Ben Wilkin v. Michael A. Narachi

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BEN WILKIN, derivatively on behalf
)
of OREXIGEN THERAPEUTICS, )
INC., )
)
Plaintiff, )
)
v. ) C.A. No. 12412-VCMR
)
MICHAEL A. NARACHI, PRESTON )
S. KLASSEN, JOSEPH P. HAGAN, )
MARK D. BOOTH, HEATHER D. )
TURNER, ECKARD WEBER, BRIAN )
H. DOVEY, LOUIS C. BOCK, )
PATRICK J. MAHAFFY, PETER K. )
HONIG, LOTA S. ZOTH, DAVID J. )
ENDICOTT, AND WENDY L. )
DIXON, )
)
Defendants, )
)
and )
)
OREXIGEN THERAPEUTICS, INC., a )
Delaware corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: November 17, 2017
Date Decided: February 28, 2018
Blake A. Bennett, COOCH AND TAYLOR, P.A., Wilmington, Delaware; Brian J.
Robbins, George C. Aguilar, and Jay N. Razzouk, ROBBINS ARROYO LLP, San
Diego, California; Nicholas Koluncich III, THE LAW OFFICES OF NICHOLAS
KOLUNCICH III, LLC, Albuquerque, New Mexico; Attorneys for Plaintiff.
William N. Lafferty, D. McKinley Measley, and Richard Li, MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware; John C. Dwyer and Jessica
Valenzuela Santamaria, COOLEY LLP, Palo Alto, California; Mary Kathryn
Kelley, COOLEY LLP, San Diego, California; Jeffrey Lombard, COOLEY LLP,
Seattle, Washington; Attorneys for Defendants.
MONTGOMERY-REEVES, Vice Chancellor
Pending before the Court is a motion to dismiss for failure to plead demand
futility and failure to state a claim in a case involving a pharmaceutical company
that was developing a drug to help in the battle against obesity. Early results of a
clinical trial indicated that this drug may have unanticipated, but significant, positive
effects on cardiovascular health. Excited by the prospect of following in the
footsteps of the likes of Alexander Fleming, the board of directors sought regulatory
approval of, and patent protection for, their drug. If further clinical trials confirmed
the effects, the drug would be revolutionary and, presumably, worth a great deal of
money.
As the company moved through the processes required for both regulatory
approval and patent protection, two less-than-ideal events occurred. First, a greater
number of people than originally contemplated became aware of the preliminary
data. While this did not affect the market approval process, the dissemination of the
data threatened the integrity of the ongoing trial and, in part, necessitated the
commission of a new clinical trial to further test the safety of the drug. This new
clinical trial came with a hefty price tag. Second, through the patent process, the
preliminary data from the clinical trial eventually became public. The market
originally reacted positively to the news, but later data revealed that the early results
were an aberration. The drug was not a revolutionary treatment for heart disease,
though it continued to prove safe for its intended weight-loss use. The company’s
1
stock price declined in response to the news. Thereafter, stockholders filed this
action, arguing that the board of directors made the wrong decisions along the way.
Plaintiff’s case rests on the premise that “Delaware law does not charter law
breakers.”1 Plaintiff alleges that the board was not free to make the decisions it did
because doing so violated positive law. This case, however, is a prime example of
the difference between a best practice and a legal obligation. Plaintiff sets forth an
in-depth explanation of best practices in clinical drug trials. All the pages of filings
Plaintiff submitted to the Court show that the directors’ decisions ultimately led to a
violation of these best practices, but Plaintiff fails to point to a single legal obligation
the directors violated. The first clinical trial was compromised and a new trial
required. This new trial cost the company money. The preliminary results were not
confirmed, and the stock price dropped. But Plaintiff has not pled facts that give the
Court reason to doubt that these outcomes stemmed from rational, good faith
decisions of faithful, loyal directors.
These same directors, therefore, retain their ability to make managerial
decisions for the company, including whether or not to bring suit on behalf of the
company. Plaintiff has failed to plead that he made demand on the board and has
failed to plead sufficient facts to show a majority of the board faces a substantial
1
In re Massey Energy Co., 2011 WL 2176479, at *20 (Del. Ch. May 31, 2011).
2
likelihood of liability such that they cannot exercise their independent and
disinterested business judgment when considering such a demand. Thus, the Motion
to Dismiss pursuant to Court of Chancery Rule 23.1 is GRANTED.
I. BACKGROUND
All facts in this opinion are drawn from Plaintiff’s Verified Amended
Stockholder Derivative Complaint for Breach of Fiduciary Duty and Waste of
Corporate Assets (the “Complaint”) and the documents incorporated therein.2 The
Court has also taken judicial notice of a document submitted by Defendants as the
doctrine of judicial notice so allows.3
A. Parties and Relevant Non-Parties
Plaintiff Ben Wilkin is a current stockholder of nominal defendant Orexigen
Therapeutics, Inc. (“Orexigen”).4 He was a stockholder of Orexigen at the time of
the wrongdoing complained of and has continuously been a stockholder since that
2
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004); see also
In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 659 n.3 (Del. Ch. 2013).
3
The Court takes judicial notice of Exhibit L to Defendants’ Opening Brief, which is
a World Intellectual Property Organization Patent Application dated June 11, 2015.
The Court relies on Ex. L only as support for the fact that the international patent
was filed. See Microstrategy, Inc. v. Acacia Research Corp., 2010 WL 5550455, at
*4 (Del. Ch. Dec. 30, 2010). The Court does not rely on Exhibits E, N, O, or R.
Along with Exhibit L, these were the only exhibits to which Plaintiff objected the
Court taking judicial notice. Oral Arg. Tr. 55-57.
4
Compl. ¶ 8.
3
time.5 Nominal defendant Orexigen is a Delaware corporation with a principal place
of business in La Jolla, California.6
There are thirteen individual defendants. One defendant, Michael A. Narachi,
served as both an officer and director of Orexigen.7 He has been President, CEO,
and a director since March 2009.8
At the time the Complaint was filed, four of the defendants had served only
as officers of Orexigen (the “Officer Defendants”). Preston S. Klassen was
Orexigen’s Senior Vice President of Product Development from November 2009 to
February 2015 and Executive Vice President of Product Development from February
2015 to May 27, 2016.9 Joseph P. Hagan was Orexigen’s Senior Vice President,
Corporate Development, Strategy, Communications from May 2009 to June 2011;
acting Chief Financial Officer from March 2011 to February 2015; Chief Business
Officer from June 2011 to December 2015; and Chief Financial Officer from
February 2015 to December 2015.10 Defendant Hagan entered into a consulting
5
Id.6
Id. ¶ 9.
7
Id. ¶ 10.
8
Id.
9
Id. ¶ 11.
10
Id. ¶ 12.
4
agreement with the Company from December 12, 2015, to December 11, 2016.11
Mark D. Booth was Orexigen’s Chief Commercial Officer from August 2009 to
September 2015, and entered into a consulting agreement with the Company from
October 1, 2015, to April 7, 2016.12 Heather D. Turner was Orexigen’s Vice
President, General Counsel, and Secretary from June 2007 to May 2010 and Senior
Vice President, General Counsel, and Secretary from May 2010 to June 2015.13
Defendant Turner entered into a consulting agreement with the Company from June
26, 2015, to March 31, 2016.14
At the time the Complaint was filed, eight of the defendants had served only
as directors of Orexigen (these directors together with Narachi, the “Director
Defendants”). Eckard Weber was a director of Orexigen from September 2002 to
May 27, 2016, and served as chairman of the board from March 2004 to May 27,
2016.15 Brian H. Dovey became a director of Orexigen in January 2004, and was an
Orexigen director at the time the Complaint was filed.16 Louis C. Bock became a
11
Id.
12
Id. ¶ 13.
13
Id. ¶ 14.
14
Id.
