Friday, February 4, 2011
I've been following the proposed Genzyme-Sanofi deal with some interest since Sanofi first made its move since what seems like many months ago. Reports are the parties are getting close to an agreement since they announced that Sanofi had entered into an NDA with Genzyme. From press reports we're hearing that the transaction will be a mix of cash and a contingent value right - earnout in English. The main difference between an earnout as it is commonly understood and the contingent value right is that the CVR must be registered with the SEC. Registering the CVR means that the right can be traded freely. The ability to trade the right is what makes it at all possible to consider accepting deferred payment in the context of a public company seller. [See update below.]
Of course, post-closing pricing adjustments can be extremely troublesome - and lead to all sorts of litigation/disputes over whether the targets were met or not, etc. The challenge with the CVR, I suspect, will be coming up with a target mechanism that is transparent and robust enough to overcome the likelihood of ex post disputes. The more complicated the mechanism, the more likely to result in ligation down the road by some CVR holder (or the shareholders' rep) who perhaps doubts that Sanofi made good on its promises. If the CVR is tied to some measure of profitability of the new Genzyme drug, then all the CVR holders are in trouble. That could be a morass of litigation. Consequently, the parties would be better of picking simple, binary milestones to trigger payments. Anyway, that's my two cents.
Daniel Wolf at Kirkland & Ellis has a memo on the current state of CVRs here.
Update: Turns out that CVRs are not generally transferable. They may generally only be purchased or sold pursuant to a permitted transfer. Here's some language defining permitted transfers as it was used by Ligand in their CVR agreement filed in connection with their acquisition of CyDex Pharmaceutical earlier this year:
"Permitted Transfer” means any transfer which is not in violation of applicable securities laws and in connection with which the transferee has executed and delivered a joinder signature page as to the Shareholders’ Representative Agreement; provided, that in the case of a transfer of Series B CVRs, Series A-1 CVRs or Common CVRs, the transfer must also be in at least one of the following categories for the transfer to be a Permitted Transfer: (i) the transfer of any or all of the CVRs (upon the death of the Holder) by will or intestacy; (ii) transfer by instrument to an inter vivos or testamentary trust in which the CVRs are to be passed to beneficiaries upon the death of the trustee; (iii) transfers made pursuant to a court order of a court of competent jurisdiction (such as in connection with divorce, bankruptcy or liquidation); (iv) if the Holder is a partnership or limited liability company, a distribution by the transferring partnership or limited liability company to its partners or members, as applicable; (v) a transfer made by operation of law (including a consolidation or merger) or in connection with the dissolution, liquidation or termination of any corporation, limited liability company, partnership or other entity; (vi) a transfer from a participant’s account in a tax-qualified employee benefit plan to the participant or to such participant’s account in a different tax-qualified employee benefit plan or to a tax-qualified individual retirement account for the benefit of such participant; (vii) a transfer from a participant in a tax-qualified employee benefit plan, who received the CVRs from such participant’s account in such tax-qualified employee benefit plan, to such participant’s account in a different tax-qualified employee benefit plan or to a tax-qualified individual retirement account for the benefit of such participant; or (viii) any transfer of a CVR by a venture capital firm, private equity firm, or other similarly-situated type of institutional investor that (a) provides to Parent an opinion of legal counsel that such transfer can be effected pursuant to an applicable exemption from the registration requirements of the Securities Act of 1933 and other applicable securities laws that is reasonably acceptable to Parent; and (b) certifies to Parent that it has not received a Quarterly Report dated within six (6) months prior to such transfer.
Capital bank used similarly restrictive language with respect to transfers in the CVR it included in its recent investment in North American Financial Holdings. You can find the CVR agreement here. If Sanofi registers the CVR with the SEC, then it would be tradable. But I suspect that since this is being proposed as a cash deal that they won't pursue registration for the CVRs. Without registration, any proposed CVRs won't be tradable.