United States: Delaware Court Of Chancery Highlights The Significance Of Director Oversight Of "Mission Critical" Operations

On October 1, 2019, Vice Chancellor Joseph Slights of the Delaware Court of Chancery issued an opinion in In re Clovis Oncology, Inc. Derivative Litigation, in which he found that stockholder plaintiffs had stated a claim against the board of directors based on allegations that they 1) repeatedly failed to monitor the accuracy of the company's clinical trial protocols and compliance with regulatory mandates, and 2) then allowed the company to mislead the market regarding the efficacy and likely FDA approval of one of the company's primary drugs under development.

Clovis marks the second case in recent months in which a Delaware court has allowed stockholder plaintiffs to proceed with a derivative breach of fiduciary duty action on the basis of an alleged failure of oversight, often referred to as a Caremark claim after a seminal Delaware decision in this area.

The Decision

Clovis is a biopharmaceutical firm that had one "especially promising" cancer drug (Rociletinib) under development, which the court described as Clovis's "mission critical product." The plaintiffs alleged that, in pursuing FDA approval for Rociletinib, Clovis adopted a well-known clinical trial protocol called RECIST, which incorporated a success-defining metric called objective response rate (ORR). The plaintiffs further alleged that the board knew that investors would not view an ORR incorporating unconfirmed (as opposed to clinically confirmed) responses as meaningful, nor would the FDA approve the drug based upon such results. Yet, despite such knowledge, the board, according to the plaintiffs, allowed the company to report an ORR of 60 percent, which was based in part upon unconfirmed responses, and which gave the market the impression that the drug was showing more promise than the "correct" ORR using only confirmed responses would have indicated. The board was also allegedly aware of other clinical trial violations and side effects, which indicated additional concerns with the drug, but did not ensure the company's announcements with the respect to the drug were tempered. When the "correct" ORR of 28-34 percent was disclosed to the market, Clovis's stock price dropped 70 percent, wiping out $1 billion in market value.

Plaintiffs brought derivative claims against the board of directors for breach of fiduciary duty for failing in their oversight obligations. In holding that all of the directors faced a substantial likelihood of liability under Caremark, the court looked to the Delaware Supreme Court's recent decision in Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), which allowed fiduciary duty oversight claims against a board and senior members of management following the listeria outbreak at Blue Bell Creameries to go forward, 1 and noted that "when a company operates in an environment where externally imposed regulations govern its mission critical operations, the board's oversight function must be more rigorously exercised." Plaintiffs adequately alleged that the directors failed in this regard with allegations that the directors knew that 1) RECIST and FDA guidance required reporting ORR based only on confirmed responses, and 2) management was publicly reporting ORR based in part on unconfirmed responses in order to keep up with competitors' reported ORR, but the directors did nothing to address this fundamental departure from RECIST.

In reaching its conclusion, the court noted that the board consisted of directors who had extensive experience in the pharmaceutical industry. In looking to board decks and minutes the plaintiffs obtained through a books and records demand, the court went into detail about the way the board was allegedly "hyper-focused" on the drug's development and clinical trial, and thus, given their education and experience, the directors either knew—or should have known—that management was reporting incorrect ORR data, and the board did nothing to address it.

The defendants had vigorously protested the plaintiffs' allegations, including whether or not RECIST requires only confirmed responses be included in ORR, whether FDA guidance was clear, and whether the FDA had otherwise blessed Clovis's plan to report unconfirmed responses. The defendants also argued that certain of the board materials provided in response to the books and records demand contradicted the plaintiffs' allegations, and that the court should consider those materials under the parties' agreement that all such materials should be deemed incorporated into the complaint. The court refused to consider these arguments, however, finding that they were factual issues that would be explored in the discovery process and that one set of documents could not be used to contradict the plaintiffs' well-pled factual allegations based upon other documents produced in response to a books and records demand. 2

Interestingly, the court noted that, although the plaintiffs' allegation that the board's failure of oversight caused harm to the company was sufficient to survive dismissal, plaintiffs' ability to show "causation will be challenging" because they "may have difficulty connecting the oversight failure(s) to the corporate trauma" due to the possibility that the drug may have failed with or without the board's alleged inaction.

At the same time, the court rejected plaintiffs' claims for breach of fiduciary duty under Brophy (for trading on the basis of alleged insider information) and unjust enrichment. Plaintiffs had pointed to stock sales made by four of the defendants in advance of the "corporate trauma soon to come." The court noted that the size of the trades relative to the defendants' overall stock holdings was an important consideration in analyzing the Brophy claims. Because these defendants sold only a "sliver" of their overall stake in Clovis (selling between $223,536 and $2,786,031 worth of stock in the trades in question, but retaining between 96 and 99.9 percent of their holdings), the court dismissed the claims.

Takeaways

  • While Caremark claims have been traditionally viewed as difficult for plaintiffs, Delaware courts have recently shown a willingness to allow such claims to proceed at the pleadings stage, particularly when they involve a failure of oversight with respect to regulatory and legal compliance as to a company's "critical product."
  • Pharmaceutical companies and their directors should pay close attention to disclosures regarding clinical studies and progression of any "mission critical" drugs.
  • Pharmaceutical companies should carefully consider their clinical trial protocols and director oversight thereof, including how such trials are described in company materials and communications with the FDA, given that such materials are often subject to stockholder books and records demands and can potentially be taken out of context.
  • More generally, as part of directors' fiduciary duty oversight obligations and given the recent Delaware Supreme Court guidance, boards should ensure that they regularly spend adequate time on regulatory and legal compliance issues, that there is a system in place for management to report any concerns up to the board, and that the board's processes are properly documented in board minutes.

Footnote

1 Our summary of that decision is available here: https://www.wsgr.com/WSGR/Display.aspx?SectionName=publications/PDFSearch/wsgralert-blue-bell.htm.

2 The court specifically noted that "our courts must regulate how far down the road of incorporation by reference a defendant may go when plaintiff has well-pled something as fact (e.g. that the Board understood ORR), even if another document might suggest the facts are otherwise. Section 220 documents may or may not comprise the entirety of the evidence on a particular point. Until that is tested, Defendants cannot ask the court to accept their Section 220 documents as definitive fact and thereby turn pleading stage inferences on their head. That is not, and should not be, the state of our law."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions