GREAT LAKES CHEMICAL v. Pharmacia Corp.

• Decision Date: 29 June 2001
• Docket Number: C.A. No. 18276.
• Citation: 788 A.2d 544
• Parties: GREAT LAKES CHEMICAL CORPORATION, Plaintiff, v. PHARMACIA CORPORATION, formerly known as Monsanto Company, and Sweet Technologies, Inc., Defendants
• Court: Court of Chancery of Delaware

788 A.2d 544

GREAT LAKES CHEMICAL CORPORATION, Plaintiff, v. PHARMACIA CORPORATION, formerly known as Monsanto Company, and Sweet Technologies, Inc., Defendants

C.A. No. 18276.

Court of Chancery of Delaware, New Castle County.

Submitted February 13, 2001.

Decided June 29, 2001.

Lawrence C. Ashby and Philip Trainer, Jr., of Ashby & Geddes, Wilmington, Delaware; and H. Roderic Heard, John E. Frey and Thomas M. Lynch, of Wildman, Harrold, Allen & Dixon, Chicago, Illinois, for Plaintiff.

Richard L. Horwitz and John M. Seaman, of Potter Anderson & Corroon, LLP, Wilmington, Delaware; and John W. Treece and Sheila A. Sundvall, of Sidley & Austin, Chicago, Illinois, for Defendants.

OPINION

JACOBS, Vice Chancellor.

This lawsuit arises from the purchase of NSC Technologies Company, LLC, a Delaware limited liability company ("NSC") that was a subsidiary of the defendants, Pharmacia Corporation¹ ("Pharmacia") and Sweet Technologies, Inc.² The purchaser was the plaintiff, Great Lakes Chemical Corporation ("Great Lakes" or "the plaintiff"), which brought this lawsuit after the purchase, alleging that the defendants had committed fraud and breach of contract in connection with the NSC purchase. Now pending is the defendants' motion to dismiss all but one count of the complaint for failure to state a claim upon which relief can be granted. This Opinion decides that motion.

I. FACTUAL BACKGROUND³

A. Overview

NSC was a business unit of Pharmacia that was devoted to the commercial development and sale of highly specialized pharmaceutical intermediates and compounds used by NSC's customers to manufacture therapeutic drugs. At the time of the purchase transaction, NSC's business included the development and sale of L-Phenylalanine ("L-Phe") and a compound called "Tic-D." NSC was also involved in research and development of new products for the pharmaceutical market.⁴

In the fall of 1998, Pharmacia decided to sell NSC. Pharmacia engaged the investment banking firm of BancBoston Robertson Stephens to prepare a Confidential Descriptive Memorandum (the "Descriptive Memorandum") for use in marketing NSC to potential acquirers. The Descriptive Memorandum projected NSC's total sales at $93.2 million for 1999, increasing to $192 million by 2002. Great Lakes received the Descriptive Memorandum on November 10, 1998. Two days later, Great Lakes indicated its interest in submitting a bid for NSC, and the parties began negotiating the terms of a possible sale shortly thereafter.

To assist it in those negotiations, which lasted from November 1998 through early May 1999, Great Lakes engaged industry consultants from The Catalyst Group ("Catalyst") and the law firm of Kirkland & Ellis ("K & E"). Together, Catalyst and K & E conducted due diligence on NSC. On December 17, 1998 and January 15, 1999, Pharmacia made presentations to Great Lakes in an effort to promote the sale of NSC.

On January 15, 1999, Pharmacia notified Great Lakes that it was reducing its 1999 sales projections for NSC from $93.5 million to $78 million.

On January 22, 1999, Great Lakes offered to acquire NSC for approximately $130 million.

During the first quarter of 1999, NSC's actual sales fell below the projected level, reaching only $5 million-far below its actual sales for the same quarter in 1998. On March 16, 1999, as a result of the low first quarter figures, Pharmacia again reduced NSC's 1999 projected sales, this time from $78 million to $68.2 million, and so notified Great Lakes. By that point, Pharmacia had reduced NSC's projected 1999 sales by 27%.

In mid-April 1999, Great Lakes and Pharmacia entered into the Ownership Interest Purchase Agreement (the "Purchase Agreement") to buy NSC. The transaction closed on May 3, 1999, and NSC was sold to Great Lakes for a renegotiated price of $125 million.

