May 2, 2019 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected [Docket No. 665] to the Debtors' proposed sales of its Toprol-XL assets and its Vimovo assets to "purportedly secured lender" Deerfield Management Company (together with affiliates, "Deerfield") and separately joined a related objection filed by AstraZeneca AB (“AstraZeneca”) [Docket Nos. 113 and 323, respectively]. The Committee vigorously assails what it views as a "Chapter 11 process is being orchestrated solely for Deerfield’s benefit…in a way that is inappropriate under the law" and urges the Court to see through Deerfield's efforts to dress equity up as debt; debt which Deerfield now proposes to credit bid for the Debtors' Toprol-XL assets.
The objection states, “Before the Court are proposed Section 363 sales of two categories of estate assets: (i) the “Toprol-XL Franchise;” and (ii) the “Vimovo” assets. Both asset bundles are being sold to the Debtors’ pre-petition, purportedly secured lender, Deerfield. Deerfield intends to take the Toprol-XL Franchise directly, via credit-bid pursuant to Section 363(k). Deerfield intends to take the Vimovo assets indirectly, by “rolling” its pre-petition debt into Nuvo [Nuvo Pharmaceuticals Inc.], which is 'fronting' the bid for Deerfield.
Neither bid comports with law and, so, both bids must be rejected. First, Deerfield’s proposed credit-bid for the Toprol-XL Franchise fails for three reasons: (1) at least $75 million of Deerfield’s purported secured debt must, under the peculiar facts of this case, be recharacterized as equity; (2) Deerfield failed to properly and fully perfect its liens on the assets comprising the Toprol-XL Franchise; and (3) Deerfield’s credit-bid is structured to impermissibly split AstraZeneca contracts that form an integrated contractual arrangement.
Second, the bid for Vimovo assets must be rejected because it contemplates ‘selling’ avoidance actions to Deerfield/Nuvo—a structural component that, if ever permissible, must at least deliver the value of such claims to unsecured creditors—which the Deerfield/Nuvo bid does not do.
Deerfield’s recharacterization (and, in turn, credit-bid) problem flows naturally from the fundamental “intent” question controlling this area of jurisprudence: Did the party infusing capital act in the manner of a lender or in the manner of an equity stakeholder? The evidence is clear. Informed by its past successes reaping equity upside in pharmaceutical ventures run by Adrian Adams (Aralez Chief Executive Officer) and Andrew Koven (Aralez President and Chief Business Officer), Deerfield again ‘partnered’ with these two gentlemen in creating Aralez, a mere 2.5 years ago. From the beginning, Aralez described its relationship with Deerfield – not in typical lender/borrower terms – but as a “partnership,” and it did so repeatedly, both internally and externally.
For its part, Deerfield contributed critical ‘start-up’ capital at a time when the new venture had little income, insufficient income-producing assets, a collateral base of questionable value, but a ‘shoot for the moon’ business plan focused on acquiring new pharmaceutical assets. Deerfield structured its initial $75 million seed funding in a highly unusual way, as a hybrid secured-yet-convertible (into equity) note. Internal documents make clear, however, that Deerfield was not motivated to supply the $75 million ‘risk’ capital by the small quantum (2.5% per annum) of cash-pay interest reserved under the ‘lending’ documents; it intended high equity returns. Moreover, Deerfield’s ‘partnership’ arrangement included (as a matter of contract and/or business understanding) Deerfield’s direct consent, as if Deerfield dominated the board of directors. Form notwithstanding, Deerfield did not provide traditional debt financing, it provided ‘equity venture’ financing, and the law demands that it now be recognized as such. Deerfield also may not credit-bid for the Toprol-XL Franchise because its asserted lien entitlements are voidable pursuant to Bankruptcy Code Sections 544(a)(1) and (2). The Debtor entity that is party to the suite of contracts comprising the Toprol-XL Franchise is Aralez Pharmaceuticals Trading DAC (‘Trading DAC’), an entity organized under the laws of Ireland. While Deerfield registered a ‘charge’ against Trading DAC assets, it failed to send a required notice or take any other steps required under Irish law for such charge to ‘crystallize.’
The objection continues, “Beyond these two credit bidding issues, the proposed Toprol-XL sale must be rejected for a third reason. As set forth in the separately filed AstraZeneca Objection, which the Committee joins in and incorporates herein by reference, the Toprol-XL sale depends upon the premise that Deerfield may pick and choose for assumption certain AstraZeneca contracts that are in fact components of a single, integrated contractual arrangement. This approach is flatly impermissible under the law, as the contracts at issue (the ones being assumed, and the one being rejected) were individual component parts of the entire transaction transferring the Toprol-XL Franchise from AstraZeneca to Aralez. Deerfield’s proposed bid structure intends to evade a large cure obligation owed to AstraZeneca, is ‘too clever by half,’ and for this reason alone must be rejected…Respecting the separate Vimovo asset sale, Deerfield intends to acquire (through Nuvo) the estates’ avoidance actions related to the assets being purchased. This is inappropriate…On information and belief, this transfer was made to accommodate Deerfield’s acquisition objectives, and may otherwise give rise to Chapter 5 theories of action benefitting Trading DAC unsecured creditors. It thus seems strategic – and wrongfully opportunistic – that the Deerfield/Nuvo bid incorporates a ‘purchase’ of such Chapter 5 theories of action. By way of summation, the Committee reiterates its frequent case objection: This Chapter 11 process is being orchestrated solely for Deerfield’s benefit and in a way that (i) has always presented at best an incomplete factual picture for the Court and (ii) in a way that is inappropriate under the law.”
The Court scheduled a hearing to consider the objection for December 11, 2019, with objections due by November 26, 2019.
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