Delaware Court Reaffirms Revlon Duties and Fiduciary Duty of Disclosure

In its recent Micromet [1] preliminary injunction decision, the Delaware Chancery Court reaffirmed that (i) Revlon’s enhanced scrutiny is a reasonableness standard based on the particular circumstances of the target company and (ii) Delaware’s fiduciary duty of disclosure only requires that the information provided to shareholders for purposes of their vote on a merger be sufficiently robust in its entirety so that the information omitted would not significantly alter the total mix of information available to shareholders. Specifically, the Micromet court found adequate (because of the nature of Micromet’s fledgling pharmaceutical company’s business that involved partnering with strategics and its Board’s understanding of the Company and its needs) a pre-signing market check that was limited to strategic buyers with which Micromet previously had a commercial relationship, and to one week of diligence. In addition, the Micromet court was not persuaded that the following omissions from the 14D-9 disclosure statement sent to shareholders were sufficient to show a reasonable probability of success on a breach of fiduciary duty of disclosure claim: (i) the specific fees paid by Micromet to Goldman Sachs, its financial advisor, for unrelated work for the previous two years, (ii) the amount of Goldman’s ownership of the buyer’s stock, (iii) the basis for Micromet management’s probability of success rates for trial drugs, (iv) management’s projections regarding the use of net operating loss carry-forwards, (v) Goldman’s sum of the parts DCF analysis (that was not significantly different than Goldman’s DCF analysis) and (vi) management’s “upside case” projections provided to Goldman but described by the CEO as “highly optimistic and, in fact, not realistic” and that were not relied upon by Goldman in its analysis. The Micromet court, citing precedent, noted that “Delaware courts have repeatedly held that a board need not disclose specific details of the analysis underlying a financial advisor’s opinion” in satisfying the fiduciary duty of disclosure.

Background

Throughout the summer and fall of 2011, Amgen, Inc. (“Amgen”), while engaged in a drug development partnership with Micromet, Inc. (“Micromet” or the “Company”), periodically made offers to buy Micromet. Micromet’s Board of Directors (the “Board”) rejected Amgen’s offers as being inadequate, and instead pursued a standalone strategy in which it would partner with established biopharmaceutical companies in developing drugs in its product pipeline. Beginning in late December 2011, Micromet was sufficiently piqued by Amgen’s then $10.75 per share potential proffer that it authorized Goldman, Sachs & Co. (“Goldman”), its financial advisor, to contact seven large pharmaceutical companies the Board determined might be interested in acquiring Micromet because of the potential strategic fit. Of the seven companies (all but one of which had already conducted due diligence on the Company in the context of the partnering process), only three expressed interest, and after conducting due diligence sessions none of them indicated that they were interested in acquiring Micromet. During the market check, Micromet began negotiations with Amgen. On January 25, Micromet entered into a Merger Agreement with Amgen providing for a tender offer to Micromet’s shareholders at $11 per share, followed by a second-step cash out merger. As part of the Merger Agreement, the Board agreed to various standard deal protection measures in favor of Amgen, including a no shop, a four-business-day match right and a break-up fee of $40 million, which was equal to approximately 3.4% of the equity value, and 4.9% of the enterprise value, of the transaction.

On February 27, various shareholders of Micromet (“Plaintiffs”) brought a motion for a preliminary injunction in the Delaware Court of Chancery to enjoin the tender offer, asserting that the Board breached its fiduciary duties by favoring Amgen as a bidder, failing to do any meaningful market check until immediately before the announcement of the proposed transaction and putting in place deal protections that would make it impossible for a competing bidder to make a successful offer. Additionally, Plaintiffs asserted that the Board breached its fiduciary duty of disclosure by omitting material information from the disclosure statement that was disseminated to its shareholders.

On February 29, 2012, Vice Chancellor Parsons denied Plaintiffs’ motion for a preliminary injunction.

The Chancery Court’s Opinion

Vice Chancellor Parsons’ denial of a motion for a preliminary injunction in Micromet reaffirmed that (i) Revlon’s enhanced scrutiny is a reasonableness standard based on the particular circumstances of the target company and (ii) Delaware’s fiduciary duty of disclosure only requires that the information provided to shareholders for purposes of their vote on a transaction be sufficiently robust in its entirety so that the information omitted would not significantly alter the total mix of information available to shareholders.

