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

Opinion

The case now under consideration involves a conflict between the financial interests of the holders of a convertible preferred stock with a liquidation preference, and the interests of the common stock. The conflict arises because the company, 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. Thus, if the liquidation preference of the preferred were treated as a liability of Genta, the firm would certainly be insolvent now. Yet Gen-ta, a bio-pharmaceutical company that has never made a profit, 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. 1 Were that to occur, naturally, a large part of the “upside” gain would accrue to the benefit of the common stock, in equity the residual owners of the firm’s net cash flows. (Of course, whatever the source of funds that would enable a nearly insolvent company to achieve that result would also negotiate for a share of those future gains — which is what this case is about). But since the current net worth of the company would be put at risk in such an effort — or more accurately would continue at risk — if Genta continues to try to develop these opportunities, any loss that may eventuate will in effect fall, not on the common stock, but on the preferred stock.

As the story sketched below shows, the Genta board sought actively 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. It publicly announced its interest in finding new sources of capital. Contemporaneously, the holders of the preferred stock, relatively few institutional investors, were seeking a means to cut their losses, which meant, in effect, liquidating Genta and distributing most or all of its assets to the preferred. The contractual rights of the preferred stock did not, however, give the holders the necessary legal power to force this course of action on the corporation. Negotiations held between Genta’s management and representatives of the preferred stock with respect to the rights of the preferred came to an unproductive and somewhat unpleasant end in January 1997.

Shortly thereafter, Genta 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. A Petition in Bankruptcy had been prepared by counsel.

This suit by a lead holder of the preferred stock followed the announcement of the loan transaction. Plaintiff is Equity-Linked In *1042 vestors, L.P. (together with its affiliate herein referred to as Equity-Linked), one of the institutional investors that holds Genta’s Series A preferred stock. Equity-Linked also holds a relatively small amount of Genta’s common stock, which it received as a dividend on its preferred. The suit 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. The suit seeks an injunction or other equitable relief against this transaction.

While from a realistic or finance perspective, the heart of the matter is the conflict between the interests of the institutional investors that own the preferred stock and the economic interests of the common stock, from a legal perspective, the ease has been presented as one on behalf of the common stock, or more correctly on behalf of all holders of equity securities. 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.

While from a realistic or finance perspective, the heart of the matter is the conflict between the interests of the institutional investors that own the preferred stock and the economic interests of the common stock, from a legal perspective, the case has been presented as one on behalf of the common stock, or more correctly on behalf of all holders of equity securities. The legal theory of the ease, 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.

While the facts out of which this dispute arises indisputably entail the imposition by the board of (or continuation of) economic risks upon the preferred stock which the holders of the preferred did not want, and while this board action was taken for the benefit largely of the common stock, those facts do not constitute a breach of duty. While the board in these circumstances could have made a different business judgment, 2 in my opinion, it violated no duty owed to the preferred in not doing so. The special protections offered to the preferred are contractual in nature. See Ellingwood v. Wolf's Head Oil Refining Co., Del.Supr., 38 A.2d 743, 747 (1944). The corporation is, of course, required to respect those legal rights. But, aside from the insolvency point just alluded to, generally it will be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests of common stock — as the good faith judgment of the board sees them to be — to the interests created by the special rights, preferences, etc., of preferred stock, where there is a conflict. See Katz v. Oak Industries, Inc., Del. Ch., 508 A.2d 873, 879 (1986). The facts of this case, as they are explained below, do not involve any violation by the board of any special right or privilege of the Series A preferred stock, nor of any residual right of the preferred as owners of equity.

As I have said, that is, I think, the heart of this matter. But the ease has been presented, not as a preferred stock case, but as a “Revlon” case. The plaintiff now purports to act as a holder of common stock. In effect, the plaintiff says: “Certainly the board can raise funds to try to realize its long-term business plan of developing commercial products from the company’s research, (even though we holders of preferred stock are bearing the risk of it), but if the financing it arranges constitutes a ‘change in corporate control,’ then it must proceed in a way that satisfies the relevant legal test”. Relying *1043 upon the teachings of Paramount Communications v. QVC Network, Del.Supr., 637 A.2d 34 (1993), plaintiff argues that the board did not satisfy the relevant legal test because, it says, defendants did not search for the best deal. Specifically, the board did not ask the holders of the preferred stock what they would have paid for the consideration given by Genta to Aries. The preferred, plaintiff says, would have “paid more” and that would have benefited the common or all equity.

