In re Pozen S’holders Litig., 2005 NCBC 7
|
STATE OF |
IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION |
(Consolidated with 04 CVS 1542)
_____________________________________________________________________________
ORDER AND OPINION
{1}
This case arises out of
Plaintiffs Philip Stein and Michael Rosenstock’s
(“Plaintiffs”) shareholder derivative claims on behalf of Pozen,
Inc. (“Pozen”) against Defendants John R. Plachetka,
Kristina M. Adomonis, John E. Barnhardt,
Matthew E. Czajkowski, Andrew L. Finn, Peter J. Wise,
Paul L. Rizzo, Ted G. Wood, Kenneth B. Lee, Jr., Jacques F. Rejeange,
Bruce A. Tomason, and James R. Butler, in their
capacities as officers and/or members of Pozen’s
Board of Directors. Specifically,
plaintiffs assert claims for insider selling and misappropriation of
information, breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets, and unjust enrichment. Pozen is named as a
nominal defendant. This matter comes
before the Court on defendants’ motion to dismiss.
{2}
After considering briefs and
oral arguments, the Court GRANTS defendants’ motion to dismiss on the grounds
that the Amended Complaint does not establish demand futility under
Womble
Carlyle Sandridge & Rice, PLLC by Pressly M.
Millen; Morgan Lewis & Bockius, LLP by William P.
Quinn, Jr., Karen Pieslak Pohlmann,
and David W. Marston, Jr., for Defendants John R. Plachetka,
Kristina M. Adomonis, John E. Barnhardt,
Matthew E. Czajkowski, Andrew L. Finn, Peter J. Wise,
Paul L. Rizzo, Ted G. Wood, Kenneth B. Lee, Jr., Jacques F. Rejeange,
Bruce A. Tomason, and James R. Butler.
I.
PROCEDURAL
BACKGROUND
{3}
These two shareholder
derivative actions were filed in Orange County Superior Court. The cases were designated complex business
cases and assigned to the undersigned Special Superior Court Judge for Complex
Business Cases by order of the Chief Justice of the Supreme Court of North
Carolina dated December 14, 2004. The
two cases were consolidated with consent of all parties on April 25, 2005. Plaintiffs’ Consolidated Shareholder
Derivative Complaint (“Amended Complaint”) was filed on March 31, 2005.
{4}
Several related class actions
have been filed in the Middle District of North Carolina against Pozen, Inc. and Dr. John R. Plachetka,
its Chief Executive Officer, alleging violations of the Securities Exchange Act
of 1934. Those actions remain pending. See In re Pozen
Sec. Litig., 386 F. Supp. 2d 641 (M.D.N.C. 2005)
(denying defendants’ motion to dismiss).
II.
FACTUAL BACKGROUND
A.
THE PARTIES
{5}
Plaintiff Philip Stein is, and
at all relevant times has been, a common stock shareholder of Pozen. Plaintiff
Michael Rosenstock is, and at all relevant times has
been, a common stock shareholder of Pozen.
{6}
Nominal Defendant Pozen is a corporation organized and existing under the
laws of the state of
{7}
Defendant John R. Plachetka (“Plachetka”) is, and
at all relevant times has been, President and Chief Executive Officer of Pozen. Platchetka is a member of the Board of Directors of Pozen. Platchetka has served as Chairman of the Board of Directors
since January 2001.
{8}
Defendant Kristina M. Adomonis (“Adomonis”) is, and at
all relevant times has been, Senior Vice President, Business Development of Pozen.
{9}
Defendant John E. Barnhardt (“Barnhardt”) is, and
at all relevant times has been, Vice President, Finance and Administration of Pozen. Barnhardt was the Interim Chief Financial Officer of Pozen from January 2004 until August 2004.
{10}
Defendant Matthew E. Czajkowski (“Czajkowski”) was the
Chief Financial Officer and Senior Vice President, Finance and Administration
of Pozen at all relevant times until January 2004.
