William T. Allen

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ On November 18, Genta's common stock price closed at $ .31 per share. As a result, on November 19, Nasdaq announced that Genta's common stock would be delisted unless by December 3 it submitted a plan with respect to how it would comply with Nasdaq's listing requirements concerning net worth. Such a delisting would effectively bring to an end management's efforts to exploit the corporation's intellectual property. ”

“ 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. ”

“ 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. ”

“ Adams responded that Genta sought (1) a two tiered financing (i.e., some immediate cash infusion) , (2) a higher exercise price on any warrants ($ .25 per share) granted in consideration of the second tier financing, and (3) a more limited board presence, permitting Aries to designate only one director and two observers. Two days later, Aries agreed to the two tiered financing structure and a $ .20 second tranche exercise price for the warrants. It continued to insist upon a contract right to designate a majority of the board. ”

“ 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. ”

“ Genta's board retained Alex. Brown & Sons Incorporated ("Alex. Brown") to advise and assist the company in dealing with its inability to provide either cash or an [p1045] assured underwriting of its common stock. [9] In addition, the company asked Alex. Brown to attempt to locate potential sources of equity financing for Genta and to participate in negotiations with SkyePharma. [10] In June 1996, Genta retained an additional firm, Henson/Montrose, to assist it in locating potential equity investors in Asia. ”

“ At most, the board believed that the common stockholders would have been left with a 10% interest under a restructuring proposal.↑ $ 250,000 was paid on January 29, 1997, with the remaining $ 2.75 million paid at closing on February 13, 1997.↑ As security for the notes, Genta granted Aries a first lien on all of Genta's lienable assets.↑ Both the A and B warrants are immediately exercisable and have a term of five years. The effective average price of these warrants is actually $ 15 per share of common stock, not $ .25. ”

“ In December 1995, it placed a $ 3 million Regulation S offering of Series B convertible preferred stock. In March 1996, it issued $ 6 million of Series C convertible preferred stock. Finally, on September 17, 1996, it placed a $ 2 million Regulation S offering of convertible debentures. ”