HFTP INVESTMENTS v. Ariad Pharmaceuticals

• Decision Date: 07 December 1999
• Docket Number: Civil Action No. 17501.
• Citation: 752 A.2d 115
• Parties: HFTP INVESTMENTS, L.L.C., a New York limited liability company, Plaintiff, v. ARIAD PHARMACEUTICALS, INC., a Delaware corporation, Defendant.
• Court: Court of Chancery of Delaware

752 A.2d 115

HFTP INVESTMENTS, L.L.C., a New York limited liability company, Plaintiff, v. ARIAD PHARMACEUTICALS, INC., a Delaware corporation, Defendant.

Civil Action No. 17501.

Court of Chancery of Delaware, New Castle County.

Submitted: November 22, 1999.

Decided: December 7, 1999.

Revised: December 9, 1999.

David A. Jenkins of Smith Katzenstein & Furlow, Wilmington; and Allan M. Pepper and Michael Braff, of Kaye, Scholer, Fierman, Hays & Handler, LLP, New York City, for Plaintiff.

Kevin G. Abrams and Thomas A. Beck of Richards, Layton & Finger, Wilmington; and Irwin H. Warren, Richard W. Slack and Timothy E. Hoeffner of Weil, Gotshal & Manges, New York City, for Defendant.

OPINION

JACOBS, Vice Chancellor.

Pending is a motion to stay this action brought by HFTP Investments, L.L.C., ("HFTP") for injunctive, declaratory, and damage relief, against the defendant, ARIAD Pharmaceuticals, Inc. ("ARIAD"). HFTP claims that ARIAD has wrongfully refused to honor HFTP's right both to convert and to have redeemed shares of ARIAD Series C Convertible Preferred Stock (the "Preferred Stock") that HFTP acquired for $3,000,000 in 1998.

HFTP filed this action on October 26, 1999. Thirteen minutes later, ARIAD filed an action (the "New York action") against HFTP and its investment advisor, Promethean Investment Group, L.L.C. ("Promethean") in the United States District Court for the Southern District of New York (the "Southern District"). ARIAD's New York complaint asserts claims under both the Securities Exchange Act of 1934 ("Exchange Act"), and state common law, based upon the identical set of facts that will be presented to this Court. Stated differently, the defenses ARIAD will raise in this Delaware action are asserted as affirmative claims for relief in the New York action, specifically, claims for a declaratory judgment that ARIAD properly refused to convert (and, later, to redeem) HFTP's Preferred Stock, because HFTP (and Promethean) had made misrepresentations to ARIAD and had also wrongfully manipulated the price of ARIAD's stock.

Later that same day, HFTP moved for expedited proceedings in this case. The next day, ARIAD filed a motion to dismiss or stay this action in favor of its New York action. At an office conference held on October 29, 1999, this Court tentatively scheduled a trial date for January 18-21 and 24, 2000, subject to a ruling on ARIAD's motion to dismiss or stay. The parties subsequently briefed and argued that motion,¹ which will be denied for the reasons discussed below.

I. RELEVANT FACTS²

ARIAD is a Delaware corporation with its principal place of business in Cambridge, Massachusetts. The company's common shares are traded on the NASDAQ National Market. ARIAD develops novel and proprietary drug. products based on its knowledge of the inner workings of cells and the genes involved in disease.

HFTP is a New York limited liability company engaged principally in the business of investment and financial services. Promethean (which is not a party to this action) is a New York limited liability company also principally engaged in the business of investment and financial services. Promethean is an affiliate of HFTP, and is also its investment manager.

On November 8, 1998, HFTP and ARIAD entered into a Securities Purchase Agreement (the "Agreement") whereby HFTP acquired 3,000 shares of ARIAD Series C Preferred Stock for $3 million. The validity and enforceability of the Agreement is governed by New York law, but the terms under which the Preferred Stock may be converted into ARIAD's common stock are set forth in ARIAD's Certificate of Designations, which was filed with the Delaware Secretary of State. The Certificate of Designations provided holders of the Preferred Stock with the right to convert that stock into ARIAD common stock from and after March 1999. The conversion rate would be determined by a formula, the denominator of which (in this case) is a "floating" Conversion Price. The effect of the floating Conversion Price is that if ARIAD's common stock drops during the 22 trading day period immediately preceding the conversion, the Conversion Price would be lower and, accordingly, the number of common shares issued in the conversion would be higher. HFTP's attempt to convert a portion of its Preferred Stock under this formula is what precipitated the dispute that eventuated in this litigation and the New York action.

