In Sciannella v. AstraZeneca (July 2, 2024), the Delaware Court of Chancery, at the pleading stage of litigation, dismissed claims that AstraZeneca UK, the 26.7% owner of Viela Bio, Inc. (the “Company”), and certain Company directors and officers, breached fiduciary duties in connection with the $3 billion arm’s-length sale of the Company to Horizon Therapeutics, Inc. The Plaintiff contended that AstraZeneca controlled the Company, and that, to facilitate securing antitrust clearance for AstraZeneca’s $38 billion acquisition of Alexion Pharmaceuticals, Inc. (the Company’s main competitor), AstraZeneca pushed the Company into a quick sale to Horizon by threatening to terminate its support agreements with the Company.

AstraZeneca, which had created the Company via a spinoff of its business, effectively had certain blocking rights (given the requirement in the Company’s charter of a 75% stockholder vote for certain actions); had designated AstraZeneca executives as directors on the Company’s board (and the Plaintiff alleged that the other directors also were “beholden” to AstraZeneca for various reasons); had appointed former AstraZeneca executives to key management positions (including the CEO); and had total control over the Company’s day-to-day operations through a “web” of support agreements. Also, the Company acknowledged in its public filings that it substantially relied on AstraZeneca and would face operational difficulties if AstraZeneca did not continue to provide support services to the Company.

The court found that (i) AstraZeneca was not a controller, and therefore owed no fiduciary duties to the Company and its stockholders; and (ii) the Company’s disclosure to the stockholders was adequate, and therefore any fiduciary breaches by Company directors and officers were cleansed under Corwin.

Key Points

• AstraZeneca was not a controller because it did not control or dominate decisions of the Company’s board. The court emphasized that AstraZeneca’s blocking rights did not provide it with the ability to block any board actions; that its director-designees did not constitute a majority of the board; and that there were no well-pled allegations that the other directors were beholden to AstraZeneca or were otherwise controlled or dominated by AstraZeneca or its director-designees.
• AstraZeneca did not control the transaction. The court rejected the Plaintiff’s contention that AstraZeneca’s proposal, during the sale process, to expeditiously sever ties with the Company was a threat that coerced the Company into a quick sale to Horizon. The court stressed that the separation of the companies had been ongoing since the Company’s IPO years earlier and that AstraZeneca had stated in its proposal to sever ties with the Company that it would work with the Company to provide continued assistance during the transition. Thus, AstraZeneca did not “abandon” the Company “and did not place [the Company] in the position of having no other alternatives other than to facilitate the Company’s sale to Horizon.”
• Overall context is important. The court has taken a broader view in recent years of who may be deemed a controller. The court conducts a facts-intensive, “holistic” analysis that considers all potential sources of a minority stockholder’s influence. While the factors in this case, considered in their totality, might have suggested the possibility of control, we would observe that the court likely was strongly influenced by the facts that: the board was comprised mostly of independent directors; the sale process included outreach to and discussions with multiple potential bidders; the board’s negotiations resulted in Horizon twice raising its offer price (from $44 per share initially to a final price of $53 per share); and the sale price reflected a high (52.8%) premium.
• Disclosure of earlier, more optimistic projections was not required as the updated projections were reliable. The court found that Company projections prepared by management in the ordinary course of business in June 2020—although they were more optimistic than the projections prepared during the sale process in October 2020—were not material. The court stressed that the October projections reflected the Company’s most recent information and were reliably prepared.

Background. In February 2018, AstraZeneca created the Company by spinning off its business. The Company functioned as a biologics research and development arm for AstraZeneca. AstraZeneca placed five of its former executives in top management positions (including CEO) at the Company; selected two directors to join the Company’s eight-person board of directors (the “Board”); and entered into a series of commercial agreements with the Company to support it (the “Support Agreements”). In May 2020, the Company did a follow-on offering, following which the three largest stockholders other than AstraZeneca each appointed a director to the Board. In mid-June 2020, the Company was granted FDA approval of its primary drug in development, UPLIZNA, and, in late-June 2020, the Company launched UPLINZA commercially. In early July 2020, the Company began discussing a potential collaboration with or acquisition by Horizon. The Board’s financial advisor then conducted outreach to other potentially interested parties, resulting in preliminary discussions with multiple parties. In December 2020, after the Company and Horizon had reached agreement on price and exchanged merger agreement drafts, Horizon put the deal on hold because it experienced supply chain problems that it had to deal with. The Company continued discussions (which were at a preliminary stage) with the other potentially interested parties.

