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Sharehold Representative Services LLC v. Sandoz, Inc.

United States District Court, Second Circuit

August 7, 2013

SHAREHOLD REPRESENTATIVE SERVICES LLC suing on its own behalf and on behalf of the former shareholders of ORIEL THERAPEUTICS, INC., in its capacity as Stockholders' Representative, Plaintiff,
v.
SANDOZ INC., SANDOZ AG, SANDOZ INTERNATIONAL GmbH, JEFF GEORGE, and CHRISTINA ACKERMAN, Defendants.

Roger R. Crane, Brian Koosed, Phillip Rodgers, Molly Nixon-Graf, K&L Gates LLP New York, New York, for Plaintiff.

Arthur E. Brown, Angela R. Vicari, Daphne Murdochowitz, Kaye Scholer LLP, New York, New York, for Defendant Sandoz, Inc.

Faith Gay, Michael Carlinsky, Corey Worcester, Quinn Emanuel Urquhart & Sullivan, LLP New York, New York, Lauren Weeman Misztal, Quinn Emanuel Urquhart & Sullivan, LLP Washington D.C., for Defendants Sandoz AG, Sandoz International GmbH, Jeff George, and Christina Ackerman.

OPINION AND ORDER

DENISE COTE, District Judge.

Shareholder Representative Services LLC ("SRS") asserts a host of claims, including claims of securities fraud under the Securities Exchange Act of 1934, against the defendants on its own behalf and on behalf of the former shareholders of a merged company. Each of the defendants has moved to dismiss SRS's complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Because SRS lacked standing at the time this suit was filed to assert the federal statutory claims upon which the assertion of subject matter jurisdiction rests, the motions to dismiss are granted and this action is dismissed without prejudice.

BACKGROUND

The following facts are taken predominantly from the second amended complaint ("Complaint") and documents integral to it, and are assumed to be true for the purposes of this Opinion. When relevant, references are also made to the original complaint ("Original Complaint") filed on August 10, 2012, and the first amended complaint ("First Amended Complaint") filed on November 13, 2012.

SRS is a stockholder representative that acts on behalf of former shareholders of selling entities in connection with mergers and acquisitions when merger agreements provide for future contingent payments or indemnification obligations. As SRS explains, stockholder representatives play a useful role in mergers and acquisitions by, among other things, alleviating the logistical issues a potential buyer would face if required to do business with hundreds of individual shareholders instead of a single stockholder representative. The defendants Sandoz Inc., Sandoz AG, and Sandoz International GmbH ("Sandoz International") are subsidiaries of nonparty Novartis, the world's second largest producer of generic pharmaceutical drugs. Defendant Jeff George ("George") is the Chief Executive Officer of Sandoz AG, and defendant Christina Ackermann ("Ackermann") was, at relevant times, the Global Head Legal & General Counsel for Sandoz AG.

Negotiations and 2010 Merger Agreement

The issues in the instant action arise out of a merger agreement (the "Merger Agreement") executed in April 2010, in which Sandoz Inc. purchased Oriel Therapeutics, Inc. ("Oriel"), a bio-pharmaceutical company, and the negotiations that preceded the execution of the Merger Agreement. The underlying events began in roughly July of 2009, when Oriel retained counsel to advise it in connection with its potential sale to a third party. The relevant negotiations began in December 2009, when Sandoz AG sent Oriel's counsel a "non-binding bid for the purchase of" Oriel ("Offer Letter"). The Offer Letter was signed by George and Ackermann. The telephone extensions for George and Ackermann listed in the Offer Letter correspond to telephone numbers that purportedly connect to offices at the headquarters of Sandoz International.

