IN THE SUPREME COURT OF THE STATE OF DELAWARE

SHAREHOLDER REPRESENTATIVE § SERVICES LLC, in its capacity as the § Stockholders’ Agent for the former § No. 162, 2017 securityholders of Calistoga § Pharmaceuticals, Inc., § §

Plaintiff Below

- Appellant, § Court Below : Court of § Chancery of the State of

v. § Delaware § GILEAD SCIENCES, INC. and GILEAD § C.A. No. 10537

- CB

BIOPHARMACEUTICS IRELAND § CORPORATION, § §

Defendants Below

- Appellees. § § § GILEAD SCIENCES, INC. and GILEAD § BIOPHARMACEUTICS IRELAND UC, § §

Counterclaimants §

Below

- Appellees, § §

v. § §

SHAREHOLDER REPRESENTATIVE § SERVICES LLC, in its capacity as the § Stockholders’ Agent for the former § securityholders of Calistoga § Pharmaceuticals, Inc.

, § §

Counterclaim

- Defendant §

Below

- Appellant. § §

Submitted: November 1 , 2017

Decided: December 1 2 , 20172

Before STRINE , Chief Justice; VALIHURA

, VAUGHN

, SEITZ

, and

TRAYNOR , Justices , constituting the Court en Banc

.

O R D E R

In this appeal, the parties differ on the meaning of contractual language critical

to whether a milestone payment is due to a corporation that sold itself to another

corporation. In a thorough decision, the Court of Chancery concluded that certain

key language in the acquisition agreement

, “Hematologic Cancer Indication

, ” was

ambiguous, considered the parol evidence, and concluded that the term meant one

of the diseas es listed in Schedule 1.1 to the Merger Agreement

. 1 The milestone

payment that is at issue was only due upon “receipt of Regulatory Approval of CAL

101 . . . as a first

- line drug treatment (i.e., a treatment for patients that have not

previously undergone systemic drug therapy therefor) for a Hematologic Cancer

Indication.” 2

Based on his determination that Hematologic Cancer Indication meant

disease , that the relevant disease in Schedule 1.1 for which regulatory approval was

sought was Chronic Lymphocytic Leukemia (“CLL”) , that first

- line approval was

not granted for the treatment of CLL

, but only for a sub

- population o f p atients with

one of two genetic defects that constituted about one

- tenth of the overall CLL

1 Shareholder Rep. Servs. LLC v. Gilead Sciences, Inc. , 2017 WL 1015621, at *1 (Del. Ch. Mar. 15, 2017).

2 App. to Opening Br. at 131 ( Merger Agreement art. IX, § 9.1(a)(iii) ).3

population, the Chancellor held that no miles tone payment was due. 3 Although there

was evidence on the other side of the question, the Court of Chancery’s decision was

supported by sufficient record evidence, and resolved the contractual ambiguity in a

commercially sensible manner. In this situatio n, it is our duty to defer to a trial

judge’s properly supported fact findings and we thus affirm. We note in this regard

that the record evidence was that the parties hoped that first

- line treatment approval

would be granted for CLL as an entire disease class and that approval of that type

w as not obtained. The milestone payment of $ 50 million is not a trifle. This

provides commercial cont ex t supporting the Chancellor’s determination that the

approval necessary to trigger the payment was of the disease the parties sought, not

of a small subset (around 10%) of the patients suffering from the disease for which

approval was received

. 4 This

, alon g with other evidence

, such as the text of S chedule

3 Shareholder Rep. Servs. LLC , 2017 WL 1015621, at * 3, 28

– 29.

4 Transcript of Oral Argument on Plaintiff’s Motion For Judgment On The Pleadings at 74

– 75, Shareholder Rep. Servs. LLC v. Gilead Sciences, Inc. , 2017 WL 1015621 (Del. Ch. Mar. 15, 2017) (“ Here’s what’s undisputed in the pleadings. CLL, that population is over 17,000 patients in Europe. That’s who could have been addressed if we would have received an ind ication within the tumor type. What we received is something that allows us to address less than 200 patients, a miniscule number

. No rational human being could ever make back, much less the investment in

first

- line, not putting aside the 50 million or 75 million or 100 million, if milestones were based on rare genetic mutations, you would never make the money ba ck. You might as w ell have just

burned it.” ) ; Shareholder Rep. Servs. LLC , 2017 WL 1015621, at *3 n.29 (citing record evidence estimating the percentage of patients subject to the approval received as five to fifteen percent of what was sought); Deposition Testimony of Dr. Derrell Porter ( “[T]he number of patients that the 17p deletion/TP53 approval language applies to is less than a thousand; and even our expectations for the number of patients that Zydelig would be treating, the number of these patients that would use Zyde lig and be treated with Zydelig was less than 200. . . . I mean, the likelihood that Gilead will capture any benefits financially from that approval language for 17p/TP53 patients is almost with certainty zero.”).4

1.1 that refers to a list of diseases including CLL, supports the resolution of the

ambiguity in the manner chosen by the Chancellor.

