Gaines v. Narachi, et al.

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EFiled: Oct 6 2011 1:00PM EDT Transaction ID 40220877 Case No. 6784-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE JOHN W. NOBLE VICE CHANCELLOR 417 SOUTH STATE STREET DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179 October 6, 2011 Jessica Zeldin, Esquire Rosenthal, Monhait & Goddess, P.A. 919 North Market Street, Suite 1401 Wilmington, DE 19801 Stephen C. Norman, Esquire Potter Anderson & Corroon LLP 1313 North Market Street Wilmington, DE 19801 Jon E. Abramczyk, Esquire Morris, Nichols, Arsht & Tunnell LLP 1201 North Market Street Wilmington, DE 19801 Re: Gaines v. Narachi, et al. C.A. No. 6784-VCN Date Submitted: October 5, 2011 Dear Counsel: The Plaintiff, a stockholder of AMAG Pharmaceuticals, In moved pursuant to Court of Chancery Rule 59(f) for reconsideration (or reargument) Gaines v. Narachi, et al. C.A. No. 6784-VCN October 6, 2011 Page 2 order.1 At issue is my conclusion that the Plaintiff failed to plead a colorable claim that the Joint Proxy/Prospectus 2 suffered from a material omission reargument is granted. engaged Morgan Stanley to provide a fairness opinion. As part of the basis of its fairness opinion, Morgan Stanley performed a DCF analysis to calculate the estimated equity values of AMAG and Allos . As is normally the case, the DCF analysis was performed by discounting each unlevered free cash flows, and free cash flows took on, essentially, the standard definition.3 The Prox analysis, Morgan Stanley used certain financial projections prepared by AMAG 1 Gaines v. Narachi, C.A. No. 6784-VCN (Del. Ch. Sept. 30, 2011). A party moving for reargumen ourt has overlooked a decision or principle of law that would have controlling effect or the Court has misapprehended the law or the facts so that the outcome Miles, Inc. v. Cookson Am., Inc., 677 A.2d 505, 506 (Del. Ch. 1995). 2 Letter to the Court from Stephen C. Norman, Esquire, dated Sept. 26, 2011, Ex. A (Proxy). 3 See Proxy at 74. Gaines v. Narachi, et al. C.A. No. 6784-VCN October 6, 2011 Page 3 management, as well as certain adjustments thereto and extrapolations therefrom prepared with the guidance of AMAG management and which were approved for 4 M Later, the Proxy discloses projected future reven under two scenarios, which, it explains, provid 5 The forecasted free cash flows utilized by Morgan Stanley are not disclosed. In advancing its argument that free cash flows must be disclosed, the Plaintiff relies primarily on three cases: Maric Capital Master Fund, Ltd. v. Plato Learning, Inc.,6 David P. Simonetti Rollover IRA v. Margolis,7 and In re Netsmart Techs .8 But these cases do not state a blanket rule that free cash flow estimates used in a DCF analysis must always be disclosed. In Simonetti, this Court found that the proxy in question met the standard of 4 Id. Id. at 88. 6 11 A.3d 1175 (Del. Ch. 2010). 7 2008 WL 5048692 (Del. Ch. June 27, 2008). 8 924 A.2d 171 (Del. Ch. 2007). 5 Gaines v. Narachi, et al. C.A. No. 6784-VCN October 6, 2011 Page 4 analysis9 when only revenue and EBITDA forecasts were disclosed.10 Additionally, in Netsmart, where the disclosures concerning the DCF analysis were found to be deficient,11 the resulting Order of March 19, 2007, called for disclosure of revenue and earnings projections, but did not specifically require the disclosure of free cash flow numbers. Furthermore, the rationale for requiring such robust disclosure of the detailed information used in performing a DCF analysis is muted in the instant case. All three of the cited cases emphasized the fact that the shareholder plaintiffs would be cashed out in the proposed mergers.12 This is an important consideration in determining the level of disclosure required surrounding future cash flows because those shareholders were being asked to decide whether to take a sum certain at that time in exchange for their right to those future cash flows. Here, the 9 Simonetti, 2008 WL 5048692, at *10. See David P. Simonetti Rollover IRA v. Margolis, C.A. No. 3694-VCN (Del. Ch.), Transmittal Aff. of Brian D. Long, Esquire, Ex. 1-a (Trizetto Group, Inc. Proxy Statement) 29. 11 See In re Netsmart Techs., 924 A.2d at 202-05. 12 See Maric, 11 A.3d at 1178; Simonetti, 2008 WL 5048692, at *9; In re Netsmart Techs., 924 A.2d at 203. 