Biotechnology Value Fund, L.P. v. Celera Corp.: § 14(e) Claim Sustained by Sufficient Pleading of Non-Futility

In Biotechnology Value Fund, L.P. v. Celera Corp., No. C 13-03248 WHA, 2014 BL 55950 (N.D. Cal. Feb. 28, 2014), the United States District Court for the Northern District of California granted plaintiffs’ motion for leave to file a second amended complaint against defendants Credit Suisse, Celera, and Ordoñez (Celera’s CEO) with respect to plaintiffs’ Section 14(e) and breach of fiduciary duty claims. Additionally, the court denied plaintiffs’ motion to file a second amended complaint consisting of a Section 14(e) claim against the Celera directors (Ordoñez excepted), for failing to sufficiently plead their case.

According to the allegations discussed in the prior order from March 2010, Celera Corporation (“Celera”) and Credit Suisse Securities, L.L.C. (“Credit Suisse”) “signed the terms of an engagement letter” in which Credit Suisse would provide advising services to Celera, recommending “potential strategic transactions” for Celera. Credit Suisse’s compensation depended, in part, on whether Celera agreed to participate in any transaction. After various rounds of negotiations and several offers, Quest Diagnostics Inc. (“Quest”) and Celera executed an agreement whereby Quest would make a tender offer of $8 per share for Celera’s common stock. In March of 2011 Credit Suisse issued a “fairness opinion” to Celera’s board of directors, using a variation of a “Tufts study’s methodology,” describing the $8 per share offer as “fair.” As a result of this transaction, Credit Suisse “received a transaction fee of $8.6 million,” and Ordoñez, Celera’s CEO, “receive[d] a $2.3 million ‘change-in-control payment’ ” as well as other benefits from Quest.

Plaintiffs, former shareholders of Celera Corporation (“Plaintiffs”), filed suit, asserting claims under federal securities law, specifically under Sections 14(e) and 20(a) of the Securities Exchange Act, as well as under state law for breach of fiduciary duties, against Celera Corporation, Celera’s directors, Credit Suisse, and Kathy Ordoñez (collectively “Defendants”).

Section 14(e) requires a showing, at a minimum, that “defendants made a material misstatement or omission in connection with a tender offer.” Additionally, a “strong inference” of scienter must be shown. Defendants raised four challenges to Plaintiffs’ pleading in their § 14(e) claim, all of which the court denied.

In their second amended complaint, Plaintiffs alleged that Credit Suisse made misrepresentations in their recommendation statement to Celera in its present value calculation of Celera’s drug royalty assets. Credit Suisse argued that it did not “make” the misrepresentations: first, because it lacked “ultimate authority;” second, because Celera’s “statutory obligation to file the recommendation statement” precluded its liability; and third, because the statement was not made to Celera stockholders. The court found all three of these contentions unpersuasive. It stated that while Janus mandates that the “maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it,” there may be more than one party with ultimate authority over a given document. In so doing, the court found that the “descriptions of Credit Suisse’s valuation analysis are attributable to, and thus made by, Credit Suisse”—even though they appeared in the recommendation statement, which was created and distributed by Celera. 

Additionally, the court found that the amended complaint attributed the misrepresentations to Celera, but not to the Celera directors. The court stated that the second amended complaint focused on the fact that Celera had issued the recommendation statement, which contained Ordoñez’s signature and studies performed by Credit Suisse. The court determined that this alone did not make the Celera directors responsible for issuing the recommendation statement, and thus “[n]o alleged misrepresentation exists there for the Celera directors.”

Moreover, the court found that Plaintiffs had sufficiently pleaded scienter on behalf of Credit Suisse, Celera, and Ordoñez. To satisfy this requirement, a “ ‘strong inference’ of scienter is required, such that ‘a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.’ ” Based upon the allegations in the complaint, the court found that “Credit Suisse was financially motivated to pursue a complete acquisition of Celera . . . even at a lowered price, so that it could salvage a transaction fee.” In addition, the amended complaint sufficiently pleaded scienter “based on the timing of Credit Suisse’s errors in valuing the drug royalty assets.” Finally, the court found that the complaint satisfied the scienter requirement with respect to Celera and Ordoñez due to communication within the company indicating knowledge of the miscalculation.

The court thus dismissed the § 14(e) claim against the Celera directors, and ordered Plaintiffs to file their second amended complaint as against Credit Suisse, Celera, and Ordoñez.

The primary materials for this post are available on the DU Corporate Governance website.