On June 3, 2022, the Delaware Court of Chancery dismissed the final two counts in an action against California biotech firm Vaxart, Inc., finding that plaintiffs failed to adequately allege that certain non-public information was material to a shareholder vote.
In September 2020, shareholders sued Vaxart’s directors and its former majority shareholder Armistice Capital LLC, alleging they wrongfully profited from non-public information about Vaxart’s efforts to develop a COVID-19 vaccine. In December 2021, Vice Chancellor Paul A. Fioravanti dismissed three of the five counts in the suit, including all claims against Armistice Capital.
The underlying action stems from the Vaxart board’s approval of an amendment to the company’s incentive compensation plan, which increased the number of shares eligible for grant. On April 24, 2020, Vaxart issued a proxy statement for its annual shareholder meeting, seeking shareholder approval for the plan amendment, which was approved at the meeting on June 8, 2020. A few weeks later, Vaxart announced that it had been selected to participate in a study sponsored by Operation Warp Speed (“OWS”), the federal government’s initiative to accelerate the development of a safe and effective COVID-19 vaccine. The company’s stock price rose significantly following the announcement. Plaintiffs alleged that, as a result of the board’s failure to disclose the OWS invitation before the annual meeting, the shareholder vote on the plan amendment was uninformed, and Vaxart directors were unjustly enriched by “their receipt of ‘stock options whose value they knew would be inflated by the OWS announcement.’”
The court rejected both theories, reasoning that (1) Vaxart had indisputably not yet been invited to participate in the OWS study when it issued its April 2020 proxy statement, and (2) plaintiffs failed to allege sufficient facts to support an inference that the OWS invitation was material to the plan amendment vote, such that Vaxart would have any duty to supplement its proxy.
In reaching this conclusion, the Vice Chancellor considered, among other things, the “soft” nature of the invitation to participate in the OWS study — which was still subject to negotiation at the time of the annual meeting — as well as the absence of well-pleaded, factual allegations that the board knew an invitation to participate in a single, non-human research study would trigger a “massive increase” in stock prices. The dismissal of the remaining counts of unjust enrichment and breach of fiduciary duty now concludes the case in the Chancery Court.
Federal Securities Fraud Claims Against Biotechnology Company Dismissed, With Leave to Amend
On May 31, 2022, the U.S. District Court for the Northern District of California dismissed a securities fraud lawsuit against biotechnology firm Precigen, Inc. and its officers, finding the complaint failed to allege scienter.
In September 2020, the U.S. Securities and Exchange Commission (“SEC”) issued a cease-and-desist order related to Precigen’s public statements touting the results of its methane bioconversion efforts — an initiative designed to convert methane into commercial end-products. The SEC claimed these statements were misleading because the company failed to disclose that it used significantly more expensive materials during testing than had previously been disclosed.
Investors later sued on the same grounds, alleging the company’s public descriptions of the efficiency and economic viability of its methane bioconversion platform, including statements that the program was “in the money,” were misleading. Also alleged to be misleading were public statements that Precigen “may” become subject to governmental investigations, when it was under an active SEC investigation at that time. The complaint alleged that these statements and omissions artificially inflated the company’s stock prices, in violation of federal securities laws.
The court found the allegedly false and misleading statements to be nonactionable puffery, statements of optimism, forward-looking statements, and opinions. According to the court, the complaint sufficiently established the falsity of Precigen’s statements about potential government investigations, as well as loss causation and damages. The court nonetheless dismissed the complaint, reasoning that it failed to adequately allege scienter under the “core operations” doctrine, which allows an inference of fraudulent intent when the relevant facts are so central to a company’s operations that its management cannot plausibly claim ignorance, noting that the methane bioconversion platform was only one of Precigen’s many enterprises at that time.
The court dismissed without prejudice, giving plaintiffs leave to amend, and specifically suggested that they “par(e) down the alleged false and misleading statements to those that pertain to testing results and assessments that the MBP program was ‘in the money’ at the time of the statement.”
Tivity Health Investors Win Class Certification in Securities Action Based on $1.3b Nutrisystem Acquisition
On June 7, 2022, the U.S. District Court for the Middle District of Tennessee certified a class of investors in a securities fraud suit against healthcare company Tivity Health Inc. and its executives, finding that questions common to the class predominate over any questions specific to individuals.
