Securities Snapshot
December 18, 2018

Delaware Supreme Court Affirms Milestone Ruling, Confirming Fresenius Kabi AG’s Right to Terminate $4.3 Billion Merger Agreement

Delaware Supreme Court Affirms Milestone Ruling, Confirming Fresenius Kabi AG’s Right to Terminate $4.3 Billion Merger Agreement; Second Circuit Revives IBM ERISA Dispute; Southern District of New York Denies Motion to Dismiss Despite Absence of Allegation of “Meaningfully Close Personal Relationship” Between S&P Analyst and Jeweler; Medtronic Agrees to Pay over $50 Million in Civil and Criminal Penalties for Kickback and Reckless Marketing Claims Brought Against Its Subsidiaries; Chairman Clayton Reaffirms SEC Considering Proxy-Voting-Process Overhaul in 2019; and District of New Jersey Refuses to Dismiss Class Action Complaint Alleging Token Sale Amounted to Sale of Unregistered Securities.

On December 7, 2018, less than two days after the appellate argument, the Delaware Supreme Court issued a unanimous three-page opinion in Akorn, Inc. v. Fresenius Kabi AG, et al. affirming a Court of Chancery opinion that Fresenius Kabi AG had no obligation to close on a proposed merger with Akorn, Inc. and that Fresenius properly terminated the agreement. Writing for the court, Chief Justice Leo Strine held that the factual record supported the lower court’s finding–consistent with precedent such as In re IBP, Inc. Shareholders Litigation and Hexion Specialty Chemicals, Inc. v. Huntsman Corp.–that Akorn had suffered a “material adverse effect,” which excused Fresenius from any obligation to close. In its two-hundred and forty-six page opinion below, the Court of Chancery detailed the support for Fresenius’s termination, including, among other things: (1) Akorn’s disastrous business performance beginning in the second quarter of 2017–after the signing of the merger agreement–allegedly stemming from Akorn’s loss of a key contract, which the Court of Chancery found constituted a General MAE because Akorn’s financial performance had “declined materially” and the underlying causes of the decline were “durationally significant”; and (2) Akorn’s pervasive data integrity problems, which Fresenius uncovered after it conducted an investigation into Akorn prompted by whistleblower letters, which rendered Akorn’s representations about its regulatory compliance “sufficiently inaccurate that the deviation between Akorn’s actual condition and its as-represented condition would reasonably be expected to result in a Regulatory MAE.” Thus, the Court of Chancery reasoned, and the Delaware Supreme Court affirmed, that Fresenius was excused from any obligation to proceed with the merger. Because Akorn is the first case in which the Delaware Supreme Court has acknowledged the presence of an MAE allowing a party to terminate a merger agreement, the ruling may introduce uncertainty in Delaware’s approach to corporate-merger disputes by providing precedent supporting a party’s decision to terminate a merger agreement post-signing.


On December 10, 2018, a Second Circuit panel in Jander v. International Business Machine reversed United States District Judge William H. Pauley III’s dismissal of a putative class action brought by IBM workers. The reversal provides IBM workers with another opportunity to prove that IBM violated their duty under ERISA to manage the employees’ assets prudently, because they knew but failed to disclose that IBM’s microelectronics division (and thus IBM’s stock) was overvalued as a result of accounting violations, and that the business was actually losing $700 million a year. Relying on the Supreme Court’s decision in Fifth Third Bancrop et al. v. Dudenhoeffer et al., the district court reasoned that a prudent fiduciary could have concluded that three alternative actions proposed in the complaint—disclosure, halting trades of IBM stock, or purchasing a hedging product—would do more harm than good to the fund. The Second Circuit disagreed. Chief Judge Katzmann, writing the opinion for a unanimous panel, concluded that when drawing all plausible inferences in plaintiff’s favor, Jander sufficiently pleaded that no prudent fiduciary could have concluded that an earlier disclosure of the overvaluation would do more harm than good. The decision provides guidance into what allegations sufficiently plead a violation of ERISA’s duty of prudence after Dedenhoeffer.


On December 6, 2018, United States District Judge Jed S. Rakoff declined to dismiss an indictment charging an S&P analyst and a Manhattan-based jeweler of insider trading in U.S. v. Sebastian Pinto-Thomaz, et al. In the indictment, the government alleges the analyst tipped off the jeweler about Sherwin-Williams Co.’s plans to acquire Valspar Corp., prompting the jeweler to open a trading account and purchase hundreds of Valspar shares and call options. In their motion to dismiss, the defendants argued the indictment failed to allege that the two men had a “meaningfully close personal relationship,” as required under U.S. v. Newman. Judge Rakoff opened the opinion by noting “[t]he crime of insider trading is a straightforward concept that some courts have somehow managed to complicate,” and proceeded to provide a detailed review of insider-trading jurisprudence, distilling the remains of Newman’s “meaningfully close personal relationship” requirement in the wake of the Supreme Court’s decision in Salman v. U.S.. Judge Rakoff concluded that it was sufficient for prosecutors to allege that the tipper had an intention to benefit the tippee, and that it was therefore “irrelevant” that the government did not specifically include allegations about a meaningfully close personal relationship between the analyst and the jeweler, as the concept advanced by Newman only applies where a fact-finder must infer a sufficient personal benefit merely from evidence of the relationship between the tipper and the tippee. Here, the court ruled, the government’s allegations in the indictment regarding the tipper’s intention to benefit the tippee obviated any such requirement. This decision accordingly provides some clarifying guidance on the pleading requirement for the “personal benefit” element of an insider trading charge post-Newman


