Court Relies on the Testimony of Compass Lexecon Senior Consultant Professor Kenneth Lehn
On November 1, 2017, Boston Scientific entered into an agreement to acquire Channel Medsystems conditional on Channel Medsystems receiving FDA approval for their Cerene device. Boston Scientific terminated this agreement on May 11, 2018 alleging that Channel Medsystems had breached its representations and warranties under the agreement, and that such breaches gave rise to a Material Adverse Effect (“MAE”). On September 12, 2018, Channel Medsystems filed a complaint in the Delaware Court of Chancery seeking a declaratory judgement that Boston Scientific had breached its obligations under the merger agreement, that no MAE had occurred, that Channel Medsystems did not breach any representations or warranties that would reasonably be expected to have resulted in an MAE, and that Boston Scientific had no right to terminate the merger agreement. On October 3, 2018, Boston Scientific filed counterclaims for fraud based on alleged misrepresentations and omissions regarding Channel Medsystems’ quality systems, seeking rescission of the merger agreement based on breaches of various representations and warranties, and seeking a declaratory judgement that Boston Scientific had the right to terminate the merger.
Compass Lexecon and Senior Consultant Professor Kenneth Lehn were retained by Paul, Weiss, Rifkind, Wharton & Garrison LLP, counsel for Channel Medsystems to respond to Boston Scientific’s valuation expert who purported to show that Channel Medsystems had suffered a MAE. A four-day trial was held in the Delaware Court of Chancery in April 2019. Professor Lehn testified, among other things, that Boston Scientific’s expert inappropriately included expected synergies from the transaction in his valuation of Channel Medsystems and failed to account for any uncertainty as to whether the FDA would approve the Cerene device. Professor Lehn also testified that Boston Scientific’s expert failed to independently validate key assumptions provided by Boston Scientific, including: free cash flow projections, the discount rate, the terminal value, and the implicit assumption that delays related to the fraud would affect Channel Medsystem’s free cash flows in perpetuity.
On December 18, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery, ruled that Boston Scientific had failed to prove that Channel Medsystems had suffered a MAE and was therefore not entitled to terminate its merger agreement. The Court also ruled that Boston Scientific had breached its obligations to use commercially reasonable efforts to consummate the merger and had failed to prove its counterclaim, that it was fraudulently induced to invest approximately $11 million in Channel Medsystems in making a series of investments from 2015 to 2017.
Chancellor Bouchard’s opinion relied upon Professor Lehn’s testimony which was described by the Court as credible and without contradiction. For example, based on Professor Kenneth Lehn’s testimony, Chancellor Bouchard found that Boston Scientific’s expert had failed to provide a reliable basis for assuming cash flow delays of two years (which as Professor Lehn testified accounted for between 91% and 95% of the alleged reduction in value), thus “undermin[ing] the soundness of the key driver of his model.” Chancellor Bouchard also relied on Professor Lehn’s testimony in finding that the increase in discount rate used by Boston Scientific’s expert to purportedly reflect Channel Medsystem’s increased risk profile “was little more than a non-rigorous ‘fudge factor.’”
Professor Lehn and Compass Lexecon worked closely with attorneys at Paul, Weiss, Rifkind, Wharton & Garrison LLP including Andrew G. Gordon, Jaren Janghorbani, Daniel Mason, Paul A. Paterson, and Andrew J. Markquart. We also worked closely William M. Lafferty from Morris, Nichols, Arsht & Tunnell LLP. Professor Lehn was supported by a Compass Lexecon team led by Adel Turki in Compass Lexecon’s New York office that included Michael Kwak and Monica Xie.