Stemgent, Inc. v. Orion Equity Partners, et al. (Lawyers Weekly No. 12-176-16)
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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
SUCV2013-2212-BLS2
STEMGENT, INC.,
Plaintiff
vs.
ORION EQUITY PARTNERS, ORION EQUITY PARTNERS, LLC
and MARK CARTHY,
Defendants
FINDINGS OF FACT, RULINGS OF LAW
AND ORDER OF JUDGMENT
This case arises from events leading up to plaintiff Stemgent Inc.’s acquisition of another company, Asterand. The defendant Mark Carthy through Orion Equity Partners (Orion) was one of the competing bidders for Asterand’s business.1 Stemgent brought this lawsuit alleging that Carthy tortiously interfered with an exclusive negotiation agreement between Stemgent and Asterand and that as a result of Carthy’s improper conduct, Stemgent was forced to pay a higher price for Asterand’s assets than it would have without such interference. Stemgent alleges that this conduct also constituted an unfair and deceptive business practice in violation of Chapter 93A. The case came before this Court for jury waived trial in October 2016. This Court concludes that judgment should enter for the defendants, the plaintiff having failed to prove that Carthy had an improper motive or used improper means in connection with his competing bid.
1 Because Carthy and Orion are one and the same, and Orion did not become a limited liability company until after events in this case, this Court sees no reason to distinguish between the three defendants and will refer only to Carthy.
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FINDINGS OF FACT
Asterand is a leading provider to scientists of high quality human tissue and tissue based research solutions. At the time of events in this case, it had two parts to its business, one located in Detroit, Michigan where human tissue was collected, stored, and prepared for shipping (the Tissue Business) and a second research arm located in the United Kingdom known as Bioseek. In 2011, Asterand received notices of default on $ 9 million of debt to two secured lenders. With insufficient funds to pay off the debt, Asterand made a decision to sell its assets. Initially, it sought to sell both parts of its business, then elected to sell each part separately on parallel tracks.
To assist it in the sale, Asterand engaged Covington Associates (Covington), a Boston based investment banking firm. Steven Mermelstein was the Covington employee assigned to Asterand, although its managing director Chris Covington also played a role. On January 8, 2012, Covington sent out an instruction letter to potential bidders that outlined the bidding process. Among other things, the letter instructed bidders not to contact Asterand or its affiliates directly but to work through Covington.
One of the potential bidders receiving this letter was the defendant Mark Carthy. Carthy had worked in various corporate positions before ending up at Oxford Biosciences (Oxford) in 2000. There, Carthy was involved in making venture capital investments in bioscience companies, first as a venture partner and then as general partner. As a consequence of his work at Oxford, Carthy became familiar with Asterand, which Oxford had founded and funded; he also became friends with Asterand’s first CEO, Randall Charlton, and dealt on occasion with
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Asterand’s then CEO Jack Davis, who had also consulted with Oxford. In 2008, Carthy left Oxford and formed his own venture capital firm, first known as Orion Healthcare Equity Partners and then Orion Equity Partners.
The plaintiff Stemgent received an instruction letter from Covington at the same time that Carthy received his letter. Stemgent was formed in 2007. Its focus was on developing research tools for the pharmaceutical industry. Its largest shareholder was Health Care Ventures, a firm that invested in biotech companies, principally those working on the development of drugs for human use. Stemgent’s president is Gus Lawlor, who was also a board member for Health Care Ventures. Unlike Carthy, Lawlor had had no prior dealings with anyone at Asterand, although like Carthy, he was, on behalf of his investors, quite interested in purchasing the company.
On January 23, 2012, Carthy submitted the first of what would be several offers to buy Asterand’s Tissue Business. The offer was submitted on Orion Equity Partners letterhead and stated that its “principals” had 25 years in the life sciences field. This was not technically accurate since at that point, Orion was simply a name under which Carthy did business and was neither a partnership nor at that time a limited liability company. Carthy had, however, collected information about Asterand from his contacts with former Asterand officers, including Charlton, and continued to work closely with both Charlton and another former Asterand officer, John Stchur, throughout the period during which he sought to acquire Asterand. Moreover, the label of Orion as a partnership did not affect in any material way Asterand’s consideration of the offer: Davis knew Carthy and regarded Orion as a responsible bidder.
