Dec 1, 2012 (5 years and 6 months ago)


Leigh Walton, Esquire
Bass, Berry & Sims, PLC

In recent weeks, there has been a surge of merger and acquisition activity spurred by
large pharmaceutical companies’ desire for new products and new sources of revenue. Between
July 15 and August 22, five major deals were announced:
• Novartis’ offer of $900 million for Speedel Holding AG,
• Roche’s $43.7 billion offer for Genetech,
• Teva's offer to acquire Barr Pharmaceuticals for $7.46 billion,
• Bristol-Myers Squibb’s $4.5 billion offer for ImClone, and
• King Pharmaceuticals’ $1.43 billion offer for Alpharma.

The strategic ingredients driving these acquisitions include the pharmaceutical companies’ cash-
rich balance sheets; the weak American dollar, making U.S. companies more attractive to foreign
acquirers; and the benefits of acquiring targets that have an existing pipeline of FDA-approved
In light of this activity, it is important to understand the legal implications of these deals,
especially the duties of boards of directors facing unsolicited take-over proposals.
Bristol-Myers/ImClone—A Case In Point
One recent scenario provides a useful framework for discussing the duties faced by
directors when presented with an unsolicited bid. On July 31, 2008, Bristol-Myers Squibb
Company (“BMS”), a global pharmaceutical corporation traded on the New York Stock
Exchange with a market cap of about $43 billion, made a public, unsolicited bid to buy ImClone
Systems, Inc. (“ImClone”), a NASDAQ company with a market cap of about $5.6 billion. BMS

See Sankar Santosh, Big Pharma’s Healthy Appetite for Acquisitions,
(August 22, 2008) and Heidi N. Moore, Pharma Deals: Start Hostile. Get
17, 2008).
Rachel Granby, 5 Potential Buyout Targets in Biotech-Barron’s,
(August 17, 2008).


offered $60 per share in cash to acquire the approximately 83% of ImClone’s common stock that
BMS does not own. The offer represents a cash-out value to ImClone’s stockholders (other than
BMS) of $4.5 billion dollars, or a 30% premium over ImClone’s closing stock price on July 30.
The per share price is approximately 40% over the average closing stock price for ImClone stock
during each of the 3 month and 12 month periods prior to the announcement.
BMS’ offer is not
conditioned on BMS receiving financing or on the performance of any due diligence by BMS.
Two pieces of information are important in understanding BMS’ decision to make this
bid for ImClone. First, BMS already owns approximately 17% of the outstanding equity of
Second, BMS and ImClone have worked together since 2001 to market the cancer
drug Erbitux, used in the treatment of metastatic colorectal cancer and for squamous cell
carcinoma of the head and neck.
Erbitux had sales of $1.3 billion worldwide in 2007.

ImClone’s board of directors responded to this bid by issuing a press release on August 4,
stating that the BMS offer “substantially undervalues ImClone” and that the “Board of Directors
has formed a committee to study the matter and to retain advisors to advise it in determining the
appropriate course of action.” The press release noted that the ImClone board “has been
discussing the possibility of separating [ImClone] into its ERBITUX(R) and its pipeline
businesses in order to maximize the value of [ImClone]. Based upon preliminary internal data,
and recognizing that the pipeline products are in various stages of development, the Board still

Bristol-Myers Squibb Proposes to Acquire ImClone Systems for $60.00 Per Share in Cash,
(July 31, 2008).
Ben Comer, Bristol-Myers Squibb Offers $4.5 Billion for ImClone,
(July 31, 2008).


believes that [ImClone]'s pipeline business may be extremely valuable and significantly increase
stockholder value as a separate business.”

