LEGAL NEWSLINE

DOVER, Del. (Legal Newsline) - A hedge fund that owned stock in health care company Celera has lost in its effort to have the New Orleans Employees' Retirement System decertified as class representative in a class action suit against the company but prevailed in its attempt to opt out of the settlement agreement.

Justice Henry duPont Ridgley wrote the Dec. 27 opinion of the en banc Delaware Supreme Court.

Both hedge fund BVF Partners L.P. and the NOERS owned stock in healthcare business Celera. Celera's corporate segment held various rights in drug royalties.

Celera started investigating opportunities for a corporate sale in 2009 after their business suffered a downturn. Quest, a Delaware company with principal place of business in New Jersey, emerged as a competitive bidder.

In early 2011, BVF became more active in the negotiation by notifying Celera's Board that it would block any transaction unless there were provisions in place that allowed shareholders to participate in future earnings of some of the drugs that were being marketed or in development.

"In March of 2011, the Board convened to consider final approval of Celera's acquisition by Quest ... In analyzing the fairness of the deal, the Board relied on a financial analysis prepared by Credit Suisse, which opined that anything within the range of $6.78 to $8.55 per share would be a fair acquisition price. Credit Suisse concluded that Quest's offer of $8.00 per share was fair," the opinion states.

Credit Suisse "used a much lower probability of success rate for a given drug in its valuations than it should have" due to Credit Suisse's incorrect interpretation of a Tufts University study which discussed probabilities of a drug reaching the market from various phases of development.

The error by Credit Suisse was not discovered until later, however, evidence was presented that the CEO and Chairman of the Board of Celera, Kathy Ordonez, was suspicious of the Credit Suisse analysis prior to the specific error being discovered.

BVF argued that the error caused the undervaluation of Celera's assets and "emphatically disagreed with the adequacy of the $8.00 per share merger price."

"When the merger was announced, BVF owned 6.6 percent of Celera's stock. By the close of business on the day the merger was announced, BVF had nearly doubled its ownership interest to 12% of the company in the course of one day.

"BVF hoped to buy as much stock in Celera as possible to drive the price up and to obtain voting control in order to prevent the merger." Ultimately, this tactic was unsuccessful and the merger was allowed to move forward.

Less than a week after the merger was announced, NOERS filed a class action complaint in the Court of Chancery alleging breach of fiduciary duty claims against Celera, Quest, and a subsidiary of Quest, Sparks Acquisition Incorporation. The complaint also named CEO Ordonez and the other Board members.

Subsequently, NOERS was named the class representative in the class action claim and BVF, also a class member, was not allowed to "opt out" of the class under the terms of the settlement agreement that was approved by the Court of Chancery.

BVF appealed the Court of Chancery certification of NOERS as class representative and also appealed the chancery court's approval of a settlement without an "opt out right" for BVF. BVF wanted to pursue litigation against the defendants independent of the class action suit.

"BVF makes compelling arguments for why NOERS was not an adequate class representative," wrote Justice Ridgley, "and the Court of Chancery recognized them. The court found NOERS to be adequate, but only barely."

BVF's primary argument was that NOERS lacked standing due to the fact that it sold all its shares of Celera four days prior to the merger.

"NOERS did sell its shares in Celera four days before the merger was consummated, and approximately ten months before the settlement was approved. But NOERS still owned its stock at the time the Board approved the merger and when the [Memorandum of Understanding] was executed, and it fits squarely within the broad definition of the class contained in the Settlement Agreement.

"Thus, NOERS satisfies the three prong test of standing: it had a cognizable injury in fact at the time the merger was approved; the alleged breach of fiduciary duties was traceable to the defendants, and the Court of Chancery could address that injury in the form of a preliminary injunction and the subsequent settlement."

"Based on our precedent and the broad definition of the proposed class in the Settlement Agreement, we conclude that NOERS has legal standing to represent the class because it held Celera stock at the time the merger was approved."

The Court then moved to the "opt out" issue.

"We have recognized that circumstances may arise where discretionary opt out rights should be granted, such as where the class representative does not adequately represent the interests of particular class members, triggering due process concerns.

"Here, the class representative was "barely" adequate, the objector was a significant shareholder prepared independently to prosecute a clearly identified and supportable claim for substantial money damages, and the only claims realistically being settled at the time of the certification hearing nearly a year after the merger were for money damages.

"Under these particular facts and circumstances, the Court of Chancery had to provide an opt-out right."

Ridgley concludes, "The Court of Chancery did not abuse its discretion in certifying NOERS as the class representative. NOERS had standing to represent the class because it owned Celera stock when the Board approved the merger. NOERS did not divest itself of standing as a matter of law when it sold its shares prior to the consummation of the merger.

"But it was an abuse of discretion to not provide an opt out right in this case. Accordingly, the judgment of the Court of Chancery is affirmed in part and reversed in part. This matter is remanded for further proceedings consistent with this Opinion."