TO: Eugene McCarthy

FROM: Elena Rogers

RE: The Case of Rick Madden

DATE: October 20, 2020

Question Presented

Did Rick Madden breach their Duty of Care, where Madden blatantly ignored significant parts of the

merger contract, neglected to review current merger and acquisition laws, and did not take adequate time

to shop the market and review the offer?

Did Rick Madden breach his Duty of Loyalty, where Madden negotiated a payout for himself four times

as large as his counterparts, did not review or suggest the board of directors review of the contract, and

retired immediately following the merger without fulfilling the 5-year advisory commitment?

Did Jane Moore engage in Insider Trading, where she received a tip on the upcoming merger from her

friend Rick Madden, knew the information was material, and traded stock with this information for

personal benefit?

Executive Summary

Yes. Rick Madden ignored his fiduciary duty to engage in informed and deliberate processes in the end of

life merger contract for Merrill Pharmaceuticals. Madden “largely ignored” sections of the merger

agreement that did not interest his personal goals, allowed Rex & Lee, BrexoWallace’s attorneys, to write

“pretty advantageous terms” into the contract because of his lack of continuing legal education with

mergers and acquisitions, and concluded dilberations and investigations well within the negotiating

deadlines without asking for a price fairness opinion or looking for other offers.

Yes. Merrill and Rick Madden negotiated a separate contract just for Madden because BrexoWallace did

not want him to cause any trouble in the negotiation of the merger agreement. The contract gave Madden
$2 million in the event of a merger, which is 4 times as much as the other 6 directors were getting in the

merger agreement. The board did not review this contract at all and the deal in no way benefitted Merrill.

Yes. June Moore took a tip from Rick Madden when he left his phone on while he left the room for her to

find the material information on the merger. Being a retired lawyer, she knew that using this material

information is illegal, but she traded with the information and gained $2 million for tendering her shares

to Brexo for the merger.

Statement of Facts

Rick Madden sat on Merrill Pharmaceutical’s board of directors when BrexoWallace approached

Merrill’s CEO, Jane Atkinson, to negotiate a merger. Atkinson invited David Willis, Brexo’s CEO, and

his team to present the terms of the merger to Merrill’s board. Brexo presented the terms as follows:

setting the purchase price at $55.50 per share, taking into account rumors of Merrill’s failed drug (Entax)

clinical trials, which could reduce the current stock price of $47.80, and giving severance pay of $500,000

to each director on the board. Willis gave the board 24 hours to discuss if they wanted to proceed with

negotiations. Both Atkinson and Madden were planning to retire. Madden did not think the board was

getting paid enough in severance – but the board decided to take the offer. Merrill’s board chose Madden,

instead of Merrill’s normal law firm Latham Arps, to negotiate the merger terms with Brexo’s attorneys at

Rex & Lee; Madden, by his lonesome, entered merger discussions with six Rex & Lee attorneys. The

initial contract drafted by Brexo’s attorneys set the purchase price at $55 a share. Accounting for an

expected news disaster stemming from the Entax disclosure, Pierce Atwell estimated a fair price range

between $55-$70. However, Madden did not request a fair price opinion. The Rex & Lee attorneys were

able to “sneak some pretty advantageous terms” into the contract without Madden noticing because of his

clear lack of knowledge on contemporary M&A developments. While merger negotiations were ongoing,

Madden visited his friend and former colleague June Moore - a retired intellectual property lawyer.

Madden was on his phone a lot during their meeting. Moore jokingly asked with a wink if Madden was

working on a merger. Madden replied with a wink but was vague with his words. After receiving a text,
Madden looked at Moore, set his phone down, tapped it, and left the room. Moore read the text on his

phone indicating there was a Merrill/Brexo merger and the deal would close before October. Moore

replaced the phone before Madden returned. On August 20, 2019, Moore bought 100,000 shares at $35

per share. During merger deliberations, Madden approached Willis to state he thought the deal was unfair

for him and mentioned he might terminate the negotiation process. To please Madden, Willis and

Atkinson decided that Merrill would create a separate agreement with Madden where he would be a

consultant with a 5-year consultancy and a $2 million stock out option in the event of a merger. There

was no explanation for the payout to be set at $2 million. Without reviewing this contract, the board

approved, per Atkinson’s suggestion. Merrill and Brexo finished negotiations well within the deadline.

The contract set the purchase price at $55 a share. Brexo announced their tender offer to the shareholders

on September 20, 2019. Moore tendered her stock and made a profit of $2 million. Brexo closed the offer

on October 15, 2019 and dissolved Merrill. Merrill paid Madden the $2 million change-of-control

payment in accordance with the agreement. Atkinson and Madden both retired.

Discussion

Issue 1: Duty of Care

The issue in this case is whether Rick Madden breached his fiduciary duty of care by neglecting parts of

the Merrill/Brexo merger agreement, representing Merrill without contemporary M&A law knowledge,

and not conducting extensive research pertaining to the agreement. A court would likely conclude that

there was a breach of fiduciary duty because Madden did not engage in an informed and deliberate

process for the end of life merger agreement.

