Archive: October 2018

Chancery Court Finds No Breach of Duty in Failed Corporate Inversion

By Joanna Diakos and Tom Sperber

In Kyle Ellis (AbbVie, Inc.) v. Richard A. Gonzalez, et al., the Delaware Chancery Court dismissed a derivative suit for failing to make a demand and to allege particularized facts demonstrating that demand would have been futile. Kyle Ellis (“Plaintiff”) alleged breaches of fiduciary duty by the CEO of AbbVie, Inc. (“AbbVie”), Richard A. Gonzalez (“Gonzalez”), and the individual members of AbbVie’s board of directors (“Director Defendants”) in connection with a proposed but ultimately abandoned corporate inversion between pharmaceutical giants AbbVie and Shire plc (“Shire”). The Court held that because AbbVie’s certificate of incorporation contained a Section 102(b)(7) exculpatory clause, Plaintiff had to allege that a majority of the board faced a substantial likelihood of liability for breaching the duty of loyalty in order for demand to be excused. Ultimately, Plaintiff failed to do that.

At all relevant times, Plaintiff was a minority stockholder of AbbVie, a Delaware corporation headquartered in Chicago, Illinois. Shire was an Island of Jersey biopharmaceutical company with its headquarters in Dublin, Ireland.

On July 18, 2014, AbbVie and Shire entered into an acquisition agreement. Pursuant to that agreement, AbbVie would acquire Shire for $54 billion worth of cash and stock of a new, wholly owned Jersey subsidiary (“New AbbVie”). Both AbbVie and Shire would then become wholly owned subsidiaries of New AbbVie, which would be headquartered in Ireland. Among other financial benefits that AbbVie stated when announcing the corporate inversion, the corporation cited tax savings from placing New AbbVie’s headquarters in Ireland rather than in the United States. On July 21, Gonzalez spoke at an investor conference. There, he reiterated the strategic rationales for the merger, stating that the avoidance of paying the higher US corporate tax rate was “clearly a benefit, but [] not the primary rationale.” On August 21, AbbVie filed a Form S-4 that outlined the strategic advantages of such a merger. Among nine other rationales for the transaction, the S-4 included the benefit of “the potential realization of tax and operational synergies by New AbbVie as a result of the Merger.”

On September 22, the Treasury Department announced that it would issue regulatory guidance that would eliminate some tax benefits that US-based corporations saw from merging with foreign companies through corporate inversions. One week later, AbbVie filed two Form 425s which included letters from Gonzalez and AbbVie Vice President Chris Turek. In their letters, Gonzalez and Turek assured employees of each company that the deal would close despite the Treasury Department’s announcement. On October 14, AbbVie announced that, in light of the regulatory shift, the board was reconsidering the merger. The next day, the board withdrew its recommendation and Shire’s stock price dropped substantially. AbbVie issued a press release on October 21 announcing the termination of the proposed merger and the payment of a $1.64 billion termination fee to Shire. Plaintiff’s complaint alleged that Gonzalez’s statements to investors in July as well as the letters included in the Form 425 filings in September amounted to breaches of fiduciary duty: Gonzalez’s statements had allegedly understated the importance of the inversion tax benefits in the decision to merge; and the Form 425 letters stated AbbVie’s intent to follow through with the merger, even though, according to Plaintiff, they had already abandoned that plan.

The defendants moved to dismiss Plaintiff’s complaint for failure to make a demand. Plaintiff argued demand-futility under the theory that the board could not impartially consider a demand because they faced a substantial likelihood of liability for the alleged material misrepresentations and omissions in the statements in question.

In finding that Plaintiff failed to sufficiently allege futility, the Court looked first to his allegation that the statements made to investors in July of 2014 were false or misleading. The Court cited Malone v. Brincat for the proposition that such a futility argument would require an allegation that the directors “deliberately misinform[ed] shareholders.” The Court identified that AbbVie’s charter’s exculpatory provision required Plaintiff to plead particularized facts that would lead to an inference that the board acted knowingly, intentionally, or in bad faith.

Plaintiff’s theory was that despite Gonzalez’s claim that tax arbitrage was but one of many motivations, realizing tax benefits was the “sole, or at least primary, rationale for the merger.” Plaintiff points to AbbVie’s press release after the decision had been made to abandon the merger, which stated that the recommendation to merge was withdrawn after a detailed consideration of the impact of the new tax rules. The Court found this argument conclusory. In so finding, the Court stated that while the tax benefits may have been necessary to the deal, it does not follow that they were the primary motivation of AbbVie. Ultimately, the Court found that Plaintiff would have had to allege that “most of the value” of the deal came out of the tax break in order to meet the heightened pleading standard of Rule 23.1. The Court also found that Plaintiff failed to allege with particularity that the Director Defendants were involved in the July statements made by Gonzalez.

