Genzyme Corp. v. Federal Ins. Co., Civ. Action No. 08cv10988-NG.

• Decision Date: 28 September 2009
• Docket Number: Civ. Action No. 08cv10988-NG.
• Citation: 657 F.Supp.2d 282
• Parties: GENZYME CORPORATION, Plaintiff, v. FEDERAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Massachusetts

Page 282

657 F.Supp.2d 282

GENZYME CORPORATION, Plaintiff, v. FEDERAL INSURANCE COMPANY, Defendant.

Civ. Action No. 08cv10988-NG.

United States District Court, D. Massachusetts.

September 28, 2009.

Howard Anglin, Marc E. Rindner, Daniel J. Standish, Wiley Rein LLP, Washington, DC, Barbara A. O'Donnell, Catherine N. O'Donnell, Zelle McDonough & Cohen, LLP, Boston, MA, for Defendant.

Robert G. Jones, Katherine A.K. Mumma, Peter L. Welsh, Ropes & Gray LLP, Boston, MA, for Plaintiff.

MEMORANDUM AND ORDER RE: DEFENDANT'S MOTION TO DISMISS

GERTNER, District Judge.

I. INTRODUCTION

On September 22, 2002, Federal Insurance Company ("Federal") issued a director and officer and corporate liability insurance policy (the "Executive Protection Policy") to Genzyme Corporation ("Genzyme"). Genzyme claims that this policy covers losses it incurred in litigating and settling a shareholder class action. Federal disagrees, and has moved for the Court to dismiss Genzyme's complaint, which seeks damages for Federal's denial of coverage. For the reasons set forth below, the Court GRANTS Federal's motion to dismiss Genzyme's complaint for failure to state a claim upon which relief can be granted (document # 12). Fed. R. Civ. Pro. 12(b)(6).

II. FACTUAL BACKGROUND

In ruling on Federal's motion to dismiss, the Court assumes the truth of all well-pleaded facts and gives Genzyme the benefit of all reasonable inferences therefrom. Vernet v. Serrano-Torres, 566 F.3d 254, 258 (1st Cir.2009).

A. Genzyme and its Tracking Stock Capital Structure

Genzyme is a biotechnology corporation organized under the laws of the Commonwealth of Massachusetts. (Compl. ¶ 4.) From 1994 to 2003, Genzyme's capital structure included a series of "tracking stock" designed to track the performance of particular business divisions rather than the company as a whole.¹ Id. ¶ 17. From December 2000 through June 2003, three series of Genzyme tracking stock were outstanding, one each for the General Division (which traded under the ticker symbol GENZ), the Biosurgery Division (which traded as GZBX), and the Molecular Oncology Division (which traded as GZMO). Id. Each of these tracking stocks was registered under the Securities Exchange Act of 1934 and traded under its own symbol on the NASDAQ. Id. However, the divisions to which the tracking stocks corresponded were not distinct legal entities. Each division was owned directly by Genzyme, and holders of the tracking stock were merely holders of a single class of Genzyme's common stock. Id. Thus, holders of all tracking stock had voting rights in the Genzyme Corporation, not in any particular division.

B. The Elimination of Genzyme's Tracking Stock Structure

Genzyme's Articles of Organization ("Articles") allowed the corporation to eliminate its tracking stock structure by requiring Biosurgery Division shareholders and Molecular Oncology Division shareholders to exchange their shares either for General Division shares or for cash. Id. ¶ 18. On May 8, 2003, Genzyme announced that its board of directors had decided to exercise the optional exchange provisions in its Articles and thereby eliminate the corporation's tracking stocks. Id. ¶ 19. In particular, Genzyme announced that it would exchange each Biosurgery Division and Molecular Oncology Division share for a certain number of General Division shares, leaving the General Division shares as the only outstanding common stock of the corporation. Id. ¶¶ 19-20. Throughout this opinion, the Court will refer to this exchange of Biosurgery Division and Molecular Oncology Division shares for General Division shares as the "Share Exchange."

Genzyme's Articles called for each Biosurgery Division and Molecular Oncology Division shareholder to receive shares of General Division stock equal to 130% of the "fair market value" of the Biosurgery and Molecular Oncology Division stock in the Share Exchange. The Articles further defined "fair market value" as the average closing price of GZBX or GZMO stock during a twenty-day period commencing thirty days prior to the announcement of the Share Exchange. Under this formula, Biosurgery Division shareholders received 0.04914 shares of GENZ stock for each share of GZBX stock when the Share Exchange was carried out on June 30, 2003. Genzyme Corp., Form 8-K (May 8, 2003).²

C. The Underlying Litigation

The Share Exchange proved to be unpopular among many Biosurgery Division shareholders. Soon after the Share Exchange was announced, a number of shareholder lawsuits were filed against Genzyme and several of its officers and directors. (Compl. ¶¶ 24-41.) Eventually, the U.S. District Court for the Southern District of New York certified a class action, and on August 6, 2007, Genzyme agreed to settle all of the class members' claims by making a one-time payment of $64 million. Id. ¶¶ 35, 41. It is this settlement payment for which Genzyme is now seeking partial indemnification from Federal.

