Turnstone-XOMA Merger: Is the Deal Fair, and What Role Do Class Action Lawsuits Play?

The proposed $0.34-per-share cash-and-CVR merger between Turnstone Biologics (TSBX) and XOMA Royalty Corporation has sparked debate over its fairness to shareholders. While the transaction offers immediate liquidity, its contingent value rights (CVRs) and opaque milestone terms raise red flags. Add to this the involvement of class action law firms—historically pivotal in challenging undervalued deals—and the stakes for investors grow even higher.

The Deal Structure: Cash Now, Uncertainty Later

XOMA's offer consists of two components: $0.34 in cash per share and a non-transferable CVR tied to future milestones of Turnstone's lead therapy, TIDAL-01. However, the CVR's specifics remain undisclosed, including the exact financial thresholds for payout, the timeline for milestone achievement, and the total upside potential.

The tender offer requires >50% shareholder approval, with 25% of shares already committed via support agreements. While this boosts XOMA's chances of closing the deal, it also raises questions about whether minority shareholders are being adequately represented.

Fairness Concerns: Low Cash, High Risk

Analysts highlight three critical flaws in the deal's fairness:

1. Undervalued Cash Component:
   Turnstone's stock had delivered a 83.92% return over one year before the deal announcement (). The $0.34 cash offer appears to ignore this outperformance, suggesting shareholders may be getting less than intrinsic value.

2. CVR's Limited Upside:
   The CVR's value is capped at $1.11 million for tax and lease contingencies, with no clarity on additional milestones. Even if TIDAL-01 succeeds, the CVR's one-year expiration window and non-transferable nature limit its practical benefit.

3. Executive and Advisor Conflicts:
   Turnstone's board, which unanimously endorsed the deal, is advised by Leerink Partners (financial) and Cooley LLP (legal). Critics argue these firms may prioritize deal completion over maximizing shareholder value, especially if fees or reputational stakes are involved.

The Role of Class Action Lawsuits

Class action law firms, such as Morgenthaler & Stuewe or Kahn Swick & Foti, are already scrutinizing the merger. Their focus areas include:
- Valuation Accuracy: Whether the $0.34 cash price reflects Turnstone's true worth, given its strong historical performance and pipeline.
- CVR Transparency: The lack of disclosed milestones could breach fiduciary duties if the board failed to negotiate clearer terms.
- Support Agreement Bias: The 25% shareholder support locked via agreements may pressure smaller investors to tender, undermining fair market competition.

A successful lawsuit could force XOMA to renegotiate terms, extend CVR timelines, or increase cash consideration. Shareholders who tender now without legal review risk locking in suboptimal outcomes.

Investment Takeaways: Proceed with Caution

1. Hold Out for More Details:
   The CVR's true value hinges on milestones not yet disclosed. Investors should wait for the Schedule TO filing (due by July 11) for clarity.

2. Consider Legal Counsel:
   Engage with class action firms to assess potential claims. If a lawsuit emerges, shareholders who opt out of the class may gain leverage to negotiate better terms.

3. Liquidate or Hesitate?:
   The $0.34 cash is a floor, but the CVR's upside is speculative. If TIDAL-01's Phase 3 data (expected in 2026) falters, the CVR could expire worthless.

Final Verdict: A Deal Worth Challenging?

While the merger is likely to close, its fairness is questionable. The opaque CVR structure and low cash offer suggest shareholders may be left holding the bag. Class action lawsuits are a necessary check on this imbalance—investors should not settle without demanding transparency.

For now, the best strategy is to hold shares pending further disclosures and consult legal experts. The XOMA-Turnstone deal isn't just about biotech innovation—it's a test of whether minority shareholders can secure their fair share in a merger market increasingly tilted toward acquirers.