ICN Pharmaceuticals, Inc. v. Khan
| Decision Date | 25 August 1993 |
| Citation | 2 F.3d 484 |
| Parties | , Fed. Sec. L. Rep. P 97,720 ICN PHARMACEUTICALS, INC. and Viratek, Inc., Plaintiffs-Appellees, v. Rafi KHAN, Defendant-Appellant. Rafi KHAN, Counter-Complainant, v. ICN PHARMACEUTICALS, INC., a Delaware Corporation; Milan Panic, an individual; Roberts A. Smith, Ph.D., an individual; Adam Jerney, an individual; Norman Barker, Jr., an individual; Robert Finch, an individual; Birch E. Bayh, an individual and Richard Starr, an individual, Counterclaim-Defendants. 1905, Docket 93-7480. |
| Court | U.S. Court of Appeals — Second Circuit |
Michael Lesch, New York City (Robert J. Hasday, David S. Tannenbaum, Stephen Lew, Regina L. LaPolla, Shea & Gould, of counsel), for defendant-appellant.
Arnold I. Burns, New York City (Charles S. Sims, Eric R. Levine, Daniel A. Seff, Eric C. Rosenbaum, Mitchell C. Shelowitz, Proskauer Rose Goetz & Mendelsohn, of counsel), for plaintiffs-appellees.
Before: CARDAMONE and MAHONEY, Circuit Judges, and PARKER, * District Judge.
Defendant-appellant Rafi Khan appeals from a preliminary injunction entered May 20, 1993 in the United States District Court for the Southern District of New York, John E. Sprizzo, Judge, that: (1) barred Khan from proceeding with his effort to replace the board of directors of plaintiff-appellee ICN Pharmaceuticals, Inc. ("ICN") by consent solicitation or any other means; although it (2) allowed Khan to file consent solicitation materials with the Securities and Exchange Commission (the "SEC"), provided that such materials are cleared with ICN and plaintiff- appellee Viratek, Inc. ("Viratek"), and the district court, prior to such filing.
Vacated and remanded.
This action arises out of a complaint filed by ICN and Viratek in the United States District Court for the Southern District of New York on April 5, 1993 following Khan's April 1, 1993 delivery to ICN, and filing with the SEC, of a written consent for shareholder action (the "Consent Statement"), pursuant to Del.Code Ann. tit. 8, Sec. 228 (1991), that sought the authorization of ICN's shareholders to replace the board of directors of ICN. At the time of the filing, Khan owned 120,000 shares, and other members of his family owned approximately 180,000 additional shares, of ICN common stock. Khan's 120,000 shares constituted less than one percent of the total ICN shares issued and outstanding as of September 30, 1992. ICN's brief on appeal represents that ICN now has outstanding approximately 20,000,000 shares of common stock.
ICN is a Delaware corporation with its principal place of business in Costa Mesa, California. It is a holding company for, and owns approximately seventy percent of the common stock of, Viratek, also a Delaware corporation with its principal place of business in Costa Mesa. SPI Pharmaceuticals, Inc. ("SPI"), another ICN subsidiary, markets drugs manufactured by Viratek. The most important asset of ICN and its subsidiaries is Virazole, a drug owned and developed by Viratek. Virazole is currently in the final stages of testing for use as a treatment for Hepatitis C, but has not yet received approval by the Food and Drug Administration for this use.
The complaint alleged, inter alia, that Khan, at all relevant times a securities broker employed by H.J. Meyers & Co., Inc. ("H.J. Meyers"), used confidential information that he obtained in connection with a public offering of Viratek common stock and warrants underwritten by H.J. Meyers to persuade a group of investors with substantial holdings of ICN common stock (the "Group") to (1) increase their holdings in ICN, and (2) seek to effectuate a change in control of ICN and its subsidiaries. The complaint charged that the alleged disclosure of inside information by Khan to the Group, and his acting in concert with the Group, violated both Khan's fiduciary obligations to ICN and various provisions of the federal securities laws, and constituted an unlawful civil conspiracy. The complaint sought the following primary relief: (1) a declaration that the Consent Statement and related shareholder solicitation were null and void ab initio; (2) a permanent injunction barring Khan and all persons and entities acting in concert or participation with him from voting any shares of stock of ICN and its subsidiaries, acquiring any such shares, soliciting proxies to vote such shares, or otherwise attempting to control, affect, or change the management of ICN and its subsidiaries, both unconditionally and until such time as corrective Schedule 13D filings were made with the SEC and the effects of prior misrepresentations and nondisclosures were dissipated; (3) disgorgement of "Khan's unjust enrichment;" (4) $25,000,000 in compensatory damages; (5) punitive damages; and (6) costs and attorney fees.