The investors’ claims arise out of Tivity Health’s 2019 acquisition of Nutrisystem, Inc. Plaintiffs allege that Tivity painted a “deceitfully rosy” picture of the transaction by making misleading statements about Nutrisystem’s performance prior to the acquisition and touting its impact on the performance of Tivity’s new “nutrition segment.” Specifically, plaintiffs allege that the company reported that its nutrition segment was “performing well,” at $13.3 million EBITDA. Plaintiffs allege that these statements were misleading, because Tivity executives failed to disclose that Nutrisystem incurred an $8.3 million loss due to its poor performance during the premerger weeks of first quarter 2019, reducing the actual adjusted EBITDA to roughly $5 million. According to the complaint, Tivity tried to recoup the loss by launching a “buy one, get one free” offer to customers; it was not until these efforts failed that Tivity reported, in February 2020, its significantly lower EBITDA and announced a charge that allegedly reduced the value of the goodwill associated with the Nutrisystem acquisition. Tivity’s revised announcement allegedly resulted in a stock price drop of more than 45%.
The court certified the proposed class of investors who purchased or acquired Tivity common stock between March 8, 2019 and February 19, 2020 — excluding the Tivity executives named as individual defendants and their family members. In reaching this conclusion Judge Waverly D. Crenshaw, Jr. held that questions common to the class predominated over questions applicable only to individuals. Namely, Judge Crenshaw disagreed with defendants’ argument that the question of reliance would vary among members of the class, applying Basic Inc. v. Levinson, 485 U.S. 224, 245 (1988) to find that plaintiffs were entitled to a rebuttable presumption of reliance due to their “fraud on the market” theory. In addition, the court credited the methodology for measuring class-wide damages offered by plaintiffs’ expert.
The court also held that plaintiffs had adequately alleged a claim for scheme liability, rejecting defendants’ argument to the contrary under Lorenzo v. Sec. & Exch. Comm’n, 139 S. Ct. 1094, 1109 (2019), which the court read to allow scheme claims based on mere misrepresentations or omissions, as opposed to deceptive acts.
Delaware Court Of Chancery Rejects Amazon Stockholder’s Bid To Inspect Books And Records As “Overreach”
On June 1, 2022, the Delaware Court of Chancery entered judgment in favor of Amazon concerning a books and records demand action brought pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”) by Amazon shareholder Oklahoma Firefighters Pension and Retirement System. In a post-trial opinion, Vice Chancellor Lori Will found that the plaintiff was not entitled to inspect a “wide array” of documents relating to Amazon’s compliance with antitrust and tax law because the plaintiff (1) had not demonstrated a proper purpose for inspection; and (2) had not shown why documents Amazon had earlier agreed to produce were not sufficient to satisfy its inspection demand.
On June 5, 2020, the plaintiff sent Amazon a Section 220 demand (the “Demand”) seeking inspection of certain books and records for the purpose of investigating whether Amazon’s officers and directors had breached their fiduciary duties by allowing Amazon to potentially violate United States antitrust law or to unlawfully avoid state taxes, and determining whether Amazon’s board members were independent and disinterested. In support of its Demand, the plaintiff cited several ongoing and past government investigations into alleged anticompetitive conduct by Amazon, as well as a $12.5 million fine levied by the South Carolina Department of Revenue in 2017 for failure to properly pay certain state taxes in 2016. The Demand sought 19 categories of documents, including Board minutes, materials, corporate policies, and files relating to internal investigations going back to 2011.
Amazon’s response to the Demand asserted that the Demand did not state a proper purpose for the requested inspection, but Amazon eventually agreed to produce eighteen months of board meeting minutes and materials concerning certain issues regarding Amazon’s compliance with U.S. and EU antitrust laws and state tax laws, but redacted all unrelated information from the Board materials. In total, Amazon produced 729 pages of documents. The plaintiff filed suit in June 2021 seeking production of additional documents, claiming that Amazon’s production contained no insight into Amazon management’s assessment of antitrust risks and that the redactions rendered the documents useless.
The court held a trial on the matter on February 14, 2022. At trial, the plaintiff also raised two additional events that had occurred after the submission of its Demand: (1) a May 2021 lawsuit by the D.C. Attorney General against Amazon for violations of D.C. antitrust laws, which was eventually dismissed, and (2) a €1.13 billion fine levied by Italian antitrust authorities against Amazon for alleged violations of Italian antitrust law. The court concluded that the plaintiff was not entitled to inspect the requested documents because it had failed to state a proper purpose for inspection and failed to demonstrate that the requested documents were necessary and essential to its stated purposes for the demand. The court noted that because the Demand’s primary asserted purpose was to investigate purported mismanagement by Amazon’s officers and directors, the plaintiff was required under Delaware law to show by a preponderance of the evidence a credible basis to suspect possible mismanagement. The court found that the plaintiff had failed to do so.
