OLIVER v. BOSTON UNIVERSITY, 16570-NC (Del.Ch. 2006)

C.A. No. 16570-NC.Court of Chancery of Delaware, New Castle County.Date Submitted: November 2, 2005.
Date Decided: April 14, 2006.

Michael A. Weidinger, Esquire of Morris, James, Hitchens
Williams LLP, Wilmington, Delaware; Michael J. Maimone, Esquire of Gordon, Fournaris Mammarella, P.A., Wilmington, Delaware; Thomas G. Griffin, Esquire of Griffin Law Offices, LLC, Chicago, Illinois, Attorneys for Plaintiffs.

William O. LaMotte, III, Esquire of Morris, Nichols, Arsht
Tunnell, Wilmington, Delaware; John F. Sylvia, Esquire and Paul P. Poth, Esquire of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, Attorneys for Defendants Boston University, John R. Silber, Leon C. Hirsch, Gerald S.J. Cassidy, and Kenneth G. Condon.

MEMORANDUM OPINION
NOBLE, Vice Chancellor.

Seragen, Inc. (“Seragen”) was a financially troubled biotechnology company nurtured and controlled by Defendant Boston University (“BU”) and its friends and affiliates, who, on several occasions, came to its short-lived fiscal rescue in transactions implemented without procedures reasonably designed to protect the interests of minority shareholders. With Seragen on the precipice of financial doom, Ligand Pharmaceuticals, Inc. (“Ligand”) offered merger consideration of approximately $75 million to acquire Seragen. That amount would have to satisfy the various stakeholders in Seragen — including holders of preferred stock, creditors, and holders of Seragen’s common stock — even though the claims of those stakeholders asserting rights to priority payment exceeded Ligand’s offer. Several stakeholders carved up the consideration to be paid by Ligand; that effort, however, was not burdened by anyone acting on a counseled and informed basis on behalf of the common shareholders who, from among various stratagems, could have injected into the allocation process (i) various derivative claims based upon earlier self-interested, capital-raising transactions and (ii) arguments against specific steps taken in that process that were inconsistent with the rights of the common shareholders. A group of minority shareholders, led by Plaintiff Sergio M. Oliver (“Oliver”), brought to trial a series of claims challenging certain transactions before Seragen’s merger with Ligand in August 1998 and the process by which the merger proceeds were divvied up. This is the Court’s memorandum opinion following trial.

I. FINDINGS OF FACT
A. The Players

Seragen was a Delaware corporation engaged in the business of developing, manufacturing and marketing various biotechnology products known as Fusion Proteins.[1]

BU, a Massachusetts charitable educational institution, was the controlling stockholder of Seragen. The individual defendants are John R. Silber (“Silber”), a former Chancellor and trustee of BU and a director of Seragen,[2] Leon C. Hirsch (“Hirsch”), a trustee of BU, and an individual identified as a BU Affiliate in Seragen’s public filings,[3] Gerald S.J. Cassidy (“Cassidy”), director of Seragen, a paid consultant to BU, and a close friend of Silber,[4] and Kenneth G. Condon (“Condon”), treasurer of BU and a member of Seragen’s Board.[5] The other individual defendants were Reed R. Prior (“Prior”), board chairman, chief executive officer, and treasurer of Seragen from November 1996 through the merger with Ligand, Jean C. Nichols (“Nichols”), a director of Seragen and its chief technology officer, and Norman A. Jacobs (“Jacobs”), an independent director of Seragen from the time Seragen began trading publicly until the merger.[6]

Plaintiffs are former holders of Seragen’s common stock and represent the class of persons, other than Defendants and their affiliates, who owned Seragen common stock on November 4, 1997 and August 12, 1998, when Seragen merged with Ligand.

B. BU Acquires Seragen and the Massachusetts Attorney General is Unhappy

In August 1987, BU purchased a controlling interest in Seragen for $25 million.[7] Sometime after BU gained its controlling interest in Seragen and before Seragen went public, BU elected various persons, including Silber, Cassidy, and Condon, to Seragen’s Board.

As a result of BU’s significant investment in Seragen, the Massachusetts Attorney General investigated the relationship between BU and Seragen. On January 15, 1992, the Trustees of BU and the Attorney General entered into a letter agreement under which BU committed to “use best efforts to reduce significantly its financial exposure resulting from the Seragen investment and its financial commitment to Seragen.”[8] BU also agreed to make monthly reports to the Attorney General on the “status of this reduction of financial exposure” and “all further expenditures and financial commitments made to or on behalf of Seragen.” In addition, BU agreed to obtain the consent of the Attorney General before making any other investment in Seragen.

C. Seragen Goes Public

In April 1992, Seragen completed its initial public offering, raising $36 million.[9] Also in April 1992, BU established the Seragen Oversight Committee “to exercise Trustees’ responsibilities to manage the University’s investment in Seragen.”[10] The Oversight Committee was “composed of persons who [had] no personal financial interest, direct or indirect, in Seragen”[11] and was chaired by Earle C. Cooley (“Cooley”).[12] In March 1993, Seragen raised an additional $16.5 million in a second public offering.[13]
Later, in 1994, Seragen obtained $6.5 million through a private placement of common stock.[14]

Continuing the effort to raise capital, in August 1994 Seragen entered into a strategic alliance with Eli Lilly and Company (“Lilly”), by which Seragen received $10 million from Lilly and the prospect of procuring an additional $45 million.[15]
The Lilly partnership created substantial optimism within BU and Seragen and throughout the investing public. Seragen had continually reported high hopes for itself and its upcoming products to BU’s Board of Trustees and to the public.[16]

D. The Loan Guarantee Transaction

Seragen, as a biotechnology company without a product in the marketplace, was required to commit relatively large sums to research and, thus, was spending its cash almost as soon as it was raised. Despite Seragen’s partnership with Lilly and the funds that the relationship brought with it, it was clear, by February 1995, that Seragen was in a severe cash crunch and could potentially run out of funds sometime in July.[17]
Addressing this desperate need for financing, Seragen entered into the Loan Guarantee Transaction on June 7, 1995.[18]
This transaction, which raised $23.8 million, was described by Seragen as:

[T]hree separate lines of credit which are guaranteed by three different entities for a total of $23.8 million in bank financing for the Company. Boston University, the Company’s majority stockholder, is the lead guarantor, providing a guarantee of $11.8 million. Two other guarantors [Hirsch and Cassidy] have guaranteed a total of $12 million. Upon the closing of the lines of credit, the Company issued warrants to the guarantors to purchase 2,776,664 shares of its common stock at an exercise price of $4.75 per share. The warrants are exercisable immediately and expire in 2005. The Company has estimated the fair market value of the warrants to be $1.50 per warrant or $4,164,996 for the 2,776,664 issued and outstanding warrants.[19]

The Plaintiffs have characterized this transaction as “the beginning of the end” for Seragen’s minority common shareholders because they believe that it was at this juncture that BU first caused Seragen to avoid the public equity markets in favor of the Loan Guarantee Transaction which prevented a significant dilution of BU’s interest in Seragen. Although any challenge to this transaction is time barred, the question of whether other financing options existed in June 1995 is important to an understanding of the context in which the pending dispute arose, and, thus, a digression may be appropriate.

By mid-1994, it had become apparent to both BU and Seragen management that Seragen would have to raise additional funds or it would be unable to continue its operations. Also, if Seragen failed, BU, as a large investor in Seragen, would suffer significant losses. Seragen turned to loan guarantees by BU-associated investors for two reasons. First, it could not borrow funds conventionally; the banks would not lend the needed funds on Seragen’s credit alone. Second, BU was concerned that the issuance of more stock would dilute its equity interest in Seragen.

Various Seragen and BU representatives in 1994 painted a rather self-serving portrait of BU’s motivations for pursuing the Loan Guarantee Transaction. For example, as early as July of 1994, Silber, when describing the Loan Guarantee proposal to the BU Executive Committee, stated:

[I]f we can expand [Seragen] now, and develop [Seragen] by bank loans, instead of by dilution, it’s going to be far better for [BU] . . . if we take all these steps, it’s going to be pretty hard for the Attorney General to say no because it would require us not to fulfill our fiduciary responsibility to seek the interests of [BU] and protect the interests of [BU], but to ignore those concerns entirely on the instructions of the Attorney General.[20] Not only had Silber informed the members of BU’s Executive Committee of the importance of maintaining BU’s majority position in Seragen, but also he stated that to do otherwise would leave them in breach of their duties to BU, seemingly with no worries about duties that BU’s Seragen directors owed to Seragen and Seragen’s other common stockholders. At trial, Silber expressed his concern for the consequences of dilution on all holders of Seragen common stock as follows:
I’m a little concerned for the best interest of all the stockholders of Seragen, including [BU] and including myself, in which I had a major investment. It would not be fair to the stockholders to engage in a deal which involved a great deal of dilution if it were possible to find another means of financing the company that did not involve that dilution.[21]

At the October 1994 annual meeting of the BU Board of Trustees, Cooley told the Trustees that Seragen’s issuing between three and four million shares pursuant to its business plan would reduce BU’s holdings and the potential value of these holdings.[22] Additionally, Cooley stated:

In view of the significant dilution that [the issuance of shares] represents in the value of the University’s holdings of Seragen common stock as well as the holdings of a majority of the other stockholders that would result from any sale . . . at prices within the recent range[,] Mr. Masters requested the Seragen Oversight Committee to consider, in the interest of avoiding dilution, approval of a bank Loan Guarantee by [BU] for Seragen up to $30 million. In return . . . [BU] would receive a substantial number of warrants to purchase Seragen common stock at attractive prices. If [BU] were to provide this guarantee it could avoid at least 3/4 of the dilution anticipated by the issuance of the new shares, thus preserving the value of its holdings. . . . [This] method of financing Seragen’s development without further dilution is clearly in the interest of both [BU] and all other stockholders.[23]

At this time, BU was optimistic about Seragen’s future, its potential for profitability, and its ability to raise capital in the market.[24] Thus, the Plaintiffs suggest that BU pursued the Loan Guarantee Transaction not only to protect its own controlling position but also to turn a tidy profit on its investment. But for the evidence of Seragen’s inability to raise capital) and the viable time bar defense available to the Defendants, such optimism, combined with the self-centered concern about dilution of BU’s interests, may have led the Court to conclude that the Loan Guarantee Transaction was a deliberate avoidance of the public market in order to prevent dilution of BU’s control of Seragen as well as to maintain BU’s profit potential in Seragen.

