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Galena Slapped with Third Investor Lawsuit Related to Planned RXi Spin Out

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By Doug Macron

Galena Biopharma was sued this week for the third time over its plan to spin out its RNAi drugs subsidiary RXi Pharmaceuticals by investors who claim that the company is required to buy back a number of stock-purchase warrants after the securities were devalued by RXi's merger with immunotherapeutics firm Apthera last year.

The suit, filed by investment firm Cranshire Capital Master Fund, seeks damages in excess of $1.3 million, as well as attorneys' fees and related costs. Already, Galena has been named in two similar lawsuits by investment groups seeking a combined $2.9 million from the company.

RXi, which was created in 2007 as a spinout of CytRx, merged with Apthera in April last year (GSN 4/7/2011). Through that transaction, Apthera's management took the reins of the post-merger company, which retained the RXi name, and diversified its pipeline with the addition of its own non-RNAi drug candidates.

A few months later, the firm shifted gears, changing its name to Galena and transferring all of its RNAi assets to a new subsidiary that would be called RXi. Galena also said that it would hold onto RXi's Nasdaq listing and spin out the RNAi subsidiary as a public company trading on the over-the-counter market as a penny stock (GSN 12/15/2011).

In the most recent lawsuit, Cranshire alleges that Galena has failed to meet its contractual obligation to exchange warrants held by the firm for cash as specified by anti-dilution provisions included in a securities offering that took place just after the Apthera merger but before the Galena restructuring.

“In agreeing to subscribe to the April 2011 offering, Cranshire … relied on, among other things, the anti-dilution protection and redemption provision contained in the warrants [it purchased, which] obligated RXi, and which now similarly obligate Galena, to provide protection to Cranshire of its interest in Galena,” the lawsuit states.

According to Cranshire, its warrants allow it to purchase Galena common stock for $1 a share. However, the terms of its deal state that “if Galena issues, or is deemed to issue … any shares at a price lower than the original exercise price of $1 per share, Galena will be obligated to adjust the original exercise price to that lower amount,” the lawsuit states.

Additional protection is provided in the case of a “fundamental transaction,” which would give Cranshire the right to require that Galena buy back the warrants in cash for fair value. The establishment of RXi as a subsidiary of Galena and the plans to spin it off into a new company mark such a transaction, according to the investment group.

Through the spinoff, “Galena will be left with substantially less value, substantially less capital, and would be required to raise further capital to fund its operations,” the suit states. “In addition, the warrant holders in Galena will lose any upside from the RNAi division of the company.”

The suit also points out that, in conjunction with its planned spinoff of RXi, Galena entered into a deal to sell 83 percent of the new RXi for $9.5 million, as well as $2.5 million in Galena stock, to institutional investors Tang Capital Partners and RTW Investments.

Shortly thereafter, Galena, Tang, and RTW amended their deal and reduced the price for Galena stock from $1 to $0.65 a share — “substantially lower than the purchase price of $1 per share offered … to Cranshire under [its] warrants,” it adds.

Cranshire said in the lawsuit that it informed Galena that it had elected to exercise its option to have Galena purchase its warrants back, but that Galena has maintained that no “fundamental transaction” occurred. Further, the suit alleges that Galena has refused its contractual obligation to allow for an appraisal of the deal with Tang and RTW.

Cranshire has asked the New York District Court hearing its case for, among other things, damages “not less than $1.3 million, plus interest.”

Galena is currently in a US Securities and Exchange Commission-mandated quiet period related to its planned spin out of RXi, and company officials are not permitted to comment.

Pile On

With the filling of the Cranshire litigation, Galena now faces three lawsuits from investment groups that feel burned by the planned spinout of RXi and its effect on Galena's securities.

In December, Hudson Bay Master Fund filed the first suit, which is seeking $1.4 million, claiming that it participated in two RXi/Galena public offerings, and that both transactions included protective terms that would allow it to sell back the warrants it had bought in the event of a fundamental transaction such as a corporate restructuring or merger/acquisition (GSN 12/22/2011).

Then, earlier this month, a group of investment firms — Tenor Opportunity Master Fund, Aria Opportunity Fund, and Parsoon Opportunity Fund — joined forces to sue Galena for $1.5 million on the same grounds as Hudson Bay (GSN 1/19/2012).

Notably, all three lawsuits point to stock and warrant offerings by CytRx prior to its establishment of RXi, noting that none of these contained anti-dilution protections for investors such as the redemption of warrants by the issuing company in the event of a merger, spinoff, or change of control.

While Cranshire wasn't an investor in CytRx, it said in its suit that it “noted that when the … spinoff [of RXi] was completed, CytRx stock and warrant investments were significantly depreciated and investors … lost their right to participate in the upside of the assets and technology transferred to RXi.”

Hudson Bay, Tenor, Aria, and Parsoon said in their suits that they had been investors in CytRx and were burned by the lack of investment-protection provisions in their transactions. As a result, they told the court, they were particularly careful to ensure that such protections were in place when they participated in RXi/Galena's public offerings.


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