{11}
Defendant Andrew L. Finn
(“Finn”) was the Executive Vice President, Product and Development of Pozen at all relevant times until March 27, 2003.
{12}
Defendant Peter J. Wise
(“Wise”) is, and at all relevant times has been, a member of the Board of
Directors of Pozen.
Wise has served as Vice Chairman of the Board of Directors since January
2001.
{13}
Defendant Bruce A. Tomason (“Tomason”) is, and at
all relevant times has been, a member of the Board of Directors of Pozen.
{14}
Defendant Ted G. Wood (“Wood”)
is, and at all relevant times has been, a member of the Board of Directors of Pozen.
{15}
Defendant Paul J. Rizzo
(“Rizzo”) is, and at all relevant times has been, a member of the Board of
Directors of Pozen.
{16}
Defendant Kenneth B. Lee
(“Lee”) is, and at all relevant times since December 2002 has been, a member of
the Board of Directors of Pozen.
{17}
Defendant James R. Butler (“
{18}
Defendant Jacques F. Rejeange (“Rejeange”) is, and at
all relevant times since January 2004 has been, a member of the Board of
Directors of Pozen.
{19}
The Pozen
Board of Directors thus consisted of one insider—Plachetka—and
seven outside directors—Wise, Finn, Thomason, Wood, Rizzo, Lee,
B.
OVERVIEW OF THE FACTS
{20}
Plaintiffs allege the
following facts which, for the purposes of this motion to dismiss, will be
treated as true. Generally stated,
plaintiffs complain of insider trading on the part of several of Pozen’s officers and of statements made by Plachetka which misled the investment community as to what
clinical studies revealed about the safety and efficacy of two drugs being
developed by Pozen and their chances of gaining FDA
approval.
{21}
During the period throughout
which the alleged wrongdoing occurred, Pozen’s lead
products were MT 100 and MT 300. MT 100 was a “proprietary formulation containing metoclopramide hydrochloride and naproxen sodium” which was
designed “to enhance the effectiveness and duration of migraine symptom relief
provided by both drugs, with fewer adverse side effects than other migraine
therapies.” (Consol. S’holder
Derivative Compl. ¶¶ 4-5.) MT 300, a “pre-filled syringe containing dihydroergotamine mesylate, or
DHE,” was designed “to provide long-lasting pain relief for patients via a
convenient injectable therapy for severe migraine
attacks.” (Consol. S’holder
Derivative Compl. ¶¶ 4 & 6.)
{22}
Pozen
submitted a New Drug Application (“NDA”) to the U.S. Food and Drug
Administration (“FDA”) for MT 300 in December 2002. In July 2003, Pozen
submitted an NDA for MT 100, which was completed in January 2004. (Consol. S’holder
Derivative Compl. ¶¶ 6-7.)
{23}
The NDAs
for both MT 100 and MT 300 were ultimately rejected by the FDA, and the
rejection letters were disclosed to the public on June 1, 2004, and October 20,
2003, respectively, resulting in significant losses to the value of Pozen stock.
(Consol. S’holder Derivative Compl. ¶¶ 10-11.)
{24}
Plaintiffs allege that, prior
to the rejections, defendants “artificially inflated the prices of Pozen securities by concealing critical material
information regarding the details of both the safety and efficacy of MT 100 and
MT 300.” More specifically, they claim
that “[d]efendants concealed key adverse information
regarding known adverse effects and safety issues, as well as the design,
execution and interpretation of studies necessary to satisfactorily assess
safety and efficacy.” (Consol. S’holder Derivative Compl. ¶ 9.)
{25}
As a result of the
concealment, plaintiffs allege Pozen securities
traded at artificially inflated prices which ultimately caused millions of
dollars in damage to the company.
(Consol. S’holder Derivative Compl. ¶ 13.)
C.
