Two investors, Belgium researchers, with stock in Idenix Pharmaceuticals, Inc., have filed a lawsuit in Delaware Chancery Court alleging that the State illegally seized and sold their shares, resulting in a $12 million loss to the investors. Together, the investors owned approximately 10% of the outstanding shares of Idenix and had physical possession of the shares. On January 2, 2009, Computershare, on behalf of Idenix, escheated 560,000 shares to the state of Delaware. The shares were liquidated in early 2009 for $1.695 million. At that time, there were approximately 50 shareholders of the company, providing only a limited market for the shares.
The two drug researchers were key participants in Idenix's business and were well known to senior management, including top executives and directors. They maintained consulting agreements with Idenix throughout the relevant time periods of the escheatment. In addition, the investors maintained regular communication with the company's transfer agent Computershare.
According to the lawsuit, the State Escheator failed to publish owner names in a daily newspaper, as required by state law. The State Escheator also failed to publish names or addresses on its unclaimed property website. Nor did the State Escheator attempt to notify the owners that their shares had been escheated. Furthermore, the investors allege that neither Computershare nor Idenix, acting as agents of the state, notified them of the potential escheatment. Finally, even if the Escheator had in fact published the names in a daily newspaper, this would not be meaningful notice to owners, nor would it help owners when the shares are liquidated days after receipt by the state.
In 2014, Idenix was bought by Merck Pharmaceuticals with a tender offer of $24.50 per share. If the shares had not been previously escheated and then liquidated, the investors would have $13.72 million from Merck. Instead, they received, after a lengthy and burdensome claims process, only the $1,695,851.75 from the 2009 liquidation, resulting in $12 million of damages.
This case has the potential to answer many important questions that have long been left unanswered:
- Does Delaware have the right to claim foreign property?
- Does Delaware have a duty to notify owners of escheated property?
- Is Delaware escheat law preempted by federal securities law or treaties with foreign nations?
- Can Delaware retroactively apply a law to claim property?
- Did Delaware act in bad faith by immediately liquidating the shares reported to it?
Long time unclaimed property practitioners will see many similarities to the Taylor case, which resulted in a temporary shut-down of the California unclaimed property program. The Taylor case also began with shareholders that were dissatisfied with their shares being reported as unclaimed property. The program was restarted only after the California legislature required the now familiar two-step reporting process where both the holder and the state are required to notify owners prior to escheat.
This Idenix investors lawsuit is another blow to the Delaware unclaimed property program. Other recent cases have attacked the state's rights to perform extrapolations, retroactively apply a 2010 record retention requirement, and arbitrarily selecting holders to audit. The program has also been under pressure for its aggressive use of third-party auditors and how those auditors hire senior unclaimed property personnel after they leave state employment. The state also has been criticized for its use of unclaimed property as a revenue source, currently the third largest source for the state.