15
Id. ¶ 15.
16
Id. ¶ 16.
5
director of Orexigen in April 2005, and was an Orexigen director at the time the
Complaint was filed.17 Patrick J. Mahaffy became a director of Orexigen in February
2009, and was an Orexigen director at the time the Complaint was filed.18 Peter K.
Honig became a director of Orexigen in February 2010, and was an Orexigen
director at the time the Complaint was filed.19 Lota S. Zoth became a director of
Orexigen in April 2012, and was an Orexigen director at the time the Complaint was
filed.20 David J. Endicott became a director of Orexigen in November 2012, and
was an Orexigen director at the time the Complaint was filed.21 Wendy L. Dixon
was an Orexigen director from April 2010 to January 2016.22
At the time the Complaint was filed, the board of directors of Orexigen
consisted of Defendants Narachi, Bock, Dovey, Endicott, Honig, Mahaffy, and Zoth
(the “Current Director Defendants”), and non-party Deborah A. Jorn.23
17
Id. ¶ 17.
18
Id. ¶ 18.
19
Id. ¶ 19.
20
Id. ¶ 20.
21
Id. ¶ 21.
22
Id. ¶ 22.
23
Id. ¶ 150.
6
B. Facts
Orexigen is a biopharmaceutical company that developed the drug Contrave
to help obese and overweight adults manage their weight.24 Contrave is a
combination of two pre-existing drugs, bupropion and naltrexone.25 Orexigen
sought market approval for Contrave from the U.S. Food and Drug Administration
(the “FDA”) on March 31, 2010 by submitting an official new drug application (the
“Application”).26 In September 2010, Orexigen entered into an exclusive
partnership with Takeda Pharmaceutical Company Limited (“Takeda”) to develop
and commercialize Contrave (the “Partnership Agreement”).27 Pursuant to this
agreement, Takeda was responsible for covering certain costs associated with the
development and commercialization of Contrave.28
On January 31, 2011, in response to the Application, the FDA issued a
complete response letter (the “Response Letter”) that explained that the FDA had
concerns about the cardiovascular safety of Contrave.29 Due to these concerns, the
24
Id. ¶ 2.
25
Id.
26
Id. ¶ 38; Defs.’ Opening Br. Ex. A Reference ID:3625465, at 2.
27
Compl. ¶ 38.
28
Id.
29
Id. ¶ 39.
7
FDA required that Orexigen “conduct a randomized, double-blind, placebo-
controlled trial of sufficient size and duration to demonstrate that the risk of major
adverse cardiovascular events in overweight and obese subjects treated with
[Contrave] does not adversely affect the drug’s benefit-risk profile” before the FDA
would approve Contrave.30 This type of clinical trial is referred to as a
cardiovascular outcomes trial, or CVOT.31
1. The Light Study
On September 20, 2011, after negotiations with the FDA, Orexigen
announced “that it had reached a tentative agreement with the FDA concerning the
[CVOT] requirement and a corresponding approval pathway.”32 The FDA would
grant expedited approval of Contrave if the data available a quarter of the way
through the CVOT met a preset threshold for cardiovascular safety.33 This approval
would be subject to certain post-marketing requirements, such as the completion of
the CVOT.34
30
Id.
31
See id. ¶ 5.
32
Id. ¶ 43.
33
Id. ¶¶ 2, 3, 44.
34
Id. ¶ 44.
8
Orexigen and Takeda commissioned a CVOT called the Light Study or,
simply, LIGHT (the “Light Study”).35 Under the Partnership Agreement, Takeda
was responsible for half of the costs of the Light Study after the first $60 million.36
An outside team known as the Executive Steering Committee (the “Steering
Committee”) led by Dr. Steven E. Nissen of the Cleveland Clinic conducted the
Light Study.37 Orexigen also engaged a separate independent team led by Dr.
Thomas R. Fleming to review and analyze the interim data (“the Data Monitoring
Committee”).38 The first subject enrolled in the Light Study on June 1, 2012.39 The
cut-off for the quarter way analysis was November 6, 2013.40
The Light Study measured major adverse cardiovascular events (“MACE”).
“The Light Study randomized 8,910 obese patients with a primary endpoint of
evaluating the impact of treatment on the combined incidence of myocardial
infarction (heart attack), stroke and [cardiovascular] death in patients taking
35
Id. ¶ 2.
36
Id. ¶ 38.
37
Id. ¶¶ 6, 49, 139.
38
Id. ¶¶ 4, 49.
39
Defs.’ Opening Br. Ex. A Reference ID:3625465, at 3.
40
Id.
9
Contrave versus placebo.”41 “After a screening period, subjects enter[ed] a 2-week
double-blind lead-in period . . . followed by a double-blind treatment period of
approximately 4 years. . . . Regardless of whether subjects discontinue from
treatment or study procedures, they are to be contacted to assess for the occurrence
of MACE unless they revoke consent for all further follow up.”42
In order for the FDA to consider granting expedited approval of Contrave, the
results of the Light Study at the quarter way mark needed to rule out the risk that
patients taking the drug experienced a doubling of cardiovascular risk.43 The Data
Monitoring Committee would conduct an analysis when one quarter of the total
MACE were observed and adjudicated to determine whether the results ruled out a
doubling of risk.44
2. Orexigen’s first data action plan
The FDA, the Steering Committee, and the Data Monitoring Committee all
had confidentiality concerns regarding the preplanned interim analysis because the
Light Study was an ongoing, double-blind study. “Maintaining confidentiality of
interim results from a trial is essential to maintain integrity and credibility of the
41
Compl. ¶ 109 (quoting Orexigen’s March 3, 2015 Form 8-K).
42
Defs.’ Opening Br. Ex. A Reference ID:3625465, at 4.
43
Id.
44
Id.
10
ongoing trial.”45 If trial participants, or those conducting the trial, learned the interim
results there could be adverse effects, “such as slowing recruitment, promoting
dropouts or cross-ins, introducing bias with regard to outcome assessment or safety-
related events, and amending the design of the trial itself based on interim
knowledge.”46
Due to these confidentiality concerns, Orexigen approved a data access plan
on November 12, 2013 (the “First Plan”).47 The purpose of the First Plan was “to
describe the strategy for maintaining confidentiality of unblinded interim data.”48
The First Plan described three levels of data access.49 Table one in the First Plan
described those three levels in more detail.50 Full Access meant “access to
unblinded, summarized, and individual subject study data.”51 Top Line meant
“access to unblinded, summarized data provided in an abbreviated format, such as a
verbal or written executive summary or a presentation prepared by someone with
45
Id. at 6.
46
Id.
47
Compl. ¶ 69; Defs.’ Opening Br. Ex. D, at 1.
48
Defs.’ Opening Br. Ex. D, at 4.
49
Id.
50
Id. at 5.
51
Id.
11
Full Access.”52 Knowledge of Threshold meant that prior to the information going
public the person would be informed as to whether or not the necessary threshold
for expedited approval by the FDA had been met.53
Under the First Plan, Defendants Klassen, Taylor, Narachi, Hagen, Booth, and
Turner all had Full Access to the unblinded data.54 Defendants Klassen and Taylor
had Full Access because they were “essential for the work necessary for preparing
the Application resubmission, as well as meeting global regulatory needs.”55
Defendants Narachi, Hagen, Booth, and Turner had Full Access as “members of
senior management with public disclosure and business development
responsibilities.”56 Finally, the board of directors had “Top Line access to the
unblinded data, with the exception of Dr. Peter K. Honing, who will have Full
Access.”57 The First Plan further stated that after the Data Monitoring Committee
performed the interim analysis, “[t]he Unblinded Team [made up of people with Full
Access] will retain functional responsibility for unblinded activities, including
52
Id.
53
Id.
54
Id. at 8.
55
Id. at 7-8.
56
Id. at 8.