The legal rule is well settled that members of a board of directors must make an informed decision based

on facts from reputable sources that are sought out during negotiations. Smith v. Van Gorkom at 336-337.
The business judgement rule does not protect informed decisions. Van Gorkom at 336. This process

should also be deliberate, meaning negotiations will likely last longer than planned. Van Gorkom at 337.

In Van Gorkom, the CEO of Trans Union Corporation, Jerome Van Gorkom, was nearing retirement and

decided to enter into end of life merger conversations with Jay Pitzker without first consulting the board

of directors. Van Gorkom at 333. He went to the meeting prepared with financials and the feasibility of a

leveraged buyout at $55 per share - an arbitrary number. Van Gorkom at 333. Pitzker requested more

financial information and then had his lawyer draft a contract for the merger with a $55 per share price -

38-75 cents above the market price at close on September 19 - and sent it to Van Gorkom for review. Van

Gorkom at 334. Pitzker told Van Gorkom he had 3 days to accept the offer, so Van Gorkom verbally

presented the offer to the board of directors the next day. Van Gorkom at 334. To justify the purchase

price, Van Gorkom offered that “the free market will have an opportunity to judge whether $55 is a fair

price.” Van Gorkom at 335. With only oral presentations from Van Gorkom, one lawyer, and the

president of Trans Union, the board approved the agreement after only 2 hours of deliberation. Van

Gorkom at 335. Without anyone reading the merger agreement, Van Gorkom and Pitzker signed the

contract on September 20. Van Gorkom at 335. Merrill and Brexo made a public announcement detailing

the merger agreement; senior management widely dissented. Van Gorkom at 335. Pitzker and Van

Gorkom made some amendments to the contract - again with no review from Trans Union’s board - and

Pitzker successfully acquired Trans Union Corporation. Van Gorkom at 336.

Similar to Van Gorkom’s arbitrarily chosen purchase price of $55, Rick Madden did not ask for a fair

market price opinion when settling on a per share purchase price. However, Madden did receive a range

of $55-70 that Atwell considered acceptable. As in Van Gorkom where Pitzker’s professional M&A

attorney drafted the merger agreement and neither Van Gorkom, the board, or a lawyer reviewed it, in the

case of Rick Madden, Brexo’s hired M&A attorneys drafted the merger agreement and Madden, on behalf

of Merrill, only partly reviewed it. Indeed, reviewing part of an agreement is at least better than reviewing
none of it. Neither Van Gorkom nor Madden took extensive time to make a decision and concluded

discussions before the quick deadlines set by the acquirer: Van Gorkom taking 2 days and Madden taking

24 hours to accept offers. Both similarly announced the merger to the public on schedule. As the court

noted in Van Gorkom, the board of directors must make informed and deliberate decisions in end of life

transactions, such as those in Van Gorkom and the case of Rick Madden. Van Gorkom at 336-337.

The case of Rick Madden is not different from Van Gorkom, as both Madden on Merrill’s board and Van

Gorkom on Trans Union’s board breached their fiduciary duty of care. Neither sought out enough

information to make informed decisions and were not deliberate in their proceedings. Van Gorkom only

gave an oral presentation to the board on the agreement without reading the contract and Madden chose to

ignore parts of the contract that were not important to him personally. Merrill and Trans Union both

executed the agreements too quickly.

Issue 2: Duty of Loyalty

The issue in this case is whether Rick Madden breached his fiduciary duty of loyalty by negotiating for

himself a better deal than the rest of the members on the board of directors; Madden received $2 million

while the others received $500,000. A court would likely conclude that there was a breach of fiduciary

duty because Madden did not negotiate his deal in good faith, and it was not inherently fair to Merrill.

The legal rule is well settled that deals made by the members of a board of directors on behalf of the

corporation must be made in good faith and with inherent fairness to prove self-interest was not the

motivating cause. Bayer v Baren at 374-375. This means the recipient of the contract must go through the

same negotiations as everyone else in that position would go through and the deal must benefit the

corporation in some way. Bayer at 377-378.

In Bayer, the Celanese Corporation of America decided to put an ad on the radio for the first time in

1942. Bayer at 375. In 1937, the Federal Trade Commission dictated that Celanese must add “rayon” to

their product labels, which created a differentiation issue that Celanese had to reconcile. Bayer at 375. To

do this, Celanese would have to increase their advertising budget drastically or break into the radio

market. Bayer at 376. After two years of receiving industry reports and research (1939-1941), Celanese’s

board of directors decided on creating a radio ad featuring “fine music” that they felt to be in line with

their products. Bayer at 376. Celanese hired a nationally known advertising agency and committed to

spending about $1 million a year, with artist contracts subject to termination every thirteen weeks. Bayer

at 376. Dr. Dreyfus, the president and a director of Celanese, held 135,000 shares of stock in the company

compared to 10,000 shares owned by the other directors out of 1,376,500. Bayer at 377. Dr. Dreyfus

asked his wife (professionally known as Miss Jean Tennyson) to consult with the advertising agency on

retainer with suggestions for the radio commercial, since she is a professional singer with “wide

experience;” the advertising agency selected all of the individuals she suggested, including herself. Bayer

at 377. Miss Tennyson received $500 an evening for her services, amounting to $24,000 in 1942 and

$20,500 in 1943 - a small compensation. Bayer at 377. Nobody questioned Miss Tennyson’s ability, nor

was any alternative proven to be better. Bayer at 377. The popularity of the program increased with the

addition of Miss Tennyson. Bayer at 378.

