Boston Scientific Ordered to Complete $275 Million Buyout of Channel MedSystems Despite Fraud and Embezzlement
On January 16, 2020, healthcare technology conglomerate Boston Scientific Corp. (NYSE BSX) entered a notice to appeal the Delaware court decision that ordered the completion of a $275 million acquisition of medical device company Channel MedSystems Inc. (“Channel”) (Mike Leonard, Bloomberg Law). The court’s decision comes despite Channel’s previous submissions of falsified records to the Food and Drug Administration (“FDA”). Id.
Channel, a venture-backed company, caught Boston Scientific’s attention with their early-stage cryothermic delivery device, Cerene. (Channel MedSystems). Between 2013 and 2015, Boston Scientific secured approximately 15 percent of Channel’s equity for approximately $8 million. (J. Andre Bouchard, Courts - Delaware). On November 1, 2017, the two companies entered into a merger agreement. Id.
Boston Scientific agreed “(i) to purchase immediately Series C-1 preferred stock in Channel for approximately $5.6 million, increasing its ownership to approximately 20% of the Company’s equity; and (ii) acquire Channel’s remaining equity for up to $275 million pursuant to a put-call structure,” with Channel’s put option remaining conditioned on receiving FDA premarket approval (“PMA”) of Cerene by September 30, 2019. Id.
The validity of Cerene’s pending PMA application came into question on December 29, 2017, when Channel’s CEO and Vice President of Finance discovered that Dinesh Shankar, the company’s Director of Quality Assurance, had embezzled approximately $2.6 million through illegitimate shell companies and sent falsified data to FDA regulators. Id.
Channel terminated Shankar and reported him to the Department of Justice, hired Greenleaf Health Inc. (a healthcare regulatory consulting firm), and notified both the FDA and Boston Scientific of these developments. Id. Following a thorough investigation, Channel formed a remediation plan for Cerene’s PMA application. Id. The FDA approved the plan on April 18, 2018, and granted the PMA for Cerene on March 28, 2019, six months earlier than the contract deadline. Id.
Despite Channel’s best efforts to mitigate the damage done by Shankar, Boston Scientific terminated the merger agreement, asserting the fraud “reasonably would be expected to have a ‘Material Adverse Effect’ on Channel.” Id. Boston Scientific asserted this “material adverse effect” exempted the company from any continuing legal obligations. Id.
Channel sued for specific performance of the merger and on December 18, 2019, Channel won. Id. Relying on evidence that Shankar had acted alone, that Channel had mitigated damages with transparency and diligence, and that Cerene had ultimately received FDA approval within the negotiated timeframe, the Delaware court concluded Boston Scientific remained contractually required to go through with the $275 million acquisition of Channel. Id.
Boston Scientific’s loss, despite Shankar’s fraud and embezzlement, exemplifies the difficultly of terminating a merger agreement based on a material adverse effect claim. In response to the order, Boston Scientific has filed a notice of appeal. (Mike Leonard, Bloomberg Law).