The Mayne Pharma saga continues. In this chapter of the trilogy (we are treating the Court and Takeovers Panel proceedings as Act 1 and the FIRB assessment as Act 2), Mayne Pharma has commenced proceedings against not only the bidder (Cosette) but also Avista Healthcare Partners (Avista) and David Burgstahler (the Managing Partner and CEO of Avista). Mayne Pharma is seeking damages on behalf of Mayne Pharma shareholders against Cosette for breach of the Scheme Implementation Deed (SID) and against the other defendants for allegedly inducing Cosette’s breach of the SID. Mayne Pharma is also seeking damages on its own behalf.
Two aspects of the proceedings could have broad reaching implications.
First, the claim has been brought by Mayne Pharma on its own behalf and on behalf of Mayne Pharma shareholders. This has all the hallmarks of the 2022 Twitter v Elon Musk proceedings (Crispo v Musk C.A. No 2022-0666-KSJM) in which the Delaware Court of Chancery ruled that given a target company has no entitlement to the consideration in the event a deal proceeds and therefore has no entitlement to the merger premium, ‘a provision purporting to define a target company’s damages to include lost-premium damages cannot be enforced by the target company’ unless the merger agreement specifically grants shareholders third-party beneficiary status. The Court left open the question as to whether shareholders could seek ‘lost-premium damages’ against a bidder in a failed merger.
The SID contains a clause stating that Mayne Pharma holds the benefit of Cosette’s obligations under the SID both for itself and as trustee for Mayne Pharma shareholders so that Mayne Pharma may recover damages against Cosette for any breach of the deed on behalf of its shareholders. The SID does not expressly address how ‘lost premium damages’ might be measured or recovered, but the SID states that payment of a reverse break fee by Cosette may not be an adequate remedy for Mayne shareholders for a breach of the SID. The Cosette reverse break fee is expressed to be the maximum amount that the Cosette Group is required to pay to Mayne Pharma in relation to the SID, is it not clear whether that cap would apply to damages sought on behalf of shareholders, and that cap does not apply in respect of any fraud or wilful or intentional breach of the SID by Cosette. Those limitations of liability clauses may not be effective for a claim for misleading and deceptive conduct in any event.
The current Mayne Pharma proceedings could see the question as to whether shareholders can recover ‘lost premium damages’ against a bidder being answered by an Australian Court.
Second, the claim against Avista (which appears to be one of the private equity sponsor vehicles that manages and/or advises the funds that own Cosette) represents a Shakespearean level of drama for private equity sponsors. Shielding limited partnerships (and the underlying limited partners) is sacrosanct for every private equity sponsor. Most private equity sponsors seek to protect their fund vehicles through broad releases in the applicable legal documentation. Whilst the SID does contain a release by Mayne Pharma against any ‘Cossette Party’, the release does not apply to the extent the relevant ‘Cosette Party’ has not acted in good faith or has acted fraudulently or has engaged in wilful misconduct. It is also not clear whether the release applies to Avista or Mr Burgstahler in any event given the definition of ‘Cosette Party’ does not extend to the more customary concept of ‘affiliate’ used by most private equity sponsors.
Mr Burgstahler gave evidence in the Court proceedings for Mayne Pharma’s initial claim against Cosette for declarations that Cosette had not validly terminated the SID. He initially gave evidence that he did not recall attending a meeting that was central to the case, but then two days before cross examination, he claimed that not only did he recall attending the meeting, but he also remembered that he only focused on one aspect of the meeting which happened to be important to Cosette’s defence. The Court ultimately held that such evidence was ‘inconceivable’ having regard to Burgstahler being a senior executive of Avista with substantial financial expertise.
While Acts 1 and 2 have already forced dealmakers and lawyers to propose new arrangements and terms to try to mitigate against the risk of a Mayne Pharma fiasco, this Act 3 may cause us to rethink how shareholders are protected in the context of a scheme of arrangement. While the deed poll given by the bidder gives target shareholders direct recourse to the bidder, it only comes into force when the scheme becomes ‘effective’ (ie after shareholder and court approvals have been obtained). Therefore, it provides no comfort in a Mayne Pharma situation. Although efforts have been made in the past to provide shareholders with recourse for earlier breaches of the SID and clear rights to damages, they have never had traction in Australia. We expect some in the market will rethink whether this approach is appropriate where there is the possibility that a deal may end up with more twists than Cymbeline.
Time will tell whether this really is Act 3 of a trilogy for Mayne Pharma, or whether this is simply the latest instalment of a Star Wars style trilogy of trilogies with more Acts to follow.
