Synergy Pharmaceuticals – Seeks to Head Off Challenges to Plan with Employment of Independent Director, Remit to Include Investigation of Claims Against Current Board

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February 19, 2019 – The Debtors requested Court authority to appoint Joseph Farnan to the Debtors’ Board of Directors as an independent director nunc pro tunc (effective from February 13, 2019) and to compensate and indemnify Mr. Farnan for his service in such capacity in accordance with the terms of an Independent Director Services Agreement substantially in the form attached to the order as Exhibit B [Docket No. 394]. Apparently taking a page from the Sears Holdings playbook, Sears having just gotten an extremely scrutinized corporate governance past to pass bankruptcy muster largely thanks to the aggressive introspective efforts of independent directors, the Synergy Pharmaceuticals Debtors are likewise looking to anticipate challenges and bolster Board defenses through internal investigative efforts by a newly hired independent director.

The motion states, “The Debtors are governed by a board of directors (the ‘Board’) comprising five independent directors and the Debtors’ Chief Executive Officer (collectively, the ‘Directors’)….Certain of the Company’s current and former Directors and officers are defendants in shareholder derivative actions commenced prior to the Petition Date (the ‘Shareholder Derivative Actions'). 

The plaintiffs in the Shareholder Derivative Actions assert that the defendant Directors and officers breached their fiduciary duties of loyalty and care by, among other things, allegedly misstating (a) TRULANCE’s side-effect profile and (b) the terms of the Prepetition Term Loan Agreement (as defined in the First-Day Declaration). In addition, the Creditors’ Committee and the Equity Committee have indicated that they are investigating other potential theories that they believe may support additional claims against the Debtors’ Directors and officers for breach of fiduciary duty. 

The Debtors consider the derivative claims asserted in the Shareholder Derivative Actions meritless and believe that there are no colorable bases to assert fiduciary-duty claims against their Directors and officers. Accordingly, the Debtors believe that the retention and prosecution of derivative claims against their Directors and officers would yield no incremental distributable value for stakeholders and would result only in the needless (yet significant) incurrence of legal fees and expenses. 

The Debtors’ proposed Plan therefore contemplates the release of all potential Claims and Causes of Action (as defined in the Plan) that the Debtors may hold against their Directors and officers and other specified Released Parties (as defined in the Plan) (the “Debtor Release”). The Creditors’ Committee and the Equity Committee have indicated that they may object to the Debtor Release. Because the Debtors’ current Directors are defendants in the Shareholder Derivative Actions and potentially the subject of the putative derivative claims that the Creditors’ Committee and the Equity Committee are investigating, the Debtors have determined that the appointment of an independent fiduciary to independently investigate and evaluate the Debtors’ potential claims against their current Directors and officers is prudent."

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