Shortly thereafter, Stemgent entered the bidding, and on February 21, 2012, proposed to buy the Tissue Business for $ 7 million. The letter did not have a financing contingency, stating that the funds necessary to finance the purchase would be provided by Stemgent’s current
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investors. Like Carthy, Stemgent proposed to purchase the Tissue Business free of liabilities; in other words, any security linked to Asterand’s $ 9 million debt had to be discharged. The offer was, however, considerably higher than Carthy’s January 23 offer, which was for $ 6 million. Undaunted, Carthy submitted two more revised offers to purchase the Tissue Business. The second of the two, on March 27, 2012, was for “$ 7.6. Million in cash.”
These two revised offers (and all offers submitted by Carthy after that) dispensed with any financing contingency or any requirement regarding due diligence. Carthy testified that he fully expected to have in place financing through certain Michigan based entities on or before any closing date; this Court finds this testimony credible. Moreover, Carthy had the ability to draw on personal assets which he held jointly with this wife, an investment banker. that totaled $ 30 million. If need be, he was willing to draw on those assets to go through with any purchase if his bid were accepted.
With Orion’s higher offer in hand, Mermelstein pressed Stemgent to raise its offer to $ 7.7 million in return for Asterand’s shutting down the bidding process. Stemgent did. On March 28, 2012, Stemgent and Asterand entered into a Letter of Intent (LOI). The LOI was essentially an agreement between the parties to work diligently over the next sixty days to negotiate and then execute a definitive asset purchase agreement. So that those negotiations could go forward without distractions, the LOI contained a provision – typical in such transactions– which prohibited Asterand or any of its representatives from soliciting or encouraging the submission of any competing offers until May 23, 2012 or until a final agreement was executed, whichever date was earlier. See Section 7
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of LOI, admitted as Trial Exhibit 9. 2 The LOI also prevented Asterand from accepting any other proposals, and if it did receive any inquiry about buying the company, required it to promptly inform Stemgent.
Carthy learned that Asterand had entered into a period of exclusive negotiations with a competing bidder on March 30, 2012. He nevertheless continued to submit offers to buy Asterand’s Tissue Business. Thus, on April 10, 2012, he submitted an $ 8.1 million bid; Mermelstein informed Lawlor of Stemgent about this. Carthy also reached out directly and indirectly (through Charlton, who was working with Carthy) to Asterand representatives as well as to some of its investors to make sure they were aware of his bids. He submitted at least one of his bids directly to Asterand’s board, with Chris Covington’s blessing. All of these offers were unsolicited.
Carthy’s efforts intensified around the beginning of May. On May 2, 2012, Asterand publicly announced that a potential bidder for its Bioseek business had withdrawn. Although the announcement stated that the company “continues to make good progress” on the sale of the Tissue Business, it cautioned that the proceeds from that sale may not be sufficient to satisfy the company’s outstanding debt. The development regarding Bioseek thus put some pressure on Asterand to realize as much as it could from the sale of the Tissue Business. Sensing an advantage, Carthy that same day increased his offer to $ 9 million in cash, and an additional $ 2 million in royalties to be paid later. This offer was submitted through Covington. Clearly
2 The specific text in the LOI was as follows:
Seller [Asterand] shall not, nor shall Seller authorize or permit any of its officers, directors, stockholders, employees, affiliates, investment bankers, advisors, representatives, and agents, directly or indirectly, to (a) solicit, initiate, propose or knowingly encourage the submission of any proposal (“Proposal”); or b) participate in any discussions or negotiations regarding, or furnish to any person or entity any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Proposal.
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tempted by this offer, Davis informed Asterand’s board of directors about it and also informed Lawlor of this latest offer. Davis was convinced (as he was throughout that time period in which Carthy was submitting offers) that Stemgent’s was the better offer, since he knew that it had full financing firmly in place. But he was nevertheless happy to use Carthy’s offer to get Stemgent to “sweeten the pot.”
