CURRENT MONTH (October 2021)

Domestic M&A

Delaware Chancery Court Dismisses Pacira BioSciences’ Claims of Post-Merger Interference, Upholds Milestone Payments to MyoScience in Wake of 2019 Merger

By Patton Webb

On October 25, 2021, the Delaware Court of Chancery (the “Court”) issued a memorandum opinion addressing several claims made by Pacira BioSciences, Inc., a leading provider of non-opioid pain management solutions (“Pacira”), against Fortis Advisors, LLC, a company providing post-closing representation to shareholders in relation to mergers, and three former employees (the “Defendants”) of MyoScience, a medical device company that was acquired by Pacira pursuant to a merger agreement between the two companies (“MyoScience”). The merger closed in April 2019.

Pacira acquired MyoScience for $120 million cash, subject to upward adjustment in the event certain milestones were reached. Such upward adjustments were to be paid to former MyoScience shareholders. These milestone payments were contingent on whether the Centers for Medicare and Medicaid (“CMS”) would reimburse treatments using the MyoSciences technologies acquired pursuant to the merger at certain dollar thresholds. Specifically, if the reimbursement rates for certain procedures using MyoScience technologies met specified thresholds, the former stockholders could receive up to $50 million in payments.

At the center of the complaint was the allegation that three former MyoScience employees, two of whom were now employed by Pacira, coordinated to ensure that only the minimum threshold for the payout of the milestones would be achieved. Specifically, the complaint alleged that the legacy employees now working at Pacira conspired with the third defendant, who was part of an advisory committee to Fortis. The two employee-defendants allegedly shared confidential information relating to Pacira’s efforts to affect the reimbursement rates triggering the milestone payments in the merger agreement. The complaint essentially alleged that these two defendants acted against Pacira’s interest, sharing information with the third defendant in order to ensure the milestone payment triggers were satisfied.

Pacira’s first claim alleged that the Defendants breached two provisions of the merger agreement. The first provision, the “Exclusive Rights Provision,” provides that the “sole and exclusive right of the [former MyoScience shareholders] . . . will be to receive . . . the Milestone Payments payable pursuant to Section 1.15.” The second provision, the “Sole Discretion Provision,” provides that Pacira “will have the right to operate the business of [Pacira CryoTech] as it chooses, in its sole discretion, except as expressly set forth in this Section.” Pacira argued that the Sole Discretion Provision imposed an obligation on the Defendants to “refrain from interfering” in Pacira’s internal affairs and operations, and that the Exclusive Rights Provision obligated the Defendants to “limit their post-merger role to potentially receiving milestone payments.” According to Pacira, the Defendants breached these provisions by coordinating to ensure the desired CMS reimbursement rates were finalized, allowing the milestone payments to occur.

The Court disagreed, noting that the language of the Exclusive Rights Provision did not impose any affirmative obligations on the Defendants to behave in a certain way. Instead, according to the Court, it merely served as a disclaimer of any further obligations owed by Pacira to the former shareholders of MyoScience. The Court supported this with similar interpretations of “sole discretion” provisions from several precedent Chancery Court decisions. The Court found that, in their strained interpretation of the terms of the agreement, Plaintiffs had “failed to specify an obligation that the Individual Defendants breached,” and so the Court accordingly dismissed the claim.

Eighth Circuit Affirms Dismissal of Aggrieved Shareholders’ § 10(b) Securities Fraud Claim in Connection with Merger of Meredith Corp. and Time Inc.

By Patton Webb

On October 18, 2021, the U.S. Court of Appeals for the Eighth Circuit (the “Court”) affirmed the dismissal of a class action claim brought against Meredith Corp., an American media conglomerate (“Meredith”), and several of its executives, by shareholders of Meredith (“Plaintiffs”), alleging securities fraud in relation to several representations made by Meredith executives in connection with Meredith’s 2018 acquisition of Time Inc., an American media corporation that owned several prominent magazine brands. The complaint alleged securities fraud under § 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and identified 138 statements made by Meredith executives alleged to be false or misleading.

Under § 10(b) of the Exchange Act, a defendant is only liable if “the plaintiff suffered economic loss as a result of relying on a material misrepresentation or omission that the defendant made with the requisite mental state.” Congress has created stringent pleading standards relating to the mental state requirement, requiring that the complainant, for each alleged misrepresentation, “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”

The Court noted that not all inaccurate statements are actionable under § 10(b). Two broad categories of statements do not meet the materiality standard under § 10(b). First, Congress has categorically excluded forward-looking declarations or predictions that are “accompanied by meaningful cautionary statements,” which identify factors that could prevent the forward-looking statements from proving truthful. Such properly qualified forward-looking statements cannot serve as the basis for a § 10(b) claim unless the declarant made the statement knowing of its falsity. The second category of statements that do not meet the materiality threshold are those statements that would not sway the decision-making of a hypothetical “reasonable investor.” According to the Court, these statements often take the form of corporate “puffery” and include vague optimistic statements and obvious hyperbole. The Court provided several examples of such statements—for example, claims that a company is “leading the race,” is on track for “significant growth,” or is “recession-resistant” would not satisfy the materiality requirement.

