exposed to the risk of these [industry] headwinds."[612]Regardless, to analyze the relative effects of industry-wide conditions, Fischel compared Akorn's performance against the performance of the industry peers selected by J.P. Morgan, Akorn's financial advisor, when preparing its fairness opinion.[613] In each case, Fischel looked at Q2 2017, Q3 2017, Q4 2017, FY 2017, and Q1 2018 results and compared Akorn's actual performance relative to consensus analyst estimates with the actual performance of the peer companies relative to their consensus analyst estimates. For revenue, EBITDA, EBIT, and EPS, Akorn's underperformance in each period was substantially worse than the median and mean of its peers.[614] Fischel prepared the following chart to illustrate the divergence in EBTDA performance:

         (Image Omitted)

         Fischel also compared the changes in analysts' forward-looking estimates for Akorn with the changes in analysts' forward-looking estimates for the peer companies used by J.P. Morgan. He found that analyst estimates of Akorn's revenue, EBITDA, EBIT, and EPS for 2018, 2019, and 2020 have declined disproportionately more than their estimates for Akorn's peers.[615] Fischel prepared the following chart to illustrate the divergence in EBTDA estimates:

         (Image Omitted)

         Based on his analysis, Fischel testified that with "one or two minor exceptions, Akorn not only vastly underperform[ed] the median and the mean of comparable firms, but it underperform[ed] every single one of the comparable firms on all time periods, on all metrics, which is really dramatic underperformance."[616] Akorn's expert recognized that Akorn underperformed the generics industry generally and its peers.[617] He offered no opinion on whether the performance was disproportionate.[618]

         This decision finds that Akorn's dismal performance resulted from Company-specific factors, not industry-wide effects. Assuming for the sake of analysis that the causes were industry-wide effects, this decision credits Fischel's analysis and finds that Akorn was disproportionately affected by the industry-wide effects.[619] For these two independent reasons, Akorn's "industry headwinds" argument fails.

         Akorn has also argued that its poor performance resulted from the restrictions that the Merger Agreement imposed on its ability to continue growing through acquisitions. In subpart (B)(2), the definition of Material Adverse Effect excludes effects resulting from "the . . . performance of this Agreement." In other words, the definition allocates agreement-related risks to Fresenius. As Akorn sees it, Fresenius cannot criticize its poor results when the Merger Agreement prevented Akorn from buying other companies.

         This argument fails for multiple reasons. First, Akorn suffered a Material Adverse Effect because of the sharp downturn in its existing business. It was the performance of that business that fell off a cliff shortly after the parties signed the Merger Agreement. The question is not whether Akorn might have been able to hide that downturn and post overall growth by buying other companies. The problem is what happened to the business that Fresenius agreed to buy. Second, the downturn happened so quickly as to defeat the suggestion that it was caused by the Merger Agreement's restrictions on acquisitions. Acquisitions take time. It was Akorn's legacy business that took a nosedive. Third, Akorn has not only grown through acquisitions. Akorn historically grew both organically and through acquisitions.[620] Fourth, if Akorn wanted to pursue an acquisition, it could have sought consent from Fresenius. Akorn has not pointed to any acquisition that Fresenius blocked. The no-acquisitions argument does not bring Akorn within an exception to the definition of a Material Adverse Effect.

         3. Whether Fresenius Knowingly Accepted The Risks That Led To The General MAE.

         Akorn contends most vigorously that Fresenius cannot claim an MAE based on any risks that Fresenius (i) learned about in due diligence or (ii) generally was on notice about because of its industry knowledge and did not thoroughly investigate in due diligence. Akorn relies for its position on Chief Justice Strine's observation in IBP that "[m]erger contracts are heavily negotiated and cover a large number of specific risks explicitly," and that consequently, even a "broadly written" MAE provision "is best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner."[621] In my view, Akorn goes too far by transforming "unknown events" into "known or potentially contemplated risks." The legal regime that Akorn argues for would replace the enforcement of a bargained-for contractual provision with a tort-like concept of assumption of risk, where the outcome would turn not on the contractual language, but on an ex-post sifting of what the buyer learned or could have learned in due diligence.

