Fortis Advisors LLC v. Allergan W.C. Holding Inc. ( 2020 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
May 14, 2020
Bradley R. Aronstam, Esquire Michael A. Barlow, Esquire
Roger S. Stronach, Esquire Daniel J. McBride, Esquire
Ross Aronstam & Moritz LLP Abrams & Bayliss LLP
100 South West Street, Suite 400 20 Montchanin Road, Suite 200
Wilmington, DE 19801 Wilmington, DE 19807
RE: Fortis Advisors LLC, v. Allergan W.C. Holding Inc.,
C.A. No. 2019-0159-MTZ
Dear Counsel:
I write regarding Defendant’s Motion to Treat Real-Party-in-Interest Sellers
as Parties for Purposes of Discovery and Trial, and to Compel Discovery (the
“Motion”).1 The Motion, filed on January 17, 2020, addresses Defendant Allergan
W.C. Holding Inc.’s (“Allergan”) request for an order requiring the former
stockholders of Oculeve, Inc. (the “Stockholders”) to participate in discovery as real
parties in interest and to be subject to trial subpoenas as parties; or in the alternative,
compelling the Stockholders’ agent, Plaintiff Fortis Advisors LLC (“Fortis” or
“Shareholder Representative”), to procure and produce documents and testimony
from the Stockholders. The parties completed briefing on the Motion on February
1
Docket Item (“D.I.”) 48.
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27. On March 2, I held a hearing on the Motion and took the matter under
advisement. For the reasons that follow, the Motion is denied.
I. Background
This case arose out of Allergan’s merger with Oculeve under the Agreement
and Plan of Merger (the “Merger Agreement”) executed on July 5, 2015. Under
Section 2.10(a) of the Merger Agreement, the Stockholders appointed Fortis to be
the Shareholder Representative, acting as the Stockholders’ “sole, exclusive, true
and lawful agent, representative and attorney-in-fact” with respect to “any and all
matters relating to, arising out of, or in connection with” the Merger Agreement,
including contingent payments.2 The Agreement provides that “[a]ll actions,
notices, communications and determinations by or on behalf of the [Stockholders]
shall be given or made by the Shareholders’ Representative.”3 Specifically, Fortis
was appointed to “receive service of process in connection with any claims under
this Agreement.”4 “[T]he [Stockholders] do not have any requirements,
prerequisites or veto rights in connection with the Shareholders’ Representative’s
2
D.I. 10 [hereinafter “Am. Compl.”], Ex. A § 2.10(a)(i) [hereinafter “Merger Agreement”].
3
Id. § 2.10(a).
4
Id. § 2.10(a)(vii).
Fortis Advisors LLC, v. Allergan W.C. Holding Inc,
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fulfillment of its obligations.”5 The Merger Agreement does not grant Fortis access
to the Stockholders’ books and records. Fortis’s obligations are limited to those
enumerated in the Merger Agreement.6
Allergan bargained for certain access to Oculeve information. Under Section
6.2, Oculeve agreed to “make available for inspection by [Allergan] and its
Representative . . . all of [Oculeve’s and its Affiliates’] respective properties, assets,
books of accounts, records . . . and any other materials requested by any of them
relating to [Oculeve] and its existing and prospective businesses and assets and
Liabilities.”7 Oculeve also agreed to make its officers and senior management
available to Allergan “to verify and discuss the information the information
furnished to [Allergan] and its Representatives and otherwise discuss [Oculeve]’s
existing and prospective businesses and assets and Liabilities.”8 Under Section
6.3(b), the parties also agreed to make available “any and all information or books
5
Id.
6
Id. § 2.10(a) (“Notwithstanding the foregoing, the Shareholders’ Representative shall
have no obligation to act on behalf of the [Stockholders], except as expressly provided
herein and in the Escrow Agreement, and for purposes of clarity, there are no obligations
of the Shareholders’ Representative in any other ancillary agreement, schedule or exhibit
to be delivered in connection with this Agreement or the Escrow Agreement or in the
Disclosure Schedule.”).
7
Id. § 6.2.
8
Id.
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and records necessary to prepare or file” a tax return, including a pre-closing tax
period or to respond to an audit for any pre-closing tax period.9
Allergan and Fortis dispute the Stockholders’ entitlement to post-closing
milestone consideration under the Merger Agreement. For the Stockholders to earn
the milestone payment, Allergan’s medical device had to achieve a specifically
defined enhanced treatment authorization (the “Enhanced Product Labeling
Milestone”) from the Federal Drug Administration (“FDA”).10 After the FDA gave
its authorization, Allergan declined to pay the Stockholders the milestone payment,
contending the FDA’s authorization fell short of what was contractually required.11
Fortis, as Shareholder Representative, asserts Allergan materially breached
the Merger Agreement by failing to make the Enhanced Product Labeling Milestone
payment,12 and by failing to use commercially reasonable and good faith efforts to
achieve the Enhanced Product Labeling Milestone before March 31, 2018.13 I
sustained these claims over Defendants’ motion to dismiss in a memorandum
9
Id. § 6.3(b).
