Disgruntled VaxGen Inc (OTC:VXGN) shareholders have initiated a class action against the board of VXGN over possible breaches of fiduciary duty in the sale to OXGN. The board certainly deserves the suit because of the appalling deal struck with OXGN. Priced at a discount to VXGN’s net cash and liquidation values, and payment in the watered scrip of a speculative biotech play, it’s a real dud for VXGN shareholders (see our more detailed take on the terms of the VXGN / OXGN deal). A successful outcome in any litigation may be a Pyrrhic victory for participating VXGN shareholders. As we understand it, VXGN’s board is indemnified out of VXGN’s assets and so as any damages award will return to VXGN plaintiffs VXGN’s assets less legal fees and the break fee. Perhaps someone more knowledgable can illuminate the situation for us in the comments. It’s also possible that the merger will not survive the shareholder vote. As reader bellamyj notes, in November 2007 VXGN announced another disastrous merger with Raven Biotechnologies. Over the next few days VXGN stock fell almost 50% and the merger was terminated the day before the special meeting, apparently due to shareholder opposition. Perhaps that will happen again. If it does, OXGN will still tear out ~$2.5M from VXGN, but it may be a better outcome than the deal on the table.
About our VXGN position
We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.
There are two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:
VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.
The VaxGen Full Value Committee comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intends to replace the current board with directors who will focus on the following objectives:
1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;
2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;
3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and
4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.
BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”
VXGN is up 25.0% since we initiated the position. At its $0.60 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:
Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.
Here’s the press release announcing the litigation:
Levi & Korsinsky, LLP Investigates Possible Breach of Fiduciary Duty by the Board of VaxGen, Inc. – VXGN.OB
Levi & Korsinsky is investigating the Board of Directors of VaxGen, Inc. (“VaxGen” or the “Company”) (OTC BB: VXGN) for possible breaches of fiduciary duty and other violations of state law in connection with their attempt to sell the Company to Oxigene Inc. (“Oxigene”) (NasdaqGM: OXGN). Under the terms of the transaction, VaxGen shareholders will receive 0.4719 Oxigene shares for every VaxGen share they own which, based on the $1.42 per share closing price of Oxigene stock on October 14, 2009, the day prior to the announcement, is valued at approximately $0.67. In addition, Oxigene is to place approximately 8.5 million common shares in escrow to be released to VaxGen shareholders contingent upon the occurrence of certain events over the two-year period following the closing.
The investigation concerns whether the VaxGen Board of Directors breached their fiduciary duties to VaxGen shareholders given that (i) the Company has approximately $1.07 per share in cash with no debt; (ii) the Company has a book value of approximately $0.99 a share; (iii) at least one analyst has set a $2.00 price target for VaxGen stock; and (iv) and the Board agreed to a non-solicitation provision and a termination fee up to $1,425,000 that will all but ensure that no superior offers will ever be forthcoming.
If you own common stock in VaxGen and wish to obtain additional information, please contact us at the number listed below or visit http://www.zlk.com/vxgn1.html.
Levi & Korsinsky has expertise in prosecuting investor securities litigation and extensive experience in actions involving financial fraud and represents investors throughout the nation, concentrating its practice in securities and shareholder litigation.
Hat tip JM.
[Full Disclosure: We have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
I haven’t seen any further discussion, since the merger announcement, about VXGN’s NOLs (which are pretty substantial). I’m not as familiar with NOL rules when a merger takes place as i would like to be.
Can someone (who knows) tell me if the NOLs will be preserved for the benefit of OXGN if the merger goes through?
Or, will the NOLs become worthless upon the merger with OXGN?
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read the latest 10Q. YTD VXGN has burned through about $5M. Quite a bit of money for doing nothing (or should I say for destroying shareholder value).. wonder how much management is getting paid “under the table” for this deal.
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When is vote on the proposed merger?
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is it me, or is value investor a moron? haha
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Wow, thanks Brad. :) Your big contribution to this site has been a slur.
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At these levels, you’re looking at either
a. the merger goes through, and you get stock worth $0.60 (at today’s prices) plus some optionality with the lease windown and anthrax vaccine royalties, or,
b. the merger gets voted down, and you get a liquidation around $0.74 (greenbackd liquidation value less termination fee and capped expenses of approximately $0.03 per share).
Oxigene stock is arguably worth more than $1.42 per share (value of stock day before announcement). Stock is down purely from arb short selling. The reason I say it’s worth more is that they are buying $33 million cash for much less than that in stock–a good deal, indeed.
By the way, there was some discussion about the termination fee. Please reread the full paragraph addressing the termination fee. If liquidatin, the termination fee is around $712.5k plus capped expenses. I know that upon first glance the paragraph reads as if it were additive, but it’s actually $1.4 million if sold and $712k if liquidated (plus capped expenses).
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K1: Good points. I still read the termination as additive. In order to liquidate, Company (VXGN) would have to terminate agreement, thus pay Parent (OXGN) 1.4mm; VXGN then does liquidate within 180 days, AND that would trigger an additional payment of 712k. (It is confusing and I can’t claim certainty here.)