As in Bayer where the board of directors deliberated for two years to choose to use radio and dignified

music, in the case of Rick Madden, there was only a brief discussion between Willis and Atkinson before

Atkinson suggested Merrill’s board of directors adopt the contract. Indeed, Merrill’s board’s decision was

weaker than Celanese’s because they did not read the contract or take time to make an informed decision.

In Bayer, Celanese paid Miss Tennyson less than any other musician hired, whereas in the case of Rick

Madden, Madden was given four times as much compensation as his fellow directors. There is proof that

Miss Tennyson added value to Celanese, as popularity increased. Contrarily, Madden retired after getting

his money and did not give any additional value to Merrill through that contract.
The case of Rick Madden is distinguishable from Bayer, as Merrill and Madden did not negotiate

Madden’s contract in good faith and it was not inherently fair, like Miss Tennyson’s. While Celanese

underpaid Miss Tennyson in comparison to her colleagues, Merrill drastically overpaid Madden in

comparison to his colleagues. Additionally, unlike Miss Tennyson, Madden did not add any value to the

company with the contract because he retired before fulfilling the 5-year consultancy.

Issue 3: Insider Trading

The issue in this case is whether June Moore participated in insider trading in the role of a tippee via Rick

Madden’s tip. A court would likely conclude that Moore is an insider trader because she acted on the

material information given to her about the Merrill/Brexo merger, and as a lawyer, she knew better.

The legal rule is well settled that a tippee inherits the duty to abstain or disclose if they are given

nonpublic material information from an insider. Dirks v. SEC at 1147. A lawyer receiving nonpublic

material information is assumed to know not to trade on the material information they are given. Dirks at

1149. If a tippee discloses the information, it must not be for her personal benefit. Dirks at 1149.

In Dirks, on March 6, Ronald Secrist, a former officer for Equity Funding America, told Dirks, a broker

in New York, that EFA was engaging in fraud and the regulatory agencies would not investigate. Dirks at

1145. Neither Dirks nor his firm owned or traded any EFA stock. Dirks at 1145. Throughout his

investigation, Dirks told some clients that had stock in EFA of the fraud he was investigating. Dirks at

1145. Five investment advisers liquidated $16 million of EFA stock because of the information Dirks

disclosed. Dirks at 1145. Dirks tried to tell regulatory authorities and the Wall Street Journal to report on

the fraud when the SEC did nothing. Dirks at 1145. During the 2 week period Dirks investigated and

shared the information he found, EFA’s stock decreased from $26 to $15 per share; the New York Stock
Exchange halted trading on March 27. Dirks at 1145. California insurance authorities then investigated

and found proof of fraud. Dirks at 1146. Only then did the SEC file a complaint against EFA. Dirks at

1146. Dirks did not reap any benefits from this outcome. Dirks at 1151.

As in Dirks where Dirks reported the fraud to the SEC, knowing it was material information, in the case

of June Moore, she traded the stock, knowing (as a lawyer) that the information given to her was material.

Indeed, we can assume Moore knew she caught the duty to disclose or abstain, like Dirks, when Madden

gave her the material, nonpublic information. In Dirks, Secrist gave Dirks the tip with the intent for him

to oust the fraudulent activities, whereas in the case of June Moore, Madden left his phone unlocked and

drew Moore’s attention to it before leaving the room, giving her time to read the information for her own

financial gain. Moore gained $2 million because she acted on the material information, while Dirks

received no personal benefit.

The case of Jane Moore is distinguishable from Dirks, as Moore benefited from trading based on

nonpublic, material information. Dirks and Moore both knew they caught the duty to disclose or abstain

when given the material information, but while Moore should have abstained, Dirks was correct in trying

to disclose the fraud to the authorities.

Conclusion

Rick Madden breached his duty of care by neglecting to engage in an informed and deliberate process in

the end of life merger contract for Merrill Pharmaceuticals. He ignored parts of the contract in

negotiations, allowed BrexoWallace’s attorneys to enter better terms for their client, and did not take

proper time to evaluate options and review reports. Rick Madden breached his duty of loyalty when he

negotiated a contract to receive four times as much compensation as his colleagues. The contract gave

Madden 4 times as much as the other 6 directors. The board did not review this contract before agreeing
to it and the deal did not benefit Merrill. June Moore traded on a tip on nonpublic, material information

from Rick Madden. Being a retired lawyer, she knew that using this material information is illegal. She

gained $2 million from her actions based on the information.