The Court also examined Plaintiff’s second allegation that statements in the Form 425 letters were misleading in that AbbVie expressed a continued interest in pursuing the merger when, in reality, plans to merge had been abandoned as soon as the Treasury Department made its announcement. In arguing that the Director Defendants could face liability for these letters, Plaintiff argued that they must have authorized or at least known about these letters. The Court found only conclusory allegations regarding the Director Defendants’ involvement.

In arguing that the letters were misleading, Plaintiff explained that the defendants intentionally failed to correct the false statements in order to avoid paying interest on the $1.6 billion termination fee for the time difference between when the board began reconsidering the deal and when it ultimately terminated it. The Court pointed out that the Complaint itself alleged that the fee would be triggered only if and when the board withdrew or modified its recommendation. This meant that the fee would have been triggered on October 15, rather than when the board started having doubts, making Plaintiff’s argument flawed. While the Court conceded that the statements made by Gonzalez and Turek may have caused a “misimpression” that the deal would still close, the Court found that Plaintiff’s remaining allegations that the statements were made in bad faith were conclusory.

In addition to the “substantial likelihood of liability” theory, Plaintiff advanced two alternative arguments for futility which the Court largely disregarded. Plaintiff alleged that some defendants served on the Audit Committee and, presumably, that would limit their ability to be impartial. The Court cited the “well-settled rule that mere membership on a board committee is insufficient to support a reasonable inference of disloyal conduct.” Plaintiff also contended that the company’s insurance policy did not provide coverage for actions that the company brings against its directors. In rejecting that argument, the Court pointed to the rejection of a similar argument made by the plaintiff in Decker v. Clausen, characterizing it as an assertion that the directors cannot be impartial if they are “suing themselves.”

As such, Plaintiff failed to adequately plead any of his claims to the extent required by Rule 23.1, resulting in the Court granting the defendants’ motion to dismiss with prejudice.

Kyle Ellis… v. Richard A. Gonzalez, et al., and AbbVie, Inc., nom. def…


By Scott Waxman and Adrienne Wimberly

In Mesirov v. Enbridge Company, Inc., et al. C.A. No. 11314-VCS (Del. Ch. Aug.29, 2018), the Delaware Chancery Court dismissed five of eight counts alleged with respect to a transaction where Enbridge Energy Company (EEP) repurchased for $1 billion a two-thirds interest in Alberta Clipper Pipelines (AC interest), despite the fact that EEP had sold that same interest years prior for $800 million and the business had steadily declined since such sale.  The dismissals were based primarily upon the language and obligations included in EEP’s limited partnership agreement.

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Delaware Chancery Court Makes Groundbreaking “Material Adverse Effect” Finding Allowing Buyer to Terminate Merger Agreement

By: Peter Flocos, Lisa Stark, Rick Giovannelli and Mark Hammes

In a landmark decision, a Delaware court has, for what is widely believed to be the first time ever, found that a material adverse effect actually occurred in an acquisition transaction, giving the buyer a right to terminate the pending transaction.  In Akorn, Inc. v. Fresenius Kabi AG,[1] the Delaware Court of Chancery (the “Court”) held, following a trial, that the buyer properly terminated the parties’ merger agreement, due to such a material adverse effect between signing and closing, under the terms of the agreement and the pertinent Delaware case law.  Unlike prior decisions rejecting buyer material adverse effect claims,[2] the Court found that a pre-closing decline in the business of the target – Akorn – was not merely a “cyclical trend” and was likely to have a post-closing, durationally-significant effect that was “material when viewed from the longer-term perspective of a reasonable acquiror.”[3]  Although groundbreaking, the Akorn decision reflects that the Delaware courts will still approach the question of whether an MAE has occurred on a case-by-case basis and does not establish a particular “bright line” test.

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Chancery Court Claims for Breach of Fiduciary Duty Dismissed for Failure to Establish Demand Futility

By: Annette Becker and Geoffrey Locher

Jennifer L. Stritzinger v. Dennis Barba, et al., letter opinion 180831

In Jennifer L. Stritzinger v. Dennis Barba, et al. Civil Action No. 12776-CB, the Delaware Court of Chancery granted the defendants’ motion to dismiss Stritzinger’s derivative lawsuit for breach of fiduciary duty for alleged mismanagement of Newark Country Club (the “Club”), a private corporation located in Newark, Delaware.  The Court dismissed Stritzinger’s suit finding Stritzinger failed to establish demand futility before filing suit against the Club.

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