Court Holds Trustee did Not Abuse Discretion in Rejecting Competing Acquisition Proposal for Liquidated Entity’s Assets
By: Scott E. Waxman and Michael C. Payant
In Acela Investments LLC, et al. v. Raymond DiFalco and Manish Shah, C.A. No. 2018-0558-AGB, (Del. Ch. April 27, 2020), the Delaware Court of Chancery (the “Court”) granted a motion by the liquidating trustee (the “Trustee”) to sell substantially all of the assets of Inspirion Delivery Services, LLC (“IDS” or the “Company”) after determining the Trustee had not abused his discretion in declining to consider a competing eleventh-hour proposal that failed to comply with bid requirements.
IDS owns technology for two FDA-approved abuse-deterrent opioids, MorphaBond and RoxyBond. It is the successor-in-interest to Inspirion Delivery Technologies, LLC, and was co-founded by Stefan Aigner, Raymond DiFalco, and Manish Shah. In a prior proceeding, the Court determined the IDS LLC Agreement was insufficient to resolve deadlocks between Aigner and the aligned duo of DiFalco and Shah. The Court concluded judicial dissolution was warranted and issued an order appointing the Trustee to preside over the dissolution and authorizing the Trustee to dispose of IDS assets with court approval (the “Sale Order”).
The Trustee retained Locust Walk (“Locust”) to assist with the sale process, and filed a motion describing a proposed sale process to the Court. The proposal called for prospective acquirers to provide best and final offers by December 1, 2019, and contemplated definitive agreements by December 31, 2019. The Court approved the proposal without opposition. Locust sent letters to 81 potential strategic and financial buyers in October 2019, shortly thereafter solicited 11 non-binding indications of interest, and ultimately received five such indications from prospective acquirers.
While the sale process was underway, Daiichi Sankyo, Inc., the sole revenue source for IDS, terminated its licensing and supply agreement with the Company in early September 2019, putting an immense strain on the Company’s already negative cash flow. In mid-September, Cerovene, Inc. (“Cerovene”), an entity co-owned by DiFalco and Shah, agreed to provide an ongoing supply of MorphaBond. However, in early December, Cerovene sent IDS a notice of breach for failure to pay invoices; and by March 2020, Cerovene terminated the arrangement and alleged IDS owed more than $1.8 million.
The Trustee did not reach definitive agreements with any acquirer before December 31, 2019, and concluded interest was largely limited to existing IDS stakeholders. The sale process continued in the months thereafter, and by March 2020, the Trustee was communicating almost daily with stakeholders. The Trustee requested they make bids soon before Company assets were depleted, and informed them that the first acceptable bid would be shopped for just 48 hours before submitting for Court approval.
On March 2, 2020, William Reid, counsel for DiFalco and Shah (”Reid”) requested a confidentiality agreement for potential purchase of IDS assets. On March 27, DiFalco emailed the Trustee requesting data room access, and the Trustee informed him that a deal was nearly agreed with OHEMO LIFE SCIENCES, INC. (“OHEMO”), an entity with prior business ties to IDS and which counted Aigner among its principal negotiators.
OHEMO and IDS entered into an Asset Purchase Agreement, dated March 31, 2020 (the “OHEMO APA”). Among other terms, the OHEMO APA called for a $750,000 OHEMO deposit, a $4 million closing cash payment, and royalties equal to 10% of net RoxyBond sales until the earlier of (i) the last valid RoxyBond patent claim, or (ii) $10 million in royalty payments to IDS. The OHEMO APA also (a) permitted OHEMO to terminate if IDS had not filed for court approval by 6 p.m. on the third business day after OHEMO deposited $750,000 with an escrow agent, and (b) required any competing bid considered by IDS to include a $750,000 deposit.