Mermelstein met with Lawlor on May 4, 2012 and informed him of Carthy’s latest offer. Displeased, Lawler had Stemgent’s counsel sent to Carthy a “cease and desist” letter informing him that his proposal was intruding on the LOI’s exclusive negotiations period. Lawlor nevertheless decided to increase Stemgent’s offer to $ 8 million for the Tissue Business and an additional $ 1 million to Bioseek in the form of a note. Davis responded that Asterand would wait out the “exclusivity period” (due to expire May 23) unless the offer was for $ 9 million. Although these negotiations included a discussion of Carthy’s latest offer (Lawler regarding it as a credible one even if its sources of financing were not clear), the fact that the deal to sell Bioseek had fallen through was also quite relevant, since the Asterand’s $ 9 million debt needed to be paid off if Stemgent was going to acquire the Tissue Business free of liabilities. Moreover, Stemgent had independently done its own financial analysis of the Tissue Business and (as Lawlor would later inform Stemgent’s investors), the higher figure proposed by Asterand was not out of line with the value that Stemgent had assigned to the assets at issue.
On May 18, 2012, Stemgent and Asterand signed an Amendment to the LOI, raising the purchase price to $ 9 million and extending the exclusivity period to June 15, 2012. On June 10, 2012, Stemgent and Asterand entered into a contract for the acquisition of the Tissue Business for $ 9 million. The transaction closed on July 30, 2012. As it turned out, the Tissue
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Business was not a good investment. The damages that Stemgent seeks are the difference between what it originally offered ($ 7.7 million) and what it ultimately paid.
CONCLUSIONS OF LAW
Stemgent asserts two claims against Carthy. Count I and II allege that he tortiously interfered with the contractual or advantageous business relationship between Stemgent and Asterand. Count III alleges a violation of Chapter 93A. This Court concludes that the plaintiff has failed to prove an essential element of the tortious interference counts, and that, as to Count III , it has failed to prove that Carthy engaged in the kind of conduct that rises to that level of rascality sufficient to constitute an unfair act or deceptive practice.
The parties agree as to the elements of a tortious interference claim. Stemgent must prove, by a preponderance of the evidence that: a) that it had a binding contract or advantageous business relationship with Asterand; b) Carthy knew about that relationship and intentionally induced or persuaded Asterand not to perform its obligations under the contract or to break that relationship; c) Carthy’s interference was, in addition to being intentional, improper in motive or in means; and d) Stemgent was harmed by Carthy’s actions. See G.S. Enterprises Inc. v. Falmouth Marine, Inc. 410 Mass. 262, 273 (1991); see also Pembroke Country Club Inc. v. Regency Savings Bank, F.S.B. 62 Mass.App.Ct. 34 (2004); Melo-Tone Vending, Inc. v. Sherry, Inc., 39 Mass.App.Ct. 315, 319-320 (1995).
As to the first element, there can be little dispute: the LOI established a contractual relationship which among other things, committed Asterand to a sixty day exclusive negotiation period. During that period Asterand was not to solicit or encourage the submission of any offers from third parties or take any other action to that could reasonably be expected to lead to or facilitate the submission any such proposal. See footnote 1, supra.
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As to the second element, this Court finds and concludes that Carthy knew about this contractual relationship and at least as of March 30, 2012, knew about the exclusive negotiation period that the LOI described. Although he may not have received a copy of the actual LOI and may not have known (at least initially) that Stemgent was the offeror, he knew that Asterand was forbidden from engaging in any discussions with him that would in any way assist him in submitting a competing offer. The closer question is whether Carthy’s conduct actually induced Asterand to breach its contractual obligations. In particular, there is no evidence to suggest that Asterand solicited the offers from Carthy. However, there is evidence that Chris Covington assisted Carthy in submitting at least one of his offers to Asterand’s Board of Directors. Moreover, Asterand clearly used Carthy’s offers as leverage in its negotiations with Stemgent in an effort to get it to “sweeten the pot” and thus had every incentive to encourage Carthy. From this, there is a basis to infer that Asterand played more than a passive role and actually facilitated Carthy’s submissions of competing proposals, in violation of Section 7 of the LOI.
The plaintiff is unable to satisfy the third element of its claim, however, which it is that Carthy used improper means or had an improper motive.3 This Court reaches that conclusion in light of case law defining precisely what it is that the plaintiff must show – and also what is not enough. Something more than intentional interference is required; that is, the interference resulting in injury must be “wrongful by some measure beyond the fact of the interference itself.” United Truck Leasing Corp. v. Geltman, 406 Mass. 811, 816 (1990). A party’s “legitimate advancement of its own economic interest” is not sufficient to satisfy this element. Pembroke Country Club v. Regency Sav. Bank, F.S.B. 62 Mass.App.Ct. at 39. That is, “a competitor may ‘interfere’ with another’s contractual expectancy by picking the deal off for
3 The existence of fact disputes as to this issue was the reason why this Court (Salinger, J.) denied cross motions for summary judgment in this case. See Memorandum of Decision and order dated June 7, 2016.
