United States: February 2015 Corporate Alert

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Delaware Chancery Court Awards $194 Million in Expectation Damages

The Delaware Chancery Court awarded PharmAthene, Inc., a pharmaceutical company, $194 million on its claim against SIGA Technologies, Inc., another pharmaceutical company, for failure to negotiate a drug license in good faith.  PharmAthene and SIGA executed a merger agreement which contained a provision that if the merger fell through, the parties would negotiate a drug license in good faith pursuant to the term sheet attached to the merger agreement.  SIGA subsequently terminated the merger agreement and, although the parties began negotiating the drug license, by that time, SIGA's overall financial position and business outlook had dramatically improved.  SIGA proposed license terms materially different from those contained in the term sheet.  In response, PharmAthene sued SIGA.

The Delaware Supreme Court held that SIGA had breached the covenant to negotiate in good faith by demanding terms that were not "substantially similar" to those contained in the term sheet. The Chancery Court initially awarded PharmAthene expectation damages. The Supreme Court found PharmAthene's evidence of expectation damages to be too speculative and remanded the case back to the Chancery Court for reconsideration.  In remanding the case, the Supreme Court ruled that expectation damages may be awarded only for losses that can be proven with reasonable certainty.

On remand, the Chancery Court awarded PharmAthene $194 million, such amount representing the present value of expected future profits from sales of the drug at issue.  In awarding expectancy damages to PharmAthene, the Chancery Court relied in part upon new evidence introduced since the commencement of the lawsuit that SIGA had entered into a contract to sell the drug at issue to the federal government.

The prior court proceedings in this case were reported in the November 2011 and June 2013 Corporate Alerts.

PharmAthene v. SIGA Technologies, Inc., C. A. No. 2627 - VCP (Del. Ch. Ct. Jan. 15, 2015)

Delaware Chancery Court Rules Interested Directors Are Not Controlling Stockholders

The Delaware Chancery Court ruled that the business judgment standard of review, rather than the heightened entire fairness standard, applied to a sale of assets transaction.  Under the transaction at issue, the company purchased assets from an entity controlled by two directors of the company.  The transaction, however, was approved by the company's audit committee consisting of the company's three other directors.

The claimants unsuccessfully argued that the heightened standard of review should apply because the two interested directors should be treated as controlling stockholders.  The interested directors owned less than 50% of the company's common stock.  The court, relying on two of its recent opinions, ruled that minority stockholders (such as the interested directors) should be viewed as controllers only in situations where they exercise actual control over the board of directors.  The court found no evidence was presented that the interested directors exerted actual control over the board of directors in connection with the asset sale.

In re Sanchez Energy Derivative Litig., No. 9132 - VCG (Del. Ch. Ct. Nov. 11, 2014)

Delaware Chancery Court Refuses to Apply Implied Covenant of Good Faith and Fair Dealing

The Delaware Chancery Court dismissed a breach of contract claim which arose under a patent purchase agreement.  The purchase of the patents was conditioned upon receipt of approval by an Israeli governmental agency.  Under the patent purchase agreement, such approval was to be on terms "satisfactory in the sole discretion (which for purposes of this condition shall not, to the extent permitted by law, be subject to the implied covenant of good faith and fair dealing)" of the purchaser.  The court held that, under the agreement, whether the terms of the approval were satisfactory to Networks was "a decision that is unreviewable in the sense that, if it is timely taken, the defendant could then ... terminate." 

The seller under the patent purchase agreement argued unsuccessfully that the purchaser's exercise of its sole discretion was qualified by either (i) a "commercially reasonable efforts" standard contained in another provision of the agreement or (ii) a default good faith standard that could not be contracted away.  In ruling in favor of the purchaser, the court found as to the first argument that it was unreasonable to assume that the disclaimer of the implied covenant of good faith and fair dealing would result in the application of the higher "commercially reasonable efforts" standard.  With respect to the second argument, the court ruled that the provision's "language ... could not be any clearer," and that it was, in fact, "as clear as it gets."

