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Chancery Court Dismisses Breach of Contract Claim Due to Plaintiff’s Failure to Proffer A Reasonable Construction of Merger Agreement Provision

In Fortis Advisors LLC v. Shire US Holdings, Inc., No. 12147-VCS (Del. Ch. Aug. 9, 2017), the plaintiff, Fortis Advisors LLC, which was acting as representative (the “Representative”) for the former stockholders of SARcode Bioscience Inc., a private biopharmaceutical company (the “Target”), pursuant to a merger agreement, alleged that the acquiror Shire US Holdings, Inc., a Delaware subsidiary of a global biopharmaceutical company (the “Acquiror”), breached the provisions of a merger agreement by refusing to pay certain milestone payments that were due.  The Court of Chancery granted the Acquiror’s motion to dismiss for failure to state a breach of contract claim, concluding that, while the Acquiror’s interpretation of the operative provision at issue was reasonable based on its plain and unambiguous language, the Representative failed to proffer a competing reasonable construction of such provision and thus the Court was required to grant the motion to dismiss.

The parties entered into the merger agreement, dated as of March 23, 2013, while the Target was developing and seeking regulatory approval for a drug, Lifitegrast, that showed promise to treat the signs (e.g., staining or tear break-up time, as based on objective signs identified by an eye-care professional) and symptoms (e.g., eye dryness or discomfort, as subjectively reported by patients) of dry eye disease. The consideration payable under the merger agreement consisted of certain fixed up-front payments and subsequent contingent payments that depended on the Acquiror’s ability to move the drug through clinical trials and regulatory approvals.  The Representative alleged that two of the contingent milestones had been achieved and the Acquiror was obligated to make $425 million in milestone payments to former Target stockholders.  The Acquiror denied that the two milestone payments had been met and indeed insisted that they would never be met.

Prior to execution of the merger agreement, the Target conducted a Phase II clinical trial and a Phase III clinical trial (referred to as “OPUS-1”) that successfully established the efficacy and safety of Lifitegrast in reducing the signs of dry eye disease. A second Phase III clinical trial (referred to as “OPUS-2”) was designed and initiated in late 2012, and had two co-primary efficacy endpoints specified in the so-called OPUS-2 Study Protocol:  the sign endpoint (designed to evaluate the drug’s efficacy in treating the signs of dry eye disease) and the symptom endpoint (designed to evaluate the drug’s efficacy in treating the symptoms of dry eye disease).  Under the OPUS-2 Study Protocol, the results for the endpoints required statistical significance.

The Representative alleged that, under the merger agreement, the former Target stockholders were entitled to two contingent payments triggered by the occurrence of the “OPUS-2 Study Endpoint Achievement Date” (the “Achievement Date”): one payment is referred to as the OPUS-2 Successful Completion Milestone and the other is referred to as the Base Case Approval Milestone.  The Achievement Date was defined in the merger agreement as occurring:

upon receipt by or on behalf of [Acquiror]…of audited final tables, figures and listings from the OPUS-2 Study (x) that demonstrate both components of the co-primary efficacy endpoints of the OPUS-2 Study as specified in the OPUS-2 Study Protocol have been achieved and (y) which do not, in a significant and clinically meaningful respect, result a materially less favorable safety/tolerability profile…, taken as a whole, for the Product than for corresponding data generated for the Product in the OPUS-1 Study, which less favorable safety/tolerability profile would reasonably be expected to significantly reduce anticipated Product Sales….

If the Achievement Date had been achieved, then the former Target stockholders would be entitled to receive the two payments at issue pursuant to the following terms of the merger agreement:

  • OPUS-2 Successful Completion Milestone. “Within ten (10) business days following the [Achievement Date] (the “OPUS-2 Successful Completion Milestone”), [Acquiror] shall notify the [Representative] that the OPUS-2 Successful Completion Milestone has been satisfied and shall, within twenty (20) business days following the date of achievement of the OPUS-2 Successful Completion Milestone, pay…$175,000,000 (such amount, the ‘OPUS-2 Successful Completion Milestone Payment’)”; and

  • Base Case Approval Milestone. “Within ten (10) business days following receipt by or under the authority of [Acquiror]…of the first Regulatory Approval in the United States for a Product for the Covered Indication with the co-primary Sign and Symptom specified in the OPUS-2 Study Protocol included in the ‘Indications and Usages’ section of the label of the Product (the ‘Base Case Approval Milestone’), [Acquiror] shall notify the [Representative] that the Base Case Approval Milestone has been satisfied and shall, within twenty (20) business days following the date of achievement of the Base Case Approval Milestone, pay…$250,000,000 (such amount, the ‘Base Case Approval Milestone Payment’)….”

Upon completion of the OPUS-2 Study in November 2013, the Acquiror informed the Representative that the OPUS-2 Study achieved the symptomendpoint but failed to achieve the sign endpoint.  The Acquiror designed and initiated an additional Phase III clinical trial (the “OPUS-3 Study”) in November 2014 and, in early 2015, the Acquiror filed a New Drug Application (an “NDA”) with the Food and Drug Administration (the “FDA”), which included evidence from the OPUS-2, OPUS-1 and other previous trials; the FDA declined to approve Lifitegrast based on the data submitted in the NDA.