How do boards of directors for companies like ImClone decide whether a proposed sale
of the company is in the best interest of their stockholders, as opposed to remaining independent
or pursuing other strategic alternatives? A brief review of the standards of scrutiny for corporate
directors’ decision-making provides insight.
Delaware Legal Framework—Three Levels of Scrutiny
The major body of corporate law establishing directors’ duties is that of Delaware, the
home of most U.S. public companies. Depending on the facts and circumstances, Delaware
courts will review a board of directors’ decision under one of three standards: (1) the business
judgment rule, (2) enhanced scrutiny, or (3) entire fairness.
The Business Judgment Rule
The most lenient level of scrutiny is the highly deferential business judgment rule, the
default standard of review under Delaware corporate law. In factual situations covered by the
rule, directors’ decisions are presumed to have been made on an informed basis, in good faith
and in the honest belief that the action was taken in the best interests of the corporation.
the business judgment rule, “the Court gives great deference to the substance of the directors’
decision and will not invalidate the decision, will not examine its reasonableness and will not

ImClone Investor Relations Press Release,
= (August 4, 2008).
See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The Delaware Supreme Court has defined the duty of care
as follows: “directors have a duty to inform themselves, prior to making a business decision, of all material
information reasonably available to them. Having become so informed, they must then act with requisite care in the
discharge of their duties. While the Delaware cases use a variety of terms to describe the applicable standard of care,
our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross
negligence”. Id (internal citations omitted). Likewise, the Delaware Supreme Court has held that the duty of
loyalty is simply “that directors can neither appear on both sides of a transaction nor expect to derive any personal
financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or
all stockholders generally.” Id. (internal citations omitted).


substitute the Court’s views for those of the board if the latter’s decision can be attributed to any
rational business purpose.”
To avail themselves of the business judgment rule, directors must
involve themselves directly in the deal-making process from its initial stages, review all relevant
information, seek outside expert assistance from the financial and legal sectors if appropriate,
and retain appropriate records of how decisions are reached.
Enhanced Scrutiny
A more stringent level scrutiny arises in two instances:
• Unocal: When a board of directors implements a takeover defense in response to
an alleged threat to corporate control or policy,
• Revlon: When a board of directors approves a transaction involving a sale of

The Unocal standard consists of two parts: directors must show that: (1) “they had
reasonable grounds for believing that a danger to corporate policy and effectiveness exist[s],”

and (2) the defensive measure adopted by the board of directors was “reasonable in relation to
the threat posed.”
Directors are entitled to business judgment rule deference if both parts of the
test are satisfied.
Crucially, Delaware courts have held that a board of directors may simply
say “No” to a merger overture and still receive business judgment protection, as opposed to the
higher Unocal standard.

Delaware courts apply the Revlon test when reviewing the decisions of a board of
directors in the context of a decision to sell control of the company. In this context, achieving

Paramount Communications Inc. v. QVC Network, Inc., 637 A.2d 34, 46 n.17 (Del. 1994)(internal citations
See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (henceforth Unocal).
See Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (henceforth Revlon).
Unocal at 955.
See Kahn v. MSB Bancorp, Inc., 1998 WL 409355 (Del. Ch.), aff’d, 734 A.2d 158 (Del. 1999). In Kahn, the
Delaware Chancery Court held, and the Delaware Supreme Court subsequently affirmed, that a board’s decision to
simply reject an acquisition overture was governed by the business judgment rule because conduct did not rise to the
level of a defensive measure given the totality of the circumstances surrounding the acquisition overture.


the highest value reasonably available for stockholders becomes the directors’ paramount
objective. The directors no longer are charged with the survival of the company, but rather are
conducting an auction.

Entire Fairness
The highest level of scrutiny applied by Delaware courts to the actions of boards of
directors is entire fairness, applied when an actual conflict of interest affects a majority of the
directors approving a transaction.
In this situation, the burden shifts to the directors to establish
that the transaction is entirely fair to the stockholders.
Entire fairness is assessed by reviewing
both the process used to arrive at a particular decision, known as “fair dealing,” as well as the
price paid in the transaction, known as “fair price.” These two factors are not considered
separately or distinctly; the entire process and outcome are considered as a whole.
Fair price is
not necessarily the highest price imaginable or affordable, but rather, it is a price that a
reasonable seller would regard as within a range of fair value.

Factors To Consider Before Making A Bid
Turning back to the Bristol-Myers/ImClone transaction, the board of directors of BMS,
the proposed acquirer, in discharging its fiduciaries duties to its stockholders, likely considered
the following factors when crafting its bid, among others:
• BMS’ available cash and debt capacity,
• the fit of ImClone into BMS’ strategic vision and plan,
• the possibility of missing other strategic opportunities while the energy and focus
of BMS’ management are turned to ImClone,
• potential antitrust issues either in the United States or in jurisdictions abroad,
• alternative means to replenish BMS’ pipeline of marketable drugs,

Revlon at 182.
See Cinerama, Inc. v. Technicolor, Inc., 662 A.2d 1134 (Del. Ch. 1994).
See id. at 1137.
See id. at 1139-1140.
See id. at 1143.


