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Himawan v. Cephalon, Inc. (Del. Ch.; 4/24) presents a familiar fact pattern in life-sciences M&A. The target biotech company was developing one main asset for two possible indications. In its acquisition by Cephalon, its stockholders were entitled to “milestone” payments tied to regulatory approval of the asset for those indications. The merger agreement left the development of the asset in the buyer’s discretion, subject to its “commercially reasonable efforts” obligation (defined as “efforts and commitment of such resources by a company with substantially the same resources and expertise as [buyer], with due regard to the nature of efforts and cost required for the undertaking at stake”).

While the buyer paid the full milestone payment for one treatment, it ultimately abandoned drug development for the other indication. The target’s stockholders sued alleging that the abandonment constituted breach.

In 2019, Vice Chancellor Glasscock denied a motion to dismiss partially because plaintiffs identified similarly situated companies pursuing the abandoned treatment, but his perspective on this argument changed after trial. Here’s an excerpt from VC Glasscock’s post-trial opinion issued yesterday:

I note that in my decision rejecting the Defendants’ motion to dismiss in this matter, I suggested that one way to give meaning to the unusual language of the CRE Clause was to compare the efforts of similarly-situated pharmaceutical companies and their actions in the real world.

After trial, I find this method unworkable; no exemplar companies operate under the actual conditions of Defendants, who, I note, are also different from one another as to their circumstances. I find that the best interpretation of the contract is that the parties meant to impose the CRE requirement on the buyer, as it found itself situated, but that the requirement went beyond buyer’s subjective good faith. It imposed an objective standard—this is the meaning of the imposition of a requirement to “exercise . . . such efforts and commitment of such resources [as] a company with substantially the same resources and expertise as” the buyer.

He concludes that the defendants used commercially reasonable efforts despite abandoning one indication, stating that” ‘due regard’ for the ‘efforts and costs’ means that Defendants may eschew development where the circumstances reasonably indicate, as a business decision, that they not go forward.” He notes that assessing the costs includes the milestone payments and opportunity costs.

Plaintiffs point out that my reading of the CRE Clause gives sellers little protection, since it is invoked only to disallow actions of the buyer that would be against the buyer’s self-interest. But this reading gives the Plaintiffs all that the sellers bargained for.

– Meredith Ervine