In Re: Micromet, Inc. Shareholders Litigation, C.A. No. 7197-VCP (Del. Ch. Feb. 29, 2012).
The issue in this case is whether a motion for preliminary injunction should be granted to enjoin an all-cash negotiated tender off for all the shares of a biopharmaceutical company. Plaintiffs are the shareholders of the target company and claim that the offer was for an unfair price and was the result of an unfair and flawed sales process. They also claim that the solicitation materials recommending the tender offer contain materially false and misleading information.
The Court concluded that the plaintiffs did not demonstrate a reasonable likelihood that they would succeed on the merits in proving that the challenged transaction was unfair or that the directors breached their fiduciary duties of care or loyalty, including their disclosure obligations, in approving the transaction. Therefore the motion for preliminary injunction was denied.
This 32-page decision provides copious details about the negotiated merger that was proposed between Micromet, an early-stage pharmaceutical research and development company. Initially, Micromet entered into a confidentiality agreement on June 15, 2010 with Amgen, Inc., the largest independent biotechnology medicines company in the world. The purpose of the confidentiality agreement of 2010 was to discuss a mere collaboration between the companies and was not for the purpose of a merger. However, in early 2011, Amgen’s interest in Micromet went beyond the collaboration over certain technologies and products, and on April 5, 2011, Amgen introduced for the first time the possibility of a strategic transaction between the companies. The board declined at that time to discuss an acquisition because it believed that Micromet was undervalued in the market, at which time its stock was trading at about $5.28 per share. Despite a rejection of Amgen’s offer for a second time in July 2011, Amgen continued to express an interest in Micromet and on August 18, 2011, representatives from both companies met to conduct a limited due diligence session to enable Amgen to understand more fully the value of the company and to possibly increase its offer. The parties at that time also entered into confidentiality and standstill agreements related to the due diligence.
Despite the due diligence, and even though Micromet had contacted another potential acquirer who was not interested, Amgen refused to increase its offer but reiterated a $9.00 per share offer on September 1, 2011. The board of Micromet again rejected this offer as inadequate and over the course of the next month contacted 21 companies who they thought might be interested in partnering to develop a product known as MT103.
The Court describes in great detail the negotiations that went back and forth between the companies, as well as the involvement of Goldman Sachs on behalf of Micromet. On December 21, 2011, Amgen increased its offer to $10.75 per share. The Court also described the efforts of Micromet to assess the interest of other potential buyers, as a market check.
On January 3, 2012, Micromet informed Amgen that it would “work with Amgen on its due diligence if it was willing to increase its offer to $11.00 per share.” On January 5, the parties “verbally agreed to that price,” and on January 7, Micromet gave Amgen access to an online data room to conduct further due diligence. After further negotiations, on January 25, 2012, the board met to consider a final merger agreement. After considering the review of the key terms of the merger agreement by the legal advisors of Micromet, and after considering the presentation by Goldman Sachs regarding the $11.00 price, and the value of the company, the board approved the merger agreement which was publicly announced on January 26, 2012.
The merger agreement provides for an acquisition by tender offer at $11.00 per share followed by a second step cash-out merger with a total consideration of $1.16 billion. When the deal was announced, the $11.00 per share price was a 37% premium. Goldman Sachs provided a fairness opinion with a range of $7.09 to $11.44 per share. The merger agreement included the following deal protection measures: (1) a no solicitation provision; (2) information and matching rights; (3) a termination fee of $40 million (which is 3.4% of the overall equity value of the deal and 4.9% of its enterprise value); (4) an amendment to the Rights Agreement of Micromet that excluded Amgen from the poison pill, but left a pill in place as to all other potential bidders.
Following the announcement of the merger on January 26, six different plaintiffs filed complaints challenging the transaction. The Court granted a motion to expedite on February 13 and the shareholder complaints were consolidated on February 15. The parties proceeded with discovery and briefing on the motion for preliminary injunction, on which the Court heard argument on February 27, 2012. This 32-page decision was issued two days later on February 29. (That amount of work, from complaint to formal decision in a relatively short amount of time, would qualify for whirlwind status.)
The plaintiffs argue that the tender offer is being made at an unfair price that resulted from a flawed sales process conducted by the board of Micromet and that the board breached its fiduciary duties by favoring Amgen as a bidder and failing to do a meaningful market check until immediately before the announcement of the proposed deal. The plaintiffs also claimed that the deal protections unreasonably restricted the tender offer and precluded other bids from emerging. The plaintiffs also asserted that the board breached its fiduciary duties of disclosure by making materially incomplete and misleading statements that were disseminated to shareholders.
The Court reviewed the familiar standard for a preliminary injunction. See generally footnotes 10 through 13 and accompanying text.
The Court reviewed the familiar Revlon standard that requires a board to maximize the value of the shares of a company for the benefit of the shareholders when “a corporation embarks on a transaction on its own initiative or in response to an unsolicited offer that will result in a change of control . . .” See footnotes 14 to 16 and accompanying text.
