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Gaines v. Narachi, et al., C.A. No. 6784 (Del. Ch. Oct. 6, 2011) (Noble, V.C.)

October 6, 2011

Plaintiff, a stockholder of AMAG Pharmaceuticals, Inc. (“AMAG”), previously moved for expedited proceedings in connection with its motion to preliminarily enjoin a proposed merger between AMAG and Allos Therapeutics, Inc. (“Allos”). In denying plaintiff’s motion to expedite, the Court found that plaintiff had not pled any colorable claims. Plaintiff moved for reconsideration of the portion of the Court’s ruling holding that plaintiff failed to plead a colorable claim that the proxy suffered from a material omission.

Under the terms of the proposed merger, AMAG stockholders would own 61% of the new company, with Allos stockholders owning the remaining 39%. In assessing the exchange ratio, AMAG’s directors engaged Morgan Stanley to provide a fairness opinion. In connection therewith, Morgan Stanley performed a DCF analysis. Although the proxy statement disclosed AMAG’s projected future revenue and EBIT under two scenarios, the proxy did not disclose the forecasted free cash flows utilized by Morgan Stanley in performing its DCF. Plaintiff argued that the failure to disclose the forecasted free cash flows constituted a material omission. The Court rejected this argument on the motion to expedite, but on plaintiff’s motion for reconsideration held that plaintiff pled a colorable claim that the proxy’s omission of free cash flow projections utilized by Morgan Stanley was a material omission that raised a threat of irreparable injury.

In granting plaintiff’s motion for reconsideration, the Court reasoned that a blanket rule does not exist under Delaware law providing that free cash flow estimates used in a DCF analysis must always be disclosed. The Court further reasoned that the rationale for requiring disclosure of free cash flow estimates in prior decisions was not present in this case because the shareholders were not being cashed out in the proposed transaction. The Court nevertheless held that plaintiff had met the standard on a motion to expedite by articulating a sufficiently colorable claim and a sufficient possibility of a threatened irreparable injury. In particular, the Court relied upon the decision in Maric Capital Master Fund, Ltd. v. Plato Learning, Inc., 11 A.3d 1175 (Del. Ch. 2010), in which the Court enjoined a proposed merger pending disclosure of free cash flow projections, despite the fact that the proxy disclosed projected revenues, EBIT, and a variation of EBITDA. The Court further stated that if the record demonstrated that AMAG management provided Morgan Stanley with free cash flow projections — as opposed to Morgan Stanley deriving its free cash flow estimates from the disclosed EBIT projections — it could bolster plaintiff’s argument. Accordingly, the Court ordered the parties to supplement the record and brief the limited issue of whether the proxy’s omission of the free cash flow projections utilized by Morgan Stanley was a material omission that raised a threat of irreparable injury. 

The Court also considered, but rejected, defendants’ argument that plaintiff’s request for injunctive relief was barred by the doctrine of laches. The Court found that defendants would suffer no prejudice given the amount of work already expended on the claim.

The full opinion is available here