Undeterred by the Lord of Regulation’s entry into the dispute, troubled medical-device maker Guidant Corp. filed a lawsuit yesterday in New York City against disenchanted merger partner, Johnson & Johnson. Guidant is attempting to persuade the court to overrule J&J’s stance that Guidant’s recent troubles constitute a “material adverse effect” on Guidant’s business that allows J&J to walk away from its proposed $25.4 billion merger ($76 per share) with Guidant that the companies announced last December.

In the meantime, J&J’s MAE argument would appear to be improving by the day. Coming on the heels of the Spitzer lawsuit last week, Guidant announced yesterday that it is the subject of civil investigations by attorneys general in Arizona, Oregon and Illinois on behalf of a total 34 states and the District of Columbia. Moreover, the company announced that its third-quarter net income declined to $65.4 million (20 cents a share) from $153.6 million (48 cents a share) from a year ago, and that sales fell almost 15% to under $800 million from $924.5 million a year ago. Finally, just for good measure, Guidant disclosed in its quarterly filing that the Securities and Exchange Commission has begun a formal inquiry into issues relating to the product-malfunction disclosures and trading in Guidant stock. Johnson & Johnson asserts in this press release that it isn’t required to go through with the deal because Guidant’s recent recalls and warnings regarding its medical devices — not to speak of the Spitzer lawsuit — are “serious matters affecting both Guidant’s short-term results and long-term outlook.” J&J contends that the malfunctions, combined and the resulting sales drop, represent a “material adverse effect” on Guidant’s business that allows J&J to walk the deal.
On the other hand, Guidant’s lawsuit contends that the damage from its recent spate of malfunction announcements is a temporary blip on its otherwise bullish business radar screen. Inasmuch as J&J was banking on anticipated explosive growth in Guidant’s heart-device business in making the deal and there is no change of circumstances regarding that anticipated growth, Guidant contends that the court should specifically enforce — i.e., require J&J to consummate — the deal.
William K. Sjostrom, Jr. and Dale Oesterle over at the Business Law Prof Blog have been following developments in the unwinding of the Guidant/J&J merger closely and this update post contains links to their prior posts on the saga.