As discussed at greater length below, the proposed sale of Oriel involved the transfer and continued development of a medication referred to in this Opinion as Drug X. Thus, the Offer Letter stated that Sandoz AG "believe[d] that Novartis' Sandoz and Pharmaceutical divisions bring to the table several key competencies and strengths that could prove critical to Oriel in order to complete the technical development of its product and establish viable commercial manufacturing operations." The Offer Letter highlighted a German production facility known as Aeropharm. It stated:

In particular, Sandoz has recently invested over 20ac50 Million to develop a state of the art Respiratory manufacturing and Development Center in Rudsolstadt, Germany [("Aeropharm")]. Additionally, Novartis Pharma possesses a very deep knowledge in respiratory device engineering and development and we plan to make those resources available to Oriel as it further scales up its manufacturing processes. Sandoz also plans to leverage its extensive API sourcing and manufacturing capabilities to enable Oriel to gain a greater advantage in sourcing raw materials which we believe could help reduce risk of API supply quality and improve approval timelines.

According to the Complaint, the content of the Offer Letter and "similar oral representations made by and on behalf of Sandoz" convinced Oriel's Board of Directors to pursue exclusive negotiations with the Sandoz defendants. On March 22, 2010, while negotiations were ongoing, representatives of the Sandoz defendants met with representatives of Oriel and certain Oriel shareholders in New York City. At the meeting, Daniel Salvadore, Director of Strategy of Mergers and Acquisitions for Sandoz AG told the Oriel representatives and certain Oriel shareholders that "Aeropharm was a state of the art facility, " that Sandoz AG had "invested 50 million Euros to make it state of the art, " and that Sandoz AG "insisted on manufacturing and testing [Drug X] at Aeropharm." The negotiations resulted in the execution of the Merger Agreement, under which Sandoz Inc. agreed to pay the shareholders of Oriel ("Shareholders") upfront cash consideration and additional cash consideration conditioned on attainment of certain Milestone Events described in the Merger Agreement, in exchange for their shares in Oriel.

The Milestone Events were keyed to certain development goals for Drug X. To understand these Milestone Events it is useful to mention that Drug X is intended to be a generic equivalent of a successful asthma drug ("Brand Name Drug"). The Brand Name Drug's patent is set to expire at an unspecified time in the near future and the Merger Agreement's Milestone Events contemplate that Sandoz Inc. will seek to have Drug X be the "first filed" generic equivalent of Brand Name Drug. Accordingly, the Milestone Events involve the achievement of certain related goals, including attainment of bio-equivalence between the Brand Name Drug and Drug X, "demonstration that [Drug X] maintained stability on store shelves over certain periods of time and under certain conditions, and regulatory approval by the United States Food and Drug Administration." It is alleged that several of the requirements for achieving the Milestone Events are predicated on Drug X being tested and produced at the Aeropharm facility in Germany.

Role of SRS under the Merger Agreement

The Shareholders were represented in the merger by plaintiff SRS. The Merger Agreement provides that it is "made and entered into" by Sandoz Inc., Oxford Merger Sub Corp. ("Oxford"), [1] Oriel, and SRS, "solely as the Stockholders' Representative." The Merger Agreement provides that it is "enforceable by and inure[s] solely to the benefit of the parties" to the Merger Agreement. The Shareholders did not individually sign the Agreement.

Section 8.1 of the Merger Agreement describes the role of SRS as the agent and attorney-in-fact of the Shareholders. It provides, in part:

By virtue of the adoption of this Agreement and/or the cancellation by a Former Holder of Company Options or Company Warrants in exchange for Merger Consideration, Option Consideration or Warrant Consideration pursuant to this Agreement, the Former Holders irrevocably nominate, constitute and appoint Shareholder Representative Services LLC as the agent and true and lawful attorney-in-fact of the Former Holders ("Stockholders' Representative") to take any and all actions and make any and all decisions required or permitted to be taken or made by the Stockholders' Representative under this Agreement or the Escrow Agreement, including the exercise of the right to... (iv) agree to, negotiate, enter into settlements and compromises of and comply with court orders with respect to claims for indemnification made by Parent under Section 7 or disputes regarding Section 1.7 [Sandoz Inc.'s obligation to use Diligent Efforts to achieve Milestone Events]; and (v) take all actions necessary or appropriate in the good faith judgment of the Stockholders' Representative for the accomplishment of the foregoing. ...

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