Equity-Linked Investors, L.P., v. Adam

Facts

As of January 28, 1997, the capital structure of Genta comprised 39,991,626 shares of common stock; 528,100 shares of Series A preferred stock, and 1,424 shares of Series C preferred stock outstanding. The original investment by the common stock had been about $58 million. The Series A preferred had originally invested $30 million. Something less than $10 million had been raised from later classes of preferred, much of which had subsequently been converted to common stock. The Series A preferred stock was issued in 1993 at $50 per share. It carries a $50 per share liquidation premium ($30 million in total). It had a dividend paid in common stock for the first two years and earns a $5 per share cumulative dividend, payable if, as, and when declared for subsequent years. In the event of a 'fundamental change,' holders of Series A preferred stock would have an option to have their shares redeemed by the company at $50 per share, plus accrued dividends. Among events that would constitute a 'fundamental change' would be a delisting of Genta stock on the NASDAQ. More important for this case, Genta was contractually obligated to redeem the Series A shares on September 23, 1996, with cash or common stock and, if common stock, to use its best efforts to arrange a public underwriting of the common stock. In December 1995, it placed a $3 million Regulation S offering of Series B convertible preferred stock. In March 1996, it issued $6 million of Series C convertible preferred stock. Finally, on September 17, 1996, it placed a $2 million Regulation S offering of convertible debentures. Genta Incorporated is on the lip of insolvency and in liquidation, it would probably be worth substantially less than the $30 million liquidation preference of the preferred stock. Genta, a biopharmaceutical company that has never made a profit, but does have several promising technologies in research, and there is some ground to think that the value of products that might be developed from those technologies could be very great. If Genta continues to try to develop these opportunities, any loss that may eventuate will in effect fall, not on the common stock, but the preferred stock. The Genta board sought to find a means to continue the firm in operation so that some chance to develop commercial products from its promising technologies could be achieved. The holders of the preferred stock were seeking a means to cut their losses, which meant liquidating Genta and distributing most or all of its assets to the preferred. The contractual rights of the preferred stock did not give the holders the necessary legal power to force this course of action on the corporation. Negotiations end in January 1997. Genta then announced that a third party source of additional capital had been located and that an agreement had been reached that would enable the corporation to pursue its business plan for a further period. The evidence indicates that at the time set for the closing of that transaction, Genta had available sufficient cash to cover its operations for only one additional week. P filed this suit following the announcement of the loan transaction. P challenges the transaction in which Genta borrowed on a secured basis some $3,000,000 and received other significant consideration from Paramount Capital Asset Management, Inc., a manager of the Aries Fund (together referred to as 'Aries') in exchange for a note, warrants exercisable into half of Genta's outstanding stock, and other consideration. P seeks an injunction or other equitable relief against this transaction. The legal theory of the case, as it was tried, was that the Aries transaction was a 'change of corporate control' transaction that placed upon Genta special obligations -- 'Revlon duties' -- which the directors failed to satisfy.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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