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Faruqi & Faruqi Challenges Conflicted Merge Healthcare, Inc., Transaction

September 28, 2016

On September 27, 2016, Faruqi & Faruqi, LLP (“Faruqi”) presented a significant motion to dismiss argument before Vice Chancellor Glasscock in a case challenging IBM’s $1 billion acquisition of Merge Healthcare Inc. (“Merge”).  Derrick Farrell, a partner at Faruqi, argued that the transaction was mired with conflicts and meant to enable Merge’s controller and largest stockholder, Ferro, to cash out his $188 million Merge investment and receive a $15 million consulting fee.  Notably, Merge’s charter did not contain a so called “102(b)(7)” provision which exculpates directors from liability for the duty of care.  Vice Chancellor Glasscock observed that this was “unusual” and even questioned counsel for both parties regarding the number of times they had not seen a company employ such a provision.

During oral argument Mr. Farrell pointed out, among other disclosure deficiencies, that the proxy statement in connection with the merger gave the false impression Merge’s financial advisor, Goldman Sachs, used a lower set of projections than those disclosed in the proxy statement, when in fact Goldman Sachs used a higher set of projections that treated stock-based compensation as a non-cash expense.  Vice Chancellor Glasscock ultimately requested supplemental briefing on this issue, stating that it “would be very helpful in my understanding of whether that element of the disclosure claim is something that I need to take into account in doing the [ratification] analysis.”  Mr. Farrell further argued that the Board’s decision to provide Ferro a consulting agreement that gave him a $15 million payment if Merge was sold for at or over a $1 billion, when Ferro knew a transaction with IBM was likely was a breach of the fiduciary duty of care.  In Mr. Farrell’s words “I think we have demonstrated here gross negligence in the sale process, this is a board that allowed someone it knew was conflicted because of this consulting agreement to negotiate a deal.”   While Mr. Farrell conceded Ferro ultimately agreed to waive the $15 million consulting fee in exchange for IBM increasing the transaction consideration by $15 million, he argued that stockholders had already been irreparably damaged when the fee was waived because Ferro negotiated with IBM towards a $1 billion purchase price (the precise amount needed for his $15 million payment), that Ferro did not disclose why he agreed to waive the fee and stockholders were not told whether Ferro would waive the fee for any potential purchaser; a fact Ferro belatedly testified to after the merger agreement was signed during what Mr. Farrell described as “litigation-driven testimony.”  Indeed, as Mr. Farrell argued to the Court, rather than ask why Ferro would not waive the consulting fee for potential purchasers other than IBM “the better question is if a potential purchaser came up and said let’s do a deal at $1.1 billion, but, by the way, Mr. Ferro, you can keep your $15 million consulting fee, why wouldn’t he take the money?”

Faruqi & Faruqi expects a ruling from the Delaware Court of Chancery  on Defendants’ motion within the next several months.

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