57
Id.
12
responding to questions from regulatory agencies or providing information for
partnering or financing activities.”58
The following three members of Orexigen’s senior management approved the
First Plan: Heather Turner, Orexigen’s Senior Vice President, General Counsel, and
Secretary, Thomas Bicsak, Orexigen’s Vice President of Regulatory Affairs, and
Kristin Taylor, Oreixigen’s Vice President/Head of Clinical Development.59 There
were no other approvals, signatures, or acknowledgments of any kind.
3. The first interim analysis
The Light Study reached the quarter way mark in November 2013. During
the last week of November, the Data Monitoring Committee reviewed and analyzed
the results from June 2012 to November 2013 (the “25% Results”).60 The 25%
Results showed an unexpected outcome. Not only did Contrave meet the goal
required by the FDA for expedited approval, but the 25% Results, “if accurate,
would make Contrave one of the most effective cardiovascular drugs in history.”61
58
Id. at 10.
59
Id. at 14.
60
Compl. ¶¶ 4, 71.
61
Id. ¶ 119.
13
Based on the 25% Results, Orexigen resubmitted the Application to the FDA on
December 10, 2013.62
4. Orexigen’s second data action plan
The Data Monitoring Committee met on November 23, 2013, and raised and
discussed two concerns. First, the First Plan allowed too many people access to the
unblinded 25% Results. The Data Monitoring Committee agreed that the First Plan
needed to be revised.63 Second, too many subjects had left the Light Study. The
Data Monitoring Committee recommended enrolling additional patients in the Light
Study to ensure its viability.64
In response to the Data Monitoring Committee’s confidentiality concerns,
Orexigen approved a new data action plan on February 3, 2014 (the “Second Plan”).
The Second Plan was substantially the same as the First Plan except that the category
of Top Line access was eliminated. The Second Plan also included a new section
entitled “Purpose of Unblinding and Levels of Data Access,”65 which explained that
an interim analysis would be conducted “to determine whether selected data should
62
Id. ¶ 71.
63
Defs.’ Opening Br. Ex. A Reference ID:3625465, at 6-7.
64
Id. at 8.
65
Defs.’ Opening Br. Ex. F, at 4.
14
be released to Orexigen to enable a resubmission to the FDA.”66 This section also
explained that “[u]nder circumstances that ensure confidentiality would be
maintained, these interim data also could be used to support other global regulatory
filings. As stated in the [Data Monitoring Committee] Charter, these interim data
‘would then be released to the core group of individuals essential to the facilitation
of [regulatory] resubmission.’”67 The same individuals from Orexigen who
approved the First Plan approved the Second Plan.68 There were no additional
signatures, approvals, or acknowledgments of any kind.
5. Unblinding the results to the board
On February 7, 2014, the Strategic Transaction Committee, comprised of
Defendants Weber, Mahaffy, and Honig, held a meeting, also attended by Defendant
Narachi, where they discussed “plans to unblind the full Board to the [25%
Results].”69 The Strategic Transaction Committee held another meeting on February
19, 2014, where Defendant Weber “reviewed with the [Strategic Transaction]
Committee one theory to explain the [25% Results].”70
66
Id.
67
Id.
68
Id. at 13.
69
Compl. ¶ 74 (quoting OREX-RA00001542).
70
Id. ¶ 75; Pl.’s Answering Br. Ex. P, at OREX-RA00001801.
15
On March 18, 2014, the board of directors held a meeting attended by
Defendants Narachi, Dixon, Mahaffy, Honig, Zoth, and Dovey, where Defendant
Narachi “reported to the Board the results of the Light Study interim analysis.”71
6. The FDA raises confidentiality concerns
On April 11, 2014, the FDA requested Orexigen provide the FDA with a list
of all individuals, excluding members of the Data Monitoring Committee, with
access to or knowledge of the unblinded 25% Results.72 Orexigen replied informally
with a list of names on April 16, 2014.73 On May 21, 2014, the FDA requested the
date that each individual had Full Access and a copy of the exact information shared
with him or her.74 On May 23, Orexigen informally replied by email, and on May
30, Orexigen submitted a formal response to both the April 11 and May 21
requests.75
On June 4, 2014, the FDA and Orexigen had a meeting where the FDA sought
to understand the full extent of the unblinding to assess the integrity of the remainder
71
Compl. ¶ 75; Pl.’s Answering Br. Ex. Q, at OREX-RA00001789.
72
Compl. ¶ 76.
73
Id.
74
Id.
75
Id.
16
of the Light Study.76 The FDA held a follow-up, internal meeting on June 5, 2014,
to determine a path forward and set a new goal date of September 11, 2014 for its
approval decision.77 On August 24, 2014, the FDA informed Orexigen that the Light
Study could not be used to fulfill post-marketing requirements after approval.78 This
decision would not affect the approval of Contrave based on the 25% Results.
7. The FDA approves Contrave
On September 10, 2014, the FDA approved Contrave and issued its Summary
Review for Regulatory Action (the “Summary Review”).79 The FDA discussed its
concerns about “data sharing after [the] interim analysis” in the Summary Review.80
The FDA review team found that more than 100 individuals, including those with
business interest in the trial, “had knowledge of the [25% Results] or access to
unblinded interim data.”81 This caused the review team to have “serious concerns
about the ability to maintain the integrity of the ongoing trial.”82 Thus, the review
76
Id. ¶ 77.
77
Id. ¶ 80.
78
Defs.’ Opening Br. Ex. A Reference ID: 3625465, at 6.
79
Compl. ¶ 83; Defs.’ Opening Br. Ex. A Reference ID: 3625465.
80
Defs.’ Opening Br. Ex. A Reference ID: 3625465, at 6.
81
Id. at 7.
82
Id.
17
team determined that the Light Study could not be used as a basis for the post-
marketing requirement.83 The FDA concluded that a new CVOT would be necessary
to meet the post-marketing requirement that Contrave not increase the risk of MACE
by 40% or more.84
The Summary Review noted two additional points, however. First, because
all the activity that led to the confidentiality concerns happened after the interim
analysis had been conducted “there was no debate among the review team . . . [that]
the interim data can be used to rule out the agreed-upon pre-approval risk margin.”85
Second, “even if concerns did not arise because of the extent of the dissemination of
interim data, the high percentage of treatment discontinuations calls into question
the ability to interpret the final results should the LIGHT trial continue to completion
. . . .”86
8. The domestic and international patent process
Orexigen sought patent protection for Contrave when the 25% Results were
finalized and indicated a possibility that Contrave could be “one of the most effective
83
Id.
84
Id. at 8.
85
Id. at 7.
86
Id. at 8.
18
cardiovascular drugs in history.”87 On July 2, 2014, Orexigen filed a confidential
United States patent application with the United States Patent and Trademark Office
(the “USPTO”).88 This application was for an invention titled “Compositions and
Methods for Weight Loss in At Risk Patient Populations.”89 Orexigen also
“submitted unexpected results which [show] that this combination as instantly
claimed in fact provides cardiovascular protective effects which is persuasive.”90 On
December 4, 2014, Orexigen also filed an international patent application with the
World Intellectual Property Organization (the “WIPO”).91
On January 5, 2015, Orexigen sent the USPTO a “Rescission of Previous
Nonpublication Request,” as required within forty-five days of filing a foreign or
international filing like the WIPO patent application.92 On January 16, 2015, the
87
Compl. ¶ 119.
88
Id. ¶ 88; Defs.’ Opening Br. Ex. K. Plaintiff objects to this exhibit in his Answering
Brief by arguing that this exhibit was unimportant to, or only indirectly referenced
in, the Complaint. This exhibit is Contrave’s United States patent application.
Plaintiff discusses the contents of the patent application in paragraphs 88 and 119
of the Complaint. Plaintiff also advances the theory in the Complaint that the
Director Defendants conspired to use the patent process to publicly disclose the 25%
Results. Therefore, the patent application is both incorporated-by-reference and
integral to the Complaint.