INSIDER TRADING
{26}
Plaintiffs’ Amended Complaint
focuses primarily on alleged insider trading by several of Pozen’s
officers, only one of whom, Plachetka, is a member of
the Board of Directors. Specifically,
four of Pozen’s officers—Plachetka, Adomonis, Barnhardt, and Czajkowski—are alleged to have sold shares of Pozen stock while in possession of undisclosed material
adverse information. (Consol. S’holder Derivative Compl. ¶¶
17-20, 153, 159-63.)
{27}
Plaintiffs allege that
Defendant Plachetka was granted 668,750 options to
purchase Pozen stock during the relevant period and
that he sold 250,000 shares for proceeds of $4,250,000. (Consol. S’holder
Derivative Compl. ¶ 17.) Plaintiffs give no indication of what
percentage of Plachetka’s total ownership of Pozen stock the 250,000 shares constituted. The Amended Complaint does not specifically
state what adverse non-public information Plachetka
possessed at the time of sale.
Plaintiffs simply claim that “[b]ecause of his
position” in the company—as President, Chief Executive Officer, and Chairman of
the Board of Directors—Plachetka:
knew
of adverse non-public information about the business of Pozen,
as well as finances, markets and present and future business prospects, via
access to internal corporate documents, conversations and connections with
other corporate officers and employees, attendance at management and Board of
Directors meetings and committees thereof and via reports and other information
provided to him in connection therewith.
(Consol. S’holder
Derivative Compl. ¶ 17.)
{28}
Plaintiffs allege that
Defendant Adomonis was granted 131,250 options to
purchase Pozen stock during the relevant period and
that she sold 69,925 shares for proceeds of $947,162. (Consol. Derivative Compl.
¶ 18.) Plaintiffs give no indication of
what percentage of Adomonis’ total ownership of Pozen stock the 69,925 shares constituted. The Amended Complaint does not specifically
state what adverse non-public information Adomonis possessed
at the time of sale. Plaintiffs simply
claim that “[b]ecause of her position” in the
company, Adomonis:
knew the adverse non-public
information about the business of Pozen, as well as
finances, markets and present and future business prospects, via access to
internal corporate documents, conversations and connections with other
corporate officers and employees, attendance at management meetings and via
reports and other information provided to her in connection therewith.
(Consol. S’holder
Derivative Compl. ¶ 18.)
{29}
Plaintiffs allege that
Defendant Barnhardt was granted 92,450 options to
purchase Pozen stock during the relevant period and
that he sold 77,148 shares for proceeds of $1,109,134. (Consol. Derivative Compl.
¶ 19.) Plaintiffs give no indication of
what percentage of Barnhardt’s total ownership of Pozen stock the 77,148 shares constituted. Plaintiffs simply claim that “[b]ecause of his position” in the company, Barnhardt:
knew the adverse non-public
information about the business of Pozen, as well as
finances, markets and present and future business prospects, via access to
internal corporate documents, conversations and connections with other
corporate officers and employees, attendance at management meetings and via
reports and other information provided to him in connection therewith.
(Consol. S’holder
Derivative Compl. ¶ 19.)
{30}
Plaintiffs allege that
Defendant Czajkowski was granted 187,500 options to
purchase Pozen stock during the relevant period and
that he sold 25,000 shares for proceeds of $425,000. (Consol. Derivative Compl.
¶ 19.) Plaintiffs give no indication of
what percentage of Czajkowski’s total ownership of Pozen stock the 25,000 shares constituted. The Amended Complaint does not specifically
state what adverse non-public information Czajkowski
possessed at the time of sale.
Plaintiffs simply claim that “[b]ecause of his
position” in the company, Czajkowski:
knew of adverse non-public
information about the business of Pozen, as well as
finances, markets and present and future business prospects, via access to
internal corporate documents, conversations and connections with other
corporate officers and employees, attendance at management meetings and via
reports and other information provided to him in connection therewith.
(Consol. S’holder
Derivative Compl. ¶ 20.)