Sometime in late 1994 or early 1995 Silber began soliciting high net worth individuals to participate in the Loan Guarantee financing.[25] Silber, by letter dated January 26, 1995, reported to Masters that Hirsch had made a commitment for a “loan guarantee of $5 million with the understanding that he would be given warrants for 500,000 shares of [Seragen common stock.]”[26] In a letter to Hirsch, dated January 27, 1995, Silber expressed his hope that the Attorney General would approve BU’s participation in the Loan Guarantee.[27] He also told Hirsch, “I think we have squeezed virtually all the risk out of this enterprise except the risk associated with having the necessary financing to reach profitability.”[28] Cassidy also agreed to participate and to provide a loan guarantee of $1 million for which he would receive warrants to purchase 116,600 shares of Seragen common stock.[29] Silber, despite sending enthusiastic letters to other potential investors, was unable to persuade anyone else to participate in the Loan Guarantee.[30]

Initially, BU committed $11.8 million, Hirsch committed $7.5 million and Cassidy committed $1 million, for a total of $20.3 million.[31] However, sometime after March 28, 1995, Cassidy and Hirsch increased their commitments, bringing the total to $23.8 million.[32] Although Cassidy served on Seragen’s Board, he did not involve himself in the negotiations or the decision-making process surrounding the Loan Guarantee, and, instead, it appears that Cassidy accepted the terms that Seragen offered.[33] Cassidy did testify, however, that he believed that Hirsch might have negotiated the terms of the Loan Guarantee.[34] The final Loan Guarantee terms were unanimously approved on March 6, 1995, by Seragen’s Board, including its three disinterested members.[35]

The Loan Guarantee Transaction was not without its other procedural issues. For example, both BU and Seragen were represented in the transaction by the same law firm, a troubling fact which repeats itself. Silber stated that he did not believe “there was any conflict of interest because the interest of [BU] and the interest of the stockholders of Seragen was one and the same.”[36] Apparently, the terms were negotiated by Hirsch, Hirsch’s banking representatives, and Masters.[37] Hirsch, however, failed to recall having any involvement in the Loan Guarantee Transaction beyond simply implementing its terms.[38]

While Silber was trying to assemble a roster of investors for the potential Loan Guarantee Transaction, executives at Seragen, especially Masters, were continuing to look for alternate methods to raise essential additional capital, particularly through public financing. It appears, however, that no alternative public or favorable private financing was available to Seragen. For example, a February 7, 1995 letter from Morgan Stanley to Masters recited that “[i]t would seem there is not a lot of support by our partners to make investments in biotech companies.”[39]
Additionally, minutes from Seragen Executive Committee meetings and memoranda from Seragen executives to the Board indicate that, although Seragen was investigating the potential for a public equity sale and even a private placement, those opportunities were either unavailable or would have been less beneficial and more costly than the Loan Guarantee Transaction.[40]
According to Masters, Seragen had sought every financing “vehicle known to man,” yet it was unable to find a bank that was willing to back an effort to raise capital in the public markets.[41] Perceiving bankruptcy as the only other option, Masters, as well as Konatich, recommended the Loan Guarantee Transaction.[42] Even at the March 6, 1995 Seragen Board meeting, the very meeting at which the Loan Guarantee Transaction was approved, there was a discussion of alternatives to the Loan Guarantee in which the Board recognized that “[t]he Company’s investment bankers have advised that [a private placement] would most likely require shares to be sold at a significant discount from current market price, in addition to the issuance of warrants” and that a public offering was unavailable as “all of the investment bankers [that] the Company has spoken to do not believe a reasonable offering could be accomplished at this time.”[43]

The Plaintiffs contend that, despite the written and testimonial record of Seragen’s efforts to secure alternative financing, no such attempt was truly made and, if Seragen had chosen to do so, it could have found alternative financing on materially superior terms to the Loan Guarantee Transaction.[44] The Court is convinced that however self-serving the motivations may have been to enter into the Loan Guarantee Transaction, and however positively some may have viewed Seragen’s prospects, Seragen did not in fact have other reasonable financing alternatives available to it.

E. The Series B Transaction

Not long after the loans secured through the Loan Guarantee Transaction infused $23.8 million into Seragen, Seragen encountered more serious financial problems. NASDAQ, the exchange on which Seragen’s shares traded, classified the $23.8 million from the Loan Guarantee Transaction as debt instead of equity, and, on April 16, 1996, NASDAQ threatened to delist Seragen because Seragen did not meet its net tangible asset requirement.[45] NASDAQ requested that Seragen submit its proposal for achieving compliance by April 30, 1996.[46]
Immediately following the receipt of this letter, Masters and other members of the Seragen Board devised alternative strategies to avoid delisting. Two suggestions were (1) convince NASDAQ that the $23.8 million was in fact equity and, if that failed, (2) persuade the three loan guarantors to pay off the loans that they had guaranteed in exchange for an enhanced equity position in Seragen.[47] Additional financing options were also discussed, including contacting other high net worth individuals about potential investments in Seragen, BU’s possible sale of a major asset with the proceeds going to Seragen, and a possible Regulation S offering through Scharff, Witchel Co. (“Scharff, Witchel”).[48] All attempts to convince NASDAQ that the $23.8 million loan obligation was equity quickly proved fruitless.[49]

On May 13, 1996, Seragen’s Board unanimously authorized the Company to engage Scharff, Witchel to act as an agent to raise $4 million in a Regulation S offering.[50] According to Condon, all major decisions regarding this financing were influenced by the need for prompt action in light of the threatened NASDAQ delisting.[51] Through this transaction, Seragen issued its Series A Preferred stock (“Series A”) to a third party investor.[52] Seragen expected a financing comprised of two separate $4 million tranches, one to be completed in June of 1996 (the Series A), and the second tranche to be completed by July or August of 1996.[53] The principal terms of the Series A were as follows: the Series A shares were convertible at the option of the holder, beginning in July 1996, into shares of Seragen’s common stock at a conversion price equal to the lesser of: the closing bid price on NASDAQ on May 28, 1996; or 73% of the average closing bid prices for a specified period prior to the conversion date.[54] The Series A shares also provided for dividends payable in shares of Seragen’s common stock.[55] Issuance of the Series A raised $4 million for Seragen (because of costs associated with the offering, Seragen netted $3.8 million).[56] However, this was not nearly enough additional capital to avert NASDAQ’s potential delisting.

At the same time, there were serious ongoing discussions both within Seragen and by the Seragen Oversight Committee concerning what to do with the Loan Guarantee financing. By May 14, 1996, Seragen’s counsel, who also represented BU, had sent to all three loan guarantors draft letters of intent describing a proposed restructuring of the loans.[57] On July 1, 1996, Seragen and the loan guarantors proceeded with the restructuring by issuing the Series B Preferred Stock (“Series B”).[58] In exchange for the guarantors’ assuming or satisfying Seragen’s $23.8 million liability to the banks, the guarantors were issued 23,800 shares of the newly created Series B at a per share price of $1,000.[59] Effectively, for each $1 million of loan amount guaranteed and satisfied (or assumed), Seragen issued $1,000 in Series B shares with a liquidation preference, a floating dividend, equal initially to the interest rate payable on the guaranteed loan, and voting rights, not exercisable as a separate class, equal to 250,000 shares of common stock; the shares were redeemable at Seragen’s option after May 1999 at a redemption price equal to the purchase price per share plus accrued dividends.[60] The Series B shares were also convertible at the holders’ option: each Series B share would convert into the number of shares of common stock equal to $1,000 divided by the average of the closing sale price of the common stock as reported by NASDAQ for the preceding ten consecutive trading days.[61] Furthermore, BU, Hirsch, and Cassidy received warrants to purchase Seragen common stock at $4.00 per share,[62] in addition to the warrants already received for the original Loan Guarantees.[63] No dividend was ever paid to the Series B shareholders and no Series B shares were ever converted into shares of common stock. This transaction ended, for a time, NASDAQ’s threatened delisting because it provided sufficient equity to allow Seragen to meet NASDAQ’s standards. However, Seragen received no “new” money; the transaction only served to reclassify the debt from the Loan Guarantee Transaction to equity. On the day the Series B restructuring was announced, Seragen common stock gained 22%.[64]

The Plaintiffs contend, and this Court concurs, that the Defendants failed to adopt or follow any procedures or safeguards that would have ensured that the Series B transaction was entirely fair to Seragen’s minority shareholders. Condon testified that, as with the Loan Guarantee Transaction, both BU and Seragen were represented by the same law firm.[65] No independent committee was formed to evaluate or to negotiate issuance of the Series B.[66] Condon also testified that the terms of the Series B issuance were set by Konatich.[67] However, Condon indicated that both Hirsch and Cassidy played some part in the Series B negotiations, and he recalled:

[T]here was a discussion with respect to offering the same opportunity to other shareholders [to buy into the Series B], but what it came down to [was] that [Hirsch], who was not . . . a related party with Seragen, if you will, was the one who we would have to follow with respect to his structuring the deal. And it was sort of a take it or leave it kind of thing.[68]

Hirsch, however, had no recollection of any involvement with the Series B transaction except for having his shares converted.[69] In other words, Hirsch claims that he took no part in the Series B negotiations. Cassidy also testified that he did not negotiate the terms of the Series B.[70]

Silber’s approach to the retention of counsel is symptomatic of the interrelationship of BU and Seragen. When asked if Seragen had retained independent legal counsel during the Series B negotiations, Silber stated that he believed that the lawyers “were independent counsel, because there is no separation of interest between Boston University and the [minority] stockholders of Seragen. Consequently, there was no conflict of interest, and that means that the counsel that represented both was independent counsel.”[71] When Silber was asked what, if anything, was done to establish the fairness of the Series B, he responded that he thought:

[T]hese nonparticipating shareholders of Seragen, including myself, were highly benefited by the fact that money came in that kept us from going bankrupt. . . . [T]he wonderful thing was that [BU] and the people it persuaded to join them in that loan guarantee saved the company and consequently saved the interest of every single stockholder who had invested in Seragen.[72]

F. The Series C Transaction

Because of Seragen’s continuing high cash burn rate, the Series B did not permanently remedy the delisting problem, and NASDAQ, on August 21, 1996, again notified Seragen that, if it did not meet certain capital requirements, Seragen would be delisted.[73] On September 12, 1996, NASDAQ granted Seragen an extension on its potential delisting until November 15, 1996.[74] That extension was predicated upon Seragen’s “us[ing] its best efforts to complete a private placement of $4 million of convertible preferred stock.”[75] Seragen had represented that the private placement would be completed by September 30, 1996.[76] The preferred shares which Seragen had planned to issue, with Scharff, Witchel’s assistance to the holder of the Series A shares, were to have a 34% conversion discount to market plus 250,000 ten-year common stock warrants per million dollars invested.[77]

According to Condon, the delisting crisis arose again at this time because the Series A holder which had a right of first refusal on the additional financing, wanted more generous terms in the second tranche than it had received under the Series A, and Seragen was forced to look elsewhere for the $4 million it had expected to receive from the Series A holder.[78]
Scharff, Witchel, however, was unable to secure additional financing and, on September 24, 1996, as the September 30, 1996, deadline for completing the private placement approached without any other potential investors available, Cooley, also the Chairman of BU’s Board of Trustees, approved an emergency $5 million cash investment in Seragen to avoid a NASDAQ delisting; these funds were delivered to Seragen the next business day, September 27.[79] Cooley, on his own, had concluded that Seragen needed an immediate cash infusion from BU, and he expected that the cash would “be replaced or returned to [BU] through a private placement by the end of the fiscal year on June 30, 1997.”[80]

When Cooley decided to proceed with the transaction, he had not yet been presented with any terms of the Series C. Condon testified that the terms of the Series C were not determined until after the $5 million had been invested and that the documents memorializing the transaction were backdated.[81]
However, Condon later recanted this testimony and stated that the deposit of the funds with Seragen and the issuance of the Series C were simultaneous.[82] For the Court’s purposes, it is not so much when the terms of the Series C were determined but who negotiated them because, as with the Series B, insiders negotiated the terms of the Series C.