Medtronic PLC, the world’s largest medical-device creator, will pay $50.9 million to the Department of Justice in order to settle kickbacks and other claims against its subsidiaries ev3 Inc. and Covidien LP. In particular, Medtronic agreed to pay (1) nearly $18 million in criminal penalties, including a fine of $11.9 million and a forfeiture of $6 million, for allegedly reckless statements made in connection with ev3’s marketing of a product designed to treat brain defects; and (2) $13 million in civil penalties on behalf of Covidien to settle claims under the False Claims Act stemming from allegations of kickbacks resulting from fees paid to hospitals to participate in a data collection effort concerning their use of a device designed to restore blood flow in stroke patients. On December 7, 2018, ev3 also entered into a plea agreement with the United States Attorney for the District of Massachusetts and the United States Department of Justice, Consumer Protection Branch relating to its marketing, sale, and distribution of Onyx Liquid Embolic System, a neurovascular medical device. According to the plea, the FDA has approved Onyx only for use inside the brain, but from 2005 to 2009 ev3 sales representatives encouraged surgeons to use Onyx outside the brain, potentially endangering patients and giving rise to ev3’s criminal liability. Covidien in turn separately entered into an agreement to resolve its civil liability for allegedly paying kickbacks to induce the use of a medical device intended to assist stroke patients with blood flow. Jeffrey Faatz, the whistleblower for the FCA claims, will receive over $2 million in conjunction with the resolution. Medtronic separately announced it will pay $20 million to resolve an unspecified Department of Justice investigation into additional market development and physician engagement activities by both ev3 and Covidien. These settlements demonstrate a continued focus on regulation of medical device companies. Indeed, just the week prior, the International Consortium of Investigative Journalists released the results of an investigation into kickback practices in the medical device industry, with a particular focus on Medtronic. In the wake of that investigative report, the U.S. Food and Drug Administration announced a planned overhaul of its approval systems for medical devices. These settlements also underscore the Department of Justice’s continued efforts to impose criminal and civil penalties against companies in the health care and medical device sectors where the government perceives the companies to be “putting profits before patient safety.”


On December 12, 2018, SEC Chairman Jay Clayton testified during an oversight hearing before the Senate Banking Committee. Clayton opined on issues including loan practices, Brexit, share buybacks, and fiduciary guidance. Notably, Clayton stressed the SEC’s priority with improving the proxy-voting process in 2019, building on his comments from the SEC’s November Roundtable on the Proxy Process. In particular, Chairman Clayton referenced the possibility of implementing stricter rules for submitting shareholder proposals to “eliminate unnecessary processes.” Chairman Clayton also acknowledged the potential value of implementing distributed ledger technology to expedite the proxy voting process, though recognizing that such a “major overhaul” could take time. Chairman Clayton’s comments are notable, as they propose changes to the proxy voting process that may impact how companies assess whether to go–or remain–public, and also suggest ways that emerging technologies might be used to streamline such processes.


On December 10, 2018, in an unpublished opinion, United States District Judge Susan D. Wigenton of the District of New Jersey rejected a motion to dismiss a putative class action complaint filed by investors against Latium Network and its founders in Solis v. Latium Network, Inc. et al. The complaint alleged the unlawful offer and sale of unregistered securities in connection with a “blockchain-based tasking platform,” which raised more than $17 million.  Defendants hoped to persuade the court their LATX token was a currency, and not an investment contract as contemplated by S.E.C. v. W.J. Howey Co.. In applying the Howey test, the Court found that, notwithstanding the functionality of the tokens on the platform, the complaint details myriad ways in which the defendants led the investors to expect a profit form their purchase of tokens, including comments that the ICO was a “unique investment opportunity” that would “generate better financial returns.” The Court concluded that the plaintiff had pled facts adequate to maintain a cause of action against Latium under Section 12 of the Act, and specifically commented that “Defendants’ arguments to the contrary are better suited to support a motion for summary judgment.” The Latium case provides another example of the emerging trend of private actions arising from alleged unregistered securities offerings in the form of ICOs. The Court’s decision also emphasizes the highly fact-specific nature of such actions brought against blockchain-based companies, which increases the difficulty in resolving such cases on a motion to dismiss.