         The "strong American tradition of freedom of contract . . . is especially strong in our State, which prides itself on having commercial laws that are efficient."[622] "Delaware courts seek to ensure freedom of contract and promote clarity in the law in order to facilitate commerce."[623] "When parties have ordered their affairs voluntarily through a binding contract, Delaware law is strongly inclined to respect their agreement, and will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract."[624] Requiring parties to live with "the language of the contracts they negotiate holds even greater force when, as here, the parties are sophisticated entities that bargained at arm's length."[625] "The proper way to allocate risks in a contract is through bargaining between parties. It is not the court's role to rewrite the contract between sophisticated market participants, allocating the risk of an agreement after the fact, to suit the court's sense of equity or fairness."[626]

         The MAE definition in this case uses exceptions and exclusions to allocate risks between the parties. The MAE definition could have gone further and excluded "certain specific matters that [the seller] believes will, or are likely to, occur during the anticipated pendency of the agreement, "[627] or matters disclosed during due diligence, or even risks identified in public filings.[628] Or the parties could have defined an MAE as including only unforeseeable effects, changes, events, or occurrences.[629] They did none of these things. Instead, for purposes of a General MAE, they agreed upon a condition that turned on whether an effect, change, event, or occurrence occurred after signing and constituted or would reasonably be expected to constitute an MAE.[630] The contractual language is forward-looking and focuses on events. It does not look backwards at the due diligence process and focus on risks.

         As discussed later in this decision, the evidence shows that the events that resulted in a General MAE at Akorn were unexpected. But assuming for the sake of argument that Akorn was correct and Fresenius had foreseen them, I do not believe that would change the result given the allocation of risk under the definition of a Material Adverse Effect set forth in the Merger Agreement. The IBP decision interpreted a broad MAE clause that did not contain lengthy lists of exceptions and exclusions, and then-Vice Chancellor Strine did not suggest that he was prescribing a standard that would govern all MAE clauses, regardless of what the parties specifically bargained for in the contract. Nor did Hexion, which adhered closely to IBP on this point. Instead, both cases held that buyers could not rely on the manifested consequences of widely known systematic risks. In IBP, the financial performance of the seller (a beef producer) suffered due to cyclical effects in the meat industry, exacerbated by a harsh winter that put even greater pressure on the performance of the buyer (a chicken producer).[631] In Hexion, the performance of the seller (a chemical company) suffered due to macroeconomic challenges, including "rapidly increased crude oil and natural gas prices and unfavorable foreign exchange rates."[632]Although the decisions framed the analysis in terms of known versus unknown risks, both cases actually allocated systemic risks to the buyers, consistent with general contracting practice and the clause at issue in this case.

         Assuming for the sake of argument that IBP and Hexion did establish an overarching standard for analyzing every MAE, those decisions speak in terms of "unknown events," not contemplated risks.[633] As Akorn's management admitted, the events that gave rise to Akorn's dismal performance were unexpected.[634] Indeed, when announcing the Merger Agreement on April 24, 2017, Akorn reaffirmed the sales and earnings guidance that management had provided on March 1, 2017, which projected revenue of $1, 010-$1, 060 million and adjusted EBITDA of $363-$401 million.[635] Akorn underperformed the low end of its revenue guidance by 17% and the low end of its EBITDA guidance by 31%. If Akorn management had anticipated the competition and price erosion that was on the horizon, they would not have reaffirmed their guidance.

         Finally, Fresenius did not know about the specific events that resulted in Akorn's collapse. Fresenius expected that Akorn would not meet its internal projections and adopted lower forecasts of its own, but Akorn dramatically underperformed Fresenius's less optimistic estimates.[636] Bauersmith was the resident pessimist on the Fresenius deal team, and Akorn even performed worse than he anticipated.[637]

         In my view, Fresenius did not assume the risk of the problems that resulted in a General MAE at Akorn. Instead, the General MAE Condition allocated those risks to Akorn.

         4. The Finding Regarding A General MAE

         Fresenius proved that Akorn suffered a General MAE. Fresenius carried its heavy burden and showed that the decline in Akorn's performance is material when viewed from the longer-term perspective of a reasonable acquirer, which is measured in years. Fresenius also showed that Akorn's poor performance resulted from Company-specific problems, rather than industry-wide conditions. Nevertheless, assuming for the sake of argument that the results could be attributed to industry-wide conditions, those conditions affected Akorn disproportionately. Neither Akorn nor Fresenius knew about the events that caused Akorn's problems, which were unforeseen. Because Akorn suffered a General MAE, the condition in Section 6.02(c) has not been met, and Fresenius cannot be forced to close.

         B. The Failure Of The Bring-Down Condition

         The next question is whether Fresenius validly terminated the Merger Agreement under Section 7.01(c)(i) because the Bring-Down Condition could not be met. The BringDown Condition permits Fresenius to refuse to close if Akorn's representations are not true at closing, except where the deviation from Akorn's as-represented condition would not reasonably be expected to constitute a Material Adverse Effect. To defeat the Bring-Down Condition, Fresenius relies on the Regulatory Compliance Representations, so the analysis boils down to whether Akorn would reasonably be expected to suffer a Regulatory MAE. Once again, because Fresenius sought to excuse its performance under the Merger Agreement, Fresenius bore the burden of proof.[638]

         In a public-company acquisition, it is standard practice to require that the seller's representations be true at signing and to condition the buyer's obligation to close on the seller's representations also being true at closing.[639] "From a business point of view, the condition that the other party's representations and warranties be true and correct at closing is generally the most significant condition for Buyers . . . . This is what protects each party from the other's business changing or additional, unforeseen risks arising before closing."[640]

         Section 7.01(c)(i) gives Fresenius the right to terminate if the Bring-Down Condition cannot be met. Formatted for greater legibility, Section 7.01(c)(i) states:

         This Agreement may be terminated and the [Merger] abandoned at any time prior to the Effective Time (except as otherwise expressly noted), whether before or after receipt of the Company Shareholder Approval: . . .