The Seragen Board voted to issue the Series C shares on September 27, 1996, and the shares were issued on September 30, 1996.[83] The terms of the Series C were that BU, for its $5 million investment would receive 5,000 shares; they were convertible at BU’s discretion into Seragen common stock at a per share conversion price equal to the lesser of $2.75 or 73% of the average closing bid prices for the five-day period prior to the conversion date, up to a maximum of 3,360,625 shares; if not previously converted, all shares would be converted to common shares on March 31, 1998, except that those Series C shares which could not be converted because of the conversion maximum would be repurchased by Seragen for $1,150 per share; and Seragen had the right to redeem the shares upon the repayment of principal only.[84] However, NASDAQ questioned the requirement that Seragen repurchase the unconverted shares; it suggested that this provision might prevent treatment of the $5 million from the Series C as equity. On November 25, 1996, BU, to satisfy NASDAQ and to avoid delisting, irrevocably waived the right to have Seragen buy back any Series C shares that did not convert because of the conversion limit.[85]

The procedures followed in issuing the Series C also raise fundamental questions about its fairness to the other holders of Seragen common stock. As with the Series B, Silber was unable to recall whether an independent investment advisor opined as to the fairness of the Series C transaction, or whether any steps were taken to insure the fairness of the Series C transaction.[86] Cassidy and Condon also testified that they were unaware of any steps taken to insure the fairness of the Series C.[87]

Although process to assure fairness was lacking, BU, nonetheless, took the Series C on less desirable terms than Seragen had privately negotiated at arms-length with the Series A holder through Scharff, Witchel.[88] The proposal to the Series A holder involved a 36% discount to market while the Series C shares received by BU, on a converted basis, only carried a 27% discount to market (or $2.75 per share, if less).[89]

G. The Lack of Financing Alternatives

As to the Series B, and to a lesser extent the Series C, the Plaintiffs have again argued that BU caused Seragen not to take advantage of other sources of funding and instead to engage in the Series B and Series C transactions, because it served to benefit BU and its affiliates. Both sides have presented experts on the question of financing available to Seragen in the summer and fall of 1996,[90] and for reasons set forth below, the Court concludes that there were no reasonable financing alternatives.[91] The Court relies upon Defendants’ expert Katherine Kirk (“Kirk”).[92]

In reaching her conclusion that Seragen was not financeable from 1995 through 1997, Kirk drew upon her significant and successful experience as a banker who had raised funds for many biotechnology companies.[93] The factors considered in determining whether a biotechnology company could raise capital were “the company’s technological capabilities, [its] ability to formulate and complete clinical trials; the projected time frame to revenues and profits; the size of the ultimate market [and the] intellectual property portfolio.”[94] In addition, the product pipeline was “absolutely crucial” in determining whether a biotechnology company could raise capital because progress in clinical trials was “really the only litmus test that investors had that was tangible.”[95]

After examining Seragen’s product pipeline from the end of 1995, Kirk concluded that Seragen was foundering because, of Seragen’s seven products in clinical trials, five had stalled with insignificant results or no response from patients, and one trial was halted due to serious side effects in a test subject.[96] Kirk drew similar conclusions concerning the clinical development outlook in 1996, finding that Seragen had dropped several trials, including those for large markets, and that Seragen’s clinical drug program had “been severely diminished.”[97]

Kirk also stated that, beyond the product pipeline, investors would typically look to the company’s finances because it needed the resources to develop its products, and “if a company had less than one year’s cash . . . they were vulnerable and on the rocks.”[98] Examining Seragen’s finances, Kirk ascertained that Seragen was running out of cash by the end of 1995; that it was in “dire straights,” and that Seragen’s auditors had issued going concern qualifications.[99] Additionally, Kirk concluded that the addressable markets for the drugs that Seragen was developing had drastically shrunk from initial projections, and that they were so small, in fact, that they could not be profitable enough to cause investors to have any interest in Seragen.[100] After evaluating Seragen’s product development pipeline, Seragen’s financial situation in 1995-96, and the ever-shrinking potential markets for Seragen’s potential products, Kirk concluded that “Seragen at the time . . . was not financeable.”[101]

Plaintiffs’ expert, J. Mark Penny (“Penny”), opined that in the summer of 1996 Seragen did in fact have a number of alternative financing options available to it that would have been more beneficial than the Series B transaction.[102] Penny, however, does not have the relevant work experience and has not relied on generally accepted methods for determining whether Seragen could have obtained alternative financing in 1996. The Defendants, with some persuasive force, have argued that his testimony should be excluded. The Court, however, has determined that it is appropriate to deal with Penny’s opinions on their merits instead of excluding him as an expert.

Penny’s report asserts, in a disconcertingly generalized manner, that because the biotechnology market had product sales of $10.8 billion in 1996 (up from $9.3 billion in 1995), because the period from mid-1995 to mid-1996 was strong for biotechnology public offerings, and because other biotechnology firms were able to raise significant capital through public offerings, Seragen must have been able to raise significant capital and simply opted not to do so.[103] It is the Court’s perception, as confirmed by Kirk, that simply because peer companies were able to raise funds does not signify that Seragen would have been able to raise funds because “[p]eople were going to look at Seragen. [T]hey weren’t going to care if some other company was raising money.”[104] What mattered was whether Seragen was a good investment opportunity, and Penny took no meaningful steps to evaluate Seragen in that light. Penny instead testified that Seragen’s weak financial condition at the beginning of 1996 was due to the Loan Guarantee Transaction, but Penny had no opinion on the effect the poor trial results may have had upon Seragen’s ability to raise financing.[105] Penny’s opinion on this matter, beyond simply being outside his field of expertise, is based on only the slightest bit of scientific/technical knowledge, and he provides no data, rationale, or research specific to Seragen in order to support his conclusion. For these reasons, the Court accords no weight to his opinion that Seragen had viable or practicable alternative financing available.

H. New Management for Seragen

Shortly after the Series C transaction, Seragen hired Prior as its new chief executive officer.[106] Before taking the position at Seragen on November 6, 1996, Prior, had made a name for himself in the biotechnology world as a “turn-around executive.”[107] Seragen was Prior’s fifth biotechnology company, and, before he was hired, Prior interviewed with Silber, Hirsch, Cassidy, and Nichols, among others.[108] In addition to a yearly salary of $350,000, Prior’s contract included stock options equal to 8.5% of the then outstanding common stock of Seragen measured on a fully diluted basis.[109] The options would vest in accordance with a schedule of 2.0833% on the date of his hiring and the same percentage on the first of each month thereafter so that all of the options would become vested before the fourth anniversary of his hiring.[110] However, in the event of a change of ownership, the options were to vest retroactively with 25% on the effective date and an additional 2.0833% on the first of each calendar month so that 100% shall be fully vested following the third anniversary of the effective date. Additionally, Prior was to receive 8.5% of the net proceeds resulting from a change of ownership during Prior’s employment. This payment was known as the “Asset Value Realization Bonus.”[111]

Prior described Seragen’s condition upon his arrival as “dire,” with less than three months of money left in the bank and no prospects of raising any more.[112] Specifically, Prior noted:

Shortage of cash was [the] number one [problem]. The four plus million dollars due [under an existing license agreement] . . . was number two right up there. The constant selling, converting and selling of Series A . . . shares [was] depressing the stock price. The Lilly deal . . . was really terrible, had transfer prices basically below any projected potential manufacturing costs. And also the inability to do other corporate deals because of provisions in the Lilly agreement that prevented that . . . [W]e had a serious problem there.[113]

On accepting a position with Seragen, Prior’s plan was to reduce Seragen’s cash burn rate by turning the company into a virtual biotechnology company through sale of the physical plant[114] and to raise additional capital by restructuring some of the preferred stock into common stock.[115]

I. The Sale to Marathon

Prior’s first significant act as chief executive officer was the sale of Seragen’s operating division to Marathon Biopharmaceuticals, LLC (“Marathon”), an entity created by BU expressly for the purposes of this sale, for $5 million. Silber presented the potential transaction to the Seragen Oversight Committee at its December 10, 1996 meeting and told the BU Board of Trustees that the proposed acquisition cost would be $5 million and that BU would be expected to enter into a services agreement under which BU would fund the facility’s operating expenses for two years, up to a maximum of $9 million per year, or a total of $18 million.[116] Additionally, Seragen retained the right to re-purchase the facility for the original sale price, $5 million, plus any expenses incurred by BU and interest at ten percent.[117] The Seragen Oversight Committee approved the proposal, as did the Seragen Executive Committee,[118] and the transaction was consummated on February 19, 1997.[119] Prior expressed gratitude and felt “lucky” that BU was willing take the operating division because, in his opinion, the operating division was devouring cash at an incredible rate and nobody else was interested in purchasing the facility.[120] Prior testified that he relied on the advice of a representative of Lehman Brothers which had been working with Seragen; the investment banker expressed the view that the transaction was necessary because otherwise Seragen could not survive with the operating division’s cash consumption.[121]

For reasons not clear in the record, almost ten months later, the Seragen Board submitted this transaction for a shareholder vote during its December 16, 1997 Annual Meeting of Shareholders and provided substantial information in its November 4, 1997 proxy statement regarding both the Marathon transaction and the financial status of Seragen at the time.[122] The shareholders approved the Marathon transaction, although, it is unclear what would have happened at this late date had the shareholders failed to approve the transaction.[123] As with the Loan Guarantee, the Series B, and the Series C, this was yet another transaction with BU on both sides, and prudent steps to assure the fairness of this transaction are not evident.

J. The USSC Transaction

Between the Marathon transaction and the shareholder approval of that transaction, Seragen entered into a technology licensing arrangement that has become known as the USSC transaction. This transaction involved a licensing agreement executed by Seragen and USSC on July 31, 1997, under which Seragen granted USSC certain rights related to Seragen’s fusion protein technology in exchange for $5 million.[124] Hirsch was both a director and officer of USSC; Silber was also a director in USSC and held a stake in the company. Hirsch, however, claims not to have been involved in any aspect of the USSC licensing agreement.[125] The agreement conferred upon USSC the option to pay an additional $5 million to affirm the agreement within fifteen months of the initial date.[126] However, if USSC chose not to exercise that option, USSC would receive $5 million in Seragen common stock based on the lower of the average of the market price for the preceding ten days or the stock price on the day the agreement was signed.[127] Seragen, if optimistic results were achieved, also stood to receive as much as $40 million from USSC over the ensuing three to four years in potential milestone payments.[128]

K. The Accord Agreement and the Merger

With no end in sight to its financial problems, Seragen began to consider merger opportunities.[129] After months of discussion, an agreement in principle was reached between Seragen and Ligand for the acquisition by Ligand, on February 20, 1998, of Seragen and its operating assets (including Marathon) for aggregate consideration of approximately $75 million, with $70 million to be paid for Seragen and $5 million to be paid for the Marathon facility.[130] One of the conditions to the merger was that no more than ten percent of the common shares be presented for appraisal.

Although the Seragen Board believed that $75 million was a sufficient combined price for Seragen and Marathon, it remained necessary to allocate the merger proceeds among the various stakeholders of Seragen before definitive agreement could be reached and a proxy statement concerning the merger could be distributed.[131] To determine how best to allocate the proceeds of the merger, the BU defendants, other Seragen and BU insiders, and Hirsch (or his representatives) negotiated primarily among and against themselves to establish the discounts that they were willing to take on their various investments while at the same time taking into consideration the least amount of proceeds that it would be necessary to divert to the common shareholders in order to avoid the exercise of appraisal rights for more than ten percent of the common shares.

Although less than clear, the better inference is that Prior and Robert Crane (“Crane”), Seragen’s chief financial officer, began the effort to provide the numbers to the various inside investors in their attempt to come to a final agreement on the discounts each would take.[132] The agreement allocating the merger proceeds among the various stakeholders came to be known as the “Accord Agreement.”[133] Despite the fact that the allocation was to be decided by many interested parties, the Seragen Board, once again, failed to adopt or to follow any procedures to assure that the division of the merger proceeds and the ensuing Accord Agreement and Merger Agreement were fair to Seragen’s minority common shareholders.[134] The only disinterested member of the Board was Jacobs, and he was unavailable to perform any separate evaluation and negotiation.[135] Moreover, although Silber and Prior both testified that they relied on the opinions of a representative of Lehman Brothers for the fairness of the final allocation, no written opinion which stated that any such allocation was fair was ever presented.[136] Because the Court has not been provided with details of this opinion or the grounds for any such opinion, the Court is unable to rely on any such opinion in its entire fairness inquiry.

