A long time ago, we wrote about Due Diligence Matters. Even the most-mundane things can become important if you don’t pay attention.
One of the primary responsibilities of junior M&A associates in due diligence is to review material contracts for assignability and change-of-control provisions.
Should be simple, right?
Lawyers at Cravath and/or Cahill Gordon misinterpreted an assignment, and it led to a $115 million reduction in purchase price.
Details after the jump.
Cravath’s Damien Zoubek led the team representing Johnson & Johnson on its investments in drugmaker Elan, which was represented by Cahill Gordon. J&J put in $1 billion for an 18.4% stake in Elan, and $500 million for a majority stake in the Elan’s pipeline of experimental Alzheimer’s drugs. J&J also got an option to acquire a half share in Tysabri, a multiple-sclerosis drug that is expected to drive $1 billion in revenue this year.
The catch was that Biogen had a 50% stake in Tysabri, which Elan was going to exercise a buy-out right on with the J&J money. The problem was that right was only exercisable by either Elan or Biogen upon a change of control of the other. So not only did Elan not have the right to buy out Biogen, Manhattan district court judge Deborah Batts has ruled that Elan’s sale to J&J is a breach of the Elan/Biogen collaboration agreement.
Biogen’s lawyer Michael Gruenglas argued in court on Thursday that Elan had given up rights in breach of its 50-50 partnership with Biogen and “is no longer in the driver’s seat, Johnson & Johnson is driving the car.”
Gruenglas was persistently questioned by the judge, but ultimately won the day.
“It appears to the court that Elan has designated an obligation it has to Johnson & Johnson by taking direction from Johnson & Johnson on the purchase price negotiations,” Batts said in a ruling from the bench after five hours of arguments.
Gruenglas (CUNY Brooklyn BS ’83, NYU JD ’90) is a Skadden litigation partner.
Judge Batts gave Biogen until September 26 to cure the breach (which seems incurable to us, but whatever). The solution is that J&J got back $115 million from Elan, and Elan and Biogen will go it alone again on Tysabri.
AmLaw Daily tracked down one of our favorite experts for comment:
Steven Davidoff, a professor at the University of Connecticut School of Law who writes about M&A for the New York Times DealBook blog, says Elan and J&J “took a position on the assignability of the [Tysabri] contract to J&J, and it turns out the position they took is incorrect at best.”
The question, Davidoff says, is: “What did they know? Did they know there was a risk here? And if they did, how did they assign out that risk?”
He’s being too kind, or else there’s something being omitted from the reports. Missing an assignment like this is just a huge, egg-on-the-face mistake.