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himself if, in advancing his own interest, he refrains from employing a wrongful means.” Doliner v. Brown, 21 Mass. App.Ct. 692, 695 (1986), citing Restatement (Second) of Torts, 768 (1979). As to improper motive, that requires proof of “actual malice” which has in turn been defined to mean that defendant acted with a “spiteful malignant purpose” unrelated to the some legitimate interest. King v. Driscoll, 418 Mass. 576, 587 (1994); see also Brewster Wallcovering Co, v. Blue Mt. Wallcoverings, Inc. 68 Mass.Ap.Ct. 582, 608 (2007). That the defendant was motivated by a desire to benefit financially is not sufficient.
There is no evidence that Carthy had an improper motive in submitting his competing bids. Based on his familiarity with Asterand from his days at Oxford and the connections he had developed with its former officers and directors, Carthy regarded the Tissue Business as a good investment. There was evidence that he genuinely believed that the company was worth more than what Stemgent was offering, and submitted higher bids in an effort to gain the competitive edge. In short, Carthy was motivated by his own economic self- interest – which was to acquire the Tissue Business.
This Court also concludes that the plaintiff has failed to prove that Carthy used improper means. He removed the financing condition from his offers because he wanted to make his bids more attractive. He took his case directly to Asterand’s board of directors because he wanted to make sure they fully considered his competing offers. Plaintiff’s arguments notwithstanding, there is no evidence that in these communications, Carthy falsely represented that Stemgent was being given preferential treatment because of its connection to one Asterand investor. Nor does the evidence support a finding that Carthy did not have the financial wherewithal to fund his offers: he did, if only through his personal holdings. Plaintiff makes much of the fact that Orion consisted of only Carthy, and that there were no other partners or principals, as his offers
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stated. But both Davis of Asterand and Lawlor of Stemgent took Carthy’s offers seriously not because they were submitted under the name of Orion Equity Partners but because they were themselves familiar with Carthy and regarded his offers as credible.
More generally, this Court does not regard the fact that Carthy knew about the exclusive negotiations agreement when he submitted his offers as sufficient to sustain this element regarding improper means, particularly in the context of this case. All parties were sophisticated in these types of negotiations, with the ability to access all the information that they needed to determine what bargaining position to take. More important (and directly relevant to the fourth element of this claim which requires Stemgent to prove a causal connection to the complained of harm), this Court is not convinced that Carthy’s conduct played a major role in Stemgent’s decision to raise its bid. Certainly, it could have held firm, relying on the fact that it was well funded and much further along in the due diligence process than Carthy, thus making its offer more attractive to Asterand. At the same time, it recognized that Asterand was under some pressure to consummate the sale (the Bioseek bid having collapsed), and that it could seal the deal for the Tissue Business with an offer that alleviated Asterand’s concerns regarding the $ 9 million debt. That Carthy had come in with a higher offer may have played a part in how these negotiations unfolded, but Stemgent was fully capable of assessing how that should affect its valuation of Asterand. It made the decision that it did with full knowledge of what its options were and chose to increase its offer not just because of Carthy but because it concluded that the price that it was willing to pay was in its own economic self-interest.
For the same reasons, this Court concludes that plaintiff has failed to prove a violation of Chapter 93A. Although Stemgent points out that it could still prevail on this claim even if it failed to prove tortious interference, it relies on the same facts and those facts simply do not
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support the conclusion that Carthy’s conduct was egregious enough to constitute an unfair or deceptive act or practice. Thus, although unfair acts include material misrepresentations of fact, there were no such material misrepresentations here. More generally, there is no evidence that Carthy’s conduct was so objectionable as to attain that “level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.” Massachusetts School of Law at Andover Inc., v. American Bar Assn, 142 F.3d 26, 41-42 (1st Cir. 1998), quoting Levings v. Forbes & Wallace, Inc., 8 Mass.App.Ct. 498 (1979).
Accordingly, it is hereby ORDERED that judgment enter for the defendants as to all Counts and that the Complaint be DISMISSED, with prejudice.
_____________________________________ Janet L. Sanders
Justice of the Superior Court
Dated: December 21, 2016