Describing the negotiations, Prior testified, “[w]e took the amount of money we thought we would have in total proceeds. We tried to figure out where we thought there were stakeholders who would be willing to take less in consideration of others doing the same and where there were ones that wouldn’t.”[137]
Silber recalled that Prior:

[n]egotiated [the allocations] and negotiated the steepest haircut that he could arrange from all the people that had to have their interest converted from preferred to common and with regard to warrants and with regard to their rights to certain intellectual properties, all of which had to be forfeited. And I think that [Prior] was the one who negotiated this and negotiated it so severely that I think that obviously the interest of the average stockholders and the minority stockholders was certainly clearly represented in that negotiation.[138]

Silber also stated that this was all one transaction; that nobody separately represented BU, Seragen, or Marathon in these negotiations, and that BU accepted a discount because it was the only alternative to the possible loss of its entire investment.[139] Prior testified that Ligand wanted the stakeholders in Seragen, including the common shareholders, to be satisfied with the deal, and even though the $75 million in merger consideration did not change from February through the close of the merger in August, the transaction remained cloaked in uncertainty until the final allocations were agreed upon by the interested parties.[140] Prior characterized the allocation negotiations as:

an overall negotiation . . . [in which] we were just trying to get a fair allocation for the commons. We were trying to get rid of the creditors. . . . I remember trying to fight for total amounts; but where individual parties wanted divvied up amongst their pieces, we were as accommodating as we could be to get the darn deal done.[141]

Lastly, Prior “believed that if the commons got anything, it was fair.”[142]

The principal participants in the process of negotiating the Accord Agreement recognized that there was a significant risk of litigation by unhappy minority common shareholders. They were aware of the history of related party transactions between Seragen and BU and its affiliates. They also appreciated the importance of obtaining a premium for the common shareholders, especially because of the potentially adverse consequences for the merger if “too many” shares were presented for appraisal. In short, it is unlikely that the filing of this action came as much of a surprise to the defendant fiduciaries.[143]

Without the benefit of an independent advisor or even a dedicated advocate, the negotiations evolved into a process in which the principal concern was the division of the merger pie in such a way as to appease the minority common shareholders while at the same time ensuring transfer of the greatest amount of merger consideration to those invested in the various preferred shares and other credit arrangements. While Prior may have done his best, and the Court concludes that Prior did what he could under the difficult conditions, it is clear that he was too concerned with completing the merger to commit himself to representing the interests of the minority common shareholders. Additionally, Prior himself was faced with accepting discounts on payments that were owed to him under his employment contract (the Asset Value Realization Bonus) and, therefore, it cannot be said that Prior did not have a personal interest in keeping the amount allocated to the minority shareholders low in order to avoid increased reductions in the sums owed to him. To this end, neither Prior nor anyone else on Seragen’s Board ever questioned the value of the potential derivative claims held by Seragen concerning the Series B, the Series C, the Marathon transaction or the USSC transaction, and they therefore never took the potential derivative claims into account when determining or negotiating what the common shareholders should receive.[144]

Although the total consideration offered by Ligand did not change from late February through the closing of the merger in August 1998, the allocation to the purchase of Marathon did increase from $5 million to $8 million.[145] At some point before May 1, 1998 it was decided that Marathon, a BU entity, would receive $8 million instead of $5 million, thereby reducing the amount to be allocated among Seragen’s various stakeholders to $67 million.[146] When asked to explain how the number allocated for the purchase of Marathon went from $5 million to $8 million, Silber, stated that, although he did not know for certain, it was likely because BU had been absorbing Marathon’s operating losses and that it had continued to do so since the initial merger figures were established in February.[147]
On this same point, Prior speculated that the increase from $5 million to $8 million was the result of strong negotiating by BU’s counsel who believed that because Marathon had absorbed so many millions of dollars in operating losses that Marathon was owed more than $5 million.[148] Prior acknowledged that the losses incurred by Marathon far exceeded the $3 million dollar increase in the cost of Marathon.[149] Although Prior and Silber may have believed that an additional $3 million was owed to BU from Seragen because of Marathon’s operating costs, the defendants have provided no persuasive evidence of this, and they have not demonstrated why BU was entitled to payments in addition to proceeds it otherwise received for the cost of the Marathon operation.[150]

The merger proxy statement, which was distributed on or about July 14, 1998, informed the shareholders that:

Pursuant to the Accord Agreement, the Compromising Claimants [BU, BU related entities, including BU Holding and Marathon, USSC, Hirsch, . . . Cassidy, Mrs. Cassidy, Prior, Nichols, and others] agreed, in order to facilitate the Merger, to accept the right to receive Merger Consideration in satisfaction of certain of their claims against Seragen. The amount of Merger Consideration allocated to [Hirsch, . . . Cassidy, Prior, Nichols, and others] and, to the extent of its claims arising from its holdings of (i) Seragen Series B Preferred Stock and (ii) those shares of Seragen Common Stock issued, and those debt obligations of Seragen owed, to it in connection with the conversion of the Seragen Series C Preferred Stock, BU Holding . . . under the terms of the Merger Agreement constitutes what Seragen management expects to be a discount from 25% to 40% (with the exact amount of the discount depending on the date of the Closing and the amount of Seragen’s payables as of the Closing) on amounts otherwise owed by Seragen to such persons in respect of their relevant claims.[151]

The shareholders were advised that $67 million of the merger proceeds would be split among Seragen’s shareholders and creditors, and $8 million would be paid to purchase the Marathon facility.[152] The Merger Proxy also informed the shareholders that their portion of the merger proceeds would be paid in part with Ligand stock: each common share of Seragen would exchange into 0.035736 shares of Ligand. When the Proxy was issued, Ligand was trading at $13.9875 per share.[153]
Accordingly, each share of common would convert into $0.49999, or $0.50 worth of Ligand stock. Additionally, holders of Seragen common stock might also be entitled to “Milestone Consideration” of $0.23 per share.[154] Effectively, the shareholders expected, under the Merger Agreement as described in the Proxy Statement, to receive $0.73 per share.[155] The shareholders, however, did not receive $0.73 per share because they bore the risk that the price of Ligand stock might decrease, which it did. By the time the merger closed, Ligand shares had declined to $9.6875 per share,[156] and Seragen’s common shareholders received only $0.35 per share, plus the $0.23 per share milestone payment, for a total of roughly $0.58 per share.[157] The Merger Proxy, however, did not disclose to the shareholders any of the negotiations that took place in arriving at the allocation.[158] Ten percent of the common shares were not submitted for appraisal, and the merger was approved and consummated by Ligand on August 12, 1998, a few days after the Plaintiffs had filed this action.

II. CONTENTIONS
The Plaintiffs contend that the BU Defendants breached their fiduciary duties to Seragen’s common shareholders by approving the Series B transaction, the Series C transaction, and the Accord Agreement. The Series B and Series C transactions precluded, according to the Plaintiffs, access to capital markets, thus causing the financial stress which resulted in the choice of (i) a merger for less than what Seragen should have been worth or (ii) Seragen’s demise. In short, they argue that the Defendants bear the burden, but did not satisfy the burden, of proving that the initial transactions were entirely fair to the minority shareholders. Similarly, they contend that the Defendants failed to meet that burden with respect to the Accord Agreement and the allocation of merger proceeds. Not only was there no properly prepared and supported advocate for the common shareholders at the bargaining table, but also no one used the potential derivative claims springing from not only the Series B and Series C transactions, but also the USSC transaction and the Marathon transaction, as bargaining chips. In addition, the process allowed (1) BU to avoid its waiver of its right to a minimum price for its remaining Series C shares and (2) BU and Marathon to obtain a premium on the sale of the Marathon facility to Ligand for $8 million, instead of the initially agreed upon amount of $5 million. Because of all this, the Plaintiffs contend that the various transactions were not fair to the common shareholder as a matter of price and process. Moreover, the Plaintiffs insist that the disclosures made in the merger proxy statement were insufficient to inform the shareholders in their decision to vote for the merger or to exercise their appraisal rights. Finally, the Plaintiffs argue that Hirsch aided and abetted the faithless fiduciaries in the transactions in which he was interested — the Series B transaction and the Accord Agreement — and in the transactions involving USSC’s interests.

The BU Defendants maintain that the Series B and Series C transactions were not only entirely fair to Seragen and its minority shareholders but also that those transactions were critical to the survival of Seragen. Also, they argue that the allocation process was fair to the minority shareholders. In addition, they assert that Seragen’s minority shareholders were provided with material and accurate information to which they were entitled. Finally, Hirsch, reiterating that he owed no fiduciary duties to Seragen and its stockholders, maintains that he did not assist the BU Defendants in any breach of fiduciary duty but, instead, was acting in his self-interest (or in the interest of USSC) as he was entitled to do.

III. ANALYSIS
A. The Analytical Context

Ligand’s offer of an effective $75 million to acquire Seragen (including the Marathon operating facility) and to resolve all of the claims and interests of Seragen’s stakeholders created a framework that fed the conflict among the stakeholders and placed even greater pressures on a conflicted board that was ill-suited to meet its responsibility to protect the interests of Seragen’s minority stockholders. Three board members — Silber, Condon, and Cassidy — were employees of, or affiliated with, BU. Prior and Nichols had their own employment-related benefits to protect. Of the board members, only Jacobs could have represented the minority common shareholders unburdened by significant conflicts, but he was not available for the job. Prior, and his management team, may well have done the best job that they could have done under the circumstances, but Prior’s principal function was to hold the Ligand transaction together — otherwise, bankruptcy was the likely end game — but that may have necessarily involved sacrificing the interests of the minority shareholders to placate the other stakeholders. It is within this troubled corporate governance context that this case must be resolved.[159]

B. The Distinction Between Direct and Derivative Claims

Before trial, the Court denied, in part, the Defendants’ motion for summary judgment as to the Plaintiffs’ direct claims with respect to the Series B and Series C transactions because there were sufficient questions of material fact concerning their characterization as either direct or derivative.[160]
However, with the benefit of evidence presented at trial, it is appropriate to revisit the question of whether the Plaintiffs’ challenges to the Series B and Series C transactions present derivative, and not direct, claims.

The question of whether a claim is to be characterized as direct or derivative is a fundamental one because a derivative claim may only be brought by a shareholder who continues to hold the shares of the corporation on whose behalf the shareholder is suing.[161] The determination of whether a claim is direct or derivative is governed by the analysis set forth in Tooley:

[A] court should look to the nature of the wrong and to whom the relief should go. The stockholder’s claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.[162]

In essence, the Court must determine whether it was the individual shareholder or the corporation that was allegedly harmed and which person would benefit from any potential recovery.[163] If a claim is found to be derivative and not direct, that claim may not be brought by the former corporate shareholders (who lost that status by way of merger) because those claims then belong to the acquiring company, and only that company may seek to enforce those claims.[164]

C. Whether the Series B and Series C Claims are Direct or Derivative in Nature

The Plaintiffs claim that issuance of the Series B and Series C shares resulted from self-interested transactions in which both the Director Defendants and BU breached their fiduciary duty of loyalty. According to the Plaintiffs, the Series B and Series C transactions resulted in both equity dilution (because the value of the common shares was decreased as a direct result of the issuance of the Series B and C shares which reduced their proportionate share of the venture) and voting power dilution (because their voting power was diminished (or threatened) by the additional shares which were, or could have been, issued).

The Court now turns to the question of whether the Series B and Series C duty of loyalty claims presented by Plaintiffs are direct claims, in which case the Plaintiffs would have standing, or are derivative claims, in which case, because they are no longer Seragen shareholders, the Plaintiffs would lack standing. Because the Plaintiffs have identified two distinct harms, equity dilution and voting power dilution, the claims will be considered separately.