89
Defs.’ Opening Br. Ex. K.
90
Id.
91
Defs.’ Opening Br. Ex. L.
92
Defs.’ Opening Br. Ex. K.
19
board authorized the payment of an issuance fee to the USPTO, also necessitated by
the WIPO application.93 On January 20, 2015, Orexigen paid the fee.94 The
projected publication date of the patent application was June 11, 2015.95
9. The 25% Results are publicly disclosed
On March 3, 2015, three months before the projected application publication
date, the USPTO issued the approved patent for Contrave.96 Orexigen responded by
filing a Current Report Form 8-K the same day (the “8-K”).97 The 8-K disclosed
that the USPTO had “issued U.S. Patent No. 8,969,371 (the “371 Patent”) and made
publicly available provisional patent applications (U.S. Application No. 61/913216,
U.S. Application 61/914938 and U.S. Application No. 61/984580) (the “Provisional
93
Pl.’s Answering Br. Ex. T.
94
Defs.’ Opening Br. Ex. K.
95
Id.96
Defs.’ Opening Br. Ex. J. Plaintiff objects to this exhibit in his Answering Brief by
arguing that this exhibit was unimportant to, or only indirectly referenced in, the
Complaint. This exhibit is the published United States patent for Contrave. Plaintiff
alleges that the disclosure of the 25% Results in this patent was a knowing and
intentional violation of the law by the Director Defendants. Plaintiff also discusses
the published patent in paragraphs 97, 109, and 129 of the Complaint. Therefore,
this document is incorporated-by-reference and integral to the Complaint.
Moreover, the Court only relies on this exhibit as evidence that the patent was
published, and the Court can take judicial notice of the publication of patents. See
Microstrategy, Inc. v. Acacia Research Corp., 2010 WL 5550455, at *4 (Del. Ch.
Dec. 30, 2010).
97
Defs.’ Opening Br. Ex. P.
20
Patent Applications”) to which the 371 Patent claims priority.”98 The 8-K also stated
that “[t]he 371 Patent and the Provisional Patent Applications contain claims related
to a positive effect of Contrave on [cardiovascular] outcomes. The observed effects
on [cardiovascular] outcomes were unexpected and appear to be unrelated to weight
change.”99 The 8-K also included data from the 25% Results. That data was
followed by a reiteration that “[i]t is important to emphasize” two things.100 First,
“[t]he U.S. package insert for Contrave states that the effect of Contrave on CV
morbidity and mortality has not been established.”101 And second, “[t]he 25%
Interim Analysis was prospectively designed to enable an early and preliminary
assessment of safety to support regulatory approval. A larger number of MACE are
required to precisely determine the effect of Contrave on [cardiovascular]
outcomes.”102 Finally, the 8-K disclosed that “[a] second, large, randomized,
placebo-controlled clinical trial evaluating the effect of Contrave on [cardiovascular]
98
Id. at 2.
99
Id.
100
Id. at 4.
101
Id.
102
Id.
21
outcomes is planned to start later this year. Orexigen expects this trial to be
completed by 2022.”103
10. The second interim analysis
At the February 19, 2015 board meeting, the Director Defendants learned that
“the Light Study has reached the 50% interim analysis point, which is underway.”104
At the March 1, 2015 board meeting Dr. Klassen “described to the Board the status
of the 50% interim analysis of the Light Study.”105
11. Orexigen and Takeda terminate the Light Study and the
Cleveland Clinic discloses the 50% Results
On March 26, 2015, the Steering Committee voted to halt the Light Study and
disclose the 50% Results to the public.106 On May 12, 2015, Takeda and Orexigen
announced that they had accepted the recommendation of the Steering Committee
for the early termination of the Light Study.107 Also on May 12, 2015, without
103
Id.
104
Compl. ¶ 96.
105
Id. ¶ 99. It is unclear from the Complaint when the Data Monitoring Committee
completed the second interim analysis and made the data (the “50% Results”)
available. All that can be ascertained from the Complaint is that the Steering
Committee knew the 50% Results sometime before or on March 26, 2015. Id. ¶
133. The Complaint does not allege sufficient facts to state or infer when the
Director Defendants knew the 50% Results.
106
Id.
107
Id. ¶ 139; Defs.’ Opening Br. Ex. S. Plaintiff objects to the exhibit in his Answering
Brief as unimportant or only indirectly referenced in the Complaint. This exhibit is
a press release announcing the termination of the Light Study. Plaintiff addresses
22
approval from Takeda or Orexigen, Dr. Nissen and the Cleveland Clinic issued a
press release disclosing the 50% Results.108 This press release included a quote from
Dr. Nissen: “The [] [50%] results do not confirm cardiovascular benefits of Contrave
claimed by Orexigen in the patent application based on the data obtained at the 25
percent time point in the trial.”109 The markets reacted to the news. Orexigen’s stock
dropped 27% on May 12, 2015.110
12. This litigation
On May 28, 2015, Plaintiff sent Orexigen a demand to inspect certain books
and records pursuant to 8 Del. C. § 220.111 Orexigen provided documents in response
to the demand on August 17, 2015.112 Plaintiff filed the original complaint in this
action on June 3, 2016. Defendants moved to dismiss on October 31, 2016. Plaintiff
filed the Complaint on January 13, 2017. Defendants again moved to dismiss on
this press release and its contents in paragraphs 139 and 140 of the Complaint.
Plaintiff also contends that the Director Defendants made misrepresentations about
when the Light Study was terminated. Therefore, this document is incorporated-
by-reference and integral to the Complaint.
108
Compl. ¶ 139.
109
Id. (alteration in original).
110
Id. ¶ 142.
111
Pl.’s Answering Br. 3.
112
Id.
23
March 27, 2017. The Court heard oral argument on the Motion to Dismiss on
November 17, 2017.
II. ANALYSIS
Defendants move to dismiss the Complaint for failure to adequately plead
demand futility under Court of Chancery Rule 23.1 and for failure to state a claim
under Rule 12(b)(6). For the reasons that follow, I find that the Complaint fails to
adequately plead demand futility under Court of Chancery Rule 23.1.
A. Standard of Review Under Court of Chancery Rule 23.1
“[D]irectors are empowered to manage, or direct the management of, the
business and affairs of the corporation.”113 This necessarily includes the right to
bring lawsuits on behalf of the corporation; “the right of a stockholder to prosecute
a derivative suit [therefore] is limited . . . .”114 For a derivative suit to proceed, “the
complaint must allege with particularity that the board was presented with a demand
and refused it wrongfully or that the board could not properly consider a demand,
thereby excusing the effort to make demand as futile.”115 Here, Plaintiff has only
pled that demand is futile.
113
Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993) (citing 8 Del. C. § 141(a)).
114
Id.
115
La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 339–40 (Del. Ch. 2012),
rev’d on other grounds 74 A.3d 612 (Del. 2013).
24
Pleadings under Court of Chancery Rule 23.1 “must comply with stringent
requirements of factual particularity that differ substantially from the permissive
notice pleadings governed solely by Chancery Rule 8(a).”116 In other words, the
complaint “must set forth particularized factual statements that are essential to the
claim” of demand futility.117 “Rule 23.1 is not satisfied by conclusory statements or
mere notice pleading,”118 nor is “mere speculation or opinion . . . enough.”119 “In
evaluating whether demand is excused, [however,] the Court must accept as true the
well pleaded factual allegations in the Complaint,”120 “as well as ‘all reasonable
inferences that logically flow from [those] facts.’”121
116
Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).
117
Id.118
Id.119
In re Walt Disney Co. Deriv. Litig., 825 A.2d 275, 285 (Del. Ch. 2003).
120
In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch. 2009).
