The plaintiff shareholder stated a proper purpose to investigate a potential breach of the duty of loyalty and provided a credible basis for his demands, the court found.
The Delaware Court of Chancery has granted a shareholder’s demand for books and records from a pharmaceutical company regarding a merger. According to the court, the plaintiff demonstrated a credible basis from which the court could infer the existence of possible mismanagement warranting further investigation. Rejecting the defendant’s contention that the document request was pretextual and made under false pretenses, the court found no misalignment in the plaintiff’s and his counsel’s interest and ordered production of the demanded books and records for inspection. The court declined, however, to shift the plaintiff’s fees and costs to the defendant (Donnelly v. Keryx Biopharmaceuticals, Inc., October 24, 2019, Glasscock, S.).
Merger. In 2017, Keryx Biopharmaceuticals began to explore a potential merger via a special committee chaired by an appointee of Baupost Group Securities, Keryx’s largest shareholder. In addition to its ownership interest, Baupost had a contractual right to appoint one director and one observer to Keryx’s seven-director board. The committee began to engage in merger discussions with Akebia Therapeutics and communicated with Baupost to ensure its support. In February 2018, Keryx declined to go forward with Akebia, citing concerns with its development stage and balance sheets and cash positions.
Shortly after Keryx’s board determined that a merger with Akebia was not in Keryx’s interest, Baupost began to conduct its own due diligence on Akebia. Thereafter, the Keryx board reconstituted the special committee and reengaged in negotiations with Akebia. As part of the change in control, several Keryx officers received benefits, including single-trigger bonuses. The committee ultimately recommended the merger, and the board unanimously approved. Stockholders approved the merger in December 2018.
A Keryx shareholder served a demand letter on the company, citing concerns about possible breaches of the duty loyalty based on the fairness of the merger price, Baupost’s potential influence, bonuses paid in connection with the merger, and certain disclosure issues. Keryx refused to produce any of the demanded books and records.
Proper purpose. The court noted that, among other things, Section 220 of the Delaware General Corporation Law requires a shareholder seeking to inspect books and records to state a proper purpose for the requested inspection. A defendant may resist a demand if it can demonstrate that the stated proper purpose is not the actual purpose, including when litigation is lawyer, not client, driven, the court explained. The defendant contends that the reasons for investigation articulated by the shareholder in his deposition and those set forth in the demand from counsel differ because the adequacy of disclosure is a concern of the shareholder’s counsel, not the shareholder. However, the court explained, the shareholder expressed a proper purpose regarding an investigation into breach of duty regarding the merger, which is not a pretextual, counsel-driven demand.
“The [p]laintiff is also entitled to documents reflecting the extent to which any potential wrongdoing was appropriately disclosed in the proxy,” the court stated.
Credible basis for demand. To meet the burden for inspection, the shareholder must only show a credible basis from which the court could infer possible mismanagement that would warrant investigation; a plaintiff is not required to show that wrongdoing is actually occurring, the court stated. The shareholder has offered evidence that Baupost had improper influence and convinced the Keryx board to resume consideration of the merger, and the plaintiff does not need to demonstrate actual control at this stage to prevail, according to the court. From the complaint, the court can infer that Baupost had significant influence on Keryx and its board through its appointees and that Baupost’s approval was a prerequisite for the merger. The shareholder’s evidence is sufficient to suggest that Baupost held a controlling position and extracted benefits not shared with other Keryx shareholders, the court found.
No fee shifting. The court, however, rejected the shareholder’s contention that the defendant engaged in “bad-faith” litigation conduct. Bad faith means a “frivolous opposition in an attempt to game the system,” the court stated, and the shareholder demonstrates nothing beyond a good-faith dispute over the purpose and scope of a books-and-records demand. As such, the court denied the shareholder’s request to shift fees to the defendant.
The case is C.A. No. 2018-0892-SG.
Attorneys: Peter B. Andrews (Andrews & Springer LLC) for Michael J. Donnelly. David E. Ross (Ross Aronstam & Moritz LLP) for Keryx Biopharmaceuticals, Inc.
Companies: Keryx Biopharmaceuticals, Inc.
MainStory: TopStory CorporateGovernance CorpGovNews GCNNews MergersAcquisitions DelawareNews
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