1. Equity Dilution

The Plaintiffs complain that the Series B and the Series C transactions resulted in equity dilution which reduced the value of their common shares and their proportionate investment in Seragen. However, as explained below, such a claim is derivative in nature, not direct, and therefore the Plaintiffs lack standing to bring these claims. Our cases have held, both before and afte Tooley, that equity dilution does not generally constitute a direct harm, but, instead, a derivative one. For example, in the pre-Tooley case of Kramer,[165] the plaintiff contended that corporate waste worked a special and direct injury to the common shareholders’ rights, an injury distinct from the harm to the corporation, because it affected the common shareholders’ merger consideration.[166] The Court concluded that mismanagement, which has the effect of depressing the value of stock, constitutes a wrong to the corporation as an entity, and, thus, “where a plaintiff shareholder claims that the value of his stock will deteriorate and that the value of his proportionate share of the stock will be decreased as a result of alleged director mismanagement, his cause of action is derivative in nature.”[167]

In the post-Tooley era, this approach was employed in In re J.P. Morgan Chase Co. Shareholder Litigation.[168] The plaintiffs in that case, shareholders of J.P. Morgan Chase Co. (“JPMC”), alleged that the JPMC stock issued to acquire Bank One — at a premium of 14% above the market price of Bank One stock — constituted overpayment and diluted the plaintiffs’ collective ownership in the surviving corporation.[169] The Court, concluding that the plaintiffs’ dilution claims were derivative, explained that “[a]ny alleged dilution was a harm suffered by all pre-merger JPMC stockholders and, consequently, JPMC itself. Thus, the harm alleged in the complaint cannot give rise to a direct claim.”[170]

Similarly, in Gatz v. Ponsoldt,[171] this Court addressed a dilution claim of disgruntled shareholders:

Mere claims of dilution, without more, cannot convert a claim, traditionally understood as derivative, into a direct one. Clearly, a corporation is free to enter into (in good faith) numerous transactions, all of which may result legitimately in the dilution of the public float. Such dilution is a natural and necessary consequence of investing in a corporation. . . . The only cognizable injuries, if any, would be a failure to act in the best interest of [the corporation]. . . . These alleged harms were inflicted upon the corporation itself and could be asserted only by or on behalf of the corporation.[172]

In the present case, the Plaintiffs have alleged equity dilution in a similar fashion. They assert that, because of a breach of the duty of loyalty by the Director Defendants and BU, the Series B and Series C shares were issued for far less consideration than they were actually worth, thereby diluting the equity value of the common shares. Under Tooley, the harm alleged by the Plaintiffs was suffered by the corporation because it was the corporation in the Plaintiffs’ scenario that issued its stock too cheaply. Any equity dilution that Plaintiffs may have suffered is simply a byproduct of the harm to the corporation. Therefore, any recovery would have gone to the corporation, because the Plaintiffs are unable to demonstrate any harm to themselves, as shareholders, without also demonstrating harm to the Seragen. For these reasons, the Plaintiffs lack standing to assert claims of equity dilution concerning the actions of the defendants in the issuance of the Series B and Series C shares.

2. Voting Power Dilution

Apart from the alleged equity dilution stemming from the Series B and Series C transactions, Plaintiffs have also contended that their voting power was diluted by issuance of the Series B and Series C shares. Voting power dilution may constitute a direct claim, because it can directly harm the shareholders without affecting the corporation, and any remedy for the harm suffered under those circumstances would benefit the shareholders.[173]

The Plaintiffs allege that issuance of the Series B and Series C shares allowed BU and its affiliates to solidify their control over Seragen at the expense of the minority shareholders. The Court, accordingly, will address the Plaintiffs’ voting power dilution claim as a direct claim.[174]

D. The Fiduciary Duty of Loyalty and the Entire Fairness Standard

The duty of loyalty requires that a corporate fiduciary act with “undivided and unselfish loyalty to the corporation” and that “there shall be no conflict between duty and self-interest.”[175] “Classic examples” implicating the duty of loyalty are when “a director [appears] on both sides of a transaction or [receives] a personal benefit . . . not received by the shareholders, generally.”[176] If corporate fiduciaries stand on both sides of a challenged transaction, an instance where the directors’ loyalty has been called into question, the burden shifts to the fiduciaries to demonstrate the “entire fairness” of the transaction. The duty of loyalty also requires that a “controlling” shareholder not act, or cause its representatives to act, in such a manner as to deal unfairly with the minority shareholders.[177]

The entire fairness inquiry has two basic aspects: (1) fair dealing or fair process and (2) fair price.[178] The inquiry into fair dealing “embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.”[179] The fair price inquiry “relates to the economic and financial considerations of the proposed [transaction], including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of the company’s stock.”[180]

Within an entire fairness inquiry, if the burden is on the corporate fiduciary, she must “establish to the court’s satisfaction that the transaction was the product of both fair dealing and fair price.”[181] Although evaluation of two components is necessary to determine entire fairness, “the test for fairness is not a bifurcated one as between fair dealing and price; [instead, all] aspects of the issue must be examined as a whole since the question is one of entire fairness.”[182]
It may be analytically convenient to address price and process as separate concepts, but the ultimate issue, one must remember, is the entire fairness of the overall transaction, assessed by way of a thorough inquiry into the means by which the fiduciaries performed (or failed to perform) their duties.[183]

Six directors served on Seragen’s Board at the time of the merger with Ligand.[184] Silber and Condon were high-ranking employees and trustees of BU. BU was a participant in the Series B, Series C, and the Marathon transactions. It was a major player in negotiating the Accord Agreement. Cassidy was closely affiliated with BU — as an adviser and later as a trustee — and he personally participated in the Series B transaction and the Accord Agreement. Accordingly, these three directors were deeply conflicted with respect to the Accord Agreement and all other transactions at issue involving BU and their personal interests. Not only did Silber and Cassidy have significant personal stakes in the outcome of the Accord Agreement negotiations, but Silber, Cassidy and Condon were also so closely linked to BU that no one could expect them to act without being unduly concerned with the interests of BU.

Prior and Nichols, were likely free of domination by BU; nonetheless, as a consequence of their personal interest in the negotiation of the Accord Agreement, in light of its potential impact on their rights under their employment agreements, they also were self-interested.

Thus, there was not a majority of the Seragen board free of control by BU, and five out of the six directors (either personally or because of their relationships with BU) had a substantial stake in the outcome of the negotiation of the Accord Agreement. With this corporate governance structure, the defendant fiduciaries must demonstrate entire fairness of the Accord Agreement.[185]

1. Should Directors Value Derivative Claims When Allocating Merger Proceeds in this Context, and, If So, How?

a. The Appropriate Standard

Derivative claims are, of course, assets of the corporation. Because of the manner in which Ligand structured its acquisition of Seragen, the Seragen board was required to allocate the proceeds to be paid by Ligand. Any fair allocation of those proceeds could not ignore Seragen’s derivative claims because the purpose of the process was to determine the relative entitlement of the various Seragen stakeholders to the fund created with the merger proceeds. The Seragen stakeholders who premised their claims to the merger proceeds, in part, upon rights acquired through the questioned transactions (upon which derivative claims could have been based) could not use their fiduciary positions to avoid potential accountability simply by failing to address the claims. Therefore, in determining how the merger proceeds could fairly be allocated, the directors should have evaluated the derivative claims of which they had knowledge during the negotiation and merger processes.[186]

Review of the various derivative claims is also necessary for at least two other reasons. First, to the extent that the Plaintiffs have sought to invoke the quasi-appraisal methodology,[187] this review assesses the impact of Defendants’ conduct on Seragen generally. This aspect focuses on the consequences of the Series B issuance and, to a lesser extent, issuance of the Series C shares on Seragen’s ability to raise funds and, thus, its ability to survive until its products could reach the market in commercially viable quantities.[188] Second, it informs the entire fairness assessment of the Accord Agreement negotiations. The funds to be allocated by the Accord Agreement were well below the Plaintiffs’ estimate of what Seragen’s market capitalization would have been but for the Defendants’ conduct. Nonetheless, the process of allocating the merger proceeds among the common shareholders and the holders of priority rights should be evaluated with the relative strengths of their bargaining positions in mind. As the strength of the Plaintiffs’ challenges to the actions of Hirsch and the BU Defendants’ may increase, the allocation of merger proceeds away from the BU Defendants and Hirsch and toward the minority shareholders should also increase.

The Court must first identify those derivative claims known to the directors. The appropriate standard for addressing knowledge is one of inquiry notice. Inquiry notice “exists when the [directors] become aware of facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery of injury.”[189] A broader standard of knowledge would force the directors to engage in an exhaustive research process not only to discover, but then to assess, all potential derivative claims. Such a requirement would not only be burdensome, but it would also require a commitment that in the transactional context may not be achievable. On the other hand, a more restrictive standard, say, one which requires that directors consider only already filed derivative claims (or claims for which demand for action has been made upon the board), would be far too narrow as it would exclude potentially viable claims known to the directors but which, for whatever reason, have not been filed (or are not the subject of a demand).[190] The inquiry notice standard places sufficient burden on the directors to value derivative claims that they have reason to be aware of, but does not require excessive action on the part of the directors to uncover claims.

If the directors are on notice of potential derivative claims, a decision by the directors as to the value of derivative claims, as with other business decisions made by the directors, would fall under the business judgment rule, unless the presumption of that doctrine is rebutted. The business judgment rule is “a presumption that in making a business decision the directors of a corporation acted on an informed basis, . . . and in the honest belief that the action taken was in the best interests of the company.”[191] “[G]ood faith and the absence of self-dealing are threshold requirements for invoking the rule.”[192] Additionally, the directors must make an informed decision, and the determination of whether a decision was informed “turns on whether the directors have informed themselves `prior to making a business decision, of all material information reasonably available to them.'”[193] In order to rebut the presumption, a plaintiff must demonstrate that the directors either breached one of their fiduciary duties in making the decision, exhibited gross negligence, or that the directors were not reasonably informed.

Thus, in order to maintain the benefits of the business judgment rule, directors would be expected to evaluate all material derivative claims of which they could reasonably be charged with knowledge and make a determination as to their validity and their potential value before suggesting an allocation of the merger proceeds. Meeting such standards, the good faith decisions of independent and disinterested directors concerning the value of derivative claims, in this context, would be free from further scrutiny. However, when a breach of the duty of loyalty is established, in the context of the allocation process, the burden would shift to the directors to demonstrate that their treatment of the derivative claims was entirely fair.[194]

b. Evaluation of the Derivative Claims

After applying these principles, the Court concludes that the director defendants, who were on inquiry notice with respect to the derivative claims concerning the Series B, the Series C, and the Marathon transactions, made the merger allocation recommendations in breach of their duty of loyalty because they stood on both sides of the allocation process and failed otherwise to protect the rights of the minority shareholders.[195] Although the four challenged transactions are considered within the entire fairness framework, the Court is not called upon to assess whether each transaction was entirely fair. Instead, the entire fairness analysis is required for review of the allocation process because that effort gave rise to the Plaintiffs’ surviving direct claims (other than their voting power dilution and disclosure claims).

(1) The Directors Were on Inquiry Notice of the Derivative Claims

The defendant directors were on notice of the potential for derivative claims; they were aware of the self-interested nature of several of the transactions;[196] and before the merger, a small, but active group of minority shareholders, including Oliver, had forcefully expressed its concerns to Seragen’s Board.[197]

(2) The Derivative Claims

There are four derivative claims that the Director Defendants should have evaluated and factored into the allocation of merger proceeds but did not.[198] They are: (1) the equity dilution and other harm to Seragen from the Series B transaction as a result of the breach of the duty of loyalty; (2) the equity dilution and other harm to Seragen from the Series C transaction as a result of the breach of the duty of loyalty; (3) the waste of corporate assets caused by the Marathon transaction which resulted from the breach of the duly of loyalty, and; (4) the breach of the duty of loyalty associated with the USSC transaction.

(a) The Series B and C Derivative Claims

Seragen’s directors, having done nothing to value the potential Series B and Series C derivative claims, effectively ignored them in negotiating the Accord Agreement. The Series B and Series C transactions should have been assessed as derivative claims because the BU Defendants stood on both sides of these transactions, and there were no safeguards to ensure the fairness of the transactions. Specifically, Condon and Silber (as Seragen directors and BU executives) and Cassidy (as a Seragen director and affiliate of BU) had conflicted interests because BU invested heavily in the Series B and exclusively in the Series C. Cassidy also invested in the Series B. The derivative claims of Seragen, arising from the Series B transaction and the Series C transaction, could have been used in negotiating against the claims of BU, its affiliates, and possibly Hirsch. In substance, the claims, including the attendant litigation risks and expenses, could have been used to bolster the position of the minority shareholders in the process of dividing up the merger consideration to be paid by Ligand.[199]

The Court turns first to the issue of fair price of the Series B and Series C. Fair price, in this context, involves not only the actual consideration received but also the consequences that those transactions had on Seragen. Indeed, the Plaintiffs also argue that the terms of the Series B and Series C put downward pressure on Seragen’s stock price, thereby making its efforts to obtain financing even more difficult, if not impossible.