121
Melbourne Mun. Firefighters’ Pension Tr. Fund ex rel. Qualcomm, Inc. v. Jacobs,
2016 WL 4076369, at *7 (Del. Ch. Aug. 1, 2016) (quoting Postorivo v. AG Paintball
Hldgs., Inc., 2008 WL 553205, at *4 (Del. Ch. Feb. 29, 2008)), aff’d 158 A.3d 449(Del. 2017). Of course, “[i]f these principles were applied mindlessly . . . a plaintiff
could describe a document or take a handful of words out of context and claim that
the court was required to accept the plaintiff’s pleading-stage characterization.”
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016). “A plaintiff
may not reference certain documents outside the complaint and at the same time
prevent the court from considering those documents’ actual terms.” Winshall v.
Viacom Int’l, Inc.,76 A.3d 808, 818 (Del. 2013). Therefore, “[t]he incorporation-
by-reference doctrine permits a court to review the actual document to ensure that
the plaintiff has not misrepresented its contents and that any inference the plaintiff
seeks to have drawn is a reasonable one.” Amalgamated Bank, 132 A.3d at 797.
25
The seminal demand futility cases in Delaware are Aronson v. Lewis122 and
Rales v. Blasband. In Aronson, the Delaware Supreme Court held that a stockholder
who challenges an action taken by the board considering the demand must allege
particularized facts sufficient to raise a reasonable doubt that: “(1) the directors are
disinterested and independent [or] (2) the challenged transaction was otherwise the
product of a valid exercise of business judgment.”123 Under Rales, a derivative
plaintiff who does not challenge actions taken by a majority of the board members
considering demand must allege particularized facts sufficient to “create a
reasonable doubt that, as of the time the complaint is filed, the board of directors
could have properly exercised its independent and disinterested business judgment
in responding to a demand.”124 This Court recently stated that Aronson and Rales
The doctrine of incorporation-by-reference applies equally in the Rule 23.1 and
Rule 12(b)(6) context. Id.; Reiter ex rel. Capital One Fin. Corp. v. Fairbank, 2016
WL 6081823, at *5 (Del. Ch. Oct. 18, 2016).
122
Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000).
123
Rales, 634 A.2d at 933 (alteration in original) (quoting Aronson, 473 A.2d at 814).
For a majority of the board to be disinterested and independent, “the board must be
able to act free of personal financial interest and improper extraneous influence.”
Id. at 935.
124
Id. at 934.
26
both address the same question of whether the board can exercise its business
judgment on the corporate behalf in considering demand.125
Relying on Louisiana Municipal Police Employees’ Retirement System v.
Pyott, Plaintiff contends that demand is excused under either Aronson or Rales
because a majority of the Board faces a substantial likelihood of liability for
breaching the duty of loyalty by causing Orexigen to violate positive law.126
“[B]ecause sophisticated and well-advised individuals do not customarily confess
knowing violations of law, a plaintiff following this route effectively must plead
facts and circumstances sufficient for a court to infer that the directors knowingly
violated positive law.”127
125
In re Duke Energy Corp. Deriv. Litig., 2016 WL 4543788, at *14 (Del. Ch. Aug.
31, 2016); see also Kandell ex rel. FXCM, Inc. v. Niv, 2017 WL 4334149, at *11
(Del. Ch. Sept. 29, 2017) (quoting In re China Agritech, Inc. S’holder Deriv. Litig.,
2013 WL 2181514, at *16 (Del. Ch. May 21, 2013)) (“The tests articulated in
Aronson and Rales are ‘complementary versions of the same inquiry.’”).
126
Pl.’s Answering Br. 32-33. “[T]he fiduciary duty of loyalty is not limited to cases
involving a financial or other cognizable fiduciary conflict of interest. It also
encompasses cases where the fiduciary fails to act in good faith.” Stone ex rel.
AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006). The Delaware Supreme
Court has articulated situations when a fiduciary fails to act in good faith, including
when “the fiduciary acts with the intent to violate applicable positive law.” Id.127
Pyott, 46 A.3d at 341. “[D]irectors’ good faith exercise of oversight responsibility
may not invariably prevent employees from violating criminal laws, or from causing
the corporation to incur significant financial liability, or both.” Id. at 340 (quoting
Stone, 911 A.2d at 373). But, “[w]ithout a connection to the board, a corporate
calamity will not lead to director liability. Without a substantial threat of director
liability, a court has no reason to doubt the board’s ability to evaluate a demand.”
Id. In order “[t]o plead a sufficient connection between the corporate trauma and
27
B. Demand Is Not Excused as Futile
Plaintiff argues that demand is excused because seven of the eight directors
on the board “knowingly and/or intentionally caus[ed] the Company to violate
regulations and breach its confidentiality obligations with respect to the 25%
[R]esults”128 and “knowingly allow[ed] the Company to make (or themselves
ma[de]) improper public statements.”129 Plaintiff further contends that demand is
excused because the Director Defendants’ decisions and actions were not a valid
exercise of the business judgment rule.130
A review of Plaintiff’s allegations shows the main deficiency in the entirety
of Plaintiff’s demand futility analysis. Plaintiff attempts to plead knowing and
intentional violations of the law without any violation of the law. Instead, Plaintiff
paints a picture of directors who, at worst, failed to follow best practices. But, a
the board, the plaintiff’s first and most direct option is to allege with particularity
actual board involvement in a decision that violated positive law.” Id. “In
Caremark, Chancellor Allen framed the test as whether the directors ‘knew or . . .
should have known’ about illegality. In Stone, the Delaware Supreme Court
tightened the test to require actual knowledge: ‘[I]mposition of liability requires a
showing that the directors knew they were not discharging their fiduciary
obligations.’” Id. at 340–41 (quoting In re Caremark Int’l Inc. Deriv. Litig., 698
A.2d 959, 971 (Del. Ch. 1996) and Stone, 911 A.2d at 370)).
128
Pl.’s Answering Br. 34; see also Compl. ¶¶ 151-52.
129
Compl. ¶ 154.
130
Id. ¶¶ 155-58.
28
failure to follow best practices does not create a substantial likelihood of liability.
For this and the other reasons explained below, I hold that demand is not excused as
futile.
1. Plaintiff fails to raise a reason to doubt that the board of
directors could have properly exercised its independent and
disinterested business judgment in responding to a demand
“The analysis of whether a majority of the board faces a substantial likelihood
of personal liability ‘is conducted on a claim-by-claim basis.’”131 “The complained-
of conduct must ‘be so egregious on its face’ that the board could not have exercised
its business judgment in responding to a stockholder demand to pursue those
claims.”132 In essence, Plaintiff argues that demand is futile due to the Director
Defendants’ substantial likelihood of liability for two reasons: (1) that the Director
Defendants face a substantial likelihood of personal liability for breaching their duty
of loyalty due to the disclosure of the 25% Results; and (2) that the Director
Defendants face a substantial likelihood of personal liability for breaching their duty
of loyalty due to public statements made by representatives of Orexigen. I address
each of these arguments in turn.
131
Melbourne Mun. Firefighters’ Pension Tr. Fund ex rel. of Qualcomm, Inc. v.
Jacobs, 2016 WL 4076369, at *6 (Del. Ch. Aug. 1, 2016) (quoting Teamsters Union
25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 58 n.71 (Del. Ch. 2015)), aff’d
158 A.3d 449 (Del. 2017).
132
Id. at *6 (quoting Aronson, 473 A.2d at 815).
29
a. Plaintiff fails to plead that a majority of the directors
face a substantial likelihood of personal liability for
allowing the dissemination of confidential interim data
Plaintiff asserts that the Director Defendants “act[ed] with the intent to violate
applicable positive law” by knowingly and intentionally disseminating confidential
interim data related to the 25% Results in violation of FDA regulations and in breach
its agreement with the FDA.133 Plaintiff’s theory of the case, as best I can discern,
is that Orexigen suffered a corporate trauma when the FDA determined a new
CVOT, costing around $200 million, would be necessary to fulfill the post-
marketing requirement for Contrave. But, it is unclear to me exactly what law or
agreement Plaintiff plead Orexigen violated. 134 Nonetheless, I attempt to address
below all the various allegations made by Plaintiff.
