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Stemgent, Inc. v. Orion Equity Partners

Superior Court of Massachusetts, Suffolk

December 21, 2016

Stemgent, Inc.
v.
Orion Equity Partners et al No. 135848

         Filed December 22, 2016

          FINDINGS OF FACT, RULINGS OF LAW AND ORDER OF JUDGMENT

          Janet L. Sanders, Justice of the Superior Court.

         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.

         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 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 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 his 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 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 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 ...


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