United States: Chancery Court Dismisses Breach Of Contract Claim Due To Plaintiff's Failure To Proffer A Reasonable Construction Of Merger Agreement Provision

Last Updated: September 28 2017
Article by Christopher H. Cunningham and Joseph Phelps

In Fortis Advisors LLC v. Shire US Holdings, Inc., No. 12147-VCS (Del. Ch. Aug. 9, 2017), the plaintiff, Fortis Advisors LLC, which was acting as representative (the "Representative") for the former stockholders of SARcode Bioscience Inc., a private biopharmaceutical company (the "Target"), pursuant to a merger agreement, alleged that the acquiror Shire US Holdings, Inc., a Delaware subsidiary of a global biopharmaceutical company (the "Acquiror"), breached the provisions of a merger agreement by refusing to pay certain milestone payments that were due.  The Court of Chancery granted the Acquiror's motion to dismiss for failure to state a breach of contract claim, concluding that, while the Acquiror's interpretation of the operative provision at issue was reasonable based on its plain and unambiguous language, the Representative failed to proffer a competing reasonable construction of such provision and thus the Court was required to grant the motion to dismiss.

The parties entered into the merger agreement, dated as of March 23, 2013, while the Target was developing and seeking regulatory approval for a drug, Lifitegrast, that showed promise to treat the signs (e.g., staining or tear break-up time, as based on objective signs identified by an eye-care professional) and symptoms (e.g., eye dryness or discomfort, as subjectively reported by patients) of dry eye disease. The consideration payable under the merger agreement consisted of certain fixed up-front payments and subsequent contingent payments that depended on the Acquiror's ability to move the drug through clinical trials and regulatory approvals.  The Representative alleged that two of the contingent milestones had been achieved and the Acquiror was obligated to make $425 million in milestone payments to former Target stockholders.  The Acquiror denied that the two milestone payments had been met and indeed insisted that they would never be met.

Prior to execution of the merger agreement, the Target conducted a Phase II clinical trial and a Phase III clinical trial (referred to as "OPUS-1") that successfully established the efficacy and safety of Lifitegrast in reducing the signs of dry eye disease. A second Phase III clinical trial (referred to as "OPUS-2") was designed and initiated in late 2012, and had two co-primary efficacy endpoints specified in the so-called OPUS-2 Study Protocol:  the sign endpoint (designed to evaluate the drug's efficacy in treating the signs of dry eye disease) and the symptom endpoint (designed to evaluate the drug's efficacy in treating the symptoms of dry eye disease).  Under the OPUS-2 Study Protocol, the results for the endpoints required statistical significance.

The Representative alleged that, under the merger agreement, the former Target stockholders were entitled to two contingent payments triggered by the occurrence of the "OPUS-2 Study Endpoint Achievement Date" (the "Achievement Date"): one payment is referred to as the OPUS-2 Successful Completion Milestone and the other is referred to as the Base Case Approval Milestone.  The Achievement Date was defined in the merger agreement as occurring:

upon receipt by or on behalf of [Acquiror]...of audited final tables, figures and listings from the OPUS-2 Study (x) that demonstrate both components of the co-primary efficacy endpoints of the OPUS-2 Study as specified in the OPUS-2 Study Protocol have been achieved and (y) which do not, in a significant and clinically meaningful respect, result a materially less favorable safety/tolerability profile..., taken as a whole, for the Product than for corresponding data generated for the Product in the OPUS-1 Study, which less favorable safety/tolerability profile would reasonably be expected to significantly reduce anticipated Product Sales....

If the Achievement Date had been achieved, then the former Target stockholders would be entitled to receive the two payments at issue pursuant to the following terms of the merger agreement:

  • OPUS-2 Successful Completion Milestone. "Within ten (10) business days following the [Achievement Date] (the "OPUS-2 Successful Completion Milestone"), [Acquiror] shall notify the [Representative] that the OPUS-2 Successful Completion Milestone has been satisfied and shall, within twenty (20) business days following the date of achievement of the OPUS-2 Successful Completion Milestone, pay...$175,000,000 (such amount, the 'OPUS-2 Successful Completion Milestone Payment')"; and
  • Base Case Approval Milestone. "Within ten (10) business days following receipt by or under the authority of [Acquiror]...of the first Regulatory Approval in the United States for a Product for the Covered Indication with the co-primary Sign and Symptom specified in the OPUS-2 Study Protocol included in the 'Indications and Usages' section of the label of the Product (the 'Base Case Approval Milestone'), [Acquiror] shall notify the [Representative] that the Base Case Approval Milestone has been satisfied and shall, within twenty (20) business days following the date of achievement of the Base Case Approval Milestone, pay...$250,000,000 (such amount, the 'Base Case Approval Milestone Payment')...."