For the reasons set forth below, following the recitation of relevant facts, I conclude that the directors of Genta were independent with respect to the Aries transaction, acted in good faith in arranging and committing the company to that transaction, and, in the circumstances faced by them and the company, were well informed of the available alternatives to try to bring about the long-term business plan of the board. In my opinion, they breached no duty owed to the corporation or any of the holders of its equity securities. Moreover, if tested judicially by a standard other than the “business judgment rule,” the board’s actions continue to appear sound. That is, in the circumstances, the board’s actions appear reasonable in relation to the board’s goal of achieving its valid business plan. While the board had no legally enforceable means to assure that the Aries transaction would achieve that goal, that transaction offered several attributes that permitted the board reasonably to conclude that it was the only available alternative. See p.-below (“Why a Revlon auction or other bidding with the preferred participating would not maximize value of common stock ...”). Indeed, in my opinion, given the history of the parties as of January 1997, it would be perfectly reasonable to conclude that any proposal that the plaintiff might make would be aimed at achieving, not the business plan the board legitimately sought to facilitate, but the dismantling of the company. While certainly some corporations at some points ought to be liquidated, when that point occurs is a question of business judgment ordinarily and in this instance.

I begin with the facts out of which the dispute arises.

I.

A. The Company: Genta was started in 1988 by Dr. Thomas Adams who has served since as its CEO and Chairman. It is in the bio-pharmaceutical business with its principal facility in San Diego. It has three components. First, it owns various intellectual property rights with respect to a genetic research area known as “antisense”. Its an-tisense activities involve research, development, and testing directed towards developing a treatment for certain cancers. It has developed no commercial products from its intellectual properties. Second, through a wholly owned subsidiary, JBL Scientific Inc., Genta manufactures generic chemicals, pharmaceuticals, and intermediate products used by bio-pharmaceutical companies, including its own antisense business. It has a positive cash flow. Thirdly, Genta owns a 50 % interest in a joint venture with SkyePharma PLC 3 , which is involved in the development of a new oral drug delivery technology. It has not yet produced a positive cash flow. Indeed, both the antisense and drug delivery products are still entirely at the development stage. The company has never made a profit and has expended almost $100 million on research, development, and overhead since its founding. While this sounds bleak, nevertheless, it is the case that some of its technologies, if they could be developed into marketable products, would be exceptionally useful and valuable.

As of the summer of 1996, when the events at issue began, Genta’s board of directors had seven members: two officers (Dr. Adams, the CEO and Chairman, and Dr. Klem, the Vice-President); three outside directors who subsequently have left the board (James Blair, Samuel Colella 4 , and David Hale 5 ) and two outside directors that remain *1044 on the board: Dr. Ts’o, a eo-founder of Genta who has a consulting agreement with Genta and receives fees for technology he has licensed to the company, and Dr. Webster, who is an international economics consultant with past board experience.

B. Capital Structure: 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. 6 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. This obligation, and the factors which prevented the redemption from occurring, occasioned the long negotiation with the holders of the preferred stock discussed below.

In addition to the foregoing, the preferred had certain governance rights. For example, the holders were entitled to notice of board meetings and were to be given rights to inspect corporate books and visit and observe board meetings. 7

C. Chronic Financial Problems: The lack of a product that generates substantial positive cash flows, coupled with an active research and development agenda, has lead to a notable (later, a somewhat desperate) search for sources of new investment capital. Genta engaged in a series of small equity placements in 1995 and 1996. 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. 8

By the spring of 1996, it became quite apparent that as of September the company would have insufficient cash to redeem the preferred with cash and, that while common stock would be available, the company’s good faith efforts to arrange a firm commitment underwriting of that stock would in all likelihood have no reasonable prospect of success. Genta’s board retained Alex. Brown & Sons Incorporated (“Alex.Brown”) to advise and assist the company in dealing with its inability to provide either cash or an *1045 assured underwriting of its common stock. 9 In addition, the company asked Alex. Brown to attempt to locate potential sources of equity financing for Genta and to participate in negotiations with SkyePhanna. 10 In June 1996, Genta retained an additional firm, Henson/Montrose, to assist it in locating potential equity investors in Asia.

D. Series A Committee Organized: In July 1996, plaintiff and five other investors holding Series A stock created the Series A Preferred Ad Hoc Committee to act as a bargaining agent with the company. The Committee was intensely interested in getting some return on the Series A and, no doubt, was interested in slowing or stopping the losses that the holders were implicitly realizing as the company continued to lose money.