{31}
Plaintiffs do not indicate
what non-disclosed material information any of these directors possessed at the
time of any of these sales. Nowhere in
the Amended Complaint do plaintiffs allege the existence of any specific
knowledge on the part of any of these defendants at the time of any specific
sale; nor do plaintiffs point to any specific sources of such information. The extent of plaintiffs’ allegations of
insider trading is that four of Pozen’s officers
owned and sold stock during a three-year period and that because of their
positions in the company they must have known some adverse non-public
information at some unstated time during the same period.
D.
THE MISSTATEMENTS
{32}
In addition to allegations of
insider trading by Pozen officers, the Amended
Complaint asserts a failure of the Board of Directors to properly supervise the
conduct of and statements made by company officers during the period between
October 10, 2000, and December 2004.
While the Amended Complaint attempts to attribute the statements to
individual outside directors, it fails to do so adequately. Rather, all the direct quotations are from
officers, specifically Plachetka.
{33}
The Amended Complaint recites
a 45-page long string of allegedly improper statements made by Pozen officers relating to the development of MT 100 and MT
300. (Consol. S’holder
Derivative Compl. ¶¶ 59-151.)
{34}
Plaintiffs allege that the
first of these statements occurred on October 10, 2000, when the company filed
an SEC Form S-1/A in connection with its Initial Public Offering. (Consol. S’holder
Derivative Compl. ¶ 59.) There, the company described the benefits of
MT 100. Plaintiffs claim that the form
was misleading because it failed to note that an ingredient in MT 100 was “known
to stimulate lactation and the production of breast milk.” (Consol. S’holder
Derivative Conpl. ¶¶ 59-61.) Plaintiffs allege that the misstatements were
intended to conceal concerns about a possible link between drugs capable of
stimulating prolactin production and breast
cancer. (Consol. S’holder
Derivative Compl. ¶ 62.) Furthermore, plaintiffs allege that the
company misled investors by stating that it had entered into an agreement with
the FDA “to deviate from the requirement of two successful clinical trials to
demonstrate that the product candidate meets with standards for approval.” (Consol. S’holder
Derivative Compl. ¶ 65.)
{35}
According to the Amended
Complaint, between January 26, 2001, and February 18, 2004, the company issued
some 25 press releases regarding the development of MT 100 and MT 300 and its
ongoing efforts to gain FDA approval.
(Consol. S’holder Derivative Compl. ¶¶ 59-151.)
None of these press releases are alleged to have been authored by any
particular person—in each instance, the Amended Complaint only generally states
that the defendants collectively caused the company to issue them. (Consol. S’holder
Derivative Compl. ¶¶ 59-151.) Plaintiffs allege that these press releases
demonstrate a continued effort by the company to conceal concerns about the
efficacy of the two drugs as well as safety issues, such as the possible
connection to breast cancer. (Consol. S’holder
Derivative Compl. ¶¶ 59-151.) The Amended Complaint contends that these
statements were designed to mislead the market and conceal “the fraudulent and
defective nature of the NDA filings.”
(Consol. S’holder Derivative Compl. ¶ 111.)
{36}
In addition to press releases,
the Amended Complaint includes excerpts from five conference calls at which
Defendant Plachetka made allegedly misleading
statements regarding the safety and efficacy of MT 100 and MT 300. (Consol. S’holder
Derivative Compl. ¶¶ 59-151.)
E.
ALLEGED WRONGDOING
BY THE INDIVIDUAL DEFENDANTS
{37}
In addition to claims of
alleged insider trading by Pozen’s officers,
plaintiffs contend that by concealing information relating to the safety and
efficacy of MT 100 and MT 300, defendants breached their fiduciary duties of
good faith, fair dealing, loyalty, and due care; grossly mismanaged and abused
their ability to control the corporation; wasted corporate assets; and were
unjustly enriched. For the most part the
only wrongful actions tied to any specific defendant relate to the alleged
incidents of insider trading. In fact,
with the exception of Defendant Plachetka, plaintiffs
do not allege any wrongful action on the part of any specific member of Pozen’s Board of Directors.
