*October 16, 2019: Update On Caremark Claims Following the Delaware Supreme Court’s Decision in Marchand v. Barnhill

In In re Clovis Oncology, Inc., C.A. No. 2017-0222-JRS, 2019 Del. Ch. LEXIS 1293 (Del. Ch. Oct. 1, 2019), the Delaware Court of Chancery applied Marchand on a motion to dismiss and determined that the complaint adequately pled a Caremark claim against a biopharmaceutical company’s board of directors. The board allegedly ignored red flags indicating the company was not adhering to FDA-required protocols in its clinical trials for the only promising drug of three drugs it then had under development, causing the FDA to withhold approval. The resulting corporate “trauma” included a 70% market capitalization loss. Like the ice cream manufacturer in Marchand, the Chancery Court characterized the company as a “monoline company operat[ing] in a highly regulated industry,” where compliance with FDA-required protocols constitute an “intrinsically critical” business operation involving a “mission critical product.” Although it acknowledged that Caremark claims remain “among the hardest to plead and prove,” it noted that Caremark liability is more likely to attach when the alleged oversight failure concerns “compliance with positive law” as opposed to the “manag[ing] of business risk.” It portrayed Marchand as further “underscor[ing] the importance of the board’s oversight function when [a] company is operating in the midst of ‘mission critical’ regulatory compliance risk.” According to the Chancery Court, Marchand “makes clear” that, in such instances, “the board’s oversight function must be more rigorously exercised.”

Clovis provides a first glimpse at the Delaware Chancery Court’s reaction to the Delaware Supreme Court’s Marchand decision. Clovis confirms that, in complying with public health and safety regulations (including those governing clinical trials), a heightened level of oversight is expected, particularly when the oversight failure may result in trauma that is significant relative to the company’s overall operations.
Continue Reading Delaware Supreme Court Allows Caremark Claim to Proceed Against Directors of Ice Cream Manufacturer Following Listeria Outbreak

In Wadler v. Bio-Rad Laboratories, Inc., No. 17-16193, 2019 WL 924827 (9th Cir. Feb. 26, 2019), the United States Court of Appeals for the Ninth Circuit held that statutes, including the Foreign Corrupt Practices Act (“FCPA”), do not constitute “rule[s] or regulation[s] of the Securities and Exchange Commission” (“SEC”) for purposes of determining whether an employee engaged in protected activity in a whistleblower claim under Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”).  This decision clarifies the proper application of the express statutory language of Section 806.
Continue Reading Ninth Circuit Holds That Statutes Do Not Constitute “Rules or Regulations of the SEC” for Purposes of Sarbanes-Oxley Act Whistleblower Claims

Public reporting companies that have material weaknesses in their internal control over financial reporting (“ICFR”) are required under Rule 308 of the Securities Exchange Act of 1934, as amended, to report such material weaknesses in their quarterly and annual reports along with proposed remedial measures. A material weakness is defined as a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of an issuer’s financial statements will not be prevented or detected on a timely basis.
Continue Reading SEC Administrative Proceedings Against Public Companies for Failure to Remediate Material Weaknesses in Internal Control Over Financial Reporting

Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220, provides that any stockholder of a Delaware corporation “shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from . . . the corporation’s stock ledger, a list of its stockholders, and its other books and records.”  Whether emails and other electronically stored information (“ESI”) created and maintained by the corporation constitute “other books and records” within the meaning of Section 220 has been a matter of some uncertainty.  Recent decisions from the Delaware Courts provide useful guidance to practitioners on this question.
Continue Reading Delaware Courts Address Production of Emails and Other Electronically Stored Information In Response to Section 220 Demands