10
Id. §§ 1.1, 2.11(b)(ii).
11
Am. Compl. ¶¶ 31–32, 36–37.
12
Merger Agreement § 2.11(b)(ii).
13
See id. §§ 1.1, 2.11(b)(ii).
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opinion issued October 30, 2019 (the “Opinion”).14 The parties lifted a stipulated
stay on discovery following the Opinion.15
On December 3, 2019, Allergan served its initial document requests (the
“Requests”), which define “Sellers” as
each of the Sellers named in Schedule I to the Merger Agreement, and
each of their corporate affiliates, agents, officers, directors,
representatives, attorneys, advisors, consultants, or contractors
(including their counsel in connection with the Merger Agreement,
Wilson Sonsini Goodrich & Rosati, and their attorney-in-fact in this
litigation, Fortis Advisors LLC).16
This definition includes over fifty individual non-party selling stockholders.17 Fortis
objected to the Requests “on the basis that they are directed to the ‘Sellers’ who are
not parties to this action,” stating, “Fortis’s responses to the Requests and any
production of documents in response to the Requests will be on behalf of Fortis
only.”18
14
D.I. 39.
15
D.I. 24.
16
D.I. 49 [hereinafter “Haller Decl.”], Ex. 12, Defendant’s First Request for Inspection and
Production of Documents Directed to Plaintiffs, at 4.
17
Merger Agreement at Schedule I.
18
Haller Decl. Ex. 13, Plaintiff Fortis Advisors LLC’s Objections and Responses to
Defendant Allergan W.C. Holding Inc.’s Request for Inspection and Production of
Documents, at 2.
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The parties met and conferred. Both sides offered meaningful compromises,
but the parties did not reach an agreement was reached.19 The Motion followed.
II. Analysis
In evaluating the relationship between and duties of Fortis and the
Stockholders, I begin with the language of the Merger Agreement. Delaware law
presumes parties are bound by the language of the agreement they negotiated,
especially when the parties are sophisticated entities that have engaged in arms-
length negotiations.20
The Merger Agreement appoints Fortis as the Stockholders’ “sole, exclusive,
true and lawful agent, representative and attorney-in-fact of all Sellers . . . with
respect to any and all matters relating to, arising out of, or in connection with, this
Agreement.”21 In particular, Allergan agreed that Fortis would “act for the Sellers
with regard to all matters pertaining to the . . . Contingent Payments,” including the
19
Fortis has offered to accept electronic service of deposition and document subpoenas for
certain members of the Stockholder Advisory Group identified in Section 2.10(d) of the
Merger Agreement, and trial subpoenas for Oculeve’s co-founder and CEO, Michael
Ackermann, as well as perhaps for other Advisory Group witnesses depending on how the
case unfolds. Haller Decl. ¶¶ 5, 6, 12, 24, Ex. 15; D.I. 55 ¶¶ 23, 26. Fortis has also offered
to allow Allergan to use Delaware subpoenas, so long as any depositions take place where
the witnesses are located. D.I. 55 ¶ 26.
20
See HC Cos., Inc. v. Myers Indus., Inc., 2017 WL 6016573, at *5 (Del. Ch. Dec. 5, 2017).
21
Merger Agreement §§ 2.10(a), 2.11(b)(ii).
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Enhanced Product Labeling Milestone.22 The Merger Agreement does not empower
Fortis to compel Stockholder participation in litigation: rather, it appoints Fortis to
litigate in the Stockholders’ stead.
The contractual appointment of a shareholder representative to bring certain
actions makes that representative the real party in interest in those actions. 23 This
structure is helpful to both buyers and sellers, as it “enables each side to resolve post-
closing disputes efficiently.”24 Buyers also benefit from the fact that the structure
makes a judgment against the representative binding on all the stockholders,
eliminating the risk of inconsistent judgments.25 This Court has been “reluctant to
disregard the clear contractual authority of the Stockholders’ Representatives at the
22
Id. § 2.10(a)(i).