At the first meeting between the committee and the company (July 1996), Alex. Brown proposed for discussion a three part restructuring. Two elements of that proposal involved the sale of the antisense and JBL businesses. 11 The third part of the proposal involved the sale of a controlling block of Genta stock to SkyePharma, in exchange for SkyePharma’s interest in the joint venture. Under this proposal, the obligation to the preferred stock would be satisfied and the common stock would continue to have an equity interest in Genta, which would continue to develop the intellectual property in the joint venture.

On August 14, 1996, Genta issued a press release disclosing its difficult cash situation and its search for financing alternatives, including a potential restructuring or an equity investment that would permit it to continue its operations. The press release stated that:

The Company is in discussions with potential corporate partners and other sources regarding collaborative agreements, restructurings and other financing arrangements and is actively seeking additional equity financing ... If such funding is unavailable, the Company will deplete its cash in September 1996 and will be forced to license or sell certain of its assets and technology, scale back or eliminate some or all of its development programs and further reduce its workforce and spending. If such measures are not successfully completed, the Company will be required to discontinue its operations.

On August 19,1996, the three part restructuring proposal was formally presented to the Series A committee by Alex. Brown. As discussed above, the plan included the sale or spin-off of the two businesses and the SkyeP-harma proposal, in which the Series A holders would convert their shares into a minority block of Genta’s common stock, with SkyePharma becoming Genta’s controlling shareholder. The proportionate interest of the pre-existing Genta common stockholders would be severely diluted as a result. The Series A holders did not accept this proposal.

The prospect of bankruptcy thus was discussed. According to a later Alex. Brown report to the Genta board, the Series A committee took the position that the preferred would “wait and see if [Genta would] run out of money and then get [delist-ed]_” A delisting would give the preferred stock the legal right to the liquidation preference, allowing them to place the company into bankruptcy.

On September 11, Alex. Brown presented a revised, but substantially similar plan to the committee. It stated that Genta’s current need for approximately $5.9 million in *1046 cash would be difficult to meet unless the JBL assets were sold. The Series A shareholders refused to consent to such a sale. They stated that they would approve such a sale only if it were part of a global restructuring solution which would resolve both Genta’s cash shortage problem and their desire to get a return on their investment.

During September, a dispute arose with regard to any disposition of the antisense assets as well. Genta (consistent with its management’s efforts to allow the common stock to participate in the eventual exploitation of Genta’s intellectual property) favored granting a non-exclusive license on its anti-sense business (to Isis). The Series A holders, however, insisted that Genta sell the antisense assets to Isis outright. Ultimately this transaction could not be accomplished.

E. Genta’s Inability to Redeem or Convert Preferred: In September, Genta gave the Series A holders an option to convert their shares into common stock, but could provide no underwriting in any event. Genta offered to effectuate the conversion or to permit the preferred stock simply to remain outstanding for the time. Due to the low market price of Genta’s common stock, (less than $1 per share) an immediate conversion into common stock was not an economically attractive option. 12 Only 10% of the Series A stockholders elected to convert into common stock without an underwriting. The remaining Series A shareholders continued to negotiate with Genta concerning its restructuring proposal.

F. Multiple Track Investigations: During October, Alex. Brown continued to work on a restructuring proposal, scheduling a meeting for October 31 to update the Series A committee on its ongoing efforts. During this same period, Dr. Adams began new efforts to seek equity financing for the company. 13 To assist in this search, LBC Capital Resources, Inc., (“LBC”) was retained and told that Genta was interested in raising between $10-12 million. Further, Dr. Adams informed LBC that the decision to seek equity financing, while continuing the restructuring negotiations, had the support of a majority of the board, but was opposed by two outside directors and Genta’s Chief Financial Officer. 14

On October 22, 1996, Genta issued another press release concerning its financial position, which like the August press release, stated that Genta was “currently seeking additional capital.” LBC solicited interest broadly. 15 Of fifteen companies contacted, five responded. The five were Aries, Susquehanna, Promethian Investment Group, Cambridge Partners, and Loeb Partners. Dr. Adams arranged meetings with the latter three companies for October 31 and November 1.