{38}
Other than a single incident
of insider trading, the extent of plaintiffs’ specific factual allegations as
to Defendant Plachetka is that he concealed material
non-public information regarding MT 100 and MT 300 in various press releases
and conference calls. However, the
complaint fails to identify how or when Mr. Plachetka
came to know such non-public information.
Plaintiffs merely assert that Plachetka must
have known this information due to his position in the company, access to
corporate documents, and attendance at various meetings. (Consol. S’holder
Derivative Compl. ¶ 17.)
{39}
At no point in the complaint
do plaintiffs allege any specific wrongful action undertaken by the Board
acting as a whole.
III.
MOTION TO DISMISS
{40}
This matter comes before the
Court on the defendants’ motion to dismiss.
Defendants base their motion to dismiss on two separate grounds. First, defendants argue that dismissal is
warranted because plaintiffs failed to make a pre-suit demand on Pozen’s Board of Directors, as required by
A.
THE DEMAND REQUIREMENT
{41}
Defendants’ motion to dismiss
is based primarily on plaintiffs’ failure to make a pre-suit demand on the
corporation. Plaintiffs argue that
demand should be excused under
{42}
The derivative suit “permits
an individual shareholder to bring a suit ‘to enforce a corporate cause
of action against officers, directors, and third parties.’” Kamen, 500
{43}
The demand requirement is
premised on the idea that the decision of whether to bring a lawsuit is a
business one that is properly in the hands of the corporation’s directors,
whose role it is to manage the business and affairs of the corporation. Aronson v. Lewis, 473 A.2d 805, 811
(Del. 1984). Its purpose is to ensure
that the derivative action remains an exception to the general rule that the
appropriate party to bring suit is the corporation acting through its
directors.
{44}
Plaintiffs here concede that
they filed suit without first making demand on Pozen’s
Board of Directors. They instead argue
that demand would have been futile and that therefore their failure to make
such demand should be excused.
B.
DEMAND FUTILITY
{45}
To survive a motion to dismiss
in a case where demand is not first made on the corporation, a plaintiff must
plead facts with particularity that demonstrate the reasons why demand would have
been futile. Aronson, 473 A.2d at
815; Brehm v. Eisner, 746 A.2d 244, 254
(Del. 2000). The “pleadings must comply
with stringent requirements of factual particularity that differ substantially
from [traditional pleading requirements.
The demand requirement] is not satisfied by conclusory
statements or mere notice pleading. . . . What the pleader must set forth are
particularized factual statements that are essential to the claim.” Brehm, 746
A.2d at 254; accord Grabow v. Perot, 539 A.2d
180, 187 (Del. 1988) (“[O]nly well-pleaded
allegations of fact will be accepted as true; conclusory
allegations of fact or law not supported by allegations of specific fact may
not be taken as true.”).
{46}
Under
{47}
{48}
Where the complaint challenges
a specific action of the board of direcors,
[I]n
determining demand futility the [trial court] in the proper exercise of its
discretion must decide whether under the particularized facts alleged, a
reasonable doubt is created that: (1)
the directors are disinterested and independent and (2) the challenged
transaction was otherwise the product of a valid exercise of business judgment.
Aronson, 473 A.2d
at 814. While this two-prong test
as initially declared in Aronson is stated in the conjunctive, later
decisions have articulated that the test should be applied in the
disjunctive. See Brehm,
746 A.2d at 256.
As a consequence, under the Aronson test, a plaintiff need only
raise a reasonable doubt that either: (1) a majority of the directors is
incapable of acting in a disinterested and independent manner or (2) the
transaction was not a result of a valid exercise of business judgment.