10 Gaines v. Narachi, et al. C.A. No. 6784-VCN October 6, 2011 Page 5 Plaintiff is not being cashed out and future cash flows.13 Nevertheless, the standard for expedition requires only that the plaintiff has articulated a sufficiently colorable claim and shown a sufficient possibility of a threatened irreparable injury proceeding.14 Although the Proxy disclosed the EBIT projections precursor to free cash flow essentially a used by Morgan Stanley in its DCF analysis, the Proxy did not disclose the related free cash flow estimates. This Court has stated that shareholders who are being advised to cash out are entitled to the best estimate of future cash flows.15 While application of this standard has not always resulted in a finding that free cash flows, specifically, must be disclosed, there is a colorable argument that, in this case, free cash flows should be disclosed to meet this standard. Indeed, in Maric this Court enjoined the proposed merger 13 on the merger, though, since their stake in these cash flows will be diluted by the issuance of shares to acquire Allos. The question, of course, is whether in this context the additional information sought is merely helpful or actually material. 14 Giammargo v. Snapple Beverage Corp., 1994 WL 672698, at *2 (Del. Ch. Nov. 15, 1994). 15 See Maric, 11 A.3d at 1178; Simonetti, 2008 WL 5048692, at *10; In re Netsmart Techs., 924 A.2d at 203. While the AMAG shareholders are not being cashed out, there is a colorable argument that this standard should be applied in the instant case. Gaines v. Narachi, et al. C.A. No. 6784-VCN October 6, 2011 Page 6 until free cash flow projections were disclosed,16 despite the fact that the proxy already disclosed projected revenues, EBIT, and a variation of EBITDA.17 Finally, it should be noted that from the record it is unclear whether AMAG management provided Morgan Stanley with free cash flow projections or if Morgan Stanley derived its free cash flow estimates from the disclosed EBIT projections.18 While Stanley with free cash flow projectio Proxy,19 this Court has previously contemplated requiring the disclosure of cash flow projections made by the investment bank advising the board,20 and any rule stating that cash flow projections not provided by management never need to be disclosed could be abused in circumstances where such disclosure would be 16 Maric, 11 A.3d at 1178-79. See Maric Capital Master Fund, Ltd. v. Plato Learning, Inc., C.A. No. 5402-VCS (Del. Ch.), Transmittal Aff. of P. Bradford deLeeuw, Esquire, Tab 2 (PLATO Learning, Inc. Proxy Statement) 27. 18 Indeed, this question is a matter of a material dispute of fact between the Plaintiff and the Defendants. See are divided on this question, review of the documents provided to the Court to date suggests that the Defendants are correct, and AMAG management did not provide Morgan Stanley with free flow projections. See -2. Nonetheless, at the current stage of the proceedings, the Court is not engaged in fact finding, and must consider this a material dispute of fact. 19 See Maric, 11 A.3d at 1178. 20 See In re Netsmart Techs., 924 A.2d at 203. 17 Gaines v. Narachi, et al. C.A. No. 6784-VCN October 6, 2011 Page 7 necessary in order to provide adequate information to shareholders. In conclusion, he free cash flow projections utilized by Morgan Stanley is a material omission that raises a threat of irreparable injury.21 *** This conclusion requires the Court to consider that the ive relief is barred by laches. Given the nature of the claim that the Plaintiff is asserting and the work that already has been done on this claim in the context of the motion to expedite, it is difficult to conclude that any prejudice will be suffered by the Defendants.22 *** granted. 21 See, e.g., Simonetti, 2008 WL 5048692, results in irreparable 22 The doctrine of laches generally requires the establishment of three elements, one of which is Reed v. Spazio, 970 A.2d 176, 182-83 (Del. 2009). Gaines v. Narachi, et al. C.A. No. 6784-VCN October 6, 2011 Page 8 *** Counsel are requested to confer on a means to supplement the current record as may be necessary and to set a schedule for the filing of memoranda on this limited issue. Argument on this disclosure claim will be heard at the same time as argument in the related In re Allos Therapeutics, Inc. Shareholders Litigation, Consolidated C.A. No. 6714-VCN, scheduled for October 17, 2011, at 10:00 a.m., in Dover. IT IS SO ORDERED. Very truly yours, /s/ John W. Noble JWN/cap cc: Register in Chancery-K

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