A meeting with the Series A committee was held contemporaneously on October 31. 16 *1047 Alex. Brown presented a different restructuring proposal: Genta would be split into two operating entities, one of which would hold only the joint venture interest. The other would continue the antisense business with funding from a company called Forward Ventures. Genta would retain a minority interest in the new entity holding the anti-sense assets, with Forward Ventures receiving majority control of this entity in return for its financing commitment. 17 The Series A holders rejected the Forward Ventures proposal, still favoring a sale of all of Genta’s antisense assets to Isis in order to create greater liquidity. Genta’s board, however, remained opposed to such an asset sale. 18

Genta’s worsening financial situation was widely recognized in the investment community. On November 14,1996, Genta issued a Form 10-Q stating that:

The Company will run out of its existing cash resources in December of 1996. Substantial additional sources of financing will be required in order for the Company to continue its planned operations thereafter.... If such funding is unavailable, the Company will be required to consider [various alternatives] ... including, discontinuing its operations, liquidation or seeking protection under the federal bankruptcy laws.

On November 18, Genta’s common stock price closed at $.31 per share. As a result, on November 19, Nasdaq announced that Genta’s common stock would be delisted unless by December 3 it submitted a plan with respect to how it would comply with Nas-daq’s listing requirements concerning net worth. Such a delisting would effectively bring to an end management’s efforts to exploit the corporation’s intellectual property-

On the LBC front, by the end of November, LBC was only pursuing negotiations with Aries because no other potential investors remained interested. 19 A meeting of representatives from Genta and Aries was scheduled for November 26,1996. In preparation for the November 26 meeting, Dr. Adams discussed with Mr. Mongiardo of LBC the potential impact of an equity investment on the rights of the Series A stockholders. Adams calculated that up to 60 million shares of common stock could be issued without triggering the “fundamental change” provision in the Series A designations which, if triggered, would obligate the company to repurchase such shares. In addition, prior to the meeting, LBC provided Dr. Rosenwald of Aries with requested information concerning the rights of the Series A holders and the effect that the potential delisting from Nas- *1048 daq would have on Genta. 20

G. Aries Proposal: Dr. Rosenwald presented the following financing proposal to Genta at the November 26 meeting. Aries would lend Genta between $5-6 million in exchange for a secured note plus securities consisting of a new class of preferred stock (special preferred stock with embedded alternative rights convertible into common stock at $. 10 per share) and warrants to buy common stock at an exercise price of $. 10 per share. The letter setting forth this proposal stipulated that Aries’s immediate control of the Genta board was a non-negotiable term of the proposed transaction. 21

Adams responded that Genta sought (1) a two tiered financing (i.e., some immediate cash infusion), (2) a higher exercise price on any warrants ($.25 per share) granted in consideration of the second tier financing, and (3) a more limited board presence, permitting Aries to designate only one director and two observers. Two days later, Aries agreed to the two tiered financing structure and a $.20 second tranche exercise price for the warrants. It continued to insist upon a contract right to designate a majority of the board. 22

H. December Negotiations: On December 2, 1996, the Genta board met again to evaluate alternatives. At that meeting, Mr. Gineris of Alex. Brown was included in a discussion concerning the impact that a $6 million investment would have on the value of Genta’s common stock if 6 million shares were granted as the consideration. 23 Gineris expressed the view that such a financing would severely dilute the value of the common stock. Following the meeting, Alex. Brown prepared a report analyzing three financing proposals, two of which involved the sale of assets being considered as part of the restructuring plan, and the third involving a sale of 55%, a majority, of Genta’s common stock for a $6 million investment. The report concluded that, on the terms assumed, the sale of equity was the least favorable proposal of those considered. 24

On December 3, the Series A committee made a further proposal to Genta that had three main components. First, Genta would sell JBL, placing all of the proceeds of the sale in escrow for the benefit of,' and controlled by, the Series A shareholders. Second, Genta would sell its antisense assets 25 , with the main part of the proceeds being paid to the Series A holders, and a portion of the proceeds being reserved for common stock *1049 holders in the event that certain milestones were reached. Third, Genta would sell control over the remainder of Genta to SkyeP-harma in exchange for $3 million in SkyeP-harma stock, to be distributed to the Series A holders, and a 29 % interest in the joint venture, of which Genta’s common stockholders would receive 20%. 26 Any additional proceeds from the sale of residual assets were earmarked for the Series A holders as well.