{49}
Where no specific action
undertaken by the board as a whole is challenged, however,
{50}
Plaintiffs here do not
complain of any specific transaction undertaken by the Board of Directors as a
whole, nor do they allege that the defendants had an affirmative duty to act in
some specific way and consciously disregarded that duty. Rather, plaintiffs complain in very general
terms of the Board’s ongoing passivity in managing the affairs of the
company—particularly in its supervision of statements made by Pozen’s officers relating to the development of MT 300 and
MT 100.
{51}
Therefore, this Court applies
the singular inquiry set forth in Rales,
asking whether the plaintiffs have asserted particularized facts sufficient to
raise a reasonable doubt that a majority of Pozen’s
Board of Directors could have responded in an independent and disinterested
manner had demand been made. Under this
inquiry, the Court asks whether any of the directors were rendered “interested”
by any of the conduct alleged and, if so, whether the disinterested directors
were nonetheless capable of acting independently from those interested
directors. In conducting this analysis,
the Court considers those directors who were on the Board at the time the original
Complaint was filed. Pogostin
v. Rice, 480 A.2d 619, 624 (Del. 1984).
1.
DIRECTORIAL INTEREST
{52}
The Court first turns to the
alleged interestedness of the director defendants. To establish directorial interest, a plaintiff
must plead particularized facts demonstrating either a financial interest or
entrenchment on the part of the allegedly interested directors. Grabow v.
Perot, 539 A.2d 180, 188 (Del. 1988).
{53}
Most of plaintiffs’ grounds
for excusal assert a financial interest on the part of one or more of Pozen’s directors. A
director is financially interested where “he or she will receive a personal
financial benefit from a transaction that is not equally shared by the
stockholders.” Rales,
634 A.2d at 936 (citing Aronson, 473 A.2d at 812; Pogostin,
480 A.2d at 624). A director is also
deemed interested where a decision of the board “will have a materially
detrimental impact on a director, but not on the corporation and the
stockholders.” Rales,
634 A.2d at 936.
All of this boils down to a question of whether the decision to bring
suit would have material consequences for the director himself that differ from
those that would fall on the corporation.
For his failure to make demand to be excused, a plaintiff must
demonstrate that a majority of the directors have a direct and material
interest in the transaction or the conduct alleged. Orman v.
Cullman, 794 A.2d 5, 23 (Del. Ch. 2002).
{54}
At the time the original
Complaint was filed, Pozen’s Board was composed of
eight directors: John R. Plachetka, Peter J. Wise, Bruce A. Tomason,
Ted G. Wood, Paul J. Rizzo, Kenneth B. Lee, Jr., James R. Butler, and Jacques
F. Rejeange.
Seven of the eight directors whose independence is challenged are
outsiders. For purposes of this opinion,
the Court considers Mr. Plachetka to be an interested
director and focuses on the seven outside directors. The plaintiffs argue in their complaint that
one or more of these outside directors is financially interested for the
following reasons:
1. Defendant Plachetka himself
engaged in alleged illegal insider trading while in possession of material,
non-public information (Consol. S’holder Derivative Compl. ¶157(a));
2. Four of the directors, Defendants Tomason,
Wood, Lee, and Rizzo, were members of the Board’s Audit Committee, which
recommended that the Board include improperly audited consolidated financial
statements in various filings with the SEC (Consol. S’holder
Derivative Compl. ¶157(d));
3. The entire Board participated in, approved, or permitted the
wrongs alleged; participated in efforts to conceal or disguise them; and/or
benefited directly from those wrongs (Consol. S’holder
Derivative Compl. ¶¶ 157(e), (i), (j), (l) &
(m));
4. In order to bring suit, the directors would be forced to sue
themselves (Consol. S’holder Derivative Compl. ¶ 157(k));
5. Any suit brought by the directors on behalf of Pozen would expose those directors to liability elsewhere
(Consol. S’holder Derivative Compl.
¶¶ 157(n) & (p)); and
6. The company’s liability insurance policy does not cover
suits brought by the company against the directors directly. Therefore, if the directors were to authorize
suit, they would open themselves up to uninsured liability. (Consol. S’holder Derivative Compl. ¶
157(q).)