At some point after HFTP acquired the Preferred Stock, HFTP (and Promethean) executed a series of short sales of ARIAD common stock.³ ARIAD claims that HFTP (and Promethean) did this on a massive scale,⁴ specifically to manipulate the price of its common shares downward in order to increase the number of shares HFTP could obtain on conversion. ARIAD contends that this short selling campaign caused the price of its common stock to be severely depressed, and thereby enabled HFTP to convert its Preferred Stock for many more shares of ARIAD common than it would have received absent this scheme to artificially depress the value of the common. HFTP vigorously disputes this claim.

This state of affairs prompted ARIAD to demand that Promethean and HFTP cease their short selling activities, because they possessed material nonpublic information about ARIAD's ongoing financing plans, which imposed upon HFTP and Promethean a duty not to trade ARIAD's stock.⁵ HFTP does not deny that it (and its affiliate, Promethean) engaged in short selling activity, but insists that that activity breached no contractual or other duty owed to ARIAD, and was lawful in all respects.

On October 12, 1999, ARIAD announced that it had entered into a letter of intent to sell ARIAD's 50% interest in the Hoechst-ARIAD Genomics Center for $40 million in cash, plus other valuable consideration. ARIAD contends that the announcement of this development generated a significant increase in ARIAD's common stock price. The announcement also created significant financial exposure for Promethean, because of Promethean's obligation to immediately cover 2.5 million ARIAD shares that it had sold short. For this reason, ARIAD contends, HFTP immediately submitted a conversion notice to ARIAD on October 13, 1999, seeking to convert 612 of its 3,000 shares of Series C Preferred Shares into 1,078,038 shares of ARIAD common stock. ARIAD refused to honor the conversion request, because the request was based on stock prices that had been artificially lowered by Promethean's allegedly illegal short sales of ARIAD common stock while in possession of material inside information.

Thereafter, on October 14 and 20, 1999, representatives of ARIAD and Promethean an attempted to negotiate a repurchase by ARIAD of HFTP's Preferred Stock. During these negotiations both sides were preparing their complaints, which would be filed in their respective jurisdictions of choice. Both sides were clearly engaged in a race to the courthouse, as the complaints in both actions were filed on the same day — October 26, 1999. Although HFTP won that race (albeit only by 13 minutes), the reasons for its "victory" are hotly contested. ARIAD contends that during the negotiations HFTP fraudulently misled it into refraining from filing in order to pursue further negotiations; HFTP denies this and contends that if anyone was misled, it was HFTP. Because this dispute involves controverted facts, it cannot be resolved on the present record. The Court is therefore unable to find (as ARIAD claims it should) that ARIAD was misled — or worse, defrauded — into delaying the filing of its federal complaint.

This action and the New York action both rest upon the same facts. The main difference between the two actions is that each is the mirror image of the other; that is, ARIAD's affirmative claims in its New York action constitute its defenses (and counterclaims) to HFTP's claims in this action, and HFTP's claims in this action constitute the basis for its defenses (and counterclaims) in the New York action. The other major difference is that in its New York action, ARIAD asserts claims under the Exchange Act.

In its original Delaware complaint, HFTP asserted claims for breach of contract (based upon the Certificate of Designations, the Purchase Agreement, and common law contract principles), and also claims under the Delaware Uniform Commercial Code and 8 Del. C. § 158. All of these claims are predicated upon ARIAD's refusal to honor HFTP's attempted conversion of its Preferred Stock. The relief HFTP requested was an order specifically enforcing HFTP's contractual right to convert. Thereafter, because ARIAD had not honored HFTP's notice of conversion by October 23, 1999, and because HFTP claimed that that failure constituted a "Triggering Event" that entitled HFTP to have its Preferred Stock redeemed under the Certificate of Designations,⁶ HFTP submitted notices on November 1-3, 1999 ("Redemption Notices"), seeking the redemption of its remaining 2,388 shares of Preferred Stock for a total redemption price of $6,644,724.

ARIAD refused to honor these redemption notices as well and, as a result, HFTP amended its complaint in this action on November 8, 1999, to add new claims arising out of ARIAD's refusal to honor the notices of redemption.⁷ The end result is that HFTP now seeks significant damage relief (to remedy the refusal to redeem) in addition to injunctive and specific performance relief (to remedy the refusal to convert). In its original New York complaint, ARIAD asserted federal securities law claims under §§ 10(b) and 13(d) of the Exchange Act, as well as state law claims, seeking declarations that HFTP was not entitled to convert its Preferred Stock and that ARIAD had not acted wrongfully in refusing to convert that stock. ARIAD's federal securities claims are that HFTP and Promethean made misrepresentations that wrongfully induced ARIAD to sell Preferred Stock to them, and also engaged in unlawful manipulation, namely illegal short sales of...