While the Company’s deal with Horizon was on hold, antitrust review of the AstraZeneca-Alexion deal was underway. During this time, on January 8, 2021—following discussions between the Company’s CEO-director (who was a former AstraZeneca executive) and one of AstraZeneca’s designees on the Board (who was simultaneously CEO of AstraZeneca plc)—AstraZeneca delivered a letter to the Company (the “Jan. 8 Letter”), stating that AstraZeneca wanted to work with the Company “over the coming weeks to achieve the full separation of [the Company] from AstraZeneca as expeditiously as possible.” In mid-January 2021, Horizon, having solved its supply chain issues, contacted the Company to reengage on the deal. The sale to Horizon was finalized, and unanimously approved by the Board, less than two weeks later, at the same price per share as had been agreed before the deal was put on hold. In March 2021, 94% of the Company’s outstanding shares were tendered to Horizon and the merger closed.

The Plaintiff brought suit, claiming that (i) AstraZeneca controlled the Company, and pushed it into a quick sale to Horizon in order to facilitate AstraZeneca’s acquisition of Axelion; and (ii) in the sale process, certain Company directors and officers had advanced AstraZeneca’s self-interests and/or had caused the Company to issue materially flawed disclosure to the stockholders. Vice Chancellor Fioravanti granted the defendants’ motion to dismiss the case.

Discussion

AstraZeneca did not exert general control over the Company, as it did not have the ability to control Board decisions.

• Blocking rights. Based on its 26.7% equity stake, AstraZeneca had the following effective veto rights: (i) the ability to block stockholder removal of directors for cause—because the Company had a classified board and the charter provided that stockholders could remove directors only for cause and with a 75% vote; and (ii) the ability to block stockholder-proposed bylaw amendments opposed by the Board—because a 75% vote was required for the stockholders to amend bylaws (but only majority stockholder approval was required if the Board recommended in favor of an amendment). AstraZeneca had no ability to block Board-proposed bylaw amendments—because the charter authorized the Board to amend the bylaws unilaterally. The court found that these rights, while “meaningful,” were “not nearly as formidable as the blocking rights highlighted in other cases” where control was found on the basis that the stockholder “had the ability to block board decisions.” The court also noted that AstraZeneca had never “exercise[d] its blocking rights.”
• Designation of directors.
  • AstraZeneca’s designees. The court emphasized that, even if AstraZeneca controlled its two director-designees, no facts were alleged supporting an inference that they, or AstraZeneca, controlled a majority of the Board. While the ability of an alleged controller to designate directors (even if less than a majority) is an “indication of control,” it “does not, without more, establish actual domination or control…[over] the corporate decision-making process.” Further, the court noted that one of the designees had resigned from the Board before Horizon even delivered its initial acquisition offer. And the court viewed the allegations about the other designee—that he “frequently acted on AstraZeneca’s behalf” (by requesting confidential information for AstraZeneca’s benefit, effecting transfers of Company shares between AstraZeneca entities, and effectuating agreements between the Company and AstraZeneca)—as merely “conclusory.”
  • CEO-director. The Plaintiff alleged that the CEO-director was beholden to AstraZeneca because it had appointed him, and as CEO he had “received over $4.2 million in golden parachute payments, including cash severance at three times [his] then-current base salary and target bonus.” The court emphasized that prior employment by a controller, without more, does not establish a lack of independence from the controller. The court also noted that the CEO received his cash severance payments from the Company, not AstraZeneca; that no facts alleged indicated that AstraZeneca controlled the terms of his employment or his severance package; and that there were no “additional facts” alleged about his employment at AstraZeneca “or any personal relationships or allegiance to AstraZeneca.”
  • Founder-directors. The Plaintiff alleged that three other directors, although not designated by AstraZeneca, were “particularly susceptible to AstraZeneca’s pressure,” because they were “executives or founders of investment funds that were early investors in AstraZeneca’s spin-off of [the Company].” The court found the allegation “makeweight,” stressing that there were no well-pled allegations that the stockholders that designated these directors, nor the directors themselves, were beholden to or subject to control by AstraZeneca. The court observed that the Plaintiff had not pled self-interest of these stockholders—that is, there was no allegation that they “had, for example, future investment opportunities that would be forfeited if the Board did not approve the Merger.”
• Appointment of management. The Plaintiff alleged that AstraZeneca’s “planting its own trusted executives in all top five executive leadership positions” supported an inference that it controlled the Company. The court stated that “[a]llegations of prior employment or business relationships, without more, are insufficient to show control.” The court also stated that there were no well-pled facts alleged to support the assertion that “AstraZeneca’s appointment of [the Company]’s executives in 2018 translates to AstraZeneca exercising control over them in 2020.”
• Support agreements. The court stated that, although the Support Agreements gave AstraZeneca control over the Company’s day-to-day operations, there were no well-pled allegations that AstraZeneca “had the ability to dominate the Board’s decision-making process as a result of the Support Agreements or operational dependence on AstraZeneca.”
• Admissions in public filings. The court acknowledged that the Company had stated in its public filings that it was “substantially reliant” on AstraZeneca and would be significantly disadvantaged if AstraZeneca discontinued its support. The court stated that an “outright admission” in public disclosure that a minority blockholder is a controller can be persuasive evidence of control, but the Company’s disclosure was “a far cry” from an admission of control. Public acknowledgements of a minority stockholder’s influence over the company and its board bear on the control inquiry only “when coupled with other well-pled allegations of control,” the court stated.