A. Reaffirmation of Revlon Duties and Adequate Pre-Signing Market Check

Vice Chancellor Parsons held that the length and breadth of the pre-signing market check conducted by the Board was adequate to fulfill its Revlon duties because it was based on the Board’s understanding of Micromet’s market position – specifically that any company that would be interested in an acquisition of Micromet would be one that was interested in the development of its most important drug (MT103) and was large enough to undertake the transaction. As such, Vice Chancellor Parsons found it reasonable that the Board chose to limit its pre-signing market check to strategic buyers that could benefit from and further develop MT103, and had the technical expertise to realize its full potential. Vice Chancellor Parsons also was untroubled by the diligence period provided to the potential bidders during the pre- signing market check being limited to one week, in large part because six of the seven potential buyers had engaged in due diligence with Micromet focused on its most important potential product during a previous partnering process, and each of the three that performed due diligence informed Micromet before it signed the Merger Agreement with Amgen that it was not interested in making a competing offer.

B. Disclosure Obligations

The Micromet court also was not persuaded that the omissions from the disclosure statement sent to shareholders was sufficient to show a reasonable probability of success on a breach of fiduciary duty of disclosure claim.

Under Delaware law, in assessing whether a Board has breached its fiduciary duty of disclosure by failing to disclose material information to shareholders, the central question is whether “‘a reasonable shareholder would consider it important in a decision pertaining to his or her stock.’ An omitted fact is not material ‘simply because [it] might be helpful.’ Instead, the inclusion of the missing fact must ‘significantly alter the total mix of information available to shareholders.’” [2] Furthermore, “[t]he duty to disclose ‘is not a mandate for prolixity’” [3] and “‘[b]alanced against the requirement of complete disclosure is the pragmatic consideration that creating a lenient standard for materiality poses the risk that the corporation will bury the shareholders in an avalanche of trivial information, a result that is hardly conducive to informed decisionmaking.’” [4] To this end, Vice Chancellor Parsons held that the following additional disclosures were unlikely to significantly alter the total mix of available information and, accordingly, their omission was not sufficient to lead to injunctive relief on the issue of a breach of duty of disclosure:

• the specific fees Micromet paid Goldman over the previous two years, when it was generally disclosed that Micromet had paid Goldman fees in the past and Goldman’s contingent fee interest in the transaction was disclosed to shareholders;
• Goldman’s $336 million specific interest in Amgen stock, representing .16% of its overall investment holdings on behalf of the firm and firm clients and 3.8% of its healthcare sector investments, when it was generally disclosed that Goldman may at any time hold positions in both Amgen and Micromet, the information was already available via publicly filed information (on Goldman’s Form 13F), there was no evidence that the size of its holdings would be likely to impede its ability “effectively and loyally” to perform its assignment for Micromet, and Goldman held an equal or greater interest in two of the bidders Goldman reached out to during the pre-signing market check;
• the basis for the probability of success rates for the drugs in Micromet’s product pipeline, which was used by Goldman in its analysis, when such underlying information is highly technical, concerns assumptions made by the Board relating to the viability of specific and unique drugs being developed by Micromet and it would be hard to determine whether the rates applied were, as asserted by Plaintiffs, unusually low (Vice Chancellor Parsons noting that Delaware courts repeatedly have held that a board is not required to disclose details underlying a financial advisor’s opinion);
• management’s projections regarding Micromet’s expected use of net operating loss carry-forwards, since the provisions of such information would involve a “level of granular disclosure not required under our law”;
• Goldman’s “sum of the parts” discounted cash flow analysis because, even though it was prepared at the request of the Board, it was not relied on for Goldman’s fairness opinion and the valuation range was substantially similar to the valuation range of the discounted cash flow analysis disclosed; and
• “upside case” projections prepared by management, where such projections were not relied on by the financial advisor and at least some of the directors found the projections to be unreliable and overly optimistic.

Insofar as it reaffirms what is already known to be established law, Micromet is not particularly interesting. However, Micromet is useful to practitioners as a primer for the application of fiduciary duty of disclosure claims to the specifics of financial analyses, and as a reminder of the importance of disclosure with respect to significant conflicting interests of transaction participants.

Endnotes

[1] In re Micromet, Inc., C.A. no. 7197-VCP, slip op. at 32 (Del. Ch. February 29, 2012). Sullivan & Cromwell LLP represented the Buyer, Amgen, Inc., in the transaction and Delaware litigation.
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[2] Id. at 23 (quoting In re 3Com S’holders Litig., 2009 WL 5173804, at *1 (Del. Ch. Dec. 18, 2009) and Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *12 (Del. Ch. Nov. 30, 2007)).
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[3] Id. at 25 (quoting Ryan v. Lyondell Chem. Co., 2008 WL 2923427, at *19 n.115 (Del. Ch. July 29, 2008)).
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[4] Id.
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