The case of Oliver v. Boston University, 2006 WL 1064169 (Del. Ch. Apr. 14, 2006) involved Seragen, Inc. (“Seragen”), a financially troubled biotechnology corporation that was nurtured and controlled by Boston University (“BU”) and by affiliates of BU. After numerous investments and the purchase of preferred stock by BU and its affiliates, and while Seragen was “on the precipice of financial doom,” Ligand Pharmaceuticals, Inc. (“Ligand”) offered merger consideration of approximately $75 million to acquire Seragen. In light of the merger, BU and its affiliates negotiated and entered into an accord agreement (the “Accord Agreement”), which “carved up” the consideration to be paid by Ligand.
The negotiation that occurred in connection with the Accord Agreement was a process that, according to the Court:
[W]as not burdened by anyone acting on a counseled and informed basis on behalf of the common shareholders who, from among various stratagems, could have injected into the allocation process (i) various derivative claims based upon earlier self-interested, capital-raising transactions and (ii) arguments against specific steps taken in that process that were inconsistent with the rights of the common shareholders.
The minority stockholders of Seragen commenced an action against BU, the directors of Seragen and certain affiliates of BU, which challenged (among other things) the process by which the merger proceeds were allocated.
After a two-week trial, in connection with the allocation of the merger proceeds and the Accord Agreement, the Delaware Court of Chancery held that BU and the BU-related directors of Seragen violated their duty of loyalty and had the burden of demonstrating entire fairness of the allocation and of the Accord Agreement:
The allocation of merger proceeds accomplished by the Accord Agreement was a self-interested effort that raised significant doubts about the director defendants’ loyalty because these parties stood on both sides of the transaction and sought to gain, for themselves or for BU, at the expense of the common shareholders. Because this transaction was in violation of the duty of loyalty, the BU Defendants are charged with the burden of demonstrating the entire fairness of the overall allocation. . . .
The Court then held that BU and the BU-related directors of Seragen failed to demonstrate the “fair dealing” component of entire fairness:
The Director Defendants treated the merger allocation negotiations with a surprising degree of informality, and, as with many of Seragen’s transactions reviewed here, no steps were taken to ensure the fairness to the minority common shareholders. More disturbing is that, although representatives of all of the priority stakeholders were involved to some degree in the negotiations, no representative negotiated on behalf of the minority common shareholders. BU, even with its substantial holdings of Seragen common stock, did not have the same incentive to negotiate for the minority common shareholder as an otherwise disinterested representative of the minority common shareholder would have been, because BU had interests that went well beyond its common shares. . . . Clearly the process implementing these negotiations was severely flawed and no person acted to protect the interests of the minority common shareholders.
Turning to the “fair dealing” component of entire fairness, the Delaware Court of Chancery reviewed each aspect of the allocation and held that BU and the BU-related directors of Seragen failed to demonstrate that certain aspects of the allocation were fair to the minority common stockholders. Indeed, the Court concluded (i) that the price assigned to the cancellation of a series of preferred stock held by BU – a price that resulted in BU being allocated $2,546,744 of the merger proceeds – and (ii) that a portion of the price assigned to the purchase of an entity related to Seragen and owned by BU – a price that resulted in BU being allocated $2,262,500 of the merger proceeds – were unfair. In sum, the Court held that damages “amount to $4,809,244,” and that “[p]laintiffs are additionally entitled to nominal damages for the other process failures associated with negotiation and implementation of the Accord Agreement.”