Akorn Inc.’s CEO stepped down after the Delaware Supreme Court ruled that a rapid downturn in its business was grounds for Fresenius SE to walk away from a $4.3 billion buyout of the generic drugmaker.
Officials of Akorn said on Friday that Chief Executive Raj Rai was retiring now that its dispute with the German pharma company had been ended by the appellate court’s decision. A panel of judges upheld a finding that a drop in revenue and other problems prior to the deal’s closing triggered Fresenius’s right to abandon the buyout.
Shares of Akorn plunged Friday as much as 37 percent, to their lowest intraday price in more than eight years. Trading in the stock was halted for a time after the appeals court issued its three-page ruling.
Rai, a protege of John Kapoor, who holds 23 percent of Akorn, agreed with company directors that his departure “will be treated as a resignation for good reason,” according to an Akorn filing Friday with the U.S. Securities and Exchange Commission. Kapoor, who served as Akorn’s CEO from 1991 to 1998, is facing federal racketeering charges related to his new company, Insys Therapeutics Inc. He is accused of bribing doctors to get them to ramp up prescriptions of an opioid painkiller, and has pleaded not guilty.
Rai, who was in court in Delaware on Wednesday for the appellate arguments, had total compensation for 2016 of more than $7 million, according to SEC filings. Under an Akorn severance plan, he would have been entitled to a $2.1 million cash payment as of Dec. 31, 2017, had he been terminated “without cause or good reason,” according to another regulatory filing. He will stay on until his successor is named, company officials said.
Rai’s departure is good for Akorn, Piper Jaffray analyst David Amsellem wrote in an email late Friday. The company “could benefit from a new leadership team that is better versed in manufacturing operations and generics R&D,” Amsellem wrote.
Jennifer Bowles, a spokeswoman for Akorn, didn’t immediately return a call, after regular business hours, seeking comment on whether Rai was stepping down over problems highlighted in the Fresenius case. In its statement, the Lake Forest, Illinois-based company said it would “move forward and rebuild shareholder value” after the “disappointing decision” in the Fresenius case.
Many high-profile disputes over mergers are heard in Delaware, corporate home to more than half the nation’s public companies and more than 60 percent of Fortune 500 firms. Its chancery court specializes in quickly hearing big-dollar business cases.
But the case marked the first time the Delaware trial court had decided whether an acquiring company can cancel a purchase because the target’s business experienced a “material adverse change” before the deal closed, and the first time the Delaware Supreme Court had upheld such a finding.
Akorn sued in April after Fresenius pulled out of the deal. Fresenius had cited the U.S. company’s plunging revenues and operational problems. As the deal was being finalized, Fresenius officials discovered Akorn wouldn’t meet profit projections. An anonymous whistle-blower also tipped off Fresenius executives about a longstanding pattern of problems in Akorn’s drug-development and manufacturing systems.
Akorn officials claimed Fresenius focused on minor regulatory and manufacturing miscues as a pretext for canceling the buyout after suffering “buyer’s remorse.” Fresenius had experienced some of the same kinds of operational problems, they said. Rai testified during the trial that officials of the German drugmaker were smearing his firm’s reputation with false claims about data insecurity and phony test results.
After the weeklong trial, Judge Travis Laster ruled in October that the deterioration of Akorn’s business was severe enough to allow Fresenius to walk away. Akorn appealed. The appellate court upheld Laster’s 246-page ruling.
Matthias Link, a spokesman for Fresenius, of Bad Homburg, called the decision “very welcome.”
The case is Akorn Inc. v. Fresenius Kabi AG, No. 535-2018, Delaware Supreme Court (Dover).