On February 21, the Securities and Exchange Commission issued new Interpretive Guidance regarding disclosures of cybersecurity-related information by publicly traded companies. This guidance comes in the context of public pressure on the SEC to update its 2011 Division of Corporation Finance guidance regarding cybersecurity risks and incidents. According to SEC Chairman Jay Clayton’s statement, this new document serves to reinforce and expand the prior guidance. It lays out principles that companies should follow in determining when cybersecurity information should be disclosed, and what should be disclosed.
Continue Reading SEC Takes Baby Steps on Cyber, but Signals Greater Vigilance

In In re Investors Bancorp, Inc. Stockholder Litigation, No. 169, 2017, 2017 WL 6374741 (Del. Dec. 13, 2017), the Delaware Supreme Court limited the ability of directors to assert the stockholder ratification defense when facing a challenge to their implementation of equity incentive plans (“EIP”). When properly invoked, the stockholder ratification defense entitles directors to have a court review their conduct under the more deferential business judgment rule standard, rather than the more stringent “entire fairness” standard. The Delaware Supreme Court held that where stockholders approve an EIP containing general parameters that afford directors discretion to determine specific awards, and their exercise of discretion is properly challenged as a breach of fiduciary duty due to alleged self-dealing, a board must prove that its actions were entirely fair to the corporation and its stockholders. This ruling has the important effect of shifting the burden from complainant stockholders to defending directors and subjects their awards of grants to stricter scrutiny.
Continue Reading Delaware Supreme Court Imposes New Limits on Stockholder Ratification Defense In Connection With Equity Incentive Plans

In Frechter v. Zier, C.A. No. 12038-VCG, 2017 WL 345142 (Del. Ch. Jan. 24, 2017) (Glasscock, V.C.), the Delaware Court of Chancery granted plaintiff’s motion for summary judgment on a declaratory relief claim and held that 8 Del. C. § 141(k) prohibits company bylaws from requiring more than a majority vote to remove directors from a company’s board.  The Frechter decision confirms that company bylaws may not impose requirements or implement procedures that conflict with 8 Del. C. § 141(k). 
Continue Reading Delaware Court of Chancery Rejects Bylaw That Required Supermajority Stockholder Vote to Remove Directors in Violation of 8 Del. C. § 141(k)

In AP Services, LLP v. Lobell et. al, No. 651613/2012, 2015 NY Slip Op 31115(U) (N.Y. Sup. Ct. June 19, 2015) (argued Feb. 21, 2014), Justice Friedman, applying Delaware Law, denied a motion to dismiss plaintiff AP Services, LLP’s first cause of action alleging breach of fiduciary duty against the defendants, former directors of Paramount Acquisition Corp., while granting dismissal of the second cause of action against them for allegedly aiding and abetting the breach of fiduciary duty.
Continue Reading Justice Friedman Allows Breach of Fiduciary Duty Claim to Proceed Against Corporate Directors Under Delaware Law

In Justinian Capital SPC v. WestLB AG, etc. et al., 2015 N.Y. Slip Op. 04381 (1st Dep’t May 21, 2015), the Appellate Division affirmed the February 25, 2014 decision of the New York County Supreme Court, Commercial Division (Kornreich, J.), 43 Misc. 3d 598, holding that actual payment for the transfer of rights to a legal claim is required in order to qualify for the champerty doctrine’s safe harbor provision.
Continue Reading Pay to Play: Appellate Division Upholds Ruling that Payment is Required to Qualify for Champerty Safe Harbor Provision

In Hill International, Inc. v. Opportunity Partners L.P., No. 305, 2015, 2015 WL 4035069 (Del. July 2, 2015), the Delaware Supreme Court affirmed the Court of Chancery’s grant of injunctive relief as it recognized the plaintiff stockholder’s — as opposed to defendant corporation’s — interpretation of a bylaw as its plain meaning interpretation.  In so holding, both courts reinforced the importance of clear and precisely drafted corporate charter and bylaw provisions, as well as specifically drafted notices of annual meetings of stockholders.
Continue Reading Delaware Supreme Court Reinforces Importance of Clear and Precise Bylaw Provisions and Specifically Drafted Notices of Annual Meetings