The only statute or regulation the Complaint references is the Food and Drug
Administration Amendments Act of 2007 (the “2007 Act”).135 The Complaint
133
Pl.’s Answering Br. 32.
134
The Complaint does not address the FDA’s statements that the new CVOT also was
necessary due to the number of participants who had left the study. Defs.’ Opening
Br. Ex. A Reference ID: 3625465, at 8. Additionally, Plaintiff rejects Defendants’
suggestion that they have attempted to plead failure of oversight claims. Rather,
they state, “Plaintiff does not plead a failure of oversight and instead alleges that the
Individual Defendants consciously breached their fiduciary duty of loyalty by
intentionally causing Orexigen to violate its agreement with the FDA.” Pl.’s
Answering Br. 34.
135
Compl. 29 n.6.
30
mentions the 2007 Act four times. First, the Complaint states that under the 2007
Act, “the FDA has the authority to require a drug-specific, risk evaluation mitigation
strategy to ensure the benefits of the drug outweighs its risks.”136 Second, the
Complaint alleges “[t]he FDA, through the [2007 Act], has broad discretion to
enforce confidentiality of interim results, including fining a sponsoring company for
breach of its confidentiality obligations or even withdrawing approval of the drug
underlying the CVOT.”137 Third, the Complaint cites the 2007 Act as authority for
the proposition that “the FDA has authority to fine or withdraw approval where a
company does not meet its CVOT obligations.” Finally, the Complaint quotes from
a March 2015 Forbes article that discussed the 2007 Act.138 The Forbes article
discussed the 2007 Act in relation to the public dissemination of the 25% Results
through the patent process not the “confidentiality breaches” that lead to the new
CVOT requirement:
[The FDA] told Orexigen when Contrave was approved
that it would need to do a second big study, because
Orexigen had not kept the data fire walled, instead letting
over 100 people, including people outside the company
and Orexigen’s CEO, learn about the results, according to
FDA documents. Now, because of the release of data via
a press release, some experts question whether doctors or
136
Id.137
Id. ¶ 45.
138
Id. ¶ 131. This Forbes article is cited by the Complaint in footnotes 42, 43, 45 and
discussed in paragraph 131.
31
patients will be willing to participate in that second trial.
What if it can’t be completed?
[John Jenkins, the director of the Office of New Drugs at
the FDA] said he wouldn’t engage in “a hypothetical” and
referred me to the FDA’s guidance. I asked him to explain
what the guidance means in a generic case, not specifically
related to Orexigen.
“Congress passed a law in 2007, [the 2007 Act],” Jenkins
said. “They gave us the authority to require these trials. If
companies are not meeting their obligations there are
fines, there are civil money penalties, there’s a possibility
for seizure, and there’s even a possibility for initiating
withdrawal procedures.”139
Plaintiff’s first three references to the 2007 Act include conclusory statements
about the FDA’s ability to require confidential trials and to impose penalties for
violations of “confidentiality.” Plaintiff, however, does not allege with particularity
any facts to suggest that the FDA ever determined that Orexigen violated anything
or issued any fines whatsoever to Orexigen. The relevance of the fourth reference
is unclear since the FDA already had determined a new CVOT was required when
139
Matthew Herper, Top FDA Official Says Orexigen Study Result Unreliable,
Misleading, FORBES, Mar. 5, 2015,
https://www.forbes.com/sites/matthewherper/2015/03/05/top-fda-official-says-
orexigen-data-unreliable-likely-false/#365923a36af8. “The Complaint here
extensively cites to and quotes from documents [Plaintiff] obtained from the
Company through a books and records inspection demand under 8 Del. C. § 220.”
Reiter ex rel. Capital One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *5 (Del.
Ch. Oct. 18, 2016). The Complaint also extensively cites to and quotes from a
myriad of other documents including certain news articles. “Accordingly, I may
apply the incorporation-by-reference doctrine with respect to the documents
referenced in the Complaint in evaluating the sufficiency of the Complaint’s
allegations to demonstrate demand futility.” Id. at *6.
32
the 25% Results were disclosed by the patent application. I cannot infer based on
these four statements that Defendants violated the 2007 Act and, therefore, face a
substantial likelihood of liability such that they cannot consider demand. A vague
reference to a law that allows fines does not explain how the Director Defendants
violated that law by disregarding internal documents and procedures. Nor does a
veiled reference to the disclosure of information in the patent application explain
how the patent disclosures relate to the new CVOT requirement.
Plaintiff also mentions 21 U.S.C. §§ 355, 355-1 and 21 C.F.R. § 312.50 in his
Answering Brief. These statutes and regulations generally govern FDA approval of
new drugs and drug trial sponsors’ responsibilities. Section 355 alone is 37 pages
long, yet Plaintiff points to no specific section that Orexigen violated nor alleges any
particular facts in relation to these statutes and regulations. Merely discussing these
statutes in vague, broad terms does not support an inference that Director
Defendants’ decisions somehow violated these statutes.140
140
See, e.g., Desimone v. Barrow, 924 A.2d 908, 928 (Del. Ch. 2007) (“But I do not
accept cursory contentions of wrongdoing as a substitute for the pleading of
particularized facts. Mere notice pleading is insufficient to meet the plaintiff’s
burden to show demand excusal in a derivative case.”).
33
Plaintiff’s brief and the Complaint also discuss, and quote from, various FDA
guidance.141 All of the guidance is just that—guidance. This is obvious from the
notation on the top of every page of each document that says “Contains Nonbinding
Recommendations.”142 Pleading violations of nonbinding recommendations does
not constitute pleading a violation of positive law such that the board faces a
substantial likelihood of liability and cannot consider demand.143
Finally, the Complaint often repeats the conclusory statement that the
Defendants violated their agreement with the FDA. The only agreement between
Orexigen and the FDA supported by particularized facts is the agreement related to
expedited market approval. As the Summary Review explains, Defendants
141
E.g., Compl. 60 n.30. (citing U.S. Dep’t of Health and Human Servs. Food and Drug
Admin., Guidance for Clinical Trial Sponsors Establishment and Operation of
Clinical Trial Data Monitoring Committees (2006)).
142
U.S. Dep’t of Health and Human Servs. Food and Drug Admin., Guidance for
Clinical Trial Sponsors Establishment and Operation of Clinical Trial Data
Monitoring Committees (2006).
143
The Plaintiff’s Answering Brief also states: “Even more curious is Defendants’
argument that Orexigen did not have ‘a legal or other duty to comply with the [the
First or Second Plan].’ If that is the case, then why have a [data action plan] if it can
be unilaterally violated for any reason or no reason at all? Why bother subsequently
revising the [First Plan] to reflect the Company’s true confidentiality obligations to
the FDA?” Pl.’s Answering Br. 35-36 (internal citations omitted). The First and
Second Plan, which were incorporate by reference in the Complaint and submitted
by Defendants, are on their face internal guidance documents only. Plaintiff fails to
explain how a violation of internal guidance documents would mean the board faces
a substantial likelihood of liability and cannot consider demand.