The current dispute between Genzyme and Federal must be understood within the context of the claims made by the plaintiffs in the Southern District of New York class action.³ The Fourth Amended Class Action Complaint notes that Genzyme's Biosurgery Division tracking stock was a product of its merger with Biomatrix, Inc., an independent biomaterials company. The merger combined Biomatrix's assets with those of Genzyme's Surgical Products and Tissue Repair Divisions to create the Biosurgery Division. Fourth Am. Class Action Compl. ¶ 42, Lewis v. Termeer, No. 03-Civ-4014 (S.D.N.Y. Dec. 30, 2005). Pursuant to its merger agreement with Biomatrix, Genzyme paid $245 million in cash for 28.38% of Biomatrix's outstanding shares and then issued one share of Biosurgery Division stock in exchange for each remaining Biomatrix share. Id. ¶ 45. According to the plaintiffs in the underlying litigation, Genzyme promised at the time of its merger with Biomatrix to operate Biosurgery as an independent, "self-sustaining business." Id. ¶¶ 49-56. However, the plaintiffs in the underlying litigation alleged that Genzyme reneged on this promise. Id. ¶ 57. Instead of seeking to maximize Biosurgery's profitability for the benefit of holders of Biosurgery Division shares, Genzyme's directors and officers allegedly schemed to depress the market value of GZBX stock so that it could fold the Biosurgery Division into the General Division at an exchange ratio that would be favorable to General Division shareholders. Id. ¶ 18.

To see how such a scheme might work, one need only look at the Share Exchange formula set forth in Genzyme's Articles. The lower the fair market value of a Biosurgery Division share, the fewer General Division shares needed to complete the Share Exchange. General Division shareholders, of course, would want to execute the Share Exchange by issuing as few new General Division shares to Biosurgery Division shareholders as possible. Issuing new shares has a dilutive effect on existing shareholders. It reduces the amount of corporate earnings attributable to each share and may reduce the amount of dividends and other distributions received by each shareholder. Executing the Share Exchange when the Biosurgery Division's stock was undervalued by the market would be a boon to General Division shareholders. The General Division shareholders would obtain the benefits of the Biosurgery Division's assets and profits while experiencing minimal dilution of their existing equity stake. Although the plaintiffs in the underlying litigation raised a number of claims under federal and state law,⁴ their claims revolved around one central allegation: Genzyme's directors and officers conspired to benefit General Division shareholders at the expense of Biosurgery Division shareholders in the Share Exchange.⁵ Id. ¶¶ 18-19.

D. The Executive Protection Policy

On September 22, 2002, Defendant Federal Insurance Company issued Genzyme a director and officer and corporate liability insurance policy (the "Executive Protection Policy").⁶ The policy covers claims made during the period of September 22, 2002, to September 22, 2003, the period during which plaintiffs' complaint in the underlying litigation was filed in the Southern District of New York. (Compl. ¶ 9.) It limits Federal's liability to $10,000,000 and is subject to a $15,000,000 deductible. Id. Insuring Clauses 2 and 3 of the policy are the coverage clauses relevant to this dispute. Insuring Clause 2 covers losses for which Genzyme grants indemnification to its directors and officers, and Insuring Clause 3 covers losses suffered by Genzyme on account of securities claims. Since the particular language of these clauses is important, the Court quotes them in full.

Insuring Clause 2 provides:

[Federal] shall pay on behalf of [Genzyme] all Loss for which [Genzyme] grants Indemnification to each Insured Person [i.e., Genzyme's officers and directors], as permitted or required by law, which the Insured Person has become legally obligated to pay on account of any Claim first made against him, individually or otherwise, during the Policy Period ... for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person before or during the Policy Period.

Insuring Clause 3 provides:

[Federal] shall pay on behalf of [Genzyme] all Loss for which it becomes legally obligated to pay on account of any Securities Claim first made against it during the Policy Period ... for a Wrongful Act.

The term "loss," as used in the policy, is defined as the "total amount which [Genzyme or its officers or directors] become [ ] legally obligated to pay on account of each Claim and for all Claims in each Policy Period ... made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, settlements, costs and Defense Costs." The policy explicitly states that the term "loss" does not include "matters uninsurable under the law pursuant to which [the insurance policy] is...