May 5, 2006

Merger Saved Corp From Bankruptcy But Board Still Breached Duties to Minority

From Francis Pileggi’s “Delaware Corporate & Commerical Litigation” Blog: “Though it is not uncommon for Chancery Court decisions to be in the area of 100-pages long, due to its length, my summary will be longer than usual for the blurbs on this blog. Oliver v. Boston University is 105-pages long and deals with a voluminous set of facts and a multitude of legal issues. I have divided the downloadable opinion into 2 parts for the user’s convenience: Part I and Part II.

Specifically, the case involves a financially troubled biotechnology company by the name of Seragen, Inc., which was controlled by Boston University (“BU”), as well as its friends and affiliates, who on several occasions came to its fiscal rescue in transactions implemented without procedures reasonably designed to protect the interests of minority shareholders.

With Seragen on the precipice of financial doom, a company by the name of Ligand offered merger consideration of approximately $75 million to acquire Seragen, but that amount would not satisfy all of the stakeholders because the claims of many stakeholders asserting rights to priority payment exceeded the amount of Ligand’s offer. A group of minority shareholders brought to trial a series of claims challenging certain transactions before the merger between Seragen and Ligand and the process by which the merger proceeds were allocated. This 105-page decision followed that trial.

The court noted that if the merger did not succeed, bankruptcy was the likely result on a very short timetable and that bankruptcy may have necessarily involved sacrificing the interests of the minority shareholders to placate other stakeholders, and it is within that troubled context that the court addressed the corporate governance issues.

Unlike other similar factual settings, this case did not deal with the issue of possible duties that the directors may have owed to creditors, because it was only the minority shareholders who were complaining that their ox was gored, primarily because they did not receive enough of the allocated proceeds of the merger. Among the legal issues addressed were: equity dilution and voting power dilution; business judgment rule; entire fairness standard; duty of loyalty that majority owes to the minority; duty to disclose material facts in proxy; aiding and abetting breaches of duty; and the difference between derivative and direct claims.”

Here is the remainder of Francis’ summary.