• the potential damage to the existing relationship with ImClone and in particular
the joint marketing efforts of Erbitux,
• dilution to existing stockholders if equity is used as consideration,
• the timing of the transaction vis-à-vis healthcare regulatory concerns, FDA issues,
and on-going clinical trials, and
• the best interests of ImClone, since BMS already owns approximately 17% of its
outstanding stock.

In weighing these factors and making a good faith determination regarding the advisability of the
acquisition, the board of directors of BMS will be protected by the business judgment rule, so
long as the duties of care and loyalty are observed.

The ImClone Board’s Response and Alternatives
ImClone’s response to BMS’ offer is also protected by the business judgment rule, in the
absence of a defensive action, a conflict of interest or a decision to sell control of the
corporation. As noted, a board of directors has the right under Delaware law to simply say “No”
to the transaction, and have that decision protected by the business judgment rule.
Often a key
basis to saying “No” is the board’s good-faith belief that the target’s long-term value exceeds the
short-term value represented by the acquirer’s bid.
Thus, ImClone’s board can make a good-faith determination that the $60 per share bid by
BMS does not fully reflect the maximum value of ImClone and simply reject the bid.
Alternatively, ImClone can engage in negotiations regarding a proposed change of control
transaction or consider alternative strategies. Key considerations in making a determination will
include the long-term cash flow expectations from marketed drugs and the value of drugs in its
pipeline. In terms of alternative strategies to maximize stockholder value, the board will
consider splitting ImClone into two parts as its chairman, Carl Icahn, has proposed.

See, e.g. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)(holding that the business judgment rule “is a
presumption that in making a business decision the directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the company”).
See Kahn v. MSB Bancorp, Inc., 1998 WL 409355 (Del. Ch.), aff’d, 734 A.2d 158 (Del. 1999).


As is typically the case, ImClone has appointed a committee of independent directors to
assess the bid by BMS and other strategic alternatives. Independent committees are formed to
preserve the integrity of the evaluation of options and to exclude directors with a connection with
the bidder
and others that may be conflicted from the deliberation process. If properly formed
and operated, an independent committee with real bargaining power should avoid the application
of the entire fairness standard to the transaction.

If the board (whether acting through its special committee or not) determines that
ImClone should be sold to maximize stockholder value, the actions of the board of directors will
be judged by Revlon. The single most important factor becomes achieving the highest value to
the stockholders in the sale. In considering whether the bid price satisfies the Revlon standard,
the ImClone special committee will consider the following questions:
• Does the price offered by BMS reflect the synergies the combined entity can expect?
• Is BMS’ offer timed to allow BMS to get ahead of expected increases in ImClone’s stock
price as Mr. Icahn has alluded?

• Does the bid price properly value the pipeline drugs?
• Does the existing relationship with BMS point to BMS as the logical buyer?
• What are the execution risks associated with the deal?
• How would a sale impact ImClone’s constituencies, other than the stockholders?

• What does the market think of the offer?

Carl Icahn, the chairman of ImClone, has been characterized as being “‘disturbed’ that one of his directors who is
a Bristol-Myers designee (John E. Celentano, senior vice president of strategy and productivity at Bristol-Myers)
might have been privy to confidential discussions by ImClone over the possibility of splitting the company.”
Associated Press, ImClone Hints at Dim View of Bristol-Myers Offer, USA Today.

(August 4, 2008).
See Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997).
Economist, Convergence or Conflict,

August 28, 2008.
Under Unocal, directors are allowed to consider the impact of a takeover on a company’s employees and,
potentially, even the impact of patients taking ImClone’s drugs. See Unocal at 955 (holding that analyzing the
reasonableness of a defensive measure “entails an analysis by the directors of the nature of the takeover bid and its
effect on the corporate enterprise. Examples of concerns may include: ….the impact on “constituencies” other than
shareholders (i.e., creditors, customers, employees, and perhaps even the community generally)”).