These arguments are considered in turn.
{55}
First, plaintiffs base their
charge of directorial interest on incidents of alleged illegal insider trading
by Defendant Plachetka. As noted above, for the purposes of this
opinion, Mr. Plachetka is considered interested. As the insider trading argument only applies
to Plachetka, the Court need not address this ground
for demand excusal.[1]
{56}
Second, plaintiffs allege that
four of the eight defendants were interested in light of their position on the
Board’s Audit Committee. The primary
thrust behind the strict demand excusal test set forth in Rales
and Aronson is a pointed rejection of the idea that directors are biased
per se merely on account of their position in a company’s corporate governance
structure. See Aronson, 473 A.2d at 815 n.8. Any
assertion that a director is interested on account of his status within the
corporation’s corporate structure must be supported by particularized facts
which would allow the court to conclude that that particular board is structurally
biased.
{57}
Here, plaintiffs complain of
self-interest on the part of the four members of the Audit Committee. Plaintiffs point to the fact that the
committee “is responsible for oversight of the financial reporting process and
system of internal control over financial reporting, and selects and oversees
the performance of, and approves in advance the services provided by, Pozen’s independent public accountants.” (Consol. S’holder
Derivative Compl. ¶ 157(d).) However, the plaintiffs fail to tie these
duties, or any failure to uphold them, to any of the misconduct which is the
basis of plaintiffs’ complaint.
{58}
The crux of the plaintiffs’
complaint is that the company misinformed its shareholders as to the safety and
efficacy of MT 100 and MT 300.[2] Plaintiffs do not complain of any misconduct
relating to the supervision of any of Pozen’s
financial statements or internal financial controls, nor do they explain how
certain directors’ status as members of the Audit Committee should enable or
require them to evaluate the accuracy of statements regarding the safety and
efficacy of MT 100 or MT 300.
{59}
The problem with plaintiffs’
attack on the disinterestedness of a majority of the directors here is that the
practical effect of the ruling they seek would make it impossible to find a
disinterested and independent board anywhere.
Plaintiffs would have the Court rule that the members of the Audit
Committee cannot be independent and disinterested simply because they were members
of the Audit Committee. Audit committees
of publicly traded companies are required to have independent and disinterested
directors comprise the committee. It
makes no sense to require audit committees to be made up of independent and
disinterested directors and then find them not to be independent and
disinterested because they are on the audit committee. Similarly, it makes no sense to hold that
other independent directors are not independent because their compensation or
nomination is dependent on the action of other directors on an audit,
compensation, or nominating committee—committees generally populated by
independent directors. The Amended
Complaint is devoid of any specific pleading that the members of the Audit
Committee had any oversight of the public statements made by management to
analysts. They did not give their prior
approval, nor were they present when the statements were made, and the
statements made by management were in the normal course of management’s
responsibility. Plaintiffs’ allegations
as to the interestedness of these four directors on account of their membership
on the Audit Committee are merely conclusory and are
insufficient to allow this Court to find that demand is excused here.
{60}
Third, plaintiffs assert that
the entire board lacks disinterest because as a whole it participated in,
approved, or concealed the wrongs alleged and/or benefited directly from those
wrongs.