Negotiations between Genta and Aries also continued throughout December. During the month, Mr. Mongiardo (I) informed Dr. Adams that Aries intended to continue the antisense business rather than sell it 27 , (2) summarized LBC’s attempts to find a potential investor, and (3) provided a draft letter, which was later presented to the board, stating a basis to conclude that Genta’s value was between $58 and $184 million. In addition, Mr. Mongiardo had discussions with Dr. Adams.

As of December 20, it had become apparent that Genta might be forced into bankruptcy if it did not fairly promptly effectuate one of the transactions on the table. Genta’s bankruptcy counsel attended its December 20 board meeting at which the status of Genta’s negotiations and the ongoing Nasdaq delisting proceedings were discussed. As expected, on December 21, Nasdaq denied Gen-ta’s request for continued listing, but the actual delisting was temporarily suspended until after a formal hearing could be held on January 23.

At this juncture, the Series A preferred stock had expressed their unwillingness to approve the proposed transaction involving Forward Ventures, leaving the Aries deal as the most likely option and one that could not be blocked by the Series A preferred stock.

On December 24, Mr. Rosen, counsel to the Series A committee, wrote Dr. Adams a letter expressing frustration that Genta had not yet accepted the proposal that the preferred stock had put forward. In addition to stating that Dr. Adams was causing Genta to “crash and bum,” Mr. Rosen stated that:

[the] Ad Hoc Committee will continue to try to bring about a resolution. However, if you wish to drive this bus into a canyon, no one can stop you. Just make sure you are alone when it happens.

After Rosen received an update on a December 27 meeting, at which the board analyzed the most recent terms of the restructuring proposal, he again expressed his discontent. Mr. Rosen, obviously unaware that any possibility existed for Genta’s board to get the financing necessary to attempt to accomplish its business plan, accused Genta’s counsel, Thomas Sparks of Pillsbury Madison & Su-fro, of waiting for “sugar plum fairies” 28 and of trying to “prolong the process and plunge Genta into Never Never Land.”

On December 30, 1996, the Genta board received a formal presentation of the Aries proposal by Dr. Rosenwald. 29 The board did *1050 not formally act at that time with respect to the proposal.

I. January 1997: Aries began performing due diligence activities in January, relying on statements that Genta intended to enter into a financing deal with Aries. The Genta board, however, continued analyzing its other options. On January 9, 1997, the Series A committee made its last proposal prior to the challenged transaction. By that date, it had become clear that the SkyePhar-ma deal was unlikely to occur, and that proceeds from the sale of JBL would be insufficient to satisfy Genta’s cash requirements. Thus, as part of this final proposal, the committee suggested that a portion of the Isis stock, which the Series A had proposed that they receive in a sale of the antisense assets, could be sold to take care of the cash shortage. In order to compensate the Series A holders for this loss of consideration, their final proposal contained a diminution in the common stockholder’s percentage of the joint venture. If, as suggested, $1.5 million worth of Isis stock were sold, the common stockholders would not be entitled to any percentage of the remaining joint venture interest pursuant to the formula proposed by the committee. 30 In addition to these proposals, the committee recommended that Genta initiate a prepackaged Chapter 11 bankruptcy.

On January 13,1997, the Genta board met. It analyzed the most recent Series A proposal and the Aries and Wang proposals, as well as the consequences of a bankruptcy option. In the event of bankruptcy, the board concluded that the common stockholders would be likely to get no return on their investment. If the terms of the latest restructuring proposal were accepted, it was also likely that the common stockholders would receive zero value, based on calculations presented by Alex. Brown.

After the board meeting, Alex. Brown’s Mr. Gineris sent Mr. Rosen a table reflecting his analysis. Gineris circled what in his judgment were the most likely scenarios on the table and wrote in comments reflecting his concern that such scenarios were “too punitive” to the common stock and would be unlikely to get stockholder approval. 31 The Series A committee offered no amendment to the terms of their January 9 proposal. Instead, Mr. Rosen indicated that the committee intended to “stand pat.” Later that day, Mr. Gineris informed the board that the committee had opted to “stand pat with no further discussions,” and that they were “willing to take the consequences of that.”

Negotiations with Ms. Wang and Aries were still ongoing throughout this period. On January 21,1997, Genta’s board members received several documents concerning the Aries deal to assist them in determining whether to approve that transaction. The packet of information distributed by Dr. Adams included the December 18 letter detailing LBC’s efforts to find an equity investor, a two page letter from LBC concluding that the Aries deal was “fairer” than the restructuring proposal 32 , a two page letter from Dr. Adams comparing the two proposals, 33 and a stock information table. Board meetings were scheduled for January 26 and 28 to discuss these proposals.