Apparently believing the Achievement Date had occurred, the Representative wrote the Acquiror to ask whether it intended to make the OPUS-2 Successful Completion Milestone Payment. The Acquiror responded, stating that none of the milestones at issue had been met, or would ever be met, since the Achievement Date had not occurred because the OPUS-2 Study failed to meet the sign endpoint.

In February 2016, the Acquiror refiled its NDA with the FDA, which included additional OPUS-3 Study data, and it was approved. After the FDA approved the label relating to the drug and the Acquiror posted it on its website, the Representative alleged that the former Target stockholders were also due the Base Case Approval Milestone Payment, due to the regulatory approval, in addition to the OPUS-2 Successful Completion Milestone Payment.

As a threshold matter, the Court noted that questions regarding contract interpretation can be answered as a matter of law on a motion to dismiss only “[w]hen the language of a contract is plain and unambiguous.” Dismissal of a contract dispute under Rule 12(b)(6) is proper “only if the defendants’ interpretation is the only reasonable construction as a matter of law.”

The Acquiror contended that the merger agreement was unambiguous and required that both the sign and symptom endpoints be achieved in a statistically significant manner in the OPUS-2 Study and, because the OPUS-2 Study did not achieve the sign endpoint, the Achievement Date had not occurred and will never occur. In supporting its argument, the Acquiror pointed to language in the definition of Achievement Date (the occurrence of which is a threshold requirement for both payments at issue), which is defined to occur “upon receipt…of audited final tables, figures and listings from the OPUS-2 Study…that demonstrate that both components of the co-primary efficacy endpoints of the OPUS-2 Study as specified in the OPUS-2 Study Protocol have been achieved” (emphasis added).

The Representative argued that the Achievement Date was achieved because clinical data used in determining whether the sign and symptom endpoints have been met are not limited to OPUS-2 Study data (where the symptom endpoint was achieved), but can incorporate prior clinical trials (where, in OPUS-1, the sign endpoint was achieved). In particular, the Representative made three principal arguments:

  • the definition of Achievement Date did not expressly exclude data from any clinical trials other than the OPUS-2 Study;

  • the definition of Achievement Date requires that a Phase III clinical trial need only be conducted “in accordance with” the OPUS-2 Study Protocol, which means conducted “in a way that agrees with or follows” it, but need not be identical; and

  • once the FDA approved the drug label, the Representative was able to confirm that, contrary to the Acquiror’s representations, the OPUS-2 Study did in fact irrefutably achieve both endpoints.

After considering the Representative’s proposed construction, the Court found it “unreasonable.” With respect to the first point, the Court noted that the definition of Achievement Date “unambiguously reflects an intent that only [data from the OPUS-2 Study] should be considered when assessing whether the sign and symptom co-primary efficacy endpoints had been achieved” and that the Representative’s construction would require the insertion of additional text into the definition of Achievement Date.

The Court found the second point similarly unpersuasive, noting, among other things, that (i) the OPUS-2 Study was defined as a clinical trial “to be conducted” and thus the OPUS-1 Study did not fit within the temporal requirements in the definition and (ii) OPUS-1 and OPUS-2 studies were conducted pursuant to separately defined protocols and thus the OPUS-1 Study was not conducted “in accordance with” the OPUS-2 Study Protocol.

Finally, with respect to the Representative’s third argument, that approval of the FDA label for the drug provided irrefutable proof that the OPUS-2 Study achieved both endpoints, the Court noted that this ignored that the OPUS-2 Study Protocol specifically required that the study data achieve statistical significance in order for the OPUS-2 Study to achieve both endpoints, and the Representative did not plead that the label in question actually showed the required statistical significance.

As a result, the Court concluded that the Representative’s construction of the merger agreement was unreasonable, while the Acquiror’s construction was reasonable based on a clear an unambiguous reading of the contract, and granted the motion to dismiss for contract breach.

Fortis Advisors LLC v. Shire US Holdings Inc., C.A. No. 12147-VCS (Del. Ch. Aug. 9, 2017)

Copyright 2018 K & L Gates


About this Author

Christopher H Cunningham, corporate law, transactional law, Seattle, Washington, K L Gates, public finance

Chris Cunningham is a partner with over 20 years of experience in corporate and transactional law. He has substantial experience in domestic and international mergers and acquisitions, the representation of start–up organizations and emerging growth companies, software and video game companies, and capital markets. In the area of capital markets, Chris’ practice includes private and public offerings of equity and debt securities of U.S. and international issuers, with an emphasis on transactions involving clients based in Asia.


Joseph Phelps, KL Gates, Emerging Growth attorney, Venture Capital lawyer

Joseph Phelps is an associate in the firm’s Seattle office. He focuses his practice on corporate matters.

Prior to joining K&L Gates, Mr. Phelps was an associate at another Seattle law firm. He has particular experience with corporate and financial transactions, particularly advising public and high-growth emerging companies in various sectors, with a focus on technology and internet-based companies.