B. The Negotiations

The reason that the NSC sales projections were lowered was that during the negotiations, significant changes had occurred that affected NSC's business. Those changes resulted from price-cutting in the aspartame market, the failure of many smaller aspartame manufacturers, and the entry of new sellers of L-Phe into the pharmaceutical market. Those developments increased the number of NSC's competitors and affected NSC's customer base-changes that turned out to be permanent. Price competition in the aspartame market also reduced the price of L-Phe in the pharmaceutical market, which in turn drove smaller producers of aspartame, (including NSC's sole sweetener customer, Enzymologa), out of the artificial sweetener market altogether.⁵

NSC management had detailed knowledge of these developments and NSC's performance, but had only limited involvement in the sale negotiations. NSC management were instructed not to speak directly to Great Lakes' personnel (and vice versa). Instead, all inquiries were to be directed to Pharmacia's negotiators, who would obtain the requested information from NSC management and then respond to Great Lakes. Beginning in January 1999, Great Lakes agreed to direct all inquiries for NSC management to Jan Wolpert ("Wolpert"), a vice president of Pharmacia and the defendants' principal negotiator.

From January through April 1999, Great Lakes made several due diligence inquiries to Pharmacia about NSC's business, intellectual property, product markets, and its actual sales and sales forecasts for 1999-2002. Having very little experience in the pharmaceutical intermediates business, Great Lakes claims to have relied on Pharmacia's experience in that business, particularly Pharmacia's representation concerning the events that affected NSC between January and April of 1999.

C. The "Infringement" of NSC's Patent

NSC holds both United States and European patents on the manufacturing process of Tic-D. Plaintiff alleges that throughout the negotiations, the defendants had reason to know that Archimica, an Italian competitor of NSC in the Tic-D market, was interfering with and infringing NSC's patents.

In late January 1999, representatives of Catalyst received unverified information that a manufacturer of Tic-D in eastern Europe was using a manufacturing process identical to that covered by NSC's Tic-D process patent. When Catalyst asked Pharmacia's representatives if they knew of the alleged interference, the representatives said they did not and provided Catalyst and other Great Lakes' representatives with a diagram showing the various manufacturers of Tic-D, among them Archimica. When Catalyst specifically asked Pharmacia representatives whether Archimica or any of the other manufacturers was interfering with NSC's Tic-D process patent, Pharmacia responded that no interference had occurred, explaining that Archimica's manufacturing process was different from, and inferior to, NSC's process. The Purchase Agreement warrants that there had been no interference with or infringement of NSC's intellectual property.

D. Defendants' Statements About NSC's Business

The plaintiff's fraud claims rest largely on alleged misrepresentations by the defendants in March and April 1999. It is claimed that Wolpert made the first of these misrepresentations during a March 15, 1999 telephone conference between Pharmacia negotiators and Great Lakes representatives. In that telephone conference, Great Lakes expressed concerns, particularly in light of NSC's actual sales for January and February 1999, about NSC's financial stability and NSC's projected sales of L-Phe and Tic-D. Mr. Wolpert responded that the reduced L-Phe sales resulted from temporary reductions in orders and from some accelerated shipments at the end of 1998. He attributed the reduced Tic-D sales to excess inventory of one of NSC's two customers over-ordering in 1998. Wolpert added that ultimately this would work to Great Lakes' benefit, because the shortfall reflected deferred sales that would be realized after Great Lakes purchased NSC.

After that meeting, NSC's financial statements were again revised downwards to show 1999 projected sales at $68.2 million-a reduction of $9.8 million. NSC's chief financial officer concluded that even $68.2 million was too high, given what the defendants knew about actual market conditions. Despite that (plaintiff alleges), NSC's president (who was also a Pharmacia employee) refused to lower the projections any further. On March 17, the reduced projections were presented to Great Lakes, with the assurance that NSC's sales would increase later in 1999 and that NSC would realize stronger sales in the coming years.

Besides the Purchase Agreement, NSC and Pharmacia entered into five transaction agreements. The transaction agreement that is relevant to this lawsuit is the Supply Agreement (the "Supply Agreement"), under which Pharmacia agreed to continue to manufacture, and NSC agreed to purchase, certain L-Phe products that are identified in a schedule attached to the Agreement. After the parties negotiated a $5 million price reduction based on NSC's poor first quarter sales performance, the purchase of NSC by Great Lakes closed on May 3, 1999.

II. THE PARTIES' CONTENTIONS AND THE RELEVANT STANDARD

In its complaint, Great Lakes alleges seven Counts, of which the defendants have moved to dismiss all but one (Count V). Count I alleges fraud in the inducement. Count II alleges breach of the Supply Agreement. Count III alleges common law fraud. Count IV alleges that Pharmacia breached the Purchase Agreement by warranting that there was no material adverse change to NSC's business when such changes had, in fact, occurred. Count VI claims indemnification for losses arising out of the breach of any representation or warranty. Count VII claims breach of a warranty that the defendants' ownership interests in NSC that were being sold to Great Lakes, were "securities" under the federal securities laws. The defendants have moved to dismiss these Counts for failure to state a claim upon which relief may be granted.

On a motion to dismiss under ...