Seems to me now VXGN is being priced by the market according to the exchange ratio (.4719), so as OXGN moves so moves VXGN, by half. The opportunity is in the fact that if no merger takes place, there could be a wide discrepancy at some point between VXGN stock price and liquidation. i.e., OXGN goes to say $1, pricing the deal for VXGN at .4719, when liquidation could remain much higher.
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JM–I agree that they are trading as a pair now. The only problem is that there was an elevated level of selling of OXGN by arbs, depressing the price of OXGN. If the deal is so bad for VXGN, then it must have been good for OXGN, which implies value more than $1.42.
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There are two class action lawsuits that have been filed. VXGN isn’t going to have $0.74 per share in value.
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At this point, nobody is fighting for liquidation. The deal will go through. These class action lawsuits are standard for mergers–ambulance chasers. The question is, if OXGN got VXGN for a steal, then shouldn’t OXGN be worth more than it was when the deal was announced ($1.42)?
The only reason OXGN is down, is from arb’s shorting the stock. OXGN is worth more than it’s currently trading at, and by default so is VXGN.
VXGN is trading down because large owners who were fighting for liquidation are dumping their stock.
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At a book value of $0.19 per share and no revenue since 2003, how exactly do you think that OXGN is worth more than what it’s trading for? I said a week ago that OXGN is the perfect company to short. Obviously we’re seeing that come to fruition right now. Amazes me when I see comments such as yours on a value investing site.
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With the stock at these levels I cant see shareholders approving the deal at all
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From 13D filed today:
Following announcement by the Company that it had entered into a merger
agreement with OXiGENE, Inc., on October 19, 2009, BA Value Investors and ROI
Capital Management determined to disband the VaxGen Full Value Committee. Thus,
BA Value Investors, at this time, is not pursuing the previously announced
intention to nominate directors to the Company’s board. The decision to disband
the Committee should not be interpreted as support for the proposed merger by
either of BA Value Investors or ROI Capital Management. As a result of their
decision to disband the Committee, as of October 19, 2009, BA Value Investors
and ROI Capital Management have ceased to act as a group with respect to the
securities of the Company.
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does this mean they are throwing in the towel? I think there must be a floor to the price as the discount to cash value implied by OXGN stock becomes ridiculous
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Does anyone know what percentage of the shares are owned by people opposed to the merger? I saw some swag numbers saying about 13% was a lock against, but I haven’t seen anything beyond that.
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That question was already asked and since that time its below 5% now. SEC has all that information for free instead of having to rely on others for it.
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My view is that the sell-off to these levels is senseless. Clearly there is turnover as value investors exit, but this turnover itself is creating a situation that should get the attention of value investors
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The sell off is coming from Value Investors and they are correct to do so. Two class action lawsuits filed. There’s no value left in this company.
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Either the merger doesn’t go through, and these lawsuits go away, or the merger does go through, and the lawsuits are settled by OXGN (cost of doing business). Either way, the current price of OXGN and VXGN are not reflective of their value…Value Investors who get in at these levels will get rewarded.
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That makes no sense. How exactly do you figure OXGN would settle a lawsuit that has nothing to do with them?
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Have you invested in mergers before? Lawsuits from these types of lawfirms are the norm. The suits are settled with no payment to shareholders, just for attorney’s fees and expenses plus some additional disclosures. It happens all the time.
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I invest in as many M&A opportunities I can find that are of quality. You are correct in that lawsuits are a normal occurrence in business. What is also normal is attorney’s fee’s. Do you know how much the average corporate lawyer requires on an hourly basis in fee’s? I have extensive knowledge of what a law firm charges. I have 4 attorney’s currently on retainer. I’ll give you a hint, they’re not cheap. Furthermore, I believe a case can be made against VXGN for not acting in the best interest of their shareholders. When a business is trading for $0.72 per share and on that same day a merger is agreed upon for less, that is a reckless act and can be proven very easily in a court of law. There is so much rational evidence at this point, I don’t care to speculate of the outcome. The only certainty I know of is that Asta WILL have to hire a law firm to represent them. If they don’t, it’ll be an easy win for the class action. Since they obviously will hire a firm to represent them, it obviously will cost money. I haven’t found an attorney who works for free yet. Any amount of money has to come from the only available source of money that Asta has which is their cash account. If that cash account drops below $33.2 Million, the merger is going to either not happen or will have to be renegotiated. Regardless of the merger going through, what makes you think you’re going to benefit from it? Especially given the asset situation of both companies. I sold my shares and took a profit. #1, don’t lose money. I didn’t. Good luck and more importantly, I hope you learn something from this deal. Nothing can beat learning from mistakes.
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Yeah, typical attorney fees for something like this will cost less than $250k. The attorney fees will be borne by OXGN, they won’t come out of VXGN’s cash value.
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LOL. A corporate attorney starts at $425 per hour. This will take a minimum of 3 months. Most likely closer to 6 months. Even if $250K is the bottom for attorney fee’s for VXGN, you’re not accounting for the ruling. What if they’re found guilty? What if the judge awards the entire business to be liquidated and returned to the shareholders minus the merger fee’s that were agreed upon. What if?
Also, how exactly do you figure that OXGN would be responsible for anything. OXGN doesn’t have anything to do with VXGN YET. As I said earlier, that doesn’t even make sense.
You do what you want. I’ll be back in 6 months to tell you “I told ya so”.
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