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Richard Collins, Sam Garlock, Ivan Belan, Larry v. Raymond P. Warrell

August 3, 2011

RICHARD COLLINS, SAM GARLOCK, IVAN BELAN, LARRY GOLDBERG, GLEN SCHOEN, AND HOSSEIN AFSHARI, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,
v.
RAYMOND P. WARRELL, JR., LORETTA M. ITRI, GARY SIEGEL, MARTIN J. DRISCOLL, CHRISTOPHER P. PARIOS, DANIEL D. VON HOFF, DOUGLAS G. WATSON, AND GENTA INCORPORATED, DEFENDANTS-RESPONDENTS.



On appeal from Superior Court of New Jersey, Law Division, Union County, Docket No. L-3046-08.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted: September 22, 2010

Before Judges Cuff and Fisher.

Plaintiffs, a group of individual shareholders of Genta Incorporated (Genta), a Delaware corporation, filed a class action complaint on behalf of holders of common stock after defendants, seven individually-named officers and directors of Genta and the corporation itself, sold twenty million dollars of promissory notes convertible into two billion shares of common stock at one penny per share. Plaintiffs appeal two orders, one dismissing their complaint with prejudice, and the other denying plaintiffs' subsequent motion for relief from final judgment and to file an amended complaint. Defendants argue the motion judge properly dismissed the complaint because plaintiffs only asserted derivative claims. Further, defendants argue plaintiffs did not set forth newly discovered evidence warranting relief or justifying the filing of an amended complaint.

We hold that the judge properly dismissed the complaint but should have permitted plaintiffs to file their amended complaint. We, therefore, affirm in part and reverse in part and remand for further proceedings.

Given the procedural posture of the case, the facts are derived from the complaint and the documents referred to in the complaint. Plaintiffs Richard Collins, Sam Garlock, Ivan Belan, Larry Goldberg, Glen Schoen, and Hossein Afshari are shareholders of Genta, a publicly traded biopharmaceutical company in the business of developing anti-cancer treatments. Defendants are Genta and Raymond P. Warrell, Jr., Loretta M. Itri, Gary Siegel, Martin J. Driscoll, Christopher P. Parios, Daniel D. Von Hoff, and Douglas G. Watson, all of whom are the officers and directors of Genta. Defendant Raymond P. Warrell, Jr., is the Chief Executive Officer (CEO) of Genta, as well as the Chairman of the Board of Directors (the Board). Defendant Loretta M. Itri, who is married to Warrell, serves as President of Pharmaceutical Development and Chief Medical Officer. Defendant Gary Siegel is Genta's Vice President of Finance. The remaining defendants are members of Genta's Board: Martin J. Driscoll, Christopher P. Parios, Daniel D. Von Hoff, and Douglas

G. Watson.

By the end of the first quarter of 2008, Genta "had a very

high level of uncertainty inherent in [the] business and in [its] liquidity position." The Board warned investors through its March 2008 Form 10-K and a corresponding media press release that Genta faced the possibility of bankruptcy if it were unable to secure additional funds. Thereafter, Genta reduced its workforce in both April and May 2008, and undertook several additional steps to conserve cash. Genta explored various options to avoid bankruptcy, including the possibility of an acquisition or merger, an attempt to license company products, and efforts to seek investors in financial transactions favorable to the corporation. However, by mid-2008, Genta announced the only viable alternative to bankruptcy was the transaction that precipitated plaintiffs' complaint.

On June 5, 2008, Genta entered into a "binding securities purchase agreement" with institutional and accredited investors. Under this agreement, Genta agreed to sell the investors forty million dollars worth of convertible promissory notes (the Notes). The Notes were convertible into Genta common stock at a price of one penny per share. On June 9, 2008, the investors purchased twenty million dollars worth of the Notes, with the option to purchase the remaining twenty million dollars worth at a later date and under the same terms (the Notes Transaction). The group of investors who purchased the Notes included defendants Warrell and Itri, who purchased $1,950,000 and $300,000 respectively of the Notes.

In the Board's proposal for Genta stockholders to amend Genta's Certificate of Incorporation to authorize an increase in the number of shares of capital stock (the Proxy), the Board noted that its remaining members had independently discussed Warrell's and Itri's participation in the Notes Transaction, and concluded such participation would not interfere with their "exercise of independent judgment in carrying out their responsibilities in their respective positions." Furthermore, "[b]ased upon their internal discussions regarding strategic alternatives and advice from their financial advisor," the Board found the Notes Transaction "was fair and in the best interests of the non-affiliated stockholders . . . ." The Board warned the stockholders that "[f]ailure to approve this proposal will likely lead to a default under the financing agreements and may lead to bankruptcy of the Company."

At the time of the Notes Transaction, Genta's common stock traded in the range of $0.20 to $0.40 per share. The Proxy informed Genta stockholders that approval of the proposed amendment and subsequent issuance of common stock "will increase the outstanding number of shares of [c]ommon [s]tock, thereby causing dilution in earnings per share and voting interests of the outstanding [c]ommon [s]tock." Further, in the event all of the Notes are converted to common stock, there would be a large increase in the number of shares of common stock, "thereby causing significant dilution in earnings per share . . . ." At the time the Proxy was issued, there were 36,760,558 shares of outstanding Genta common stock.

On October 6, 2008, Genta conducted its Annual Meeting of Stockholders, at which time the stockholders were asked to vote on the proposal to amend Genta's Certificate of Incorporation to increase the total number of authorized shares of capital stock available for issuance. By a majority vote, the stockholders approved the amendment.

Plaintiffs filed their complaint on September 8, 2008. They alleged that prior to the Notes Transaction and corresponding amendment to Genta's Certificate of Incorporation, Genta's public stockholders owned approximately ninety-five percent of the corporation, whereas afterwards, the public stockholders owned just 1.8 percent of the corporation and the investors who purchased the Notes owned ninety-eight percent of the corporation. Plaintiffs further asserted they were never offered the opportunity to participate in the Notes Transaction, the value of their economic interests "was expropriated entirely by the sale of the Notes," and Genta and the Board did not take any steps to protect their interests during the negotiations preceding the Notes Transaction. Moreover, plaintiffs claimed the individually-named defendants "essentially put a gun to the heads of shareholders" in requesting their approval of the proposed amendment to the Certificate of Incorporation.

In their motion to dismiss, defendants argued the decision to enter the Notes Transaction, given the dire financial circumstances of Genta preceding the Transaction, was reasonable. Further, defendants contended they "acted aggressively and diligently to safeguard the interests of shareholders." Defendants also emphasized the detailed Proxy made available to shareholders prior to the vote on the amendment, which outlined the reasons for ...


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