AstraZeneca did not exert transaction-specific control over the sale of the Company. The Plaintiff contended that the Jan. 8 Letter “threatened to disrupt [the Company]’s operations by expeditiously terminating all of its contracts with [the Company] to pressure the [Company]’s Board into a rushed, single-bidder sale process” in order to facilitate AstraZeneca’s securing antitrust clearance for its acquisition of Axelion. The Plaintiff noted that the acquisition agreement for the AstraZeneca-Axelion deal contained a hell-or-high-water clause requiring AstraZeneca to take all actions necessary or appropriate to obtain antitrust clearance. The Plaintiff alleged that the Letter “loomed large over the Merger [with Horizon] and amounted to coercion, domination and/or bullying of [the Company]’s Board” with respect to the transaction. The court, however, stressed that: the process of separating the Company from AstraZeneca had been ongoing since the Company’s IPO years earlier; AstraZeneca did not have the right under certain of the Support Agreements to terminate them immediately; the Company already was in discussions with Horizon before the Jan. 8 Letter was delivered to it; and the Company continued discussions with other potential buyers after it received the January 8 Letter. Most importantly, the court found the content of the Letter to be inconsistent with any “threat,” as the Letter laid out AstraZeneca’s “plan to collaborate with the Company to ensure its business continuity and put it in the best position moving forward.” Further, the Letter did not mention the possibility of AstraZeneca selling its block of Company stock; did not state that AstraZeneca would terminate the Support Agreements; and did not “otherwise abandon” the Company. The Company had “other alternatives” beyond facilitating the sale to Horizon, the court stated. The court also noted that the Company had played no role in “bringing Horizon back to the table” to finalize the deal—an event the Plaintiff himself had characterized as a “lucky break” for the Company. “Perhaps so,” the court wrote, “[b]ut it also undermines Plaintiff’s entire theory that AstraZeneca exercised control to force [the Company] into the Merger.”

