WILMINGTON, Del. (AP) - Delaware officials asked a judge Friday to dismiss a lawsuit filed on behalf of two Belgian scientists who claim the state improperly used its abandoned property laws to seize their shares in a pharmaceutical firm, cheating them out of $12 million when it was acquired by drug giant Merck & Co. in 2014.
Attorneys for the state argued that the lawsuit was filed after the allowable time period, that the claims are inadequate under the law, and that the scientists have been reimbursed the fair value of their shares at the time they were sold in 2009.
Steven Rosenthal, a lawyer representing Delaware revenue officials, also told Vice Chancellor Joseph Slights III that abandoned property collection, also known as “escheat,” does not amount to a government taking of property, but is simply “a limitation on the nature of property.”
Attorneys representing two holding companies owned by Gilles Gosselin and Jean Louis Imbach argued that Delaware had no legal authority to seize their foreign-owned shares in Idenix Pharmaceuticals Inc. The company was incorporated in Delaware in 2002 as the successor to a firm established in 1998 to develop a new hepatitis drug synthesized by a research team led by Gosselin and Imbach.
According to the lawsuit, Computershare, a company acting as a transfer agent for Idenix, erroneously reported to Delaware in 2008 that 560,000 Idenix shares owned by the scientists had been “abandoned” and were unclaimed property.
State officials took ownership of the shares and sold them at market value in 2009 for $1.7 million.
But the scientists claim that after they spent years inquiring about their shares, Delaware officials did not confirm until May 2014 that the shares had been seized, and that state officials were “waiting for the proceeds from the sale to be applied.” In fact, the shares had been sold five years earlier.
“They escheated stock without any notice that they had no right to do,” Stephen Brauerman said. “They sold it almost immediately without any notice.”
A month after state officials confirmed that they had the shares, Merck announced a tender offer for outstanding Idenix common stock at $24.50 per share. If Gosselin and Imbach had sold their 560,000 shares at that price, they would have received $13.7 million.
Instead, the state in 2015 sent them a check for $1.7 million, the market value of their shares when they were sold without their knowledge.
“We paid them just compensation. We paid them fair market value,” Rosenthal said.
Brauerman argued that state officials acted negligently and in bad faith, and that they violated his clients’ due process rights in depriving them of their shares.
Arguing that state officials acted “with the sole purpose of raising revenue,” Brauerman pointed to a ruling last year in a different case in which a federal judge blasted Delaware’s escheat practices, saying they violated due process and amounted to a game of “gotcha” that “shocks the conscience.”
Abandoned property is a critical source of funding for Delaware’s state government, amounting to more than half a billion dollars annually and representing the state’s third-largest revenue category.
Under U.S. Supreme Court rulings, states follow a two-tier scheme for reporting and claiming abandoned property. Under the primary priority rule, unclaimed property is reported to the state of the owner’s last known address appearing on a company’s records. But if the owner’s address is unknown or incomplete, the unclaimed property is reported to the company’s state of incorporation. Because so many corporations are formed in Delaware, the state benefits significantly from the second-priority rule.
Slights gave no indication on when he might rule.
Please read our comment policy before commenting.