Upon completion of the OPUS-2 Study in November 2013, the Acquiror informed the Representative that the OPUS-2 Study achieved the symptom endpoint but failed to achieve the sign endpoint.  The Acquiror designed and initiated an additional Phase III clinical trial (the "OPUS-3 Study") in November 2014 and, in early 2015, the Acquiror filed a New Drug Application (an "NDA") with the Food and Drug Administration (the "FDA"), which included evidence from the OPUS-2, OPUS-1 and other previous trials; the FDA declined to approve Lifitegrast based on the data submitted in the NDA.

Apparently believing the Achievement Date had occurred, the Representative wrote the Acquiror to ask whether it intended to make the OPUS-2 Successful Completion Milestone Payment. The Acquiror responded, stating that none of the milestones at issue had been met, or would ever be met, since the Achievement Date had not occurred because the OPUS-2 Study failed to meet the sign endpoint.

In February 2016, the Acquiror refiled its NDA with the FDA, which included additional OPUS-3 Study data, and it was approved. After the FDA approved the label relating to the drug and the Acquiror posted it on its website, the Representative alleged that the former Target stockholders were also due the Base Case Approval Milestone Payment, due to the regulatory approval, in addition to the OPUS-2 Successful Completion Milestone Payment.

As a threshold matter, the Court noted that questions regarding contract interpretation can be answered as a matter of law on a motion to dismiss only "[w]hen the language of a contract is plain and unambiguous." Dismissal of a contract dispute under Rule 12(b)(6) is proper "only if the defendants' interpretation is the only reasonable construction as a matter of law."

The Acquiror contended that the merger agreement was unambiguous and required that both the sign and symptom endpoints be achieved in a statistically significant manner in the OPUS-2 Study and, because the OPUS-2 Study did not achieve the sign endpoint, the Achievement Date had not occurred and will never occur. In supporting its argument, the Acquiror pointed to language in the definition of Achievement Date (the occurrence of which is a threshold requirement for both payments at issue), which is defined to occur "upon receipt...of audited final tables, figures and listings from the OPUS-2 Study...that demonstrate that both components of the co-primary efficacy endpoints of the OPUS-2 Study as specified in the OPUS-2 Study Protocol have been achieved" (emphasis added).

The Representative argued that the Achievement Date was achieved because clinical data used in determining whether the sign and symptom endpoints have been met are not limited to OPUS-2 Study data (where the symptom endpoint was achieved), but can incorporate prior clinical trials (where, in OPUS-1, the sign endpoint was achieved). In particular, the Representative made three principal arguments:

  • the definition of Achievement Date did not expressly exclude data from any clinical trials other than the OPUS-2 Study;
  • the definition of Achievement Date requires that a Phase III clinical trial need only be conducted "in accordance with" the OPUS-2 Study Protocol, which means conducted "in a way that agrees with or follows" it, but need not be identical; and
  • once the FDA approved the drug label, the Representative was able to confirm that, contrary to the Acquiror's representations, the OPUS-2 Study did in fact irrefutably achieve both endpoints.

After considering the Representative's proposed construction, the Court found it "unreasonable." With respect to the first point, the Court noted that the definition of Achievement Date "unambiguously reflects an intent that only [data from the OPUS-2 Study] should be considered when assessing whether the sign and symptom co-primary efficacy endpoints had been achieved" and that the Representative's construction would require the insertion of additional text into the definition of Achievement Date.

The Court found the second point similarly unpersuasive, noting, among other things, that (i) the OPUS-2 Study was defined as a clinical trial "to be conducted" and thus the OPUS-1 Study did not fit within the temporal requirements in the definition and (ii) OPUS-1 and OPUS-2 studies were conducted pursuant to separately defined protocols and thus the OPUS-1 Study was not conducted "in accordance with" the OPUS-2 Study Protocol.

Finally, with respect to the Representative's third argument, that approval of the FDA label for the drug provided irrefutable proof that the OPUS-2 Study achieved both endpoints, the Court noted that this ignored that the OPUS-2 Study Protocol specifically required that the study data achieve statistical significance in order for the OPUS-2 Study to achieve both endpoints, and the Representative did not plead that the label in question actually showed the required statistical significance.

As a result, the Court concluded that the Representative's construction of the merger agreement was unreasonable, while the Acquiror's construction was reasonable based on a clear an unambiguous reading of the contract, and granted the motion to dismiss for contract breach.

Fortis Advisors LLC v. Shire US Holdings Inc., C.A. No. 12147-VCS (Del. Ch. Aug. 9, 2017)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.