The first inquiry into the board’s actions when applying the Revlon analysis is whether the board fulfilled its duty to be informed, which requires a determination about whether the information relied upon by the board in the decision making process was adequate. Second, the Court examines the reasonableness of the decision of the directors viewed from the point of time during which the directors acted. See footnote 17 (citing In Re: Orchid Cellmark, Inc. S’holders Litig., 2011 WL 1938253, at *4 (Del. Ch. May 12, 2011)).
The Court also emphasized prior Delaware law which provides that there is “no single blueprint that a board must follow in maximizing shareholder value, but instead, the duty to act reasonably is just that, a duty to take a reasonable course of action under the circumstances presented.” See footnotes 18 and 19.
The parties did not agree on when the Revlon duties were triggered but based on the briefing and the record, the Court determined that the board did not seriously contemplate a sale of the company sufficient to trigger its Revlon duties until late December 2011 or the meeting on January 2, 2012 when it determined to enter into serious merger negotiations with Amgen and instructed its financial advisor to conduct a market check with other potential inquirers. Before that time, the board had said it was not interested in a sale.
The Court considered the argument that the market check was not as broad as it should have been. Among the reasons why the Court rejected this argument was because the Court made a conscious decision not to contact companies that had previously expressed a lack of interest. In addition, Micromet decided to eschew private equity buyers because the primary business strategy involved collaborating with larger pharmaceutical companies in the commercialization and distribution of drugs which require more than capital, but necessitate technical expertise in the specific industry.
Deal Protection Provisions
The Court reviewed in detail the challenges to the various deal protection provisions. For example, the recommendation provision which required that Micromet notify Amgen by sending a “change of recommendation notice” if it received a superior offer at which time it had to provide Amgen with all relevant materials and give Amgen four business days to negotiate with the board of Micromet to decide whether to match the superior offer, after which the board of Micromet had to determine whether its fiduciary duties required it to change its recommendation in favor of the new bid. The Court determined that the recommendation provision was not identical to a provision in the recent decision of In Re: Compellent Technologies, Inc. Shareholders Litigation, 2011 WL 6382523 (Del. Ch. Dec. 9, 2011), which Vice Chancellor Laster found to be problematic. The Court here found that the language in the Compellent case was less clear than in this case.
Regarding the termination fee, the Court noted that a termination fee of roughly 3% of equity value, as well as a top-up option and a poison pill exemption were recently approved by the Court of Chancery in the case of In Re: Orchid Cellmark, Inc. Shareholder Litigation, 2011 WL 1938253 (Del. Ch. May 12, 2011), which involved only a slightly longer post signing period of 42-days.
The Court observed that the duty of disclosure is a judicially imposed fiduciary duty that serves the ultimate goal of informed stockholder decision making. See footnote 37 (citing to Steven A. Radin, The Business Judgment Rule, 1712 (6th ed. 2009)). Unlike the full blown disclosure regime under federal law, the duty of disclosure under Delaware law is a specific application of the general fiduciary duty owed by directors and is concomitant with the duty of care, loyalty or both. (citing Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998)).
When stockholder action is requested, directors are required to provide shareholders with all information that is material to the action being requested and to “provide a balanced, truthful account of all matters disclosed in the communications with shareholders.” (See footnote 40 (citing Radin’s treatise on The Business Judgment Rule at page 1714.))
The Court focused on the central question of whether an omitted fact is material, which requires a determination about whether “a reasonable stockholder would consider it important in a decision pertaining to his or her stock.” See footnotes 41 through 44 and accompanying text. The Court reviewed in detail why each of the allegations regarding disclosure was not persuasive. For example, the fact that Goldman held approximately $36 million in Amgen stock was not considered material because those holdings only equaled about .16% of Goldman’s overall investment holdings and Goldman owned a substantially larger share of stock in another company that was contacted by Goldman as a potential buyer of Micromet during the market check. See footnotes 49 and 50. In addition, the Court explained that a challenge to the use by Goldman of an historical risk premium rather than a supply-side equity risk premium was not a disclosure claim. Under Delaware law, it has previously been decided that “a complaint about the accuracy or methodology of a financial advisor’s report is not a disclosure claim and amounts to a quibble with the work of a financial advisor.” See footnotes 61 and 62.
In sum, the Court concluded that there was no demonstrated irreparable harm if the tender offer were not enjoined, and also there was a failure to show a reasonable likelihood of success on the merits. The Court emphasized that the shareholders were being offered a substantial premium which was negotiated by an independent and disinterested board, and was the result of a reasonable sales process during which no other bidders emerged. Thus, the Court reasoned that the balance of equities weighed against enjoining the proposed transaction.
SUPPLEMENT: Prominent corporate law scholar Professor Stephen Bainbridge comments on the case here, in connection with how this case fits (or does not fit) within his view of Delaware’s Revlon jurisprudence.