(c) by [Fresenius Kabi]: (i) if the Company shall have breached any of its representations or warranties . . ., which breach . . .
(A) would give rise to the failure of a condition set forth in Section 6.02(a) [the Bring-Down Condition] . . . and
(B) is incapable of being cured . . . by the Outside Date . . .
provided that [Fresenius Kabi] shall not have the right to terminate this Agreement pursuant to this Section 7.01(c)(i) if [Fresenius Kabi] or Merger Sub is then in material breach of any of its representations, warranties, covenants or agreements hereunder . . . .

         Whether Fresenius could terminate the Merger Agreement pursuant to Section 7.01(c)(i) therefore turns on three questions: (i) whether Akorn breached a representation in a manner that would cause the Bring-Down Condition to fail, (ii) whether the breach could be cured by the Outside Date, and (iii) whether Fresenius was otherwise in material breach of its obligations under the Merger Agreement. The answer to the third question also determines whether Fresenius may terminate based on the failure of the Covenant Compliance Condition, so this decision addresses it separately.

         1. The Operation Of The Bring-Down Condition

         Section 6.02(a) is the Bring-Down Condition. Formatted for greater legibility, it states:

The obligations of [Fresenius Kabi] and Merger Sub to effect the Merger shall be subject to the satisfaction (or written waiver by [Fresenius Kabi], if permissible under applicable law) on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and warranties of the Company
(i) set forth in Section 3.01(a), Section 3.02(a), Section 3.02(b), Section 3.03(a)-(c), Section 3.14 and Section 3.20 shall be true and correct in all material respects as of the date hereof and as of the Closing Date, with the same effect as though made as of such date (except to the extent expressly made as of an earlier date, in which case as of such earlier date) and
(ii) set forth in this Agreement, other than in those Sections specifically identified in clause (i) of this paragraph, shall be true and correct (disregarding all qualifications or limitations as to "materiality", "Material Adverse Effect" and words of similar import set forth therein) as of the date hereof and as of the Closing Date with the same effect as though made as of such date (except to the extent expressly made as of an earlier date, in which case as of such earlier date), except, in the case of this clause (ii), where the failure to be true and correct would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. . . .

         The Bring-Down Condition in the Merger Agreement thus requires Akorn's representations to have been true "as of the date hereof," viz., at signing, and "as of the Closing Date."

         In this case, Fresenius asserts that Akorn breached the Regulatory Compliance Representations found in Section 3.18 of the Merger Agreement. In that section, Akorn made extensive representations regarding its compliance with regulatory requirements. Each of the relevant representations contained specific materiality or MAE qualifiers that applied for purposes of evaluating the accuracy of those representations in their own right, such as if Fresenius had asserted a fraud claim. For purposes of testing the Bring-Down Condition, the language of the condition scrapes away those specific qualifiers in favor of an aggregate MAE qualifier.[641] Formatted for greater legibility, the following reproduction of the Regulatory Compliance Representations omits the specific qualifiers and the portions that are not at issue in this case:

(a) The Company and its Subsidiaries are and, to the Knowledge of the Company, since July 1, 2013, (1) have been in compliance with
(A) all applicable Laws (including all rules, regulations, guidance and policies) relating to or promulgated by the U.S. Food and Drug Administration (the "FDA"), DEA, EMEA and other Healthcare Regulatory Authorities and
(B) all Healthcare Regulatory Authorizations, including all requirements of the FDA, DEA, the EMEA and all other Healthcare Regulatory Authorities, in each case that are applicable to the Company and its Subsidiaries, or by which any property, product, filing, submission, registration, declaration, approval, practice (including without limitation, manufacturing) or other asset of the Company and its Subsidiaries is bound, governed or affected . . . .
(b) All . . . reports, documents, claims and notices required or requested to be filed, maintained, or furnished to any Healthcare Regulatory Authority by the Company and its Subsidiaries since July 1, 2013, have been so filed, maintained or furnished and, to the Knowledge of the Company, were complete and correct . . . on the date filed (or were corrected in or supplemented by a subsequent filing) . . . .
The Company and its Subsidiaries are and have been, since July 1, 2013, in compliance with current good manufacturing practices and have maintained appropriate mechanisms, policies, procedures and practices to ensure the prompt collection and reporting of adverse event or any other safety or efficacy data, notifications, corrections, recalls and other actions required by Law related to their products . . . .
* * *
(d) Since July 1, 2013, neither the Company nor any of its Subsidiaries (i) have made an untrue statement of . . . fact or fraudulent statement to the FDA or any other Governmental Authority, (ii) have failed to disclose a . . . fact required to be disclosed to the FDA or other Governmental Authority, (iii) have committed any other act, made any statement or failed to make any statement, that (in any such case) establishes a reasonable basis for the FDA to invoke its Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Final Policy or (iv) have been the subject of any investigation by the FDA pursuant to its Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Final Policy . . . .

