Ariad Pharmaceuticals Chairman and CEO Harvey Berger defended himself this morning in a conference call with investors, after a nasty boardroom dispute spilled out into plain view and four directors accused him of “grossly inappropriate” conduct.
The controversy emerged late Friday when Ariad disclosed in a regulatory filing that four of its nine directors resigned on Dec. 1, citing “self-interested, combative and obstructionist actions” by Berger in the handling of a merger with a company subsidiary called Ariad Gene Therapeutics. Ariad, (NASDAQ:ARIA) was founded in 1991 and has no marketed products. Its cancer drug deforolimus is in the final stage of clinical trials in a partnership with Merck.
Berger, in prepared remarks on the call this morning, said he was “extremely disappointed” with the way the directors chose to resign. “I will not stand idly by and let them potentially damage the reputation of the company they once served,” he said.
The roots of the dispute, as described by Berger, go back a couple of years. Ariad Gene Therapeutics (AGTI) was a subsidiary Ariad set up in 1994 to in-license technology from Harvard University and Stanford University focused on a process called dimerization, he said. This technology has become critical to Ariad’s strategy, and to its ownership of deforolimus, which is being tested as a treatment for multiple tumor types. Ariad has long owned 80 percent of AGTI, and the board has been discussing ways to buy out the remaining minority interest held by the universities and various scientists for years, Berger said.
Ariad announced on Sept. 12 that it had reached an agreement for such a buy-out after years of discussion about the timing, methods, and valuation, Berger says. Berger and another director Jay LaMarche abstained from the vote because they had personal interest in the deal, which gave shareholders in the subsidiary two shares of Ariad stock for each one they held—a ratio determined by the other directors of Ariad’s board. This exchange rate ended up giving the AGTI shareholders about a 3.1 percent ownership stake in Ariad, the company said.
Berger opposed this deal, but once the board approved it, he said he felt duty-bound to carry out the board’s wishes. He even issued a statement in the Sept. 12 announcement that said, “Upon the consummation of this merger, Ariad is poised to realize all of the potential future economic benefit from deforolimus and other assets previously owned by AGTI.”
But that wasn’t the end of the story. The deal hasn’t closed yet. The tentative agreement contained a clause that said any holders of AGTI common stock who properly demand appraisal of their shares are entitled to seek a judicial determination of their fair value under Delaware General Corporation Law.
It’s been the handling of the implementation of the deal that prompted the directors to resign, they said. The directors accuse Berger of mishandling litigation over the appraisal of AGTI shares.
Berger didn’t get into any details of the litigation on his conference call, but he did say that the company’s general counsel was terminated in October. The four directors resigned on Dec. 1, partly because of a board meeting on Nov. 3. In the letter, addressed to Berger, the resigning directors say they chose to leave after Berger recomposed the board “to allow your surrogates to control the Board’s decisions without regard to or even inviting our input, the removal of the vice chairman of the Board at a precipitously called meeting in which you knew we could not participate, your installation of a close personal family friend as lead director of the Board, and your determination to cause Ariad to breach agreements approved by the Board over your opposition.”
Berger insists that no agreements have been violated, and that the resigning directors are making “false and misleading statements.” The Nov. 3 meeting was called in accordance with company bylaws, had advance notice, and an agenda that covered matters like how to handle the dispute with the general counsel, the matter of the lead director, and governance of the merger, Berger said. The resigning directors chose not to participate in the conference call, he said. “The complaints about that meeting are much ado about nothing,” Berger said, in response to a question from Phil Nadeau, an analyst with Cowen & Company.
Berger spent a fair bit of time on the call trying to assure shareholders that the dispute won’t become a distraction that hurts the company as a whole. It doesn’t affect the company’s partnership with Merck, or derail its clinical trial plan for deforolimus. The company’s management team is “stable, growing, and unified,” Berger says.
Where this all ends up going is anybody’s guess. Ariad will look to fill one, or maybe two, of the vacancies on the board, but probably won’t try to fill all four right away, Berger said in response to another query from Nadeau. Berger added that he’s happy to answer investors’ questions about this controversy, but he sure sounded like someone who wanted to put this behind him fast. “We’ll keep our eye on the ball,” he said, citing his goals of boosting the stock price and bringing deforolimus to the market.
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