*1051 On January 23, Genta and an Aries representative participated in the anticipated Nas-daq delisting hearing. As a result of the hearing, Nasdaq decided again to postpone the threatened delisting of Genta’s stock. Genta was, however, informed that it would be delisted in the future unless it increased its net tangible assets and met other requirements. 34

As of the January 26 meeting, it had become clear that Genta had to complete a financing transaction rapidly, or else face bankruptcy. Recognizing that Genta would not have sufficient cash for its payroll due on February 1, Genta’s bankruptcy lawyers had begun preparing the necessary papers to file for bankruptcy on January 29. At this juncture, faced with an imminent decision, Dr. Adams informed the board that he opposed the restructuring proposal in its present form. 35 Further, Dr. Adams reported to the board that he had told Mr. Gineris that the current Series A proposal was unacceptable. 36

The Aries offer was set to expire as of January 28; the board had received no further restructuring proposals from the Series A committee; no firm offer from Ms. Wang was on the horizon; and bankruptcy was imminent. In this context, during the January 28 meeting, the board again reviewed the terms of each of the proposals before it made a decision concerning Genta’s future.

J. Aries Transaction: On January 28, 1997, the Genta board unanimously approved the Aries transaction. 37 According to plaintiff, the members of the Series A committee and Alex. Brown learned of this transaction for the first time when they read a press release disclosing the transaction on the following day.

Pursuant to a January 28 letter of intent, Genta and Aries agreed to enter into a two step financing on the following terms. The first step, which by the time of trial of this case had already occurred, involved Aries loaning Genta $3 million in cash. 38 In ex *1052 change, Aries received convertible secured bridge notes with a $3 million face value, 39 7.8 million Class A warrants with a $.001 per share exercise price, and 12.2 million Class B warrants with a per share exercise price of $.55. 40 The bridge notes are immediately convertible into 600,000 shares of Series D convertible preferred stock with a $10 stated value per share. 41 In the event that Aries converts this preferred stock, Aries would receive 20 million shares of Genta common stock. Together the transaction offers Aries the right to acquire 40 million shares of Genta common stock — a controlling interest in the company. 42

In addition to this consideration in the form of debt and equity, Aries received an immediate contractual right to require the Genta board to cause a sufficient number of its designees to be added to the board so as to constitute a majority of the board. 43 In the event that Aries does not satisfy its future obligations to raise additional capital (the second tier financing), however, this right will terminate. That is, pursuant to the terms of the second tranche of this financing, Aries has agreed to use its “best efforts” to arrange between $2.5 to $12 million in additional financing for Genta. 44 If, within six months following the effective date of the agreement, Aries has not located at least $3.5 million of additional financing for the company, it will lose its right to designate a majority of the board. The agreement does not state the minimum terms upon which an acceptable financing can be made in order to satisfy Aries’s obligation, but requires board approval and permits Genta to opt for alternative financing if it is available on preferable terms.

In addition to the financial terms of the deal, Aries represented to Genta that it did not intend to liquidate the company and would use its best efforts to continue Genta’s antisense business. Aries did not make any representations or side agreements concerning the continued employment of Dr. Adams or other Genta board members. To the contrary, the testimony is that Dr. Adams told Aries that it should consider hiring a new CEO.

K. Equity-Linked’s March 3 Proposal: Immediately prior to the hearing in this action, Equity Linked delivered a proposal to Genta that offered to extend a $3.6 million loan to Genta on the same terms as those reflected in the Aries transaction. 45 This offer appears to have been an attempt by plaintiff to demonstrate that it would have been willing to do the same deal on terms at least as favorable as those offered by Aries. 46

*1053 II.

The broad question is whether the foregoing facts constitute a breach of duty by the directors of Genta. The theory of the original complaint was that the Aries transaction represented a bad faith exercise of corporate power; that the purpose of the transaction was simply to protect the employment of the incumbent officers; and that a sweetheart deal with Dr. Rosenwald’s entity was arranged in order to do that. Indeed, the discovery here showed that Rosenwald was very much an arm’s length negotiator and that there was no comfort offered to (or sought by) existing management. Rather, the evidence tends to show that the majority of the Genta board was motivated by a desire to see the enterprise finally pay-off by developing or participating in a portion of the development of some of its intellectual properties.

