In re Transkaryotic Therapies, Inc., C.A. No. 2776 (Del. Ch. June 19, 2008) (C. Chandler)

In this combined appraisal and breach of fiduciary duty action, the Court of Chancery granted partial summary judgment on several of plaintiffs’ non-appraisal claims. Of particular note are the Court’s rulings with respect to plaintiffs’ disclosure claims and plaintiffs’ claim that the merger was not approved by shareholders as required by 8 Del. C. 251(c). The case arose from the merger of Transkaryotic Therapies, Inc. (“TKT”) with and into Shire Pharmaceuticals, PLC (“Shire”). The merger was negotiated over a six month period and approved by a 5 to 2 vote of TKT’s board on April 21, 2005. TKT’s CEO resigned in protest over the merger. The transaction was ultimately approved on July 27, 2005 by less than 52% of the holders of TKT’s stock. On June 20, 2005, ten days after the record date to vote on the merger, TKT released extraordinarily positive Phase III clinical trial results for one of its pipeline drugs. Many of the plaintiffs in the case purchased their stock after the announcement of these clinical trial results. After discovery in the appraisal action, plaintiffs filed a complaint against TKT, Shire, and four of TKT’s directors, alleging that the directors breached their fiduciary duties of loyalty and disclosure, that Shire aided and abetted those breaches, and that the merger was invalid because the shareholder votes were improperly calculated. Shire, TKT and three of the four individual director defendants moved for summary judgment with respect to all of the non-appraisal claims.

The Court first dismissed plaintiffs’ disclosure claims, holding that because a disclosure violation results in irreparable harm and because the Court could no longer provide an equitable cure for such harm since the merger vote had already been conducted, plaintiffs were barred from pursuing claims for breach of the duty of disclosure. The Court held that “this Court cannot grant monetary or injunctive relief for disclosure violations in connection with a proxy solicitation in favor of a merger three years after the merger has been consummated and where there is no evidence of a breach of the duty of loyalty or good faith by the directors who authorized the disclosures.” The Court further held that TKT’s exculpatory charter provision authorized under 8 Del. C. 102(b)(7) was an alternative basis to grant summary judgment to the individual defendants.

The Court also granted summary judgment in favor of the three directors who filed motions on plaintiffs’ duty of loyalty claims. The Court held that the evidence did not support plaintiffs’ argument that those three directors approved the merger for personal and/or professional reasons. Having granted summary judgment to 3 of the 4 individual defendants on plaintiffs’ disclosure and duty of loyalty claims, the Court also dismissed plaintiffs’ claims that Shire aided and abetted those breaches.

The Court denied Shire’s motion for summary judgment with respect to plaintiffs’ claim that Shire aided and abetted the alleged disloyal conduct of the fourth director defendant, Dennis Langer. Because Langer did not move for summary judgment, the Court assumed for purposes of the motion that Langer was disloyal. Plaintiffs alleged that Shire induced Langer to support the merger in exchange for Shire’s agreement to license some of TKT’s products to a joint venture in which Langer would own stock potentially worth $8 million. After considering the evidence, the Court held that there were genuine issues of material fact as to whether Shire knowingly participated in Langer’s assumptive breach and whether such breach proximately caused the damages (i.e. whether but for the alleged side-deal between Shire and Langer, the TKT board would have approved the merger). The Court further held, however, that only those plaintiffs who owned stock on the date TKT's board approved the merger had standing to pursue these claims against Langer and Shire.

Finally, the Court refused to grant Shire’s motion for summary judgment on plaintiffs’ claim that the merger was invalid under 8 Del. C. 251(c). Although the Court acknowledged that under 8 Del. C. 105, the certificate of merger filed with the Secretary of State constitutes prima facie evidence that the shareholders approved the merger, the Court held that the presumption can be overcome if plaintiffs demonstrate that at least the margin of votes by which the merger was approved can be called into question. Because plaintiffs offered evidence creating an issue of fact as to the validity of votes totaling more than twice the margin of approval, the Court held that summary judgment was not appropriate. The Court went on to state, however, that because of policy concerns regarding the need for finality in corporate transactions, at trial plaintiffs would have to submit clear and convincing evidence that the vote was invalid.

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