After reviewing whether the statements alleged in the complaint were material misrepresentations, the Court found that all but one failed to meet the materiality threshold. According to the Court, all 137 of those statements were properly categorized as either (1) properly supported forward-looking statements or (2) standard corporate puffery that would not sway a “reasonable investor” and thus could not serve as the basis of a § 10(b) claim.

The remaining statement was allegedly made by Thomas Harty, who was the CEO of Meredith at the time the merger occurred. According to the complaint, Harty stated that Meredith had “fully integrated [its] HR, finance, legal, and IT functions” in February 2019. To support the claim that the statement was a material misrepresentation, Plaintiffs also included a statement from a former Meredith employee indicating that legacy Time and Meredith employees were still operating on different software systems. The Court found that, while that the remaining statement may qualify as a material misrepresentation, it was not actionable under § 10(b) because it failed to meet the state of mind requirement.

The Court noted that in instances where the challenged statement is not a forward-looking statement, the statement must be made with “severe recklessness” for § 10(b) liability to attach. The Court found that there was no “strong inference” that the statement was made with severe recklessness. The Court found that any falsity, if present, was understandable, given that Harty made the statement while overseeing a major corporate consolidation during which he had “limited information about the inner workings” of the legacy firm’s software systems. As a result, the Court found that the statement did not satisfy the state of mind requirement and affirmed the dismissal of the Plaintiffs’ claim.

Delaware Court of Chancery Uses New Demand Futility Test to Dismiss Talos Investor Suit

By Noah Lewis

On September 30, 2021, the Delaware Court of Chancery (the “Court”) dismissed a suit brought by an investor (the “Investor”) of Talos Energy Inc. (“Talos”), a leading offshore energy company focused on oil and gas exploration, accusing the investment firms Apollo Global Management Inc. (“Apollo”) and Riverstone Holdings LLC (“Riverstone”), both major shareholders of Talos, of using Talos to complete unfair acquisitions.

In a complaint filed May 29, 2020, the Investor sued the board of Talos, Apollo and Riverstone. The Investor alleged that after Talos completed a 2018 merger with Stone Energy Corporation, a Louisiana-based oil and gas exploration and production company (“Stone Energy”), for $2.5 billion, Apollo and Riverstone unlawfully caused Talos to purchase Whistler Energy II LLC (“Whistler Energy”), a company wholly owned by Apollo. Specifically, the Investor alleged that Talos’s financial advisor inflated the value of Whistler Energy, which allegedly benefitted Riverstone by $200 million in the Apollo-backed transaction.

The Court, however, dismissed the Investor’s suit against the board of Talos, Apollo and Riverstone. The Court noted that the Investor did not have a right to sue pursuant to a recent Delaware Supreme Court ruling in a Facebook share reclassification case. In that case, the Delaware Supreme Court produced a new demand futility test (the “Test”). The purpose of the Test is to determine whether a pre-suit demand by the plaintiff to the company’s board to take action prior to filing suit would have been futile. The three-part Test requires the court to determine (1) whether a director received a material personal benefit from the alleged misconduct, (2) whether the director faces a substantial likelihood of liability from the alleged misconduct, and (3) whether the director lacks independence from an individual who received a material personal benefit from the alleged misconduct. If the Test applies to a majority of the board, then pre-suit demand would have been futile, and the suit can proceed.

Applying the Test to the Investor’s suit, the Court ruled that the Investor failed to prove that the majority of Talos’s board members satisfied the test. As a result, the Court ruled that the Investor’s pre-suit demand to the Talos board would not have been futile, and the suit could therefore not proceed.

International M&A

Supreme Court of Delaware Affirms Ruling Clearing AstraZeneca from $275 Million Liability

By Parker Davis

On October 21, 2021, the Supreme Court of the State of Delaware (the “Court”) affirmed the judgment of the Court of Chancery of the State of Delaware (the “Court of Chancery”) to the benefit of AstraZeneca PLC, a global biopharmaceutical company (“AstraZeneca”).

The Court upheld the Court of Chancery’s finding that AstraZeneca’s Zeneca, Inc., which merged with Astra AB to form AstraZeneca in 1999 (“Zeneca”), and MedImmune, LLC, AstraZeneca’s biologics research and development subsidiary (“MedImmune”) were not liable for $275 million in milestone payments to former shareholders of Amplimmune LLC, a biologics company (“Amplimmune”). Zeneca paid $225 million to acquire Amplimmune and incorporated the target into its MedImmune branch in 2016.

In the original suit filed in the Court of Chancery in 2017, the agent for the stockholders, David Kabakoff, Ph.D. (the “Agent”), argued that Zeneca and MedImmune had not used commercially reasonable efforts related to the development process of two cancer-related drug candidates. The Agent claimed that Zeneca and MedImmune owed the Amplimmune shareholders $275 million based on breaches of provisions in the merger agreement governing the four milestone payments. The Court affirmed the Court of Chancery’s prior decision finding that MedImmune had not achieved the milestones required under the merger agreement and therefore the Amplimmune shareholders were not entitled to the milestone payments from AstraZeneca.

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