{61} Clearly, the directors are not required to ensure that a pharmaceutical company with NDA filings pending publicly speculate as to all the possible problems the FDA might find in its NDA. Just as clearly, directors who are aware that management’s public statements are false should take action. It is easy to look back with 20-20 hindsight after an NDA is rejected and say the directors should have known that the NDA would be rejected and why. Investors in pharmaceutical companies, especially those engaged in research and development, should know that FDA approval is not easy to obtain and that there are often setbacks and rejections in the application process as well as clinical failures. Only by going through the NDA process can a drug company know specifically the concerns the FDA has concerning a particular drug application. The directors are not required to have the same level of scientific knowledge attributable to management; nor are directors responsible for the management of the application process. That job belongs to management. Absent specific knowledge to the contrary, the board of directors of a pharmaceutical company may rely upon management’s assessment of the safety and efficacy of the company’s products and its assessment of progress in the FDA approval process. The directors’ responsibility is to have programs in place designed to detect or discover the falsification of information provided to the FDA and the public or the suppression of information which should be provided to the FDA by FDA guidelines. In that regard, the guidance provided by Chancellor Allen in In re Caremark Deriv. Litig. is instructive:
[N]o rationally designed information and reporting system will remove the possibility that the corporation will violate laws or regulations, or that senior officers or directors may nevertheless sometimes be misled or otherwise fail reasonably to detect acts material to the corporation’s compliance with the law. But it is important that the board exercise a good faith judgment that the corporation’s information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility. Thus, I am of the view that a director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by noncompliance with applicable legal standards.
698 A.2d 959, 970 (Del. Ch. 1996).
{62}
The Amended Complaint does not
allege any specific knowledge of wrongdoing by the directors; nor does it call
into question the company’s corporate information and reporting system. Plaintiffs merely put forth conclusory allegations that defendants participated in,
approved, or benefited from the alleged wrongdoing. As such allegations have been roundly
rejected by
{63}
Fourth, plaintiffs raise the
bootstrap argument that in order to bring suit defendants would be forced to
sue themselves.
Such an argument, if accepted, would utterly obliterate the demand
requirement. Perhaps no allegation of
directorial interest has been more often asserted or more consistently rejected
in the courts of
{64}
Fifth, plaintiffs argue that demand here would have
been futile because, if the directors were to bring suit against themselves,
they would open themselves up to liability in other related litigation. Specifically, plaintiffs argue that
prosecuting suit on behalf of the company against themselves would open the
directors up to future civil litigation for securities laws violations and
would harm them in the class actions currently pending in federal district
court. (Consol. S’holder
Compl. ¶¶ 157(n) & (p).) Again, these assertions are merely conclusory and have similarly been rejected by
{65} Sixth, plaintiffs assert that the directors are interested because the company’s liability insurance does not cover suits brought directly by the company against the directors. Plaintiffs argue that the director defendants have a vested interest in ensuring that the lawsuit is derivative, rather than direct, in nature because derivative actions, unlike direct actions, are covered under the policy. (Consol. S’holder Derivative Compl. ¶ 157(q).)
{66}
This argument has commonly
been made in
{67}
In addition to showing a financial interest, a
plaintiff may establish reasonable doubt as to a director’s disinterest on an
entrenchment theory. Under
{68}
Plaintiffs allege that the director defendants
have been granted stock options, some of which are unvested and which therefore
create a financial incentive for the director defendants to retain their
positions as directors. (Consol. S’holder Derivative Compl. ¶
157(g).) The mere fact that directors
receive customary compensation such as stock options has been rejected as
grounds for demand excusal in
{69}
Plaintiffs contend that it is “reasonable to
assume that an individual who has already received, and who expects to receive
still more options of such significant value could not objectively decide
whether to commence legal proceedings against other directors.” (Consol. S’holder
Derivative Compl. ¶ 157(g).) This cursory proposition that it is
“reasonable to assume” that the Pozen directors would
be motivated to reject any demand because they would like to keep their jobs is
a far cry from the particularized pleading required for demand excusal. Plaintiffs have not provided any factual
support for this contention, nor have they provided any indication that the
directors’ jobs have in any way been threatened. These allegations are patently insufficient
and fail to establish a reasonable doubt of the directors’ disinterest. To hold that a director is interested because
he or she has long term stock options would defeat one of the primary goals of
good governance and that is to align the directors’ interest with the long term
interests of the shareholders.
Plaintiffs’ position, if adopted, would have the consequence of eliminating
long term incentives for directors.
Consequently, plaintiffs have failed to establish a reasonable doubt as
to any of the outside directors’ disinterestedness.
2.
DIRECTOR
{70} &nbs