In all events, at trial, plaintiffs theory was no longer that the transaction represented an effort to protect management. The legal theory that plaintiff advanced at trial does not really acknowledge the true nature of the financial conflict at the heart of the matter. Rather, plaintiffs trial theory acts as if plaintiff were simply like any other holder of common stock and sought a corrective order so that a higher price for the common could be achieved in a sale.

The claim now is that the board “transferred control” of the company and that in such a transaction it is necessary that the board act reasonably to get the highest price, which this board did not do. Plaintiff urges that the special duty recognized in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986), arose here because (1) Aries has a contract right to designate a majority of the Genta board and (2) Aries acquired warrants that if exercised would give it the power to control any election of the Genta board. Thus, this transaction is seen as similar to the noted case of Paramount Communications Inc. v. QVC Network Inc., Del.Supr., 637 A.2d 34 (1993). Plaintiff claims that the board hid the fact that control might be for sale, instead of announcing it and creating price competition respecting it. In support of the assertion that the board could have done better for common stockholders, like themselves, plaintiff points to the litigation produced alternative proposal of the Series A preferred stock. The idea is that this alternative is financially a little better and that if the directors would have met their “Revlon duty” then, this or another better alternative would have come to light. In this way, plaintiff claims the interests of all holders of equity securities would have been better off because Genta would have gotten greater value.

Based upon a preponderance of the admissible, credible testimony, it is my opinion, for the reasons set forth in this opinion, that the Genta board fully satisfied its obligations of good faith and attention with respect to the Aries transaction. The directors of Genta did not, therefore, breach a fiduciary duty owed to the corporation or any of its equity security holders. I conclude that with respect to this transaction, the board was independent; it was motivated throughout by a good faith attempt to maximize long-term corporate value; and that the board and senior management were appropriately informed of alternatives available to implement the business plan that the directors sought to achieve. Moreover, if reviewed under a reasonableness criterion, I conclude that the board acted in an entirely reasonable way to achieve its goal and that its goal, although obviously one that reasonable minds could disagree about — was not one that was impermissible.

A.

“Revlon Duties” and a Change in Corporate Control: In Paramount Communications, Inc. v. QVC Network Inc., the Delaware Supreme Court considered a series of *1054 eases dealing with the fiduciary duties of corporate directors when directors authorize a transaction that has the effect of changing corporate control. The most prominent of these was the 1986 opinion in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. That case had been widely thought to announce special directorial duties in the event of a “sale” of the corporation. The specific character of that rule however was not entirely clear, but it was generally taken to be that in certain circumstances (loosely a “sale” of the company) directors must maximize the current value of the corporation’s stock; they may not exercise a judgment to choose less when more is offered. 47 But this broad generalization masks more questions than it answers. In fact the meaning of Revlon— specifically, when its special duties were triggered, and what those duties specifically required — were questions that repeatedly troubled the bench and the bar in the turbulent wake of the Revlon decision. Reasonable minds differed. One view of the holding in Revlon was that it was premised on a duty (the duty to auction the company when it was for sale, or, less woodenly, the duty to get the best price, or the duty not to discriminate between bidders) that was different in some way from the ordinary director duties: to act in good faith pursuit of corporate welfare and to be informed and attentive. On this view, once a “sale” of the corporation was in contemplation, “Revlon duties” would be thought to limit the range of good faith business judgment that the board might make (e.g., board must conduct an auction; or no “lock-up” agreements allowed; or no “favoritism” among bidders; etc.), and afforded a reviewing court additional (fairness) grounds in any judicial review of director action. This interpretation of “Revlon duties” was early on taken up by academic commentators and plaintiffs’ attorneys and continued to resonate in some of the opinions throughout the period. See, e.g., Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1989).

Other cases tended to “normalize” directors’ duties in these important transactions; they reflect greater deference to an independent board even in a “sale” context, and acknowledged the necessity of an independent board to make business judgments even in that setting. Thus, these cases tended to evaluate board conduct, even in that context, in terms of the board’s steps to be informed and its good faith. See, e.g., In re RJR Nabisco, Inc. Shareholders Litig., Del. Ch., C.A. No. 10389, Allen, C. (Jan. 31, 1989), Slip Op., 1989 WL 7036, (1989). Under this more business-judgment like view, the board continued to possess substantial discretion with respect to conducting a sale. So long as it satisfied a burden to show compliance with its basic duties — independence, good faith and due attentiveness — the board’s judgments would be respected. See, e.g., In re J