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KEYWORD: Preferred Stock

Case Name:
FRANK G. PILKIEWICZ, PH. D., ET AL. V. TRANSAVE, LLC
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 6319-CS
Keywords:
Appraisal Action, Fair Value, Preferred Stock
Industry:
Pharmaceuticals, Biotechnology
Professionals:
David G. Clarke, ASA, Michael J. Mattson, William Jeffers, CFA, Joseph W. Thompson, CFA, ASA, William P. McInerney, ASA

Transave, Inc. was a privately-held biopharmaceutical company focused on developing drugs for the treatment of lung infections. In December 2010, Transave merged with Insmed, Inc., a publicly traded shell company.

Under the terms of the merger agreement, Insmed acquired all of the outstanding capital stock of Transave and paid off Transave’s debt of $7.8 million. Transave preferred and common stockholders received, in the aggregate, (i) approximately 25.9 million shares of Insmed common stock, (ii) approximately 91.7 million shares of Insmed Series B Conditional Convertible Preferred Stock with a stated value of $0.7114 per share, and (iii) cash consideration of $561,280. After giving effect to the merger, former Transave stockholders held a 46.7% equity interest in the combined company (on an as-converted, fully diluted basis), and Insmed shareholders held the remaining 53.3%.

At the time of the merger, Transave did not have any drugs on the market but was far along in the process of developing an anti-infective, inhaled drug compound with strong commercial prospects. The drug had the potential to become a leading treatment for at least three types of infection, for which few or no competing treatments existed. In order to finish clinical trials and bring the drug to market, however, Transave needed funding. Insmed was a pharmaceutical development company that had sold its technology portfolio and was looking for an opportunity to deploy its cash.

A group of former Transave stockholders brought an appraisal action, seeking the fair value of their common shares. David G. Clarke, ASA, a Managing Principal at The Griffing Group, submitted opening and rebuttal reports and testified at deposition on behalf of the petitioners. The matter settled shortly before trial.

David G. Clarke, ASA was assisted by Michael J. Mattson, William Jeffers, CFA, Joseph W. Thompson, CFA, ASA and William P. McInerney. The petitioners were represented by Paul A. Fioravanti, Jr., Marcus E. Montejo, and Laina M. Herbert of Prickett, Jones and Elliott, P.A. and Richard Feldman and Stephen M. Rosenberg of Rosenberg Feldman Smith, LLP.

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Case Name:
IN RE HANOVER DIRECT, INC. SHAREHOLDERS LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, Consol. C.A. No. 1969-CC
Keywords:
Appraisal Action, Entire Fairness, Fair Value, Fiduciary Duties, Preferred Stock
Industry:
Clothing; Home Goods
Professionals:
David G. Clarke, ASA, Michael J. Mattson, William P. McInerney, ASA

Hanover Direct, Inc. sold clothing and home goods through a portfolio of catalogs and websites. The company was publicly traded, but by 2007 had become distressed and was struggling to remain solvent, as its debt commitments and mandatorily redeemable preferred stock exceeded the value of its assets.

In April 2007, the company was taken private by its controlling shareholder. Several minority shareholders sued, alleging that consideration of $0.25 per common share paid in the going-private transaction was unfair. The case, a hybrid entire fairness/appraisal action, was heard by Chancellor William B. Chandler, III.

The Griffing Group was retained by the respondent/defendant group. David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted opening and rebuttal reports and testified at deposition and trial, opining that the fair value of Hanover Direct’s common stock was zero. Mr. Clarke relied upon indications of value from three valuation methods: the discounted cash flow method, the guideline public company method, and the guideline transaction method. Each method indicated that the fair value of the company’s common stock was negative. Mr. Clarke also noted that the terms of a prior offer to acquire the company’s preferred and common stock implied that the common stock was worthless. The expert for the plaintiffs/petitioners opined that the fair value of the common stock was $4.75 per share, based solely upon the result of a guideline public company analysis.

Chancellor Chandler gave full weight to Mr. Clarke’s testimony and no weight to that of the opposing expert, noting: “From using a data set that raises no issues of reliability, to applying multiple valuation techniques that support one another’s conclusions, respondent’s expert witness [Mr. Clarke] has convinced me that his valuation of the company is accurate, reliable, and reflective of a per-share value of the company below $0.00.” Citing the “overwhelming persuasiveness of the respondent’s evidence and arguments relative to those of petitioners,” the Court concluded that the merger price of $0.25 was fair.

David G. Clarke, ASA was assisted by Martin J. Ferguson, Michael J. Mattson, and William P. McInerney. The defendants were represented by Bruce L. Silverstein, Elena C. Norman, Tammy L. Mercer, and James M. Yoch, Jr. of Young Conaway Stargatt & Taylor, LLP.

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Case Name:
IN RE LORAL SPACE AND COMMUNICATIONS INC. CONSOLIDATED LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 2808-VCS
Keywords:
Economic Damages, Entire Fairness, Fiduciary Duties, Preferred Stock
Industry:
Satellites; Telecommunications
Professionals:
David G. Clarke, ASA, Michael J. Mattson, Edward T. Schroeder, CPA/CFF, CVA, MAFF, William P. McInerney, ASA

In this case, the Court evaluated the fairness of a $300 million convertible preferred stock transaction entered into between Loral Space and Communications, Inc., a manufacturer of satellites and provider of related services, and its largest stockholder, MHR Fund Management LLC.

The case was brought as a derivative and class action by shareholders of Loral who alleged that the MHR financing was an unfair transaction approved through a flawed special committee process. With respect to fair price, the Court determined that the financial terms of the MHR financing were unfair to Loral. After concluding that the MHR financing failed the entire fairness standard, the Court determined that the most equitable remedy would be to convert the preferred stock that MHR received into non-voting stock. In setting the conversion price, the Court took into account MHR’s access to inside information, its insulation of itself from market pressure, as well as Loral’s actual stock trading price. The Court gave 50% weight to the mid-range of MHR’s internal valuation of Loral and 50% weight to Loral’s trading price.

David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted a report and testified at deposition and trial, opining that the fairness opinion relied upon by the Special Committee of Loral’s Board of Directors was flawed, and that Loral’s trading price did not reflect its fair value (and thus should not be used as a basis for setting the conversion price). Vice Chancellor Leo E. Strine, Jr. recognized Mr. Clarke as one of the “credible experts” (for the plaintiffs) who had “done a good job of pointing out flaws in the work of the Special Committee’s advisor, North Point, that leave me unable to draw any confidence from North Point’s work.”

David G. Clarke, ASA was assisted by Martin J. Ferguson, Michael J. Mattson, Edward T. Schroeder, CPA/CFF, CVA, MAFF, and William P. McInerney. The Blackrock plaintiffs were represented by Lawrence C. Ashby, Philip Trainer, Jr., and Richard L. Renck of Ashby & Geddes; and Lewis R. Clayton, Roberto Finzi, David Friar, Anthony P. Ellis, and Joseph D. Borrero of Paul, Weiss, Rifkind, Wharton & Garrison LLP.

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