IN RE CORNERSTONE THERAPEUTICS INC. STOCKHOLDER LITIGATION
Submitted: June 5, 2014
Seth D. Rigrodsky, Brian D. Long, and Gina M. Serra, of Rigrodsky & Long, P.A., Wilmington, Delaware; OF COUNSEL: Ira M. Press and J. Brandon Walker, of Kirby McInerney LLP, New York, New York, and Shane Rowley, of Levi & Korsinsky LLP, New York, New York, Attorneys for the Plaintiffs.
Donald J. Wolfe, Jr., Kevin R. Shannon, and Christopher N. Kelly, of Potter Anderson & Corroon LLP, Wilmington, Delaware; OF COUNSEL: Anthony M. Candido, Robert C. Myers, and John P. Alexander, of Clifford Chance U.S. LLP, New York, New York, Attorneys for Defendants Cornerstone Therapeutics Inc., Michael Enright, Christopher Codeanne, James H. Harper, Michael Heffernan, and Laura Shawver.
Kurt M. Heyman and Patricia L. Enerio, of Proctor Heyman LLP, Wilmington, Delaware, Attorneys for Defendants Craig A. Collard and Robert M. Stephan.
GLASSCOCK, Vice Chancellor
This case involves the acquisition of the minority interest in a corporation by a controlling stockholder, in a manner alleged not to be entirely fair. Because the controller is a fiduciary that stood on both sides of this transaction, the controller will have to demonstrate on a developed record that the transaction was entirely fair to the minority (or that mechanisms were in place approximating an arm's-length transaction, in which case its burden may be reduced). The Amended Complaint also pleads breaches of fiduciary duty against directors of the company appointed as members of a special committee formed to negotiate with the controller and other disinterested directors who voted to recommend the transaction, as well as a claim against the company for aiding and abetting directors' breaches of fiduciary duty. This Memorandum Opinion addresses those defendants' Motions to Dismiss.
1. The Parties
Cornerstone Therapeutics Inc. ("Cornerstone, " or the "Company") is a publicly-traded Delaware pharmaceutical company, headquartered in Cary, North Carolina. Cornerstone's business "focuse[s] on commercializing products for the hospital, niche respiratory, and related specialty products" industry by "acquiring companies and . . . registration-stage products that fit within its focus areas, " and "marketing [those] products through its wholly-owned subsidiary, Aristos Pharmaceuticals, Inc." Craig A. Collard is the Company's founder and, prior to the February 3, 2014 merger at issue in this litigation (the "Merger"), was its CEO. As of February 3, 2014, Cornerstone's board of directors consisted of Collard, Anton Giorgio Failla, Robert M. Stephan, Marco Vecchia, James A. Harper, Laura Shawver, Christopher G. Codeanne, Michael D. Enright, and Michael Heffernan.
In May 2009, Chiesi Farmaceutici S.p.A. ("Chiesi"), a privately-held Italian drug manufacturer, purchased 11, 902, 741 shares of Cornerstone common stock, obtaining a controlling position in the Company, pursuant to a "series of agreements with the Company and certain of its stockholders, including Collard, "in exchange for approximately $15.5 million in cash and a ten-year distribution license for Chiesi's "Curosoft" product, "a treatment for respiratory distress syndrome in premature infants." In connection with that transaction, Cornerstone and Chiesi entered into a "Governance Agreement, " which granted Chiesi certain majority stockholder rights and placed restrictions on Chiesi's ability to make purchases and transfers of Cornerstone stock. According to the Plaintiffs, "[a]s part of the 2009 Chiesi Transaction, the Company agreed that Chiesi was permitted to purchase additional shares from the Company, other stockholders, or on the market, such that Chiesi would be able to maintain its beneficial ownership of 51% of Cornerstone's outstanding common stock."
In December 2010, Chiesi purchased an additional 450, 000 shares of Cornerstone stock from entities controlled by Collard, after which Chiesi owned 55.51% of Cornerstone's outstanding stock. In March 2012, pursuant to a Stock Purchase Agreement, Chiesi purchased an additional 1, 443, 913 shares, increasing its interest in Cornerstone to above 60%. In June 2012, Cornerstone and Chiesi entered into a senior secured loan facility, pursuant to which Chiesi obtained a right to convert certain debt to common stock, and became the beneficial owner of 65.4% of Cornerstone common stock.
2. The Special Committee
On February 18, 2013, Chiesi delivered to the Cornerstone board a letter (the "Offer Letter") "offering to acquire all of the outstanding shares of common stock of Cornerstone not owned by Chiesi at a price range of $6.40 to $6.70 per share."The Offer Letter explained that "[d]uring the last few months we have conducted an extensive review of Cornerstone based on publicly available information, our own deep experience in the pharmaceutical industry and consultations with our outside advisors, " and that, "[a]t $6.40 to $6.70 per share, our proposal represents a 20% to 25% premium over [the] Friday, February 15, 2013 closing price of $5.35." The Offer Letter did not condition Chiesi's offer on the approval of a majority of the minority stockholders.
As noted above, in February 2013, Cornerstone's board consisted of nine directors. Of those nine directors, three had current or prior employment relationships with Chiesi. Specifically, Failla served at that time as Head of Business Development at Chiesi; Vecchia served "as Head of Legal and Corporate Affairs at Chiesi and as a member of the board of directors of several Chiesi subsidiaries;" and Stephan had "served as Vice President and Secretary from 1997 to 2012 and [had] served as a director from April 2009 to 2012 of Chiesi Pharmaceuticals, Inc., USA, a subsidiary of Chiesi."
In response to Chiesi's Offer Letter, the Cornerstone board formed a special committee of five directors-Harper, Shawver, Codeanne, Enright, and Heffernan (the "Special Committee"). Although the Defendants contend that the members of the Special Committee were disinterested and independent, the Plaintiffs disagree. Rather, the Plaintiffs allege that Harper and Shawver lacked independence in evaluating Chiesi's offer due to their involvement with Phenomix Corporation, Inc. ("Phenomix"), a company that in 2009 signed a $191 million agreement with Chiesi. At that time, Harper was a director, and Shawver was the CEO and a director, of Phenomix, but by 2013 Phenomix was defunct and existed only to wind up its affairs. Although the Phenomix deal was consummated in 2009- several years prior to Chiesi's February 2013 Offer Letter-and Phenomix was defunct by that time, the Plaintiffs contend that Harper and Shawver's relationships demonstrate that neither individual could have acted independently in evaluating the transaction. Further, the Plaintiffs allege that Codeanne, Enright, and Heffernan lacked independence because those directors were "hand-picked by Collard, " who sold stock to Chiesi in May 2009 and December 2010.
The Plaintiffs additionally contend that "[t]he Special Committee [held] only illusory power, " as "Chiesi made clear from the outset that it was not interested in divesting its controlling interest or considering alternative strategic transactions."The Plaintiffs point to Chiesi's Offer Letter, which concluded with the statement that "we are interested only in acquiring the remaining shares of Cornerstone and we have no interest in a disposition of our controlling interest or in considering any other strategic transaction involving Cornerstone."
Upon its formation in February 2013, the Special Committee obtained Clifford Chance U.S. LLP as legal counsel and Lazard as its financial advisor. The Plaintiffs challenge the Special Committee's decision to retain Lazard, in light of "the fact that Lazard informed the Special Committee that it had current and recent past financial advisory relationships with, or connections to, Chiesi."Specifically, the Plaintiffs find fault in the Special Committee's accepting that "(i) an employee of Lazard S.r.l. . . . is a member of the board of directors of Chiesi; (ii) an analyst at Lazard Italy is the nephew of ...