On July 9, 2021, the Delaware Court of Chancery issued a post-trial opinion in Bardy Diagnostics, Inc. v. Hillrom, Inc., C.A. No. 2021-0175-JRS, ordering specific performance in favor of Wilson Sonsini Goodrich & Rosati’s client, Bardy Diagnostics, Inc. (BardyDx), the seller under a merger agreement with Hill-Rom, Inc. (Hillrom). The Wilson Sonsini team included partners David Berger, Steven Guggenheim, and Brad Sorrels; Of Counsel Andrew Cordo; senior counsel Jessica Hartwell; and associates Lindsay Faccenda, Ben Potts, Nora Crawford, Jeremy Gagas, and Leah León.

In late February 2021, Hill-Rom refused to close its acquisition of BardyDx, a medical device company that offers ambulatory cardiac monitoring devices, claiming that a change in the Medicare reimbursement rates applicable to BardyDx’s products constituted a material adverse effect. Hillrom also contended that it was excused from closing the merger because the rate decrease “frustrated the purpose” of the merger agreement. 

In its detailed 112-page memorandum opinion, the court concluded that the rate change did not “substantially threaten the overall earnings potential of [BardyDx] in a durationally-significant manner,” because Hillrom did not meet its burden of proving that it was reasonably expected that the current Medicare reimbursement rates—which are subject to ongoing regulatory changes—would endure for a commercially reasonable period. The court further concluded that the exclusion in the definition of Material Adverse Effect for changes in “Health Care Laws” in the parties’ agreement encompassed the Medicare rate change, and the exception for such changes that had a “disproportionate impact” on BardyDx as compared to “similarly situated” companies was not applicable. The court also rejected Hillrom’s frustration of purpose argument, focusing, among other things, on Bardy’s clinically superior technology. 

The BardyDx decision marks another example of the Court of Chancery declining to find a material adverse effect and highlighting the difficult burden faced by buyers attempting to use a Material Adverse Effect provision to excuse their performance.

For more information on the Delaware Court of Chancery opinion, please contact any member of Wilson Sonsini’s corporate governance litigation or corporate governance practices.