34
“originally submitted a new drug application (NDA 200063) for Contrave on 31
March 2010.” The FDA’s response to this application addressed concerns about a
“statistically significant higher mean systolic and diastolic blood pressure and heart
rate among naltrexone/bupropion-treated subjects compared with placebo-treated
subjects.”144 The FDA’s response informed Defendants that, to assuage these
concerns, “before your application can be approved, you must conduct a
randomized, double-blind, placebo-controlled trial of sufficient size and duration to
demonstrate that the risk of major adverse cardiovascular events in overweight and
obese subjects treated with naltrexone/bupropion does not adversely affect the
drug’s benefit-risk profile.”145
After receiving the FDA’s response, Defendants submitted formal dispute
resolution requests to several subsets of the FDA. Eventually, the Office of New
Drugs sent a letter to Defendants expressing that it “supported the conduct of an
interim analysis to support approval with a final analysis to occur after approval.”146
The letter from the Office of New Drugs recommended that “the interim analysis
was to exclude a hazard ratio (HR) of 2.0 (upper bound of the 95% confidence
144
Defs.’ Opening Br. Ex. A Reference ID: 3625465, at 2.
145
Id.146
Id. at 2-3.
35
interval [CI]) and the final analysis was to exclude a HR of 1.4.”147 The Light Study
was designed to allow these two analyses to be conducted. The 25% Results would
be the basis of FDA approval, and the final analysis would be used for the post-
marketing requirement.148
The FDA approved Contrave based on the 25% Results in September 2014.
The Summary Review issued with the approval addressed confidentiality concerns
regarding the Light Study, but confirmed that because “the concerns regarding
dissemination of unblinded data arose after the interim analysis, there is no debate
among the review team that the upper bound of the 95% CI for MACE is less than
2.0; therefore, the interim data can be used to rule out the agreed-upon pre-approval
risk margin.”149 The Summary Review made clear that “[t]he review team has
serious concern [sic] about the ability to maintain the integrity of the ongoing trial
such that the final results could, on their own, reliably assess the HR risk margin of
1.4,”150 because the FDA was “not confident that [it] would ultimately be able to
detect or exclude the possibility that the [Orexigen]’s activities may have biased the
147
Id. at 3.
148
Id. at 3; see id. at 8.
149
Id. at 7.
150
Id. at 6.
36
[Light Study]’s results or otherwise compromised its integrity.”151 This ultimately
meant that the Light Study results could not be used to show Contrave met the post-
marketing requirement for cardiovascular safety.152
Plaintiff does not argue that the FDA concluded that there was any violation
of any agreement with the FDA. In fact, the Summary Review, which Plaintiff
incorporated by reference in the Complaint and relied on extensively, reflects that
the only concern the FDA raised was that the Light Study’s results after the 25%
Results could be compromised. This meant the FDA required a new study for
Contrave to fulfill its post-marketing requirements but not that Contrave’s market
approval was at risk. Plaintiff has not pled any particularized facts for the Court to
infer differently, and thus, Plaintiff has not adequately pled a violation of positive
law such that the board faces a substantial likelihood of liability and cannot consider
demand.153
151
Id. at 8.
152
Id.
153
The allegations in the Complaint are not organized in chronological order, which
makes it unclear what exact causal connections Plaintiff is attempting to plead. To
the extent Plaintiff is trying to plead that the new CVOT was required due to the
patent process disclosures, this case presents an even clearer application of the
business judgment rule. In that case, the board faced a business decision. They
could comply with the Second Plan, an internal protocol developed without any
input from the FDA, and risk not having patent protection for a potentially lucrative
drug. Alternatively, they could not comply with the Second Plan and risk the cost
of a second trial, but preserve and protect Orexigen’s intellectual property. Plaintiff
has not adequately alleged that either of these options was illegal, or in violation of
37
b. Plaintiff fails to plead that a majority of the directors
face a substantial likelihood of personal liability for
knowingly allowing the dissemination of false
information to stockholders154
“Whenever directors communicate publicly or directly with shareholders
about the corporation’s affairs, with or without a request for shareholder action,
directors have a fiduciary duty to shareholders to exercise due care, good faith and
loyalty.” 155 Thus, “[i]t follows a fortiori that when directors communicate publicly
or directly with shareholders about corporate matters the sine qua non of directors’
fiduciary duty to shareholders is honesty.”156 “The issue in this case is not whether
[the] directors breached their duty of disclosure.”157 Instead, the issue “is whether
they breached their more general fiduciary duty of loyalty and good faith by
some agreement with the FDA. The board therefore was free to exercise their
business judgment. The board chose to pursue patent protection, and the FDA
required a new CVOT to fulfill the post-marketing requirements.
154
Three federal securities actions were filed against Orexigen on March 10 and 11,
2015. Defs.’ Opening Br. Ex. G, at 12. These three actions were consolidated on
June 22, 2015. Id. at 13. The allegations in the federal securities action significantly
overlapped with the allegations related to the disclosure claims in this litigation. See
id. at 22-31. The consolidated action was dismissed, partially with prejudice and
partially without, on May 19, 2016. Id. at 36.
155
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
156
Id.157
Id. As the Delaware Supreme Court explained in Malone v. Brincat, there is a
difference between the duty of disclosure in the context of requesting stockholder
action and the more general requirement to communicate honestly with stockholders
under the duty of loyalty and good faith. Id.38
knowingly disseminating to the stockholders false information about . . . the
company.
“To successfully state a duty of loyalty claim against directors for providing
information in the absence of a request for shareholder action, a stockholder must
allege that he received ‘false communications’ from directors who were ‘deliberately
misinforming shareholders about the business of the corporation.’”158 Under Malone
v. Brincat, “[w]hen shareholder action is absent, plaintiff must show reliance,
causation, and damages” in order to establish a breach of the duty of loyalty. 159 “The
decision by the Supreme Court to set a high bar for Malone-type claims was not . . .
inadvertent.” 160 The purpose was “to ensure that [Delaware] law was not discordant
158
Orloff v. Shulman, 2005 WL 3272355, at *14 (Del. Ch. Nov. 23, 2005) (quoting
Jackson Nat’l Life Ins. Co. v. Kennedy, 741 A.2d 377, 389 (Del. Ch. 1999)).
159
A.R. DeMarco Enters., Inc. v. Ocean Spray Cranberries, Inc., 2002 WL 31820970,
at *4 n.10 (Del. Ch. Dec. 4, 2002); see also Dubroff v. Wren Holdings, LLC, 2010
WL 3294219, at *1 (Del. Ch. Aug. 20, 2010) (“Because no shareholder approval
was sought through the challenged disclosure, Delaware requires that reliance and
causation be alleged and proven.”); Anglo Am. Sec. Fund, L.P. v. S.R. Global Int’l
Fund L.P., 2006 WL 1494360, at *3 (Del. Ch. May 24, 2006) (“[I]f a complaint
does not allege statements made to shareholders in conjunction with a request for
shareholder action, a plaintiff cannot rely on a ‘rebuttable presumption of
reliance.’”); Alessi v. Beracha, 849 A.2d 939, 944 (Del. Ch. 2004) (explaining that
when there is no request for shareholder action, stockholders cannot rely on the
fraud on the market theory under Delaware law).
160
Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121,
158 (Del. Ch. 2004).
39
with federal standards.”161 This also helps ensure that Delaware law does “not
encourage a proliferation of disclosure claims outside the discretionary vote or
tender context by exposing corporate directors to an additional host of disclosure
claims that did not involve the need to show reliance or scienter.”162
In the Complaint, Plaintiff takes issue with three instances where Defendant
Narachi and other members of Orexigen’s senior management shared information
with the public: a call with analysts on September 11, 2014,163 the 8-K and related
public statement issued on March 3, 2015,164 and an earnings call on May 8, 2015.165
I have serious doubts about whether any of the statements made by Orexigen’s
representatives on these three occasions reflect a knowing dissemination of false
information.166 Regardless, Plaintiff has failed to sufficiently plead all the necessary
161
Id.162
Id.163
Compl. ¶¶ 104-07.
164
Id. ¶¶ 108-10, 126-29.
165
Id. ¶¶ 137-38.