With this context in mind, we therefore AFFIRM the Court of Chancery’s

March 24, 2017 Final Judgment and Order o n the basis of its detailed March 15,

2017 decision.

FOR THE MAJORITY :

/s/ Leo E. Strine, Jr.

Chief Justice5

SEITZ , Justice, dissenting, with TRAYNOR , Justice, joining :

B ecause we write only for the parties to this contractual dispute, we will not

repeat in detail the analysis ably conducted by the Chancellor in his post

- trial

opinion. The Court of Chancery thought fully considered the language of the

Purchase Agreement , found the parties’ use of the words “Hematologic Cancer

Indication” ambiguous, weighed the parol evidence, and decided that Hema tologic

Cancer Indication referred to a “disease” listed in Schedule 1.1 to the Purchase

Agreement. 5 As the Majority notes, w e de fer to that finding on appeal.

Where we part company is the second step of the court’s analysis

— that

“disease” also meant “disease

- level approval” when it came to the third milestone

payment. Under the Purchase Agreement, the third milestone payment is due when

three conditions are met : (1) “receipt of Regulatory Approval of CAL

- 101 ” ; (2) as a

“ first

- line drug treatment” ; and (3) “for a Hematologic Cancer Indication.” 6 The

first two conditions were not seriously in dispute. CAL

- 101 , the Gilead drug,

received regulatory approval in Europe as a first

- line treatment

. Also not in dispute

were the patients covered by the regulatory approval

— “adult patients with chronic

5 Shareholder Rep. Servs. LLC v. Gilead S ciences, Inc. , 2017 WL 1015621

, at *19 (Del. Ch. Mar. 15, 2017).

6 App. to Opening Br. at 131 (Merger Agreement art. IX, § 9.1(a)(iii)).6

lymphocytic leuk a emia (CLL)

. . . in the presence of 17p deletion o r TP53 mutation

in patients unsuitable for chemo

- immunotherapy.” 7

In our opinion, the analysis should have ended there. Gilead received

regulatory approval for its drug from the European Union as a first

- line treatment

for patients with CLL

— a disease listed in Schedule 1.1. That they also had a genetic

abnormality is irrelevant. Under the plain language of the Purchase Agreement , and

in particular Schedule 1.1, the third milestone payment was due

.

I nstead of applying the unambiguous meanin g of the word disease by

reference to the diseases listed in Schedule 1.1

, however, Gilead persuaded the court

to embark on a search for ambiguity where there was none, and added a “disease

level” approval requirement to trigger the third milestone payment

. The court’s

interpretation of “disease,” however, “burdens that term with far more precision than

it can reasonably bear.” 8 N either the Purchase Agreement nor Schedule 1.1

contained such a condition. W e would apply the plain meaning of “ disease ” with

reference to Schedule 1.1, and find that the European Union’s approval for patients

7 App. to Answering Br. at 136 ( E UROPEAN M ED S

. A GENCY

, PRAC A SSESSMENT R EPORT ON
P ROVISIONAL M EASURES 4 § 2.1 ( Mar. 18, 2016) )

. 8 BLGH Holdings LLC v. enXco LFG Holding, LLC , 41 A.3d 410, 415 (Del. 2012). The Majority points to the commercial reality that CLL patients with the genetic abnormality make up about 10% of CLL patients. The parties did not , however, define the trigger for the third milestone payment in economic terms. Whether the trigger the parties chose made financial sense was irrelevant when no ambiguity existed about the meaning of the term “disease.” See Nemec v.

Shrader , 991 A.2d 1120, 1126 ( Del. 2010) (“Parties have a right to enter into good and bad contracts, the law enforces both.”).7

with CLL satisfied the conditions for the third milestone payment. W e respectfully

dissent.