A Delaware judge has ordered Caris Life Sciences to pay its employees $16.3 million after finding Caris breached its Stock Incentive Plan in an attempt to avoid paying taxes on two business units it spun off prior to selling a portion of its business to Miraca Life Sciences.
Caris used to consist of three business units: Caris Diagnostics, TargetNow, and Carisome. Caris’ founder, David Halbert, owned 70.4%, while private equity firm JH Whitney Fund VI owned 26.7%.
Caris employees owned the majority of the remaining 2.9% through stock options. Caris’ Stock Incentive Plan said option holders would receive the difference between the fair market value (as determined by Caris’ board of directors) of the share price and the price at which their options were exercised.
Caris Diagnostics consistently made a lot of money, but TargetNow and Carisome did not, so in early 2011 Caris began exploring its options, and the decision was made to sell Caris Diagnostics. During the bidding process, a few potential buyers expressed interest in buying TargetNow as well, but in the end, only Caris Diagnostics was sold.
Through a complex maneuver designed to minimize tax liability involving at least four subsidiaries and a newly-created entity in the Cayman Islands, Caris spun off TargetNow and Carisome, which were together valued at $65 million, to its shareholders, and then Miraca paid $725 million for Caris Diagnostics in November 2011.
Halbert and JH Whitney received about $560 million from the merger, and they pumped $100 million into TargetNow and Carisome.
The stock options owned by the employees were cancelled as a result of the merger. Caris told them they would receive the difference between $5.07 ($4.46 was for Caris Diagnostics, and the remaining $0.61 was for TargetNow and Carisome) and the price at which their options were exercised. Caris also withheld 8% of the difference and placed it in an escrow account.
Kurt Fox, a former Caris Diagnostics salesman who owned options for 71,600 shares of Caris stock, filed a class action lawsuit and alleged Caris’ executives, and not its board of directors, determined Caris’ fair market value, and that they did so in an “arbitrary and capricious” manner that resulted in undervaluation. He further alleged Caris’ Stock Incentive Plan did not allow for any option proceeds to be withheld and placed in an escrow account.
The judge stated the central fact at issue in the case is what Halbert, Gerard Martino (Caris’ EVP, CFO and COO), and other Caris principals believed TargetNow and Carisome were truly worth back in the fall of 2011.