166
Moreover, Plaintiff only pled a connection to a majority of the Director Defendants
in one instance—the 8-K. The board “reviewed and approved the public disclosure
of the 25% Results via Current Report on Form 8-K, along with a script of expected
questions and answers.” Id. ¶ 108. There is no basis for attributing any statements
on the calls on September 11 and May 8 to the Director Defendants, other than
Defendant Narachi, such that a majority of the board would face a substantial
likelihood of liability for a breach of the duty of loyalty. Desimone v. Barrows, 924
A.2d 908, 943 (Del. Ch. 2007) (“Delaware law does not permit the wholesale
40
elements of his disclosure claim; thus, the Director Defendants cannot face a
substantial likelihood of liability for a breach of the duty of loyalty such that demand
would be excused. 167
In Wood v. Baum, the Delaware Supreme Court considered a case where “the
plaintiff attempted to create a ‘reasonable doubt’ that the Board would have properly
exercised its business judgment by alleging that the Board was disabled because of
a substantial risk of liability.”168 The Supreme Court described the issue before it as
“whether the Complaint alleges particularized facts that, if proven, would show that
a majority of the defendants knowingly engaged in ‘fraudulent’ or ‘illegal’ conduct
or breached in ‘bad faith’ the covenant of good faith and fair dealing.”169 The
Supreme Court held “that the plaintiff’s factual allegations [were] insufficient to
imputation of one director’s knowledge to every other for demand excusal
purposes.”).
167
Wood v. Baum, 953 A.2d 136, 142 (Del. 2008). Moreover, a failure to plead any
facts related to a particular element warrants dismissal under Court of Chancery
Rule 12(b)(6). Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 147 (Del.
1997) (“In every case, a plaintiff stating a claim against directors for violation of the
duty of disclosure must set forth in a well-pleaded complaint allegations sufficient
to warrant the remedy sought.); DiRienzo v. Lichtenstein, 2013 WL 5503034, at *10
(Del. Ch. Sept. 30, 2013) (“[F]ailure to plead an element of a claim precludes
entitlement to relief and, therefore, is grounds to dismiss that claim.”).
168
Wood, 953 A.2d at 140-41.
169
Id. at 141.
41
establish demand futility,”170 because “the Complaint [did] not even purport to state
a cause of action for fraud, let alone plead the specific facts required to support such
a claim,” and “[t]he Complaint alleges many violations of federal securities and tax
laws but does not plead with particularity the specific conduct in which each
defendant ‘knowingly’ engaged.”171
The same is true here. Plaintiff has not pled a single fact related to an element
of his claim—individual reliance. The only facts Plaintiff has pled that are remotely
related to reliance are (1) analysts reacted “enthusiastically” to the 8-K;172 (2)
Orexigen’s stock price went up nearly 50% after the 8-K was issued;173 and
“Orexigen’s stock price reached its apex on April 10, 2015, topping off at $81.10 a
share, as adjusted to reflect a 1-for-10 reverse stock split in 2016 to maintain the
Company’s listing on NASDAQ.”174 But, none of these alleged facts, or even all of
these facts taken together, show or infer reasonable, individual reliance. And “if a
complaint does not allege statements made to shareholders in conjunction with a
request for shareholder action, a plaintiff cannot rely on ‘a rebuttable presumption
170
Id. at 144.
171
Id. at 141, 142.
172
Compl. ¶ 111.
173
Id.174
Id. ¶ 132.
42
of reliance’” 175 i.e. “the fraud on the market theory.”176 As reflected in Wood, a
failure to plead an element of a claim precludes a finding that the directors face a
substantial likelihood of liability for that claim such that demand is excused.
Therefore, Plaintiff cannot show that a majority of the Director Defendants face a
substantial likelihood of personal liability for knowingly allowing the dissemination
of false information to stockholders.
2. Plaintiff fails to plead that the board’s actions were so
egregious that they are not a valid exercise of the business
judgment rule
Plaintiff contends that “[a] pre-suit demand on the Orexigen Board is also
excused because [seven of the eight Board members] did not exercise valid business
judgment in connection with their decisions, actions, and transactions”177 in three
ways.178 First, Plaintiffs allege that the Director Defendants “failed to act with
loyalty and due care by knowingly or recklessly allowing the Company to make (or
175
Alessi, 849 A.2d at 944.
176
Id.177
Compl. ¶ 155.
178
Plaintiff mentions the Director Defendants’ duty of care twice in the Complaint as
part of the broad allegations against the Director Defendants but abandoned these
claims in his briefing. Presumably this is because Orexigen’s certificate of
incorporation includes a Section 102(b)(7) provisions that exculpates the directors
for personal liability to the fullest extent allowed under Delaware law.
43
themselves making) improper public statements.”179 This allegation was addressed
at length in Section II.B.1.b. above. Second, Plaintiffs allege that the Director
Defendants “failed to act with loyalty and due care by knowingly or recklessly
making decisions and taking actions that caused or allowed Orexigen to breach its
confidentiality obligations with respect to the 25% Results, forcing the Company to
abandon the Light Study and bear the expenses of a new CVOT . . . .”180 This
allegation was addressed at length in Section II.B.1.a. above. Finally, Plaintiff
alleges that the Director Defendants “failed to exercise valid business judgment in
connection with causing the Company to waste its assets.”181
“A board of directors enjoys a presumption of sound business judgment, and
its decisions will not be disturbed if they can be attributed to any rational business
purpose. A court under such circumstances will not substitute its own notions of
what is or is not sound business judgment.”182 “Irrationality is the outer limit of the
business judgment rule. Irrationality may be the functional equivalent of the waste
179
Id. ¶ 156.
180
Id. ¶ 157.
181
Id. ¶ 158.
182
Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).
44
test or it may tend to show that the decision is not made in good faith, which is a key
ingredient of the business judgment rule.”183
“[T]o excuse demand on grounds of waste the Complaint must allege
particularized facts that lead to a reasonable inference that the director defendants
authorized ‘an exchange that is so one sided that no business person of ordinary,
sound judgment could conclude that the corporation has received adequate
consideration.’”184 In order “[t]o prevail on a waste claim ... the plaintiff must
overcome the general presumption of good faith by showing that the board’s
decision was so egregious or irrational that it could not have been based on a valid
assessment of the corporation’s best interests.”185
Plaintiff argues that the “breach of the confidentiality obligations was
unnecessary, served no legitimate business purpose, and provided [Orexigen] with
virtually no benefit in return for the substantial, otherwise avoidable costs incurred
by the breach and from carrying out a new CVOT”.186 But, as Plaintiff points out,
the 25% Results, while preliminary and unreliable, showed that Contrave could be
183
Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000).
184
In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 136 (Del. Ch. 2009)
(quoting Brehm, 746 A.2d at 263).
185
White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001).
186
Compl. ¶¶ 158, 165.
45
“one of the most effective cardiovascular drugs in history.”187 Plaintiff also points
out that Contrave was Orexigen’s “primary drug and best business prospect.”188 In
light of these realities, the Court cannot reasonably conclude, even at the motion to
dismiss stage, that there was no legitimate business purpose for the disclosures.
Additionally, based on the facts in the Complaint, and the Summary Review, it is
not a reasonable inference that the new CVOT was an otherwise avoidable cost
absent the confidentiality concerns. Both the Data Monitoring Committee and the
FDA raised concerns about the Light Study’s continuing viability due to loss of
participants.189 At the very least, the Light Study would have required a new cohort
of trial subjects to continue. Plaintiff has failed to plead particularized facts that
show the Director Defendants’ actions were “so egregious or irrational that it could
not have been based on a valid assessment of the corporation’s best interests.” Thus,
demand is not excused.
III. CONCLUSION
For the foregoing reasons, the Motion to Dismiss is GRANTED.
IT IS SO ORDERED.
187
Id. ¶ 119.
188
Id. ¶ 37.
189
White, 783 A.2d at 554 n.36.
46