The burden is on the Defendants to demonstrate fair price. The appropriate starting point is review of their experts’ testimony concerning the fairness of the price and terms of the Series B and C. The Defendants first presented Dr. Allan Kleidon (“Kleidon”).[200] The Court concludes that Kleidon, supplemented somewhat by Kirk, demonstrated that the price and terms of the Series B and Series C shares were fair to Seragen and that a nil value for those claims would have been appropriate.[201]

Kleidon began his analysis by accepting that the Loan Guarantee Transaction was in place and that Seragen needed to remedy the NASDAQ delisting crisis.[202] He concluded that no harm resulted to Seragen’s common shareholders when the Series B and Series C were issued, and he, indeed, opined that there is strong evidence that the Series B was valuable to shareholders at the time.[203] In Kleidon’s opinion, “analytically[,] the effect on the common shares of having the bank loan in place or replacing the bank loan with the Series B [—] it’s equivalent from the point of view of the common shareholders.”[204] Kleidon argued that, because Seragen replaced $23.8 million in Loan Guarantee financing with the Series B shares which could convert, at most, into $23.8 million worth of Seragen common shares, the position of Seragen’s common stockholders was left unaffected.[205] In other words, the Series B transaction was, in Kleidon’s view, substantially equivalent to the Loan Guarantee Transaction because both the Loan Guarantee and the Series B established priority claims over the rights of the common stockholders in the amount of $23.8 million. Therefore, the Series B transaction did nothing to change the share value of the common stock because it created no new liabilities or obligations.[206] In support of this analysis, Kirk testified that she considered Series B shares “much more favorable than the debt it replaced” because “it became permanent capital,” and it was her view that because of the circumstances facing Seragen, the terms of the Series B were fair.[207]
Kirk also opined that, as an investment banker, she could not have sold the Series B to an outside investor.[208]

Addressing the Series C, Kirk observed that the Series C was functionally a $5 million interest-free loan from BU to Seragen because Seragen had the right to redeem the Series C shares with a $5 million payment without interest.[209] Not surprisingly, Kirk testified that she could have not sold the Series C to any other investor because there was no benefit to be gained by an investor who provided an interest-free $5 million loan.[210]

Kleidon also conducted an event study because it was his belief that, if the terms of the Series B and Series C were as grievous as Penny portrayed them,[211] those fears would have been reflected in the price of the common shares when the transactions were disclosed to the public.[212] Kleidon found that, on the day the Series B was announced, “there was a residual return of . . . 22 percent” for the common shares.[213] Kleidon stated that the increase in the price of Seragen common on the day that the Series B was announced was directly related to the Series B and could not be attributed, as Penny suggested,[214] to positive clinical announcements, because those clinical announcements were already available in the marketplace and did not contain any new information.[215]
Accordingly, Kleidon concluded the market reacted positively to the Series B because it was an important fiscal event for Seragen.[216] Kleidon conceded that the announcement of the Series B did not report that the Series B holders would have voting rights and dividend rights, but it did contain the remaining, supposedly more detrimental Series B’s characteristics, including the conversion and warrant features.[217] Additionally, Kleidon found that on the day the Series C transaction was announced, there was no significant change in the price of Seragen’s common shares.[218]

Kleidon addressed the market’s failure to show a negative reaction to either issuance of the Series B or issuance of the Series C by explaining that neither had the characteristics which would lead to short selling and thereby drive the price of Seragen common stock down.[219] Instead, Kleidon perceived that the market was pleased that Seragen had acquired some form of financing which would allow it to avoid delisting and to continue operations and testing. According to Kleidon, the reason the share price of Seragen was continually experiencing a decline — a decline that started before the issuance of the Series B and continued well after the Series C shares were issued — was unrelated to the Series B and Series C. Instead, Kleidon believed that Seragen, with its high cash burn rate and its failure to report good news or progress over a period of months, was responsible for its own declining share price.[220] In other words,

[y]ou’ve got a company which is burning money month by month. And if you never hear a positive announcement which says `yes, this drug is going to work and we’re going to have a large market for it,’ that company will eventually run out of money and go out of business.[221]

Taking Kleidon and Kirk’s testimony together, the Court concludes that the price and terms for the Series B and C were fair. Primarily, the Court does not accept that, based upon the terms of either of these issues, any harm was done to the common shareholders. The Series B could only ever convert into $23.8 million worth of common, and the Series C, while converting at a discount, did have a ceiling beyond which it could not yield any additional common shares. In addition, if the terms of the Series B shares and Series C shares placed the Seragen common shareholders at a material and unwarranted risk of dilution, the market price of the Seragen common should have reacted negatively when those shares were announced. However, no such reaction was observed.

The Plaintiffs have not demonstrated otherwise. They attempt to counter Kleidon and Kirk’s testimony by asserting that, because of the unfair price and terms associated with the Series B and C, the common shares of Seragen decreased in value; they suffered equity dilution; and it became increasingly difficult, if not impossible, to raise financing for Seragen. The Plaintiffs rely almost entirely on the report and testimony of their expert, Penny.[222] Although Penny, as an appraiser, may be more qualified to give an opinion as to the damages that the Series B and C may have caused to Seragen and its shareholders than he was to determine whether Seragen was financeable, the Court still concludes that Penny’s analysis is without merit.

Penny opined that the Series B and C “had certain dilutive characteristics which resulted in a stock price decline subsequent to the issuance of the Series B and Series C” and that those characteristics then created a major barrier for Seragen to acquire new financing.[223] Penny believed that issuance of the Series B and Series C shares resulted in dilution because the Series B and Series C were convertible based upon the future price of Seragen common shares, and “this characteristic, if the stock price of Seragen falls, then these securities are convertible into an ever-increasing number of common shares . . . of Seragen stock and would then, after conversion, represent a growing percentage of the ownership interest in Seragen.”[224] Next, Penny recognized that companies that issue these types of securities[225] often witness a rapid decline in their stock price because these stocks attract interest from short sellers who engage in short selling to drive the price down which enables them to convert a progressively greater amount of common stock.[226] Penny also suggested that because the Series B and C shares were sold to insiders there was some extra incentive for them to drive the share price down.[227]

Penny sought support for this conclusion by presenting a simple graph which demonstrates that from the middle of May 1996 the Seragen share price decreased in value from $4.813 to a low of $1.00 in December 1996.[228] Noting that the Series B shares were issued in June 1996, and the Series C shares were issued in September 1996, Penny took what can best be described as a leap of faith (not logic) and concludes that, because of the potentially dilutive characteristics of the Series B and Series C shares, the drastic decrease in share price was solely attributable to the Series B and Series C shares. Penny again avoids any semblance of logic when he concludes that it was also these terms that made Seragen almost impossible to finance in the future.[229]

Penny identified two theories of why a company’s stock may suffer a decline after it issues securities that resemble Series B and Series C shares.[230] The first theory, as Penny described it, is that the issuance of securities that resemble the Series B and Series C shares causes short selling which drives the stock value down. The second theory, which Penny did not bother to mention until cross-examination and ignored entirely in his report, is that the Series B and Series C financing could be examples of “last resort financing,” which would be followed by a decline in the value of the stock in any event because the company is on its last legs.[231] Penny, however, took no steps, other than to review a handful of reports prepared by Seragen and graph Seragen’s stock price, to identify any other potential cause of the decline in the price of Seragen’s shares.[232] In fact, Penny went so far as to state that he “focused on factors which in [his] view strongly pointed to the market reaction to the B and C, and its negative features.”[233] Penny simply failed to consider, except in the most cursory fashion, other factors that may have played a significant, if not a complete, role in the decline of Seragen’s share price.

In addition to failing to consider other potential causes of the decline in share price, Penny also ignored the fact that the Series B and Series C shares do not embody all of the characteristics generally associated with death spiral securities. Namely, the Series B shares were not convertible at a discount, and no holder of the Series B or Series C shares engaged in short selling.[234] On top of this oversight, Penny does not consider that the Series A shares were convertible at a discount; the Series A holder did convert; and the Series A holder’s selling practices may have been responsible, in material part, for the decline in share price.[235] Thus, the Court is satisfied that neither issuance of the Series B shares nor issuance of the Series C shares was materially responsible for the decline in share price or caused any cognizable equity dilution.[236]

As to fair process, however, the Court cannot characterize the treatment, during the negotiation of the Accord Agreement, of the Series B and Series C transactions as entirely fair because, quite simply, there was no process to protect the interests of the minority shareholders. However, the nil value effectively assigned to the Series B and Series C claims was, in the Court’s view, a fair price as demonstrated by the evidence; thus, the only harm suffered by the Plaintiffs was a procedural one.[237] Therefore, although the BU Defendants did breach their duty of loyalty and were unable to demonstrate the entire fairness of the Series B and C transactions,[238] for purposes of assessing the fiduciaries’ treatment of these claims in the context of negotiating the Accord Agreement, the Court does not find it appropriate to assign anything but nominal damages to these breaches.[239]

(b) The Marathon Claim
As with the Series B and C derivative claims, Seragen’s directors did nothing to value the potential Marathon derivative claim which was a claim of both waste and breach of the duty of loyalty because the Marathon facility was sold to a BU-controlled entity in a clear case of self-dealing, and no steps were taken to ensure that the sale to Marathon was fair.

When waste is asserted, the issue is whether “what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation has paid [or received].”[240] Waste is a rare, “unconscionable case where directors irrationally squander or give away corporate assets.”[241]

The Marathon sale, however, was not one of those rare cases in which waste can be found. The Marathon facility was sold to BU for $5 million plus a significant commitment to meet ongoing operating expenses. Although, the Plaintiffs argue that this was so little consideration that no person of ordinary sound business judgment would have sold Marathon for such a price, they offer no specific factual basis for separately valuing the facility. The basis for their claim is simply that Marathon, several months later, was sold to Ligand in connection with the merger for $8 million. Perhaps the Marathon facility was undervalued, but the transaction, in light of the consideration paid by BU, does not amount to waste.

Of course, concluding that the Marathon transaction was not waste does not end the inquiry. The BU Defendants, nonetheless, must show entire fairness. Neither side in this debate devoted significant resources to the task, and the Court has little before it to allow for an informed judgment. Even though the burden of proving fair price and fair process is imposed upon the fiduciaries in this context, the shareholders cannot achieve recovery without some factual basis.

It is clear that the Marathon facility was a cash drain on Seragen and that Prior recognized that escaping this burden was an early and essential task of his tenure.[242] Seragen, from the Marathon transaction, received cash that was essential for continued operations, and BU’s subsidy of Marathon’s operating costs significantly helped with Seragen’s survival. In addition, Seragen retained the right to reacquire the facility on very favorable terms. In short, based on the evidence before the Court, it is reasonable to conclude that the price was fair even though the process, of course, was sorely deficient.[243]

(c) The USSC Transaction
The Plaintiffs assert that the USSC transaction resulted from a breach of the duty of loyalty by the Director Defendants because of their relationship with Hirsch, a major benefactor of BU, a trustee of BU, and the major participant in the Series B transaction. The Defendants, or so the Plaintiffs argue, provided a special deal for USSC, a company founded and led by Hirsch. Therefore, the Plaintiffs contend that the USSC claim had value and that the defendant directors breached their duty of loyalty by failing to evaluate that claim in the context of the Accord Agreement.[244] The USSC transaction involved a licensing agreement between Seragen and USSC under which USSC purchased the licensing rights to certain Seragen Fusion Proteins for $5 million.[245] USSC had the option to make an additional $5 million payment to affirm the agreement within fifteen months of the initial date of the agreement. If it chose not to exercise that option, USSC would have received $5 million in Seragen common stock based on the lower of the average market price for the preceding ten days or the stock price on the day the agreement was signed. USSC was bound to fund various studies on the Fusion Proteins, and Seragen could have received as much as $40 million in milestone payments.[246]

Although the Plaintiffs contend that this transaction was tainted by the Seragen board’s lack of loyalty, it is difficult to conclude that any director, other than Silber, potentially could have breached the duty of loyalty in regard to this transaction. Silber sat on both Seragen’s Board and USSC’s Board and had material holdings in both corporations. However one may view Silber’s status, the other Seragen directors approved this transaction and there has been no showing that Silber received any direct benefit from the transaction or controlled any of the other directors as they approved the transaction.