         When Section 3.18 and the Bring-Down Condition are read together, the operative question becomes whether Fresenius proved by a preponderance of the evidence that (i) the Regulatory Compliance Representations were inaccurate and (ii) the deviation between Akorn's as-represented condition and its actual condition was so great that it would reasonably be expected to result in a Material Adverse Effect.[642]

         The "reasonably be expected to" standard is an objective one.[643] When this phrase is used, "[f]uture occurrences qualify as material adverse effects."[644] As a result, an MAE "can have occurred without the effect on the target's business being felt yet."[645] Even under this standard, a mere risk of an MAE cannot be enough. "There must be some showing that there is a basis in law and in fact for the serious adverse consequences prophesied by the party claiming the MAE."[646] When evaluating whether a particular issue would reasonably be expected to result in an MAE, the court must consider "quantitative and qualitative aspects."[647] "It is possible, in the right case, for a party . . . to come forward with factual and opinion testimony that would provide a court with the basis to make a reasonable and an informed judgment of the probability of an outcome on the merits."[648]

         2. Qualitative Significance

         The qualitative dimension of the MAE analysis strongly supports a finding that Akorn's regulatory problems would reasonably be expected to result in a Material Adverse Effect. There is overwhelming evidence of widespread regulatory violations and pervasive compliance problems at Akorn. These problems existed at signing and got worse, rather than better, during the period between signing and when Fresenius served its termination notice. Akorn does not dispute that it has problems, only their extent and seriousness.

         As a generic pharmaceutical company, Akorn must comply with the FDA's regulatory requirements. This is no small thing; it is an essential part of Akorn's business. It was also essential to Fresenius, which cared a great deal about Akorn's pipeline of ANDAs and new products. The value of Akorn's pipeline depended on Akorn's ability to comply with the FDA's regulatory requirements.

         Under the FDA's data integrity requirements, Akorn must be able "to prove the origin, transmission, and content of the company's data and that data is what it is purported to be."[649] Data must meet be attributable, legible, contemporaneously recorded, original or a true copy, and accurate, as well as complete, consistent, enduring and available.[650] A properly functioning data integrity system, including an effective IT infrastructure, is essential for meeting these requirements.[651]

         Akorn has pervasive data integrity and compliance problems that prevent Akorn from being able to meet these standards. As discussed in the Factual Background, Akorn hired Cerulean in 2016 to assess its data integrity systems. Avellanet testified that some of Akorn's data integrity failures were so fundamental that he would not even expect to see them "at a company that made Styrofoam cups," let alone a pharmaceutical company manufacturing sterile injectable drugs.[652] In his opinion, Akorn's data integrity issues were among the "top three worst" of the 120 pharmaceutical companies that he has assessed, [653]a notorious status given that his practice only involves companies that "have problems."[654] He believed that the "FDA would get extremely upset" about Akorn's lack of data integrity "because this literally calls into question every released product [Akorn has] done for however many years it's been this way."[655]

         As discussed at greater length in the Factual Background, Cerulean's report on the Decatur facility identified seven critical, seven major, and at least five minor nonconformities.[656] Cerulean's report on the Somerset facility was never completed because Akorn's IT department failed to provide adequate support, [657] but the preliminary report identified three critical findings and three major findings.[658] Avellanet believed that some of the violations were so severe that Akorn's senior management should be concerned about potential criminal liability.[659] Akorn made "no effort" to schedule a date to complete the Somerset inspection[660] and cancelled Cerulean's previously scheduled assessment at Amityville.[661]

         Akorn's internal quality experts confirmed the validity of the critical deficiencies that Cerulean identified.[662] They also determined that Akorn essentially ignored them. In March 2018, the GQC team found that Akorn had not yet addressed the vast majority of the deficiencies.[663] Somerset had done absolutely nothing to address its deficiencies.[664]Decatur likewise had "failed to appropriately investigate and remediate" Cerulean's findings, having only completed "32% of the corrective actions."[665] These findings are consistent with a contemporaneous email written by Franke, who told Avellanet in late 2017 that ...


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