William T. Allen

“ Thus, unlike two competing cash transactions or transaction in which widely traded securities are offered, the alternatives that plaintiff poses are rich with legitimate, indeed unavoidable, occasions for the exercise of good faith business judgment. Where judgment is inescapably required, all that the law may sensibly ask of corporate directors is that they exercise independent, good faith and attentive judgment, both with respect to the quantum of information necessary or appropriate in the circumstances and with respect to the substantive decision to be made. ”

“ Generally where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation, as in Graham or in this case, in my opinion only a sustained or systematic failure of the board to exercise oversight -- such as an utter failure to attempt to assure a reasonable information and reporting system exits -- will establish the lack of good faith that is a necessary condition to liability. ”

“ To generalize, the existence of a "below water" liquidation preference would allow the preferred to out bid an arm's length bidder for Genta's assets and defeat an attempt to exploit the company's properties (and not incidentally, an attempt to exploit the preferred in its current situation) for the benefit of the common stock. What the board did, in effect, was to try on behalf of the common to exploit the preferred -- by imposing risks on them without proportionate opportunity for rewards. That the preferred is open to this risk legally, is a function of the terms of its security. ”

“ The holding of Paramount, however, was that where the stock to be received in the merger was the stock of a corporation under the control of a single individual or a control group, then the transaction should be treated for "Revlon duty" purposes as a cash merger would be treated: there is no tomorrow for the shareholders (no assured long-term) , the board's obligation is to make a good faith, informed judgment to maximize current share value, and the court reviews such determinations on a "reasonableness" basis, which otherwise they would not do. ”

“ Obviously the level of detail that is appropriate for such an information system is a question of business judgment. And obviously too, no rationally designed information and reporting system will remove the possibility that the corporation will violate laws or regulations, or that senior officers or directors may nevertheless sometimes be misled or otherwise fail reasonably to detect acts material to the corporation's compliance with the law. ”

“ Liability for failure to monitor: The second class of cases in which director liability for inattention is theoretically possible entail circumstances in which a loss eventuates not from a decision but, from unconsidered inaction. Most of the decisions that a corporation, acting through its human agents, makes are, of course, not the subject of director attention. Legally, the board itself will be required only to authorize the most significant corporate acts or transactions: mergers, changes in capital structure, fundamental changes in business, appointment and compensation of the CEO, etc. ”

“ The most prominent of these was the 1986 opinion in Revlon, Inc. v. MacAndrews & Forbes Holding, Inc. That case had been widely thought to announce special directorial duties in the event of a "sale" of the corporation. The specific character of that rule however was not entirely clear, but it was generally taken to be that in certain circumstances (loosely a "sale" of the company) directors must maximize the current value of the corporation's stock; they may not exercise a judgment to choose less when more is offered. ”

“ They have every right to send no good dollars after bad ones. Indeed, they had the right to withhold necessary consents to salvage plans unless their demands were satisfied. But when plaintiff now contends that the Genta board was required by fiduciary duty to the company's common stockholders to go back to the Series A preferred after finding an investor willing to do what the Series A sought to prevent, I cannot agree. ”

“ But, a demanding test of liability in the oversight context is probably beneficial to corporate shareholders as a class, as it is in the board decision context, since it makes board service by qualified persons more likely, while continuing to act as a stimulus to good faith performance of duty by such directors. ”

“ In light of the fact that the Caremark Board already has a functioning committee charged with overseeing corporate compliance, the changes in corporate practice that are presented as consideration for the settlement do not impress one as very significant. ”

“ But what that requirement means in this setting, where (1) the transaction is not a merger or tender offer with a "price" per share at all, and (2) the transaction (or alternatives now advanced) are not otherwise easily reduced to a present value calculation, is not obvious. What is clear is that the Genta board was striving to maximize the possibility of the common stock participating in some "upside" benefit from the commercial development of the company's intellectual properties. ”

“ It offered as well a good faith effort to raise additional financing and it offered a principal with considerable experience and expertise on the financing and operation of bio-technology firms. Even if one were to believe that the preferred stock's offer that came before trial should be accepted as a bona fide alternative to reach the company's long-term goal, there would be sufficient substantive differences between Aries's proposal and the only alternative that might have been available, to permit the judgment of the independent board to stand. ”

“ That Caremark, undertakes for itself and its employees, and agents not to pay to or split fees with physicians, joint ventures, any business combination in which Caremark maintains a direct financial interest, or other health care providers with whom Caremark has a financial relationship or interest, in exchange for the referral of a patient to a Caremark facility or service or the prescription of drugs marketed or distributed by Caremark for which reimbursement may be sought from Medicare, Medicaid, or a similar state reimbursement program ”

“ By entering into this deal with an experienced bio-pharmaceutical company investor familiar with the antisense and drug delivery fields, Dr. Adams predicted that "the transaction [would preserve] a very large percentage of the upside for the existing common stockholders and... [assure] the Series A that eventually they will be able to be taken out in an underwritten take out, which [would] ... allow them to recover their investment." The board estimated that the Aries proposal, although dilutive, would leave the common stockholders with 36% of the equity value of Genta. ”

“ It does not tend to show knowing or intentional violation of law. Neither the fact that the Board, although advised by lawyers and accountants, did not accurately predict the severe consequences to the company that would ultimately follow from the deployment by the company of the strategies and practices that ultimately led to this liability, nor the scale of the liability, gives rise to an inference of breach of any duty imposed by corporation law upon the directors of Caremark. ”