Moreover, although the parties devoted little effort to the USSC transaction at trial, the Defendants produced evidence to support the conclusion that the USSC transaction was at a fair price. It was effectively a $5 million loan (perhaps masquerading as a licensing agreement) from USSC to Seragen, that USSC could call back and exchange into Seragen common stock based upon a preset formula. Significantly, USSC was to fund research on the Seragen Fusion Proteins. If this research proved successful, USSC could invest another $5 million and Seragen could be entitled to substantial funds in milestone payments. Given Seragen’s need for funds at the time, its inability to raise funds from other sources, and the potential benefits of the transaction, it was fair to Seragen and its shareholders. As a derivative claim, it was without value. At most, it was a claim that the directors should have evaluated — for it was a claim not wholly without merit. As such, it amounts to nothing more than a minor procedural flaw in the negotiation of the Accord Agreement.[247]

2. Was the Allocation of the Merger Proceeds in the Accord Agreement Entirely Fair?

a. Some General Thoughts

The allocation of merger proceeds accomplished by the Accord Agreement was a self-interested effort that raised significant doubts about the director defendants’ loyalty because these parties stood on both sides of this transaction and sought to gain, for themselves or for BU, at the expense of the common shareholders.[248] Because this transaction was in violation of the duty of loyalty, the BU Defendants are charged with the burden of demonstrating the entire fairness of the overall allocation. For the reasons stated below, they did not demonstrate the entire fairness of this transaction, and, the Plaintiffs did suffer actual harm from the BU Defendants’ breaches of fiduciary duty.

The Director Defendants treated the merger allocation negotiations with a surprising degree of informality, and, as with many of Seragen’s transactions reviewed here, no steps were taken to ensure fairness to the minority common shareholders. More disturbing is that, although representatives of all of the priority stakeholders were involved to some degree in the negotiations, no representative negotiated on behalf of the minority common shareholders. BU, even with its substantial holdings of Seragen common stock, did not have the same incentive to negotiate for the minority common shareholder as an otherwise disinterested representative of the minority common shareholder would have been, because BU had interests that went well beyond its common shares. Additionally, Prior, with significant financial interests of his own, cannot be said to have negotiated for the minority common shareholder because every dollar the minority common shareholder received was likely to reduce the Asset Value Realization Bonus that he would receive as a consequence of the merger. Clearly the process implementing these negotiations was severely flawed and no person acted to protect the interests of the minority common shareholders.

Prior, Hirsch (or his representatives), and the BU Defendants were aware of the risk that the minority shareholders might pursue litigation attacking the merger proceeds allocation. Prior and the other directors understood that Seragen’s inability to implement a satisfactory process for the allocation process could expose the directors to a shareholder suit.

Turning to fair price, the Court has already concluded that, although the directors failed to value the known derivative claims against Seragen during the allocation process, there was no discrete, material value to these claims. However, more than a simple valuation of the derivative claims was involved in the merger proceeds allocation effort.

b. USSC’s Repayment in Full

The Plaintiffs have questioned why USSC was entitled to receive the $5 million it invested with Seragen back at 100 cents on the dollar when everyone else was forced to take a discount.[249] The Plaintiffs’ argument on this point fails because neither Hirsch nor USSC was a conflicted party, and they had the right to claim what they were owed.[250] The critical element is that Hirsch and USSC did not owe any fiduciary duty to Seragen or its shareholders, and, therefore, Hirsch could insist upon the terms negotiated in the USSC transaction, which included the cancellation of the agreement for $5 million in Seragen stock. USSC received $5 million in cash as a substitute for stock. Entire fairness is not implicated.

c. Payments to BU Related to the Series C Shares

As to the allocation of merger proceeds based on the Series C shares, the Court finds that the price paid was unfair. By the terms of the Series C shares, as of March 30, 1998, those shares automatically converted at a discount into the maximum of 3,360,625 Seragen common shares.[251] Additionally, although Seragen was bound at the time of issuance to redeem all unconverted Series C shares for $1,150, this provision was waived to satisfy NASDAQ’s capital requirements.[252] On March 30, 1998, 1,060 Series C shares automatically converted into the maximum allowable 3,360,625 shares of Seragen common stock in accordance with the terms of the Series C issuance.[253]
The remaining 3,940 Series C shares were purchased by Seragen for $1,150 per share, for a total of $4,530,461. Seragen, of course, could not pay this amount and it became a debt owed by Seragen to BU. Under the Accord Agreement, BU received $5,000,000 in satisfaction of the debt owed to it from the conversion of the remaining Series C shares and for the delivery of its 3,360,625 shares of common stock which it received as the result of conversion of some of its Series C shares. The debt and common stock (3,360,625 shares at $0.73 per share) represented a combined claim of $6,983,717, which BU compromised to $5,000,000. However, BU had waived any right to receive any compensation for those Series C shares which had not been converted because of the conversion ceiling. Thus, it had no right to recover the debt purportedly owed to it by Seragen from the exchange of the remaining Series C shares; compensation for the remaining Series C shares, as part of the allocation process, cannot be considered “entirely fair.” The $5,000,000 which BU accepted — perhaps not coincidentally the same amount as BU had paid for the Series C shares — represents a compromise of a claim. How to factor the compromised amount with the amount to which BU had no viable claim presents an interesting question with respect to the calculation of damages. Perhaps the amount to which BU had no claim should be subtracted from the $5,000,000 received by BU, but that would deprive BU of any “credit” for the amount by which it compromised its claim. Another approach would be to prorate the compromised amount across both the claim to merger proceeds based on the common shares and the claim representing the remaining Series C shares. The more appropriate methodology would be to treat the 3,360,625 shares for what they were — validly converted shares with an implicit value at that time of $0.73 per share and allow BU the implicit value represented by those common shares. If the common shares are given a value of $2,453,256 (3,360,625 shares at $0.73 per share) and that amount is deducted from the $5,000,000 paid to BU under the Accord Agreement for the rights arising under the Series C shares, i.e., $2,546,744, then, the proper measure of damages (or, more specifically, the deviation from fair value) is established.[254] The Defendants were unable to present any evidence to explain why any payment was made for the remaining Series C shares, and they were able to offer nothing more than an admitted “hypothesis” as to the rationale behind the payment.[255] Because this payment to BU was not entirely fair, the Court concludes that BU had a windfall of $2,546,744, which, therefore, was unfairly paid to BU, the sole Series C holder.

d. The Reallocation of Proceeds to Marathon

Finally, the Plaintiffs challenge the fairness of the $8 million that BU was paid for the Marathon facility in connection with the merger. The merger closed on August 12, 1998, and BU received $8 million for the Marathon facility, which it had purchased from Seragen for $5 million on February 19, 1997. The BU Defendants have failed to demonstrate that the price paid by Ligand for Marathon was fair at the time of the merger. No party saw fit to make an effort to show, in any helpful fashion, the actual value of the Marathon facility. Early in the negotiations with Ligand, it appeared that $5 million would be the price for the Marathon facility. For reasons that no one has convincingly explained, that number increased to $8 million.[256] The Defendants argue that Marathon owned the Marathon facility and that Seragen had no claim to it because it already sold it. Under more typical circumstances, that argument might prevail, but BU, in effect, owned the Marathon facility and controlled the allocation process, the process that divided up the entire consideration provided by Ligand, including those funds which would be paid for the Marathon facility. The increase in the price of the Marathon facility occurred at the expense of Seragen’s common shareholders and was accomplished by BU and acquiesced in by its representatives on the Seragen board for BU’s exclusive benefit.

Although the consideration allocated from Ligand’s offer to BU for the Marathon facility cannot satisfy any “entirely fair” standard, the question of how to value that claim remains. The Marathon aspect of the allocation process may be valued as if Seragen had repurchased Marathon from BU and then passed it along to Ligand as part of the merger. Seragen was allowed to repurchase Marathon for $5 million, plus operating expenses, plus ten percent interest. The record does not demonstrate that BU was not repaid the operating expenses that it advanced; therefore, BU was entitled to receive for Marathon $5 million plus ten percent interest. The interest, charged over the one year, 5 months and 3 weeks of BU’s ownership of Marathon, computes to $737,500, and, therefore, the total amount that BU should have been paid for Marathon was $5,737,500. The difference, $2,262,500, measures the spread between actual consideration ($8 million) and fair consideration ($5,737,500).

e. Some Concluding Thoughts on the Allocation Process

The allocation process, with the limits established by what Ligand was willing to pay, necessarily left Seragen’s stakeholders disappointed. The Series B holders, for example, received approximately 60% of their investment (including accrued interest). How to allocate such a fund in a fair fashion after the fact is a daunting task. The priority holders could have held fast or compromised their claims — USSC was paid, but Hirsch settled for a discount on his Series B shares. Also, BU received back the $5 million it had invested in the Series C, but it also compromised its Series B rights. Would the analysis be different if, for example, the Series B holders had taken more and USSC and BU (for its Series C rights) had taken less? Creating, after-the-fact, a fair bargaining dynamic is, at best, an imprecise effort. Even though they received a premium to the prevailing market price for their shares, it is apparent that the common shareholders’ rights were not reasonably satisfied by the defendant fiduciaries because the allocation process cannot meet an entire fairness standard. That answer, however, leaves open the question of what to do about those shortcomings. The derivative claims, which should have been assessed and could have been used as bargaining chips, were, when separately analyzed, of little quantifiable value. There are two aspects of the Plaintiffs’ challenge which are readily capable of quantification and approximation. They do as well as any other measuring stick in approximating the net benefit that might have been conferred by a fair bargaining process. Yet, monetary relief in that amount does not fully compensate the Plaintiffs for the fundamental failures of their fiduciaries. A more specific determination of those damages cannot be accomplished through this review and, thus, the Plaintiffs are not entitled to a greater specific monetary award; because of the harms which they suffered, which were real, they are entitled to a recognition of those harms through an award of nominal damages.

One of the many ironies is that Silber and Oliver, staunch adversaries here, at one time shared the same view of Seragen’s future. Perhaps both were unduly optimistic, but both continued to support Seragen after its difficulties should have been apparent. The Series A shares, which generated fewer dollars than Seragen had sought and were issued under terms generally unfavorable to Seragen, should have warned them about the lack of market interest in Seragen. Oliver, even after issuance of the Series B shares, about which he now complains, continued to invest in Seragen. Ultimately, this is a case about frustrated expectations. Oliver (and the other Plaintiffs) blame BU; BU’s conduct, from a corporate governance standpoint, obviously fell far short of what was required of it, but that was not the cause of Seragen’s downfall. Without the Ligand acquisition, Seragen most likely would have ended up in bankruptcy, but that destination would have been the result of Seragen’s cash flow needs and the market’s lack of interest in the company and its unwillingness to satisfy its cravings for cash.

The Court’s view of the “value” of the derivative claims is not a matter of exigent circumstances excusing fiduciary failures.[257] It is not a matter of asking the question: if the BU Defendants had not come forward with the Series B and Series C financings, then what would have happened? Instead, despite the shortcomings that one can identify with the issuance of the Series B and Series C shares, any harm resulting to Seragen and its shareholders was, at most, negligible.