Khan filed an answer to the complaint that substantially denied its allegations and set forth a number of affirmative defenses, including failure to state a claim upon which relief might be granted and the lack of irreparable injury to ICN and Viratek. Khan also filed a counterclaim against ICN and members of ICN's board of directors alleging (1) breaches of fiduciary duty to ICN, (2) slander, and (3) intentional interference with economic relations.
On April 14, 1993, the district court entered a temporary restraining order that enjoined Khan from soliciting proxies or consents and from taking any action with respect to the Consent Statement until at least the conclusion of a pending hearing upon an application by ICN and Viratek for a preliminary injunction. The district court conducted evidentiary hearings on April 13, 14, 20, and 22, 1993. A number of witnesses testified, including: (1) David C. Watt, senior vice president, general counsel, and secretary of ICN; (2) Adam Jerney, executive vice president and chief operating officer of ICN and president of SPI; (3) Jack Scholl, senior vice president of public relations for SPI; (4) William MacDonald, executive vice president of corporate development and taxes for ICN and senior vice president of corporate development of SPI; (5) John Phillips, executive vice president and chief financial officer of SPI; (6) Seth M. Glickenhaus, an investment banker and manager and senior partner in Glickenhaus & Company; (7) Khan; and (8) Timothy John Tyrell, a securities broker and one of Khan's former colleagues at H.J. Meyers.
The hearing testimony set forth the following course of events. On or about August 24, 1992, Viratek and H.J. Meyers entered into a letter of intent regarding the public offering of 1.375 million units, each consisting of a share of Viratek common stock and a warrant to purchase another share (the "Offering"). A major purpose of the Offering was to raise capital for the development of Virazole. H.J. Meyers was to serve as the lead underwriter for the Offering, which was to be made on a "firm commitment" basis.
In October 1992, Khan and Jerney travelled to New York, Boston, Columbus, and Denver to meet with ICN's major institutional investors. The chief purpose of the trip was to introduce Jerney to the institutional investors. Jerney had recently become the chief executive officer of ICN, replacing Milan Panic upon Panic's leave of absence from ICN in July 1992 to serve as prime minister of the Federal Republic of Yugoslavia. 1
Jerney testified that in a meeting preparatory to this trip, he provided Khan with significant nonpublic information regarding ICN and its subsidiaries. Khan denied that this occurred. Jerney specifically testified that he and Khan discussed the forthcoming Offering at that meeting. Khan testified, on the contrary, that he was unaware of the Offering at the time of the October trip with Jerney, and that he was never aware of the Offering prior to its public announcement on November 18, 1992. 2
That announcement by Viratek was coupled with the filing of an initial prospectus with the SEC. Subsequently, during the first half of January 1993, Khan and various members of ICN management travelled to various cities within the United States to meet with institutional investors in order to generate interest in the Offering. Khan testified that the issue of FDA approval of Virazole was a central topic of discussion at these meetings, but denied that he possessed, or conveyed to those present, nonpublic information concerning preliminary results of the Virazole tests.
Shortly thereafter, Khan called on Jerney at ICN's offices in Costa Mesa to introduce its management to an institutional investor potentially interested in purchasing shares of ICN. Following the meeting with the investor, Khan asked to speak with Jerney privately. Jerney testified that Khan stated
he was very unhappy with Mr. Panic and Mr. Panic's role, and he was very unhappy, he and the group of shareholders that he represented, ... which he said was more than 50 percent, were very unhappy with some of our directors.
At the same time he said that they were happy with my performance at the leadership of [ICN] and he tried to set a date for an appointment for a luncheon meeting, and he said that it should take place as early as possible, ... because ... they had in mind to make certain changes, and he felt that he had the control, the interest in the company to make those changes happen, and it was up to me to decide whether I am on their side or on whose side I am.
The Offering became effective on January 28, 1993, and Khan placed approximately one million of the total 1.375 million units with clients maintained by him through H.J. Meyers. Khan earned approximately $300,000 in commissions from these sales.
On February 10, 1993, Khan attended a lunch with Jerney, Watt, and MacDonald in Costa Mesa. At the lunch, Khan again expressed dissatisfaction with Panic, as well as three other ICN directors, asserted that they should be replaced by four independent directors, including Khan, and...
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