Hindsight is a wonderful thing. It could save you $7.2 billion

In 2004, J&J signed a merger agreement to buy Guidant for $21.5 billion. The merger agreement contained a no-solicitation clause that allowed Guidant to consider a higher offer if one was provided, but not to proactively seek one out. Guidant later accepted a higher offer of $25 billion from another company, Boston Scientific Corporation (‘Boston Scientific’).  Boston Scientific then announced that it would sell part of the Guidant business to Abbott Laboratories (‘Abbott’) to avoid antitrust issues. 

J&J allege that Guidant breached their contract by allowing Abbott to conduct due diligence on its business, therefore allowing the offer from Boston Scientific to be made. 

Usually any amount paid in damages is meant to put the party back in the position they would have been in had the breach of contract not occurred. In this case, that is the position that J&J would have been in had they been able to buy Guidant in 2006.

However, this case is complicated by the fact that the acquisition of Guidant by Boston Scientific was not a success. In fact, it has been called “arguably the second-worst ever ”(to be clear – this was not the second-worst ever by Boston Scientific; It was the second-worst ever by anyone). Within months of completion of the deal, Boston Scientific had to issue safety recalls relating to Guidant cardiac devices, and also faced a number of expensive product liability lawsuits . Boston Scientific quickly issued a profit warning, and within a year, Boston Scientific's stock had dropped by 46 percent, wiping out $18 billion in shareholder value. Ouch.

So, given the difficulties faced by Guidant after 2006, it is conceivable that J&J were in fact better off as a result of the alleged breach of contract. However, J&J have asked the Court to turn a blind eye to this possibility. Initial filings in this case  show that J&J argue that using hindsight should not be used in the calculation of damages, and are attempting to exclude from the case any information which arose after the alleged date of breach. J&J’s damages figure of $7.2 billion is therefore based on what they expected from Guidant in 2006 (plus court interest). 

Not surprisingly, Guidant disagree with this approach, saying instead that the Court should take into account the (poor) performance of Guidant after its purchase. Such an approach would no doubt result in a much lower damages figure than $7.2 billion (or perhaps even no damages at all). 

This is a phenomenally valuable issue, and our team can’t wait to see what the Court decides, as hindsight is an issue that forensic accountants have to consider regularly when calculating damages in breach of contract matters.

In our experience, the circumstances of each case must be carefully considered as to whether using hindsight is appropriate - one approach may be to consider the valuation both with and without hindsight to wholly appreciate the impact of subsequent events. 

For more information on recent hindsight cases, see our previous publications:

- ‘Why grope in the dark? The issue of hindsight’ – KordaMentha’s Forensic Matters publication discussing how changes in commodity prices, interest rates, exchange rates and movements in the stock market all have the potential to affect assessments of loss.

- 'The Real Value of Hindsight’ – KordaMentha’s Damages Matters publication on hindsight in business valuations and its impact on assessing ‘real’ value.

UPDATE (18/03/2015): 

On 17 February 2015, Boston Scientific paid $600 million to settle this claim with J&J. This compares to the amount of damages claimed of $7.2 billion.

Boston Scientific’s 2014 earnings were (only!) $267 million (including all one-off items), and so this will mean Boston Scientific suffered a loss for FY2014 after this subsequent loss adjustment. Despite this, the Boston Scientific share price jumped up approximately 12% after the announcement.

Sources:
http://dealbook.nytimes.com/2014/07/27/multibillion-dollar-dispute-over-guidant-seems-headed-for-trial/?_r=0