By Doug Macron
Galena Biopharma's effort to spin out RNAi subsidiary RXi Pharmaceuticals hit yet another roadblock last week when investment firm Iroquois Master Fund filed a lawsuit alleging that Galena failed to meet its obligation to buy back certain securities following a corporate restructuring.
The Iroquois suit, which is seeking $1 million and attorneys' fees, comes on the heels of three other lawsuits filed by investment groups making similar allegations against Galena.
All four suits center around an April 2011 financing in which Galena sold common stock and warrants to purchase shares at a public offering price of $1 each, and a subsequent equity arrangement that saw Galena offer its shares for significantly lower. As a result, the investment groups allege, Galena is required to accommodate their requests to buy back their warrants.
Early last year, RXi, which was created in 2007 as a pure-play RNAi spinout of CytRx, merged with peptide immunotherapy firm Apthera (GSN 4/7/2011). As part of the transaction, Apthera management took control of the post-merger company, which retained the RXi name, and cut much of its RNAi research and development while pushing a non-RNAi breast cancer therapy to the front of the pipeline.
Just a few months later, the company announced it was changing its name to Galena and moving its RNAi assets into a newly created subsidiary that would be called RXi. Galena also said it would retain RXi's Nasdaq listing and spin out the RNAi subsidiary into an independent company that would trade on the over-the-counter market as a penny stock (GSN 12/15/2011).
In its suit, Iroquois said that it participated in a stock-and-warrant offering that took place in April 2011 — after the merger between Apthera and RXi but before the decision to restructure into Galena and spin out the RNAi operations.
However, Iroquois said in its suit that it was aware of a 2007 public offering by CytRx in which the securities sold did not include investor-protection provisions, including “anti-dilution price protection for additional common stock issuances at dilutive prices or a right to require the redemption of such warrants by [CytRx] for cash” at a fair value price.
When CtyRx spun out RXi, its stock and warrants were “significantly depreciated and investors in the 2007 transaction lost their right to participate in the upside of the [RNAi] assets and technology transferred to RXi.”
As such, Iroquois maintains that it only participated in the April 2011 offering because its warrant-purchase agreement provided certain protections including the right to demand that RXi, now Galena, buy back the warrants sold in the case of a “fundamental” transaction that lowered their value.
That transaction, Iroquois alleges, was a deal Galena entered into with two institutional investors, Tang Capital Partners and RTW Investments, to sell 83 percent of the new RXi for $9.5 million. The investors also agreed to buy $2.5 million in Galena stock, $1.5 million of which is to be used to fund the spun-out RXi.
In doing so, “Galena is effectively transferring the majority of its RXi RNAi therapy business, its former principal and most valuable business asset, and significant capital, to [Tang and RTW] for nominal consideration,” Iroquois charged.
Making matters worse, Galena, Tang, and RTW later amended their deal and reduced the price for Galena stock from $1 to $0.65 a share. As a result, Galena will receive only $455,000 for its stock rather than $2.5 million, yet is still obligated to transfer $1.5 million to RXi following the spinoff.
Because the $0.65 per share price is “substantially lower” than the $1 per share purchase price offered under the warrants Iroquois bought, the investment group said in its suit that it exercised its option to have Galena buy back the securities.
Galena, however, has rejected this request, the suit states.
In suing Galena, Iroquois has joined the ranks of other investment groups that feel burned after investing in RXi.
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).
Last month, a group of firms — Tenor Opportunity Master Fund, Aria Opportunity Fund, and Parsoon Opportunity Fund — jointly filed similar litigation seeking $1.5 million (GSN 1/19/2012). Also in January, Cranshire Capital Master Fund lodged its own legal complaint on the same issue, asking for $1.3 million in damages (GSN 1/26/2012).
Galena remains in a US Securities and Exchange Commission-mandated quiet period related to the planned RXi spin out and is unable to comment on the lawsuits.
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