“ Michael Weiss, the Senior Managing Director and General Counsel of Aries, testified that he understood that the Series A holders would not be informed about the Aries proposal.↑ Aries, which typically makes non-passive investments, has a history of assisting in successful turn arounds of financially troubled bio-pharmaceutical companies.↑ After further negotiations, discussed below, Aries agreed to a forfeiture of board control in the event that additional second tier financing was not arranged by Aries for Genta. ”

“ The corporate form gets its utility in large part from its ability to allow diversified investors to accept greater investment risk. If those in charge of the corporation are to be adjudged personally liable for losses on the basis of a substantive judgment based upon what an persons of ordinary or average judgment and average risk assessment talent regard as "prudent" "sensible" or even "rational", such persons will have a strong incentive at the margin to authorize less risky investment projects.↑ 208 App. ”

“ Rosenwald presented the following financing proposal to Genta at the November 26 meeting. Aries would lend Genta between $ 5-6 million in exchange for a secured note plus securities consisting of a new class of preferred stock (special preferred stock with embedded alternative rights convertible into common stock at $ .10 per share) and warrants to buy common stock at an exercise price of $ .10 per share. The letter setting forth this proposal stipulated that Aries's immediate control of the Genta board was a non-negotiable term of the proposed transaction. ”

“ From its inception, Caremark entered into a variety of agreements with hospitals, physicians, and health care providers for advice and services, as well as distribution agreements with drug manufacturers, as had its predecessor prior to 1992. Specifically, Caremark did have a practice of entering into contracts for services (e.g., consultation agreements and research grants) with physicians at least some of whom prescribed or recommended services or products that Caremark provided to Medicare recipients and other patients. ”

“ It has developed no commercial products from its intellectual properties. Second, through a wholly owned subsidiary, JBL Scientific Inc., Genta manufactures generic chemicals, pharmaceuticals, and intermediate products used by bio-pharmaceutical companies, including its own antisense business. It has a positive cash flow. Thirdly, Genta owns a 50% interest in a joint venture with SkyePharma PLC [3] , which is involved in the development of a new oral drug delivery technology. It has not yet produced a positive cash flow. ”

“ That every patient will receive written disclosure of any financial relationship between Caremark and the health care professional or provider who made the referral; That the Board will establish a Compliance and Ethics Committee of four directors, two of which will be non-management directors, to meet at least four times a year to effectuate these policies and monitor business segment compliance with the ARPL, and to report to the Board semi-annually concerning compliance by each business segment ”

“ That requirement is very clear when, for example, one bidder, offers an all cash deal and another offers all cash as well, but less money. It is tolerably clear when one bidder offers cash and another offers cash and widely traded securities, the package being worth less when measured by dependable markets. ”

“ The case can be more narrowly interpreted as standing for the proposition that, absent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealings on the company's behalf. ”

“ The other would continue the antisense business with funding from a company called Forward Ventures. Genta would retain a minority interest in the new entity holding the antisense assets, with Forward Ventures receiving majority control of this entity in return for its financing commitment. [17] The Series A holders rejected the Forward Ventures proposal, still favoring a sale of all of Genta's antisense assets to Isis in order to create greater liquidity. Genta's board, however, remained opposed to such an asset sale. ”

“ North, 692 F.2d 880, 885-6 (2d. Cir. 1982) , especially if one attempts to look to the substance of the decision as any evidence of possible "negligence." Where review of board functioning is involved, courts leave behind as a relevant point of reference the decisions of the hypothetical "reasonable person", who typically supplies the test for negligence liability. It is doubtful that we want business men and women to be encouraged to make decisions as hypothetical persons of ordinary judgment and prudence might. ”

“ For example, the holders were entitled to notice of board meetings and were to be given rights to inspect corporate books and visit and observe board meetings. [7]
C. Chronic Financial Problems: The lack of a product that generates substantial positive cash flows, coupled with an active research and development agenda, has lead to a notable (later, a somewhat desperate) search for sources of new investment capital. Genta engaged in a series of small equity placements in 1995 and 1996. ”

“ There is only a modest substantive benefit produced; in the particular circumstances of the government activity there was realistically a very slight contingency faced by the attorneys at the time they expended time. ”

“ According to a later Alex. Brown report to the Genta board, the Series A committee took the position that the preferred would "wait and see if [Genta would] run out of money and then get [delisted] . . . ." A delisting would give the preferred stock the legal right to the liquidation preference, allowing them to place the company into bankruptcy.
On September 11, Alex. Brown presented a revised, but substantially similar plan to the committee. It stated that Genta's current need for approximately $ 5.9 million in [p1046] cash would be difficult to meet unless the JBL assets were sold. ”

“ Any additional proceeds from the sale of residual assets were earmarked for the Series A holders as well.
Negotiations between Genta and Aries also continued throughout December. During the month, Mr. Mongiardo (1) informed Dr. Adams that Aries intended to continue the antisense business rather than sell it [27] , (2) summarized LBC's attempts to find a potential investor, and (3) provided a draft letter, which was later presented to the board, stating a basis to conclude that Genta's value was between $ 58 and $ 184 million. In addition, Mr. Mongiardo had discussions with Dr. Adams. ”