Auspex Directors Beat Suit Challenging $3.5B Teva Deal

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By Michael Greene

Aug. 26 — Auspex Pharmaceuticals Inc. shareholders can't proceed with a would-be class action challenging the company's $3.5 billion merger with Teva Pharmaceutical Industries Ltd., the Delaware Chancery Court ruled Aug. 25 ( Larkin v. Shah, 2016 BL 277097, Del. Ch., No. 10918-VCS, 8/25/16 ).

The shareholder plaintiffs alleged that venture capital firms that owned Auspex stock and directors that had ties to the firms pushed through the all-cash transaction at the expense of other stockholders.

Vice Chancellor Joseph R. Slights III dismissed the claims, finding that the case didn't involve a controlling shareholder that tainted the deal. He found that even if a controller had existed, the plaintiffs couldn't show the venture capital firms had a conflict of interest.

The court also concluded that absent a controlling stockholder, the deal must be reviewed under the deferential business judgment rule, citing two recent Delaware Supreme Court rulings— Corwin v. KKR Fin. Holdings LLC, 2015 BL 323544 (193 SLD, 10/6/15) and Singh v. Attenborough, 2016 BL 145197 .

This ruling marks the second time in as many days that the chancery court has applied Corwin and Singh, which make it harder for plaintiffs to succeed in certain merger challenges. The court applied the two cases Aug. 24 in dismissing a shareholder lawsuit over C&J Energy Services Inc.'s $2.86 billion merger with a unit of Nabors Industries Ltd.

Corwin and Singh hold that where a transaction is approved by a fully informed, uncoerced stockholder vote, the business judgment standard of review—which defers to corporate decision-making—must be applied unless challenged on the basis of waste.

Two-Step Merger

Teva, one of the largest generic drug producers in the world, in 2015 acquired Auspex in a two-step merger. Under the transaction, a buyer purchases a majority of a public company's shares through a tender offer, then completes the back-end of the merger by acquiring the remaining shares.

Because more than half of Auspex's outstanding shares were tendered to Teva, the merger occurred under Delaware's two-step merger statute—General Corporation Law Section 251(h)—without a stockholder vote.

Slights applied a July chancery court ruling— In re Volcano Corp. Stockholder Litig.—that provided that stockholders' acceptance of a tender offer under Section 251(h) has the same cleansing effect as a stockholder vote in favor of the transaction (128 SLD, 7/5/16).

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