The Trustee sent the OHEMO APA to Reid and DiFalco the evening of March 31, along with instructions for submitting a competing bid. The instructions required (i) delivery of a signed agreement and (ii) deposit of $750,000 in an escrow account by close of business on April 2, 2020. At 4:55 p.m. on April 2, Michael Yoder (“Yoder”), counsel for DiFalco and Shah, sent an unexecuted APA markup (the “Cerovene APA”) and requested escrow wire instructions. Cerovene did not wire the deposit on April 2.
The Cerovene APA stated Cerovene would deliver $4.1 million at closing, $1.85 million of which would be a credit to discharge debt IDS owed Cerovene. The Cerovene APA included the same royalty provision as the OHEMO APA, except the royalty cap was $15 million, rather than $10 million. On April 3, Locust informed Yoder that the Cerovene bid would not be evaluated because (i) no deposit was made by the deadline; (ii) Cerovene failed to provide proof of financial wherewithal; (iii) the bid was not “higher and better”; and (iv) the lack of a deposit and an executed Cerovene APA created higher closing risk.
The Court approved the Trustee’s motion seeking court approval of the OHEMO APA on April 3, 2020, and DiFalco and Shah (collectively, the “Objectors”) filed an objection on April 13, 2020. Objectors argued (i) the Trustee’s rejection of their bid for noncompliance with bid requirements was unwarranted; and (ii) Cerovene’s offer provided more value to IDS’s stakeholders than the OHEMO APA.
The Court first determined the standard of review. Looking to the plain language of the Sale Order and the Court’s rulings in similar cases, it determined that the Trustee’s actions would be subject to review for abuse of discretion. A decision by the Trustee would be overturned only if it was “arbitrary or capricious” or “exceeds the bounds of reason in light of the circumstances.”
Next, the Court held that the Trustee had not abused his discretion in rejecting the Cerovene bid due to non-compliance with bidding requirements. The Court concluded that the $750,000 deposit and limited 48-hour shopping period (the “Topping Bid Requirements”) were material, heavily negotiated provisions. They reflected the relative leverage between IDS, a cash-strapped and deteriorating company that had lost its primary source of revenue in Daiichi Sankyo, Inc., and OHEMO, the lone serious suitor to emerge after a six-month sale process. Therefore, it was not arbitrary or capricious for the Trustee to agree to the Topping Bid Requirements in the OHEMO APA. Objectors did not dispute they had failed to comply with the Topping Bid Requirements. They noted instead that (i) Cerovene sent $2.3 million to its counsel’s trust account the day after the deadline, and (ii) that Shah had signed the Cerovene APA on April 2, prior to the deadline, but Locust did not receive the signed page until April 3, after the deadline. The Court found these comments unpersuasive.
The Court next concluded it was neither arbitrary nor capricious to adhere to the Topping Bid Requirements in rejecting Cerovene’s bid. Through the course of the sale process, Cerovene repeatedly stated it lacked funds necessary to continue operating. Then when the deadline came to submit an offer, Cerovene failed to comply with enumerated requirements for doing so. Under these circumstances, the Trustee did not abuse its discretion when he opted not to risk the binding OHEMO offer in pursuit of the more uncertain Cerovene offer.
Finally, the Court determined the Trustee did not abuse discretion in concluding the Cerovene bid was not a better offer than OHEMO’s bid. While the $4.1 million value in the Cerovene bid exceeded the $4 million offered by OHEMO, the Trustee did not abuse his discretion in concluding OHEMO’s all-cash offer — rather than the part-cash, part-credit offer from Cerovene — was a better deal in light of the Company’s pressing need for liquidity to handle windup costs and claims. Similarly, though the royalty cap was higher under Cerovene’s bid ($15 million versus $10 million), the Court concluded the Trustee did not abuse his discretion in determining that the likelihood of actually receiving royalty payments under either proposal was negligible and discounting the value of each potential royalty stream accordingly.
For these reasons, the Court granted the Trustee’s motion and approved the sale of substantially all of the assets of IDS pursuant to the OHEMO APA.
Acela Investments LLC, et al. v. Raymond DiFalco and Manish Shah, C.A. No. 2018-0558-AGB, (Del. Ch. April 27, 2020)