The Company’s prior, more optimistic projections did not have to be disclosed. The Plaintiff contended that the failure to disclose the June 2020 Projections was part of an effort “to persuade the Board (and ultimately stockholders) to accept the price obtained via a rushed, single-bidder process with Horizon.” The court found that the June 2020 Projections were stale, as they had been prepared in early June—before the FDA’s mid-June approval, and the late-June commercial launch, of UPLIZNA; and before other “significant changes” that occurred after June due to the pandemic and other causes. The October 2020 Projections, however, reflected the Company’s most recent information and were relied on by the Board and its financial advisor. Further, the court noted that, after receiving the October 2020 Projections, the Board “proceeded to reject not one, but two offers from Horizon before agreeing to the $53.00 per share price ….” The court distinguished other cases, where it had concluded that earlier financial projections were material and had to be disclosed. In those cases, there had been “concerns about [the revised projections’] reliability and materiality” (for example, where a CEO who was self-interested in the deal unilaterally slashed projections that had been prepared by management and affirmed by the board’s financial advisor).

The CEO’s compensation-related discussions with Horizon were adequately disclosed. The Company’s Schedule 14D-9 disclosed the specifics of a post-closing consulting arrangement that Horizon had offered to the CEO, as well as Horizon’s intentions, as part of the merger, to give all Company employees an equity grant and to accelerate management’s unvested options. The Plaintiff claimed that the disclosure should have stated that the CEO had “personally discussed” with Horizon these matters and the expected post-acquisition retention of the Company’s executive management team. The court stated: “Although Horizon did offer [the CEO] a post-closing consulting agreement, there [were] no well-pleaded allegations…that [he] influenced the negotiations and ultimate terms of the Merger for his self-interest.”

Practice Points

• M&A parties should keep in mind the significant benefits of a good board process and good disclosure to stockholders. In this case, the case was dismissed at the pleading stage based on the court’s findings that the minority stockholder did not control the board and the disclosure to stockholders was adequate. Importantly, only two of the directors on the eight-person board had been designated by the alleged controller; the alleged controller did not act like a controller, in the court’s view; the board’s process included discussions with multiple potentially interested parties; the board achieved multiple price increases from the buyer; the deal represented a high premium; and the disclosure was adequate as the updated projections that were disclosed reflected material, new information and were prepared reliably.
• Minority stockholders should keep in mind that a minority equity stake, when coupled with supermajority stockholder approval requirements—or possibly even standing alone—can indicate control. To determine control status, the court will consider all potential sources of a minority stockholder’s influence, in their totality, as well as the particular factual context. We note that, in other recent cases, the court has embraced the concept that a minority equity stake of around 20% or more, standing alone, potentially could indicate control as it provides the stockholder with a sizeable leg-up for stockholder votes (given that not all stockholders vote), and provides a stockholder with significant influence in the boardroom. (See, e.g., Voigt v. Metcalf (Feb. 10, 2020) and Tornetta v. Musk (Jan. 30, 2024).)
• A minority stockholder providing support to the company should consider carefully any proposal to sever ties with the company. In the context of a sale process, for example, such a proposal could be viewed as coercion of the board to sell the company or to sell it to a particular bidder. The risk of such a conclusion should be mitigated by making it clear in any such proposal that the stockholder is not abandoning the company and will continue to assist it to ensure a smooth transition. The stockholder also should maintain a record establishing the valid business reasons for making the proposal at that time.
• A company should carefully review the nature and scope of any disclosure it makes with respect to a non-majority stockholder’s control or influence. As highlighted in Sciannella, the court may view an “outright admission” that a stockholder “controls” the company as strong evidence of control, whereas it may not view a statement of significant reliance similarly, absent other strong indications of control.
• Updated projections should be prepared reliably, particularly during a sale process. Courts are typically skeptical of revisions of management projections during a sale process (particularly in alleged controller transactions). When they are necessary, the board should explore the revisions with management and the bankers—to understand the process that was undertaken and the assumptions made in creating the new projections, the rationale for the revisions, and the reasons for a less optimistic view than previously regarding the business. Depending on the circumstances, to provide a fuller picture, the company should consider also disclosing the prior projections, with an explanation that they were not relied on by the board or its financial advisor, and the reasons the update was appropriate. Generally, revisions to projections should be made under a regular, deliberative process, rather than, for example, being made by or at the direction of a controller or a self-interested executive.