A recent California case(1) serves as a cautionary note for buyers and their officers and directors when an acquisition has the potential to have a material negative impact on a key technology licence of the target. On March 12 2014 the California Supreme Court upheld a decision of the California Court of Appeals affirming a $385 million verdict against Actelion Pharmaceuticals and three of its executives, and a separate award of $30 million in punitive damages against the executives, for their interference with a licence agreement between a company that Actelion acquired, CoTherix Inc, and Asahi Kasei Pharma Corp. It appears that a primary driver for the jury's verdict was its finding that Actelion acquired CoTherix to block the introduction of a drug known as Fasudil to the US market, which would have threatened the market dominance of Actelion's own blockbuster Tracleer drug.

CoTherix entered into a licensing and development agreement with Asahi in 2006. Under that agreement, CoTherix was to develop and seek US and European regulatory approvals for Asahi's Fasudil drug. After this relationship was announced, Actelion began to contemplate acquiring CoTherix to protect Tracleer's market, which exceeded $1 billion in annual sales. In November 2007 Actelion announced it had entered into an agreement to buy CoTherix.

This prompted Asahi to request that CoTherix and Actelion provide reasonable assurances that they would honour the obligations under the licence agreement following the acquisition. Although Actelion had decided internally not to proceed with the development of Fasudil, it apparently told Asahi before the closing that "Actelion does not have any intention to make any delay of [F]asudil development" following the merger. However, concurrently with the closing of the acquisition in January 2008, Actelion informed Asahi that it was discontinuing the development of Fasudil for "business and commercial reasons". Efforts to negotiate a termination agreement failed and Asahi brought a claim against CoTherix for breach of contract, on which arbitrators awarded Asahi over $91 million.

Asahi also brought a separate action in California state court against Actelion and certain of its officers under a variety of contract and tort claims, including intentional interference with a contract. The jury awarded compensatory damages against the defendants (which were reduced by the amounts awarded in the arbitration) and further found the executives had acted with malice, oppression or fraud, awarding some $30 million in punitive damages against the executives. The California Court of Appeals largely affirmed the jury's verdict, noting that California law recognises that corporate owners, officers and directors may be held liable for interfering with contracts – with the burden being on them to show they did not use improper means – and rejecting Actelion's argument that, as the corporate owner of CoTherix, it had an absolute right to interfere with its subsidiaries' agreements.

For further information on this topic please contact James Lidbury at Ropes & Gray LLP's Hong Kong office by telephone (+852 3664 6488), fax (+852 3664 6588) or email (james.lidbury@ropesgray.com). The Ropes & Gray LLP website can be accessed atwww.ropesgray.com.

Endnotes

(1) Asahi Kasei Pharma Corp v Actelion Ltd, No CIV478533, December 18 2013 (Superior Court of the State of California, County of San Mateo).