Guidant/JJ Litigation
posted by Dave Hoffman
Counsel, start your time-clocks.
As has been well-reported, Guidant has sued Johnson & Johnson for specific performance of J&J’s $25.4 billion acquisition. J&J will almost certainly assert that its obligation is void under the merger agreement’s “material adverse effect” clause, and, specifically, will argue that the clause has been triggered by Guidant’s messy encounters with state and federal regulators over its heart stents.
Bill Sjostrom at the Business Law Prof Blog has been all over this looming fight.
Back in September, he started questioning the deal’s continued viability. In October, he put up a great post on the MAE at issue in the (then) potential litigation. He argued that NY AG Spitzer’s lawsuit against Guidant may strengthen JJ’s claim here. Finally, he broke news of the suit here.
Obviously, I do not know how this will turn out. But doesn’t it seem that J&J could have protected itself against this type of risk with more precision? Isn’t regulatory action the number two legal problem medical device makers potentially face, after patent claims?
For more information, Pharmablog talks about the underside of drug testing here. Finally, the Stent Blog (!) is a must-read resource if you care about the statistical likelihood of stent failure.
November 8, 2005 at 11:30 am
Posted in: Corporate Law
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Responses (3)
Bill Sjostrom - November 8, 2005 at 12:48 pm
I wouldn’t fault J&J or its counsel for not doing a better job protecting against this type of risk. Walk-away rights (provisions that dictate when a party can back out of a deal with no liability) in merger agreements are always subject to intense negotiation. Obviously, the acquiror would like a broad right, and the target would like a narrow right. Unless one side has superior bargaining power, the parties end up compromising on a “material adverse effect” or similar standard, as they did in the J&J/Guidant deal. There will then be intense negotiation as to how to define the standard, if at all. I suspect J&J did the best it could in the situation.
Dave Hoffman - November 8, 2005 at 1:19 pm
Bill,
I don’t disagree that walk-away rights are likely to be tightly contested, and it might make economic sense for the parties to externalize the costs of such a negotiation as much as possible onto the judicial system. Of course, J&J was at some risk if it pushed for more definition and failed to get it, to the extent that the court uses evidence of those terms non-inclusion as interpretative aids (notwithstanding a merger clause).
Christine Hurt - November 8, 2005 at 2:29 pm
I think you said it Dave — the transaction costs of negotiating a specific MAC/MAE clause are fairly high and most parties leave some ambiguity on the table to be fought out later if necessary. I think it’s interesting to remember that Enron & Dynegy had agreed to merge when things for Enron had taken a turn but before the final collapse and before Enron’s investigation began. Dynegy withdrew; Enron sued for billions; the two parties settled for $25 million. Dynegy knew that Enron was having troubles, but Dynegy apparently didn’t negotiate an iron-clad MAE clause, either.
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