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Chancery Court Finds That Res Judicata Bars Plaintiff's Demand for Information Rights Under Merger Agreement

In the Memorandum Opinion, Fortis Advisors LLC v. Shire US Holdings, Inc., No. 2018-0933-JRS (Del. Ch. Feb. 13, 2020), the Court of Chancery granted Shire US Holdings, Inc.’s motion to dismiss under the doctrine of res judicata because the breach of contract claim brought by Fortis Advisors LLC arises from the same transaction that was the subject of a prior action (the “2016 Action”) between the parties, Fortis Advisors LLC v. Shire US Holdings, Inc., No. 12147-VCS (Del. Ch. Aug. 9, 2017).

In the 2016 Action, Fortis Advisors LLC, acting as representative (the “Representative”) for the former stockholders of SARcode Bioscience Inc., a private biopharmaceutical company (the “Target”), in connection with a merger agreement (the “Merger Agreement”), alleged Shire US Holdings, Inc., a Delaware subsidiary of a global biopharmaceutical company (the “Acquiror”), had breached the Merger Agreement by refusing to pay certain milestone payments tied to the results of a clinical trial. In the 2016 Action, the Court of Chancery granted the Acquiror’s motion to dismiss for failure to state a breach of contract claim, concluding that (1) the Acquiror’s interpretation of the operative provision at issue was reasonable based on its plain and unambiguous language and (2) the Representative failed to proffer a competing reasonable construction of such provision (the “2017 Decision”).

After the 2017 Decision, the Representative sought information from the Acquiror that would shed light on how the Acquiror determined whether the milestone payments were owed. When the Acquiror provided some, but not all, of the requested information, the Representative brought this action against the Acquiror, alleging it was entitled to the withheld information under the Merger Agreement, (the “Complaint”). The Complaint asserts two claims: (1) a claim for declaratory relief that the Acquiror must turn over the requested information under the Merger Agreement; and (2) a claim for breach of the Merger Agreement resulting from the Acquiror’s failure to provide the requested information and a prayer for specific performance. The Acquiror moved to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim, arguing the current suit is barred by res judicata.

In Delaware, res judicata will bar a claim when the defendant demonstrates that: (1) the original court had jurisdiction over the subject matter and the parties; (2) the parties to the original action were the same as those parties, or in privity, in the case at bar; (3) the original cause of action or the issues decided was the same as the case at bar; (4) the issues in the prior action must have been decided adversely to the appellants in the case at bar; and (5) the decree in the prior action was a final decree.

According to the Representative, res judicata does not bar the Complaint because: (1) the Court of Chancery reserved the Representative’s right to bring an information rights’ claim in the 2017 Decision; (2) the 2016 Action and the Complaint do not arise from the same transaction; and (3) the Acquiror is equitably estopped from asserting res judicata.

The Court of Chancery rejected all three of the Representative’s claims. On the first claim, the Court found that the 2017 Decision simply commented that the Representative had not brought an information rights’ claim in the 2016 Action but could attempt to bring such a claim if it wished, and the Acquiror could then “raise its defenses.” The Court found that nothing in that statement gave the Representative a hall pass to avoid Rule 12(b)(6) in a subsequent action. On the second claim, the Court found that the Complaint does arise from the same transaction as the 2016 Action because the Merger Agreement makes clear the Representative’s information rights vest upon a determination by the Acquiror that no milestone payments were owed. As a result, when the Representative brought the 2016 Action to recover the milestone payments, the information rights under the Merger Agreement were both known and knowable. On the third claim, the Court found that the Representative could point to no pre-litigation action by the Acquiror that would have caused the Representative to change its position or refrain from asserting its information rights in the 2016 Action.

For the foregoing reasons the Court granted the Acquiror’s 12(b)(6) motion to dismiss the Complaint.

Copyright 2020 K & L Gates

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About this Author

Annette E. Becker, Practice Area Leader, Corporate Lawyer, Securities Compliance Attorney
Practice Area Leader – Corporate & Transactional

Annette Becker has over 20 years experience practicing corporate law with an emphasis on U.S. and cross border mergers and acquisitions for emerging, middle market, and Fortune 500 companies. Ms. Becker advises her company clients and their boards as to corporate governance issues and general corporate matters. Ms. Becker’s transactional experience also includes joint ventures and other complex strategic relationships, securities offerings and securities compliance issues, strategic and venture capital investments, financing transactions, recapitalizations and...

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