23
Coughlan v. NXP B.V., 2010 WL 1531596, at *2–3 (Del. Ch. Apr. 15, 2010) (“Coughlan,
as Stockholders’ Representative, is a party in whose name a contract has been made for the
benefit of the GloNav Stockholders, who are admittedly the real parties in interest.
Accordingly, she may bring this action without joining the GloNav Stockholders.”).
24
Ballenger v. Applied Dig. Sols., Inc., 2002 WL 749162, at *10 (Del. Ch. Apr. 24, 2002);
see also Mercury Sys., Inc. v. S’holder Representative Servs. LLC, 2014 WL 591218, at *1
(D. Mass. Feb. 14, 2014) (citing Ballenger for the principle that “a shareholder
representative [is] a helpful mechanism for resolving post-closing disputes efficiently and
quickly” and determining that the inclusion of individual shareholders as defendants would
“eviscerat[e] the salutary purpose of having appointed a shareholder representative in the
first place”).
25
Ballenger, 2002 WL 749162, at *11.
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behest of a party, [Defendant], whose aims are clearly adverse to those of the former
[Stockholders].”26
Allergan’s Motion seeks to displace Fortis and the agreed-upon shareholder
representative structure. To hold that the Stockholders must participate in discovery
as real parties in interest would be contrary to the language and purpose of the
Merger Agreement’s shareholder representative structure. Allergan bargained for
structural efficiency in closing the merger and in adjudicating post-closing disputes,
and cannot now avoid that structure because third-party discovery introduces some
tangential inefficiency in litigation against the sellers.27
Further, the Merger Agreement does not grant Fortis control over the
Stockholders or their documents. “In the Rule 34 context, [c]ontrol has been defined
to include ‘the legal right to obtain the documents requested upon demand.”28 A
party has possession and control of documents if it “has the power, unaided by the
26
Id.
27
D.I. 63 at 9 [hereinafter “Hrg. Tr.”].
28
Deephaven Risk Arb Trading Ltd. v. UnitedGlobalCom, Inc., 2005 WL 1713067, at *11
(Del. Ch. July 13, 2005) (quoting 7 James Wm. Moore et al., Moore’s Federal Practice §
34.14[2][b] (3d ed. 2005)).
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court, to force production of the documents.”29 The Merger Agreement does not
give Fortis any right to compel Stockholders to produce documents; accordingly,
Fortis has no control over those documents and no obligation to produce them in
discovery.30
Both Fortis and Allergan note that no Delaware authority addresses the scope
of a shareholder representative’s control over the stockholders’ documents.31
Allergan has submitted cases from outside Delaware, but I find them
distinguishable.32
29
Deephaven, 2005 WL 1713067, at *11; see Dawson v. Pittco Capital P’rs, L.P., 2010
WL 692385, at *1 (Del. Ch. Feb. 15, 2010) (“Court of Chancery Rule 34 requires
defendants to produce all documents within their possession, custody, or control.”).
30
See Theravectys SA v. Immune Design Corp., 2014 WL 5500506, at *2 (Del. Ch. Oct.
31, 2014) (declining “to apply a broader definition of ‘control’ that would also include an
inquiry into the practical ability of the subpoenaed party to obtain documents” (quoting
Cradle IP LLC v. Tex. Instruments, Inc., 2013 WL 1794992, at *1 (D. Del. Apr. 29,
2013))).
31
Plaintiff’s counsel from Delaware and California contend that Allergan’s position is
unusual in this Court. Hrg. Tr. at 13, 26; id. at 26 (“I checked with . . . my client at Fortis.
He said this is the first case he’s aware of in which a defendant in a merger agreement case
has taken the position that the selling stockholders should be treated as parties . . . a real
departure from the practice that’s followed in Chancery . . .”) (Martin S. Schenker,
Esquire); id. (“That’s been similar to my experience as well, not only with Fortis but also
with respect to Shareholder Representative Services.”) (Bradley R. Aronstam, Esquire).
32
Royal Park Invs. SA/NV v. Deutsche Bank Nat’l Tr. Co., 314 F.R.D. 341 (S.D.N.Y.
2016); JPMorgan Chase Bank, N.A. v. KB Home, 2010 WL 1994787 (D. Nev. May 18,
2010); JPMorgan Chase Bank v. Winnick, 228 F.R.D. 505 (S.D.N.Y. 2005); In re Infant
Formula Antitrust Litig., 1992 WL 503465 (N.D. Fla. Jan. 13, 1992). Delaware courts
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Allergan points to two cases: JPMorgan Chase Bank v. Winnick33 and
JPMorgan Chase Bank, N.A. v. KB Home34. In both Winnick and KB Home, the
court granted motions to compel discovery requiring administrative agents,
established under credit agreements, to produce discovery in the principal lenders’
possession, custody, and control. Neither of the underlying credit agreements
included litigation arrangements such as those present in the Merger Agreement.