As to this last point, the day after BMS’ offer was announced, ImClone stock was trading
at $64.20 per share, a jump of 39%, which immediately fueled speculation that, if a deal were to
be done, it would be at a higher price.
This speculation has proved correct. On September 10,
ImClone issued a statement that the special committee had informed BMS that its bid was
inadequate, and that ImClone has received an offer from “a large pharmaceutical company” at
$70 per share in cash.
With speculation of a bidding war for ImClone increasing after the
announcement of the higher bid, ImClone appeared to some observers headed for an auction of
the company, or what corporate lawyers sometime refer to as “Revlon mode.”
If ImClone decides that a sale is a superior option to staying independent, a split-up or
other strategic alternative, it will face additional challenges as it decides how to maximize
stockholder value. Can it simply negotiate for a better price among BMS and the new bidder that
has emerged? Or should ImClone be auctioned?
Would it be sufficient to enter into an
acquisition agreement with a fiduciary out
with one of the two bidders (creating a so-called
“market check”
), or even a “go-shop” provision
? Delaware courts grant boards reasonable

Corporate Financing Week, Bristol Bids US$5.2bn for ImClone. August 4, 2008. p.4.
ImClone Investor Relations Press Release,
= (September 10, 2008). The offer from the as-yet-unnamed large
pharmaceutical company is conditioned upon due diligence. There is no financing contingency.

ImClone previously placed itself up for bid in January of 2006 but failed to draw any bidders. The board of
directors subsequently canceled the sale later that year. See
(September 3,
2008). This fact may be deemed relevant if maximization strategies are considered.

A “fiduciary out” is a provision that permits a board of directors to consider alternative acquisition proposals,
despite already having entered into a contract to sell the company, if doing so is necessary to carry out the board’s
fiduciary duties to stockholders. See Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).


A “market check” means a testing of market conditions by the seller in order to ensure that the buyer is paying a
fair price. A market check usually involves one of four scenarios: “(i) a transaction with the highest bidder after a
full public auction of the target company, i.e. a pre-agreement market check, (ii) a transaction with the highest
bidder after a more limited pre-agreement market check in which multiple potential bidders are contacted and
participate in the bidding, (iii) a transaction with a single bidder where the target board has reliable evidence
demonstrating that the board has obtained the best transaction reasonably available, or (iv) a transaction with a
single bidder where the target board, due to the absence of reliable evidence that the board has obtained the best
transaction reasonably available, bargains for a post-signing market check.” Mark A. Morton and Roxanne L.
Houtman, Go-Shops: Market Check Magic or Mirage?, The Harvard Law School Corporate Governance Blog,


latitude in determining the method of sale most likely to produce the best price for

A Look Ahead
All current indications are that large pharmaceutical companies will continue to pursue
biotechnology firms for a number of strategic reasons.
Despite resistance from certain
biotechnology companies to this trend, one publication has noted: “Given how wealthy and
desperate the drugs giants are, some deals are inevitable.”
In this environment, directors of
large pharmaceutical companies and biotechnology companies are well advised to understand
their duties to stockholders, and how their discharge of those duties will be analyzed by the


Market%20Check%20Magic%20or%20Mirage.pdf (May 11, 2007). See also, Barkan v. Amsted Indus., Inc., 567
A.2d 1279 (Del. 1989).

A “go shop” provision “is a provision in a merger agreement that permits a target company, after executing a
merger agreement, to continue to actively solicit bids and negotiate with other potential bidders for a defined period
of time.” Such provisions become widely used during the robust mergers and acquisition activity from 2005 to
2007. The provisions in essence allow a seller to conduct an auction after signing with an initial bidder. If a higher
bidder is identified, the seller may cancel the agreement with the initial bidder after paying the bidder a pre-
negotiated breakup fee. See Mark A. Morton and Roxanne L. Houtman, Go-Shops: Market Check Magic or
Mirage?, The Harvard Law School Corporate Governance Blog,
Market%20Check%20Magic%20or%20Mirage.pdf (May 11, 2007).

The Delaware courts have consistently held that boards of directors are entitled to deference under the business
judgment rule in designing the best way to sell control of a company. See e.g. Paramount Communications Inc. v.
QVC Network, Inc., 637 A.2d 34 (Del. 1994), Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989), and Mills
Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261 (Del. 1989).
Economist, Convergence or Conflict,

(August 28, 2008).