Orckit Communications Ltd. v. Networks Inc. et al., C.A. No. 9658 (Del. Ch. Ct. Jan. 28, 2015)

Delaware Chancery Court Rules $112 Million Termination Fee Conditions Not Satisfied

The Delaware Chancery Court ruled that a target company was barred from seeking the $112 million reverse termination fee provided for in the merger agreement.  The court found that the target company had failed to satisfy all of the conditions to closing the merger.  After entering into the merger agreement, the target company experienced labor difficulties with both its Chinese and domestic labor unions. The foreign labor union dispute resulted in the cessation of operations for a significant period of time.  The domestic labor union claimed that the merger would require renegotiation of the collective bargaining agreement.  The acquirer sought to negotiate a new collective bargaining agreement with the domestic labor union, but failed to reach agreement.

The target company, alleging that the acquirer had failed to negotiate a new collective bargaining agreement in good faith, claimed that it was entitled to the $112 million reverse termination fee.  In response, the acquirer claimed that the target company was not entitled to such fee by reason of the target company not having satisfied all of the conditions to closing the merger.  In particular, the acquirer claimed that the target company breached a merger agreement covenant requiring the continued operation of each subsidiary of the target company in the ordinary course of business.  The target company argued that the covenant applied only to operations within its control.  

The court, in ruling in favor of the acquirer, held that the labor disputes prevented the target company from satisfying its merger closing conditions.  In so ruling, the court stated that "ordinary course" means "the normal and ordinary routine of conducting business," and that the labor disputes prevented compliance with the covenant at issue.

Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd, C. A. No. 8980-VCG (Del. Ch. Ct. Oct. 31, 2014)

SEC Proposes Dodd-Frank Disclosure Rule for Company Hedging Policies

On February 9, 2015, the Securities and Exchange Commission issued proposed rules to enhance corporate disclosure of company hedging policies for directors, officers and other employees under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Under the proposed rules, companies would be required to disclose in their annual meeting proxy statements whether directors, officers and other employees are permitted to purchase financial instruments designed to hedge or offset any decrease in the market value of their equity securities.  The proposed rule requires only disclosure of such hedging activities.  The proposed rule does not require companies to prohibit hedging transactions or to adopt policies that address hedging activities.  According to the Securities and Exchange Commission, the purpose of the proposed rules is to provide transparency to shareholders about whether the directors, officers and employees of the issuer are permitted to engage in transactions that mitigate or avoid the incentive alignment associated with their equity ownership. 

Securities Act Rel. No. 33-9723 (Feb. 9, 2015)

U.S. Ninth Circuit Court of Appeals Addresses Impact of Dodd-Frank Act upon Bank's Trust Preferred Securities

The U.S. Ninth Circuit Court of Appeals upheld the dismissal of a breach of contract claim involving a trust indenture for a bank's trust preferred securities.  The claim arose out of the redemption of the trust preferred securities.  The indenture permitted the issuer to redeem the trust preferred securities upon the occurrence of a "Capital Treatment Event." Under the indenture, a "Capital Treatment Event" is the reasonable determination by the issuer that, as a result of the occurrence of any change (including any prospective change) in law, there is more than an insubstantial risk that the issuer will not be entitled to treat the trust preferred securities as "tier 1 capital" for purposes of the capital adequacy guidelines of the Federal Reserve.  The issuer redeemed the trust preferred securities in response to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010.  This Act changes the law relating to trust preferred securities.  Under the Act, bank holding companies, such as the issuer, would no longer be permitted to use trust preferred securities as tier 1 capital beginning in 2013.  The trustee unsuccessfully argued that the issuer breached the indenture by redeeming the trust preferred securities in advance of the effective date of the Act's trust preferred securities provision.  The court, relying on the express language of the indenture, focused upon the inclusion of prospective changes in law within the definition of Capital Treatment Event.      

Turkle Trust v. Wells Fargo & Company, D.C. No. 4:11-cv-06494-CW (U.S. Ct. of Appeals (9th Cir.) Feb. 10, 2015)

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