Acquisition of ID Biomedical Corporation by GlaxoSmithKline
January 31, 2006
With the threat of flu pandemics topping health concern lists in 2005, Vancouver-based biotechnology company, ID Biomedical Corporation (IDB), a developer and manufacturer of vaccine products (primarily for influenza), was a prime takeover candidate. On December 8, 2005, British pharmaceutical giant GlaxoSmithKline (GSK) completed the $1.7 billion negotiated acquisition of IDB by means of a securityholder and court-approved statutory plan of arrangement – but not without a fight from a group of IDB securityholders.
McCarthy Tétrault Notes:
On October 17, 2005, IDB obtained an interim order from the British Columbia Supreme Court directing that a meeting of all of the securityholders of IDB be held to approve the arrangement. At the special meeting held on November 16, 2005, the arrangement was approved by 85 per cent of the securityholders (voting as a single group). The date for the hearing of the final order of the court was set for November 18, 2005.
One group of securityholders (certain holders of common share purchase warrants issued by IDB in 2003 and publicly traded) opposed the application for the final order on grounds that the consideration being offered to them was inadequate ($5.33 per warrant). GSK offered this consideration on the basis that it represented the "in-the-money" value of the 2003 warrants based on $35 being paid for each common share (that is, $35, less the strike price of the warrants). The consideration being offered to other holders of common share purchase warrants (issued in 2004 and 2005) and options was based on this same formula. No other group of securityholders opposed the arrangement. A fairness opinion from a financial perspective was obtained, but only on the common shares, which is common practice.
Counsel on behalf of IDB argued before the court that the consideration being offered to the 2003 warrantholders was fair because this was the only amount the 2003 warrantholders were entitled to receive pursuant to the adjustment and anti-dilution provisions of the governing warrant indenture. That is, the only amount the 2003 warrantholders were entitled to was the same consideration as shareholders would receive in any "capital reorganization". Counsel for the 2003 warrantholders argued that the warrant indenture excluded the contemplated plan of arrangement from the definition of "capital reorganization". Counsel for IDB further argued that despite the purported exclusion, the warrant indenture contained other provisions that ran counter to this interpretation.
Counsel for the 2003 warrantholders also argued that the procedure approved by the interim order for the holding of the securityholders’ meeting was unfair in that it should have given the 2003 warrantholders a separate right to vote on the basis that their interests were sufficiently different from the interests of the common shareholders. In general, counsel for IDB argued that there was an inherent danger in unduly placing into the hands of a dissenting minority a veto over a large transaction that is otherwise seen as advantageous to the securityholders as a whole.
As part of the evidence submitted for the hearing of the final order, counsel for both sides solicited opinions from "financial experts" – counsel for the 2003 warrantholders obtained an opinion that the price being offered for the 2003 warrants was unfair (based on a "full economic value" approach) and counsel for IDB obtained an opinion that the price was fair (based on an "immediate exercise value" approach).
Mr. Justice Tysoe, in his reasons for judgment, would not approve the plan of arrangement in the form as submitted. He first concluded that the amount to be paid to the 2003 warrantholders was not governed by the warrant indenture. He then considered the experts’ opinions and focused heavily on the fact that common shareholders would be receiving a premium (the common shares were trading at $30.94 the day before the deal was announced), but the consideration being offered to the 2003 warrantholders represented a discount of $3.89 from the trading price of the 2003 warrants the day before the announcement (which was $9.22).
Mr. Justice Tysoe did not suggest what a fair price for the 2003 warrants would be and instead urged the parties to negotiate a new price and to present an amended plan of arrangement to him. He also emphasized that his judgment should not be read as holding that warrantholders are always entitled to be in a separate class.
A price of $9.20 per 2003 warrant was agreed to among the parties, pursuant to which Mr. Justice Tysoe approved the arrangement and granted the Final Order.
The decision highlights the importance of paying careful attention to the drafting of material agreements governing derivative securities and to the consideration to be paid to holders of such securities in the context of a plan of arrangement – particularly when the securities are publicly traded and there exists a discount to the trading price of such securities immediately prior to announcing the transaction. While it could be argued that Tysoe was wrong to focus on a premium or discount received (particularly because such logic assumes that a valuation method is only fair if the derivative securities in question are "in-the-money" and does not consider the volatility of the trading price over a period of time that may be affected by takeover speculation of an acquisition), the decision may potentially spark a deviation from what has arguably been standard practice – that is typically, there is no separate vote given to warrantholders (or optionholders) and no financial fairness opinion is obtained on derivative securities. McCarthy Tétrault acted as counsel for IDB in this transaction.
Technology & Licensing