This distinction is dispositive.
In Winnick, JPMorgan Chase Bank (“the Bank”) served as administrative
agent to lenders who sued a borrower company’s directors and employees for
fraud.35 The Bank’s authority as agent was governed by a credit agreement to which
the borrower company was a party. Although the Bank was the assignee of certain
litigation claims, the credit agreement did not expressly establish any litigation
arrangement.36 Considering the underlying agreement, the court placed the burden
of discovery on the administrative agent, stating, “If plaintiff and the assignees failed
have not cited any of these authorities in the context of a shareholder representative
framework or otherwise.
33
228 F.R.D. 505.
34
2010 WL 1994787.
35
228 F.R.D. at 506.
36
Id. at 507; D.I. 59, Ex. 2 at 9–10.
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to obtain rights to insist on cooperation from their assignors in providing such
discovery, and cannot persuade the lending Banks to cooperate now, that is their
problem, not defendants’.”37
In KB Home, the Bank again served as administrative agent for a group of
lenders who loaned money to the defendants.38 The Bank and the lenders were
parties to a written credit agreement, which again assigned certain rights to the Bank
but did not delineate any litigation arrangement. The borrower defendant, which
was not a party to the credit agreement, moved to compel lender discovery from the
Bank as the administrative agent.39 The court analyzed Winnick and reasoned that
“[a]ny failure to obtain rights to insist on cooperation in discovery [in the credit
agreement] was the Bank’s fault and is therefore the [Bank’s] problem, not the
defendants’.”40
37
Winnick, 228 F.R.D. at 507 (“It would be unfair to the defendants to permit plaintiff and
the assignees to divorce the benefits of the claims from the obligations that come with the
right to assert them, to the detriment of defendants . . . having purchased the right to bring
the lawsuit, there is nothing unfair about imposing on them the cost of purchasing
cooperation or otherwise complying with discovery obligations”).
38
2010 WL 1994787, at *1.
39
Id. at *1–2.
40
Id. at *5.
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Here, the lack of authority to compel the stockholders’ participation is not
Fortis’s burden to bear as agent. Unlike the credit agreements in KB Home and
Winnick, which were silent as to litigation responsibilities, the Merger Agreement
specifies Fortis is to act for the Sellers with regard to all matters pertaining to the
Contingent Payments. Allergan consented to the shareholder representative
structure as formulated in the Merger Agreement, which does not include the
discovery rights it seeks to enforce, and which limits itself to the enumerated rights.41
The fact that the Merger Agreement does not give Fortis control over the
Stockholders and their discovery is not Fortis’s “fault” or “problem”—it is a result
that Allergan bargained for.
Further, Fortis has submitted that (i) it has no “substantive relationship with
any of the Stockholders outside of the Advisory Committee and has had no
communication with them about the litigation,” and (ii) Fortis’s litigation counsel
was engaged for Fortis alone, not on the Stockholders’ behalf.42 These facts bolster
the conclusion that Fortis does not have control over the Stockholders’ documents,
and raise the threat of legal conflicts if Fortis were ordered to procure discovery on
the Stockholders’ behalf.
41
See Merger Agreement § 2.10(a).
42
D.I. 55, Pl.’s Opp’n Br. ¶ 6; id., Adam Lezack Decl., ¶¶ 5, 8.
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As a practical matter, upholding the terms of the Merger Agreement will not
significantly prejudice Allergan in this litigation. Allergan retained most of the
Oculeve documents post-closing.43 Allergan explained that its Motion seeks
discovery into what Oculeve’s investors thought about the merger.44 This issue does
not appear to me to be at the core of the parties’ dispute, and in any event, it can be
explored through third-party discovery.
III. Conclusion
The Merger Agreement’s shareholder representative structure identifies Fortis
as the real party in interest in this action, and does not give Fortis control over the
Stockholders’ discoverable material. Allergan’s Motion is denied.
To the extent an order is required to implement this decision, IT IS SO
ORDERED.
Sincerely,
/s/ Morgan T. Zurn
MTZ/ms Vice Chancellor
cc: All Counsel of Record via File & ServeXpress
43
Hrg. Tr. at 10 (“Q: Can you elaborate for me a little bit more on basically what is already
is in Allergan’s control and what remains with Oculeve? . . . A: Well, Allergan should
have most of the documentation.”).
44
D.I. 48 ¶ 8(d); Hrg. Tr. at 10–11.