Of course, any evaluation of a fiduciary’s compliance with his duties must consider the circumstances confronting the fiduciary. Those negotiating the Accord Agreement, even with the awareness of the potential for shareholder litigation, were under serious time constraints. Unless they reached an agreement promptly, Seragen might well have run out of money before the merger could have been consummated. In addition, with the limited proceeds, compared to the demands of the stakeholders to those proceeds, there was an incentive not to make the process more costly than necessary. Unfortunately, there was no process, and, in the absence of even the most rudimentary measures to protect the interests of the minority shareholders when the participating fiduciaries are all conflicted, those fiduciaries should not be surprised that adverse consequences result.

In summary, the Court concludes that the Defendants failed to demonstrate that the merger allocation was entirely fair because not only was there no process to ensure its fairness, but also because the price assigned to the BU’s interests resulting from cancellation of the Series C shares was unfair and the price paid to BU for the Marathon facility was unfair. Damages, thus, amount to $4,809,244.[258] Plaintiffs are additionally entitled to nominal damages for the other process failures associated with negotiation and implementation of the Accord Agreement.[259]

E. The Disclosure Claims

“Delaware law imposes upon a board of directors the fiduciary duty to disclose fully and fairly all material facts within its control that would have significant effect upon a stockholder vote.”[260] Therefore, to prevail on a disclosure claim, a plaintiff must prove not only an omission or misstatement of a particular fact, but also that the fact was material.[261]
An omitted fact is material

if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.[262]

The “materiality standard is an objective one, measured from the point of view of [a] reasonable investor [and not] the subjective views of the directors.”[263] Thus, the omission of an immaterial fact or the making of an immaterial misstatement will not result in a finding of a violation of the duty of disclosure. Also, corporate fiduciaries “are not required to confess wrongdoing or engage in self-flagellation in proxy materials.”[264] “[E]ven where material facts must be disclosed, negative inferences or characterizations of misconduct or breach of fiduciary duty need not be articulated.”[265]

The Plaintiffs have asserted a number of disclosure claims concerning the merger proxy statement. They contend that the proxy was insufficient because it did not discuss the shortcomings of the Series B, Series C, Marathon and USSC transactions and the potential liability of those stakeholders. Therefore, according to the Plaintiffs, the proxy failed to inform the common shareholders of the possibility that instead of taking the discount described, these holders may have been entitled to nothing (or substantially less than they took). Additionally, the Plaintiffs assert that because of the way the proxy addressed BU’s entitlement under the Series C, and because it insinuated that the Lehman Brothers fairness opinion confirmed the fairness of the allocation to the common shareholders (and not just the overall transaction) the proxy failed to disclose material facts and made material misstatements.

The Plaintiffs first complain that the Defendants did not reveal that the various transactions may have been challengeable due to breaches of the duty of loyalty. The essential facts defining the transaction, challenged by the Plaintiffs, were in the public domain. The self-interested nature of the transactions was known.[266] Therefore, the “facts” that form the basis for the various challenges were disclosed. Corporate fiduciaries are not required to review the facts and then draw and report the negative inferences that they may have breached their fiduciary duties. This broad-based knowledge of Seragen’s various transactions implemented by a board controlled by BU seriously undercuts any argument that the Plaintiffs would have pursued appraisal if only there had been better disclosure. This was an instance in which the common shareholders knew, or should have known, the facts necessary to have made an informed decision with respect to the exercise of appraisal rights.

The Plaintiffs next, and more specifically assert, that the merger proxy was incorrect with respect to what BU was owed from its Series C investment. The Court has already found that the payment BU received from the Series C investment did not satisfy the applicable entire fairness standard. The failure to inform shareholders that BU had waived its right to receive $1,150 for each of the remaining Series C shares after all conversion rights had been exhausted was a material omission. In the context of allocating the merger proceeds, the diversion of such an amount would have been significant to an informed exercise of the shareholder franchise. The Plaintiffs are entitled to no separate damages beyond nominal damages, from this disclosure failure because of the Court’s award of damages based on the underlying allocation. Whether an accurate disclosure would have induced more shareholders to seek appraisal cannot be ascertained now and the award of damages based on the overpayment for the Series C shares fairly compensates the minority shareholders.[267]

Finally, the Court must address the Plaintiffs’ allegation that the proxy statement was misleading and intentionally confusing with its references to the Lehman Brothers fairness opinion. Specifically, the Plaintiffs argue the proxy statement gives the impression that Lehman Brothers approved of both the overall merger price and the allocation of the merger proceeds to the common shareholders. Lehman did not provide a fairness opinion with respect to the merger allocation and the Plaintiffs might have had a viable claim if the merger proxy had unequivocally reported that Lehman had given an opinion as to the fairness of the allocation.[268] However, the proxy statement cannot be fairly and comprehensively read as setting forth any such opinion. Instead, it stated:

Lehman Brothers has acted as financial advisor to Seragen in connection with the Merger. As part of its role as financial advisor to Seragen, Lehman Brothers rendered to the Seragen Board an opinion as to the fairness, from a financial point of view, to holders of Seragen Common stock of the consideration to be offered to such stockholders in the Merger.
. . . .
. . . Lehman Brothers was not requested to and did not make any recommendation to the Seragen Board as to the form of the consideration to be offered to Seragen’s common stockholders in the Merger, which was determined through arm’s-length negotiations between the parties. In arriving at the Opinion, Lehman Brothers did not ascribe a specific range of value to Seragen, but made its determination as to the fairness, from a financial point of view, of the consideration to be offered to Seragen’s common stockholders in the Merger on the basis of financial and comparative analyses described below. . . . [T]he Opinion does not address . . . (ii) the fairness of the allocation of the aggregate consideration to by paid by Ligand among the common stockholders of Seragen and other intended recipients.[269]

Lehman Brothers’ fairness opinion was attached to the proxy statement, and it read in part:

We have not been requested to opine as to, and our opinion does not in any manner address . . . (ii) the fairness of the allocation of the aggregate consideration to be paid by Ligand among the common stockholders and such other intended recipients.
. . . .
. . . [W]e are of the opinion as of the date hereof that, from a financial point of view, the consideration offered to the common stockholders in the aggregate in the Proposed Transaction is fair to such stockholders.[270]

The proxy statement, and the Lehman Brothers’ fairness opinion, although falling short of the proverbial model of clarity, both clearly report that Lehman did not offer an opinion to the fairness of the allocation of the merger consideration “among the common shareholders of Seragen and the intended recipients.” The distinction could have been clearer, but, with a fair reading, the proxy statement did not mislead the minority shareholders into believing that Lehman Brothers had approved the allocation. Accordingly, the proxy statement was not materially false or misleading with respect to Lehman’s fairness opinion.

F. Voting Power Dilution

The Court now turns to the Plaintiffs’ claims that they were directly harmed as the result of the voting power dilution caused by the issuance of the Series B and Series C shares.

Seragen issued 23,800 Series B shares, and each share had 250 voting rights.[271] This is the equivalent of additional 5,950,000 additional voting shares. No small number, but this is not what Plaintiffs have focused on. Instead, Plaintiffs have argued that, because of its conversion features of the Series B — the shares were convertible into an ever-increasing number of common shares as the price of the common shares dropped — the Series B had the potential to dilute in drastic fashion the voting power of the minority shareholders if Seragen’s stock price declined and the Series B holders converted.[272]
However, this argument is missing one very important piece of the puzzle: not one share of the Series B ever converted. Thus, although the Series B had the potential to dilute the voting power of the common shareholders, because no such conversion ever occurred, no harm resulted.[273] That the Series B shares were accorded 250 votes each for merger voting purposes had no impact on the outcome of that shareholder vote.[274]
Accordingly, the Court concludes the Plaintiffs have failed to demonstrate that they suffered any cognizable dilutive harm to their voting rights because of the Series B issuance.

The Plaintiffs encounter similar obstacles in their voting power dilution challenge to the Series C. Those shares came with no voting rights.[275] Thus, the Series C shares (without conversion) could not have had any dilutive effect on the Plaintiffs’ voting rights. However, unlike the Series B, the Series C could convert at a discount.[276] On March 30, 1998, a portion of the Series C shares converted into the maximum permitted number of shares of Seragen common stock.[277]
This conversion, however, did not happen until after the potential merger with Ligand had been announced, and the Plaintiffs have not demonstrated that the outcome of any shareholder vote was affected by BU’s control of these additional shares of Seragen common stock. For these reasons, the Plaintiffs have failed to demonstrate any injury.[278]

G. The Aiding and Abetting Claims Against Hirsch

Plaintiffs contend that Hirsch (through his involvement with the Series B issuance and the Accord Agreement) aided and abetted the defendant directors in breaching their fiduciary duties. An aiding and abetting claim has four elements:

“(1) the existence of a fiduciary relationship, (2) the fiduciary breached its duty, (3) a defendant, who is not a fiduciary, knowingly participated in a breach, and (4) damages to the plaintiff resulted from the concerted action of the fiduciary and the non-fiduciary.”[279]

With the dismissal of the Plaintiffs’ direct challenge to the Series B transaction, it necessarily follows that claims against Hirsch for aiding and abetting that transaction fail.

Hirsch’s involvement in the merger allocation does not amount to “knowing participation” in the fiduciaries’ breaches of their duty. The negotiations Hirsch (or his representative) had with Seragen and the other stakeholders were conducted at arms-length: Hirsch was an independent third-party, owing no fiduciary duty to the minority shareholders. Hirsch did not force, or even encourage, the fiduciaries, as fiduciaries, to breach their duties. He bargained hard for his interests and those interests conflicted with those of the fiduciaries — indeed, at one point, Hirsch even threatened to sue the members of Seragen’s Board.[280]

Furthermore, no damages sustained by the Plaintiffs resulted from “concerted action” between Hirsch and the Board. The Plaintiffs were harmed by the fiduciaries’ decision to overcompensate BU (by paying for the Series C preferred shares under a provision that BU had previously waived and by allocating additional funds for the Marathon facility). The Board chose this outcome, in breach of its fiduciary duty and independent of Hirsch’s influence.[281] Based on these facts, Hirsch is not liable for the aiding and abetting claims brought against him.

H. Nominal Damages

The Plaintiffs are entitled to an award of nominal damages for the failure of fair process in the negotiation of the Accord Agreement. Although monetary relief can only satisfactorily redress the benefits received by BU with respect to the Series C shares and the Marathon facility, the minority shareholders’ rights to fair price and process were infringed and nominal damages are appropriate. For example, the negotiation of the Accord Agreement with respect to the Series B transaction does not support a separate award of calculable damages, but it does support a nominal award. Some indeterminate economic consequences resulted.[282]

Even though Seragen common stock was trading for less than $0.50 per share before announcement of the merger, the Plaintiffs argue that nominal damages in excess of $1.00 per share are appropriate.[283] That request is excessive:

Nominal damages are not given as an equivalent for the wrong, but rather merely in recognition of a technical injury and by way of declaring the rights of the plaintiff. Nominal damages are usually assessed in a trivial amount, selected simply for the purpose of declaring an infraction of the Plaintiff’s rights and the commission of a wrong.[284]

Nominal damages of $1.00 per share have been awarded in certain circumstances in which a rational basis can be found in the record for the award.[285] No such showing has been made. Accordingly, “for the purpose of declaring an infraction of the Plaintiff[s’] rights and the commission of a wrong,”[286]
the Court awards the Plaintiffs, and the prevailing class they represent, one dollar in nominal damages.

IV. CONCLUSION
For the foregoing reasons, the Court concludes that the common shareholders of Seragen suffered actual damages of $4,809,244 and nominal damages of one dollar. The Plaintiffs and the class as of the time of the merger which they represent are entitled to judgment for their proportionate share against BU, Silber, Condon, and Cassidy, jointly and severally, together with interest at the legal rate from the date of the merger and costs.[287] The Plaintiffs’ claims against Hirsch, the Plaintiffs’ claims relating to voting power dilution, the Plaintiffs’ other claims directly challenging issuance of the Series B shares and the Series C shares, and the Plaintiffs’ disclosure claims (other than as related to payment for BU’s remaining Series C shares), however, are dismissed. Counsel are requested to confer and to submit a form of order to implement this memorandum opinion.