First, the court rejected the plaintiff’s argument that the mere existence of ongoing government investigations and litigation regarding Amazon’s compliance with antitrust and tax laws created a credible basis to suspect possible mismanagement, noting that “Delaware courts have routinely looked to some additional evidence beyond ongoing inquiries or litigation to find that a plaintiff has met its burden.” The court concluded that the plaintiff had failed to provide any “plus factor” beyond the mere existence of these investigations and litigation that would indicate possible mismanagement because the investigations cited by the plaintiff were either still ongoing or had not resulted in any further action against Amazon, and the D.C. litigation had been dismissed. And while the court noted that the €1.13 billion fine levied by Italy’s antitrust regulator provided more substantial evidence of possible wrongdoing, the court ultimately found that it did not help the plaintiff satisfy its burden because: (1) the fine was not raised in the plaintiff’s Demand; and (2) a fine resulting from alleged violations of Italian antitrust law was not sufficient to support the plaintiff’s asserted purpose of investigating whether Amazon’s directors breached their fiduciary duties in connection with violations of domestic antitrust law.
Second, the court similarly concluded that the plaintiff had failed to meet its burden to provide a credible basis to suspect mismanagement regarding Amazon’s state tax compliance. The plaintiff cited only a single $12.5 million fine levied against Amazon by South Carolina in 2017, which the court found did not constitute evidence of wrongdoing sufficient to support a broad investigation into Amazon’s tax law compliance, given its age and the immaterial size of the fine. The court also quickly rejected the plaintiff’s other stated purpose of investigating the independence and disinterestedness of Amazon’s directors, noting that the plaintiff made no allegations in its Demand or complaint calling into question any of the directors’ independence.
In addition to holding that the plaintiff had failed to state a proper purpose for inspection, the court also found that the plaintiff had failed to show that the additional documents it sought were necessary to its stated purpose for inspection in light of the substantial amount of documents Amazon had already voluntarily produced. The court found that the eighteen months of board minutes and materials produced by Amazon were sufficient for the plaintiff to investigate whether the Amazon board had exercised proper oversight, and rejected as an “overreach” the plaintiff’s desire to inspect a wide range of documents concerning Amazon’s business practices over an 11-year time period.
Ninth Circuit Affirms Dismissal Of Securities Fraud Complaint Against Nektar Therapeutics
On May 19, 2022, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal of a securities suit against Nektar Therapeutics, finding that the plaintiffs had failed to allege that any of Nektar’s statements concerning the interim clinical trial results of its flagship drug candidate were materially false or misleading, and had failed to allege loss causation.
Nektar is a biotech company that develops drugs for cancer, autoimmune disease, and chronic pain. The suit stems from Nektar’s announcement of interim results from the Phase 1 clinical trial, called “EXCEL,” of its flagship drug candidate, NKTR-214, which stimulates the body’s immune system to attack cancer cells. As the EXCEL trial was ongoing, Nektar reported interim results in 2017 in a chart claiming to show that “cancer-fighting cells increased by an average of 30-fold in tumors” of ten patients dosed with NKTR-214 in the study (out of 28 total patients).
After these promising results were disclosed, Nektar launched a new Phase 1/2 trial of NKTR-214 called “PIVOT.” While the EXCEL trial tested NKTR-214 as a monotherapy, PIVOT tested the effectiveness of NKTR-214 in combination with another drug in patients with several different types of tumors. In November 2017, Nektar presented data from this trial indicating that 85% of melanoma patients in the PIVOT study were responding to the treatment. But in June 2018, Nektar disclosed further data showing that the response rate for NKTR-214 in melanoma patients had declined to 50%. Following this announcement, Nektar’s stock price dropped by 42%. Several months later, anonymous short sellers issued a report claiming that a different chart released by Nektar indicates that one outlier patient among the ten patients originally disclosed in the 2017 interim EXCEL trial results had experienced a 300-fold increase in cancer-fighting cells, which skewed the results reported by Nektar, which purported to give the average across all ten patients.
Following these events, Plaintiffs filed this suit alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs primarily argued that Nektar’s statements regarding the interim EXCEL trial results were materially misleading because Nektar failed to disclose that the 30-fold average increase in cancer-fighting cells reported by Nektar included the outlier patient who had experienced a 300-fold increase. The complaint also cited a confidential witness who claimed that the outlier patient was included in the interim results reported by Nektar and that the 30-fold average would have been much smaller without this patient’s data. Plaintiffs contended that Nektar’s misleading presentation of the interim EXCEL trial results created a false impression that NKTR-214 was more effective than it really was, which allegedly inflated the market’s expectations until the release of the June 2018 data form the PIVOT study.
The court first found that the complaint failed to establish that the inclusion of the outlier patient’s results in the interim EXCEL results rendered them materially false or misleading. The court noted that the complaint failed to adequately allege what exactly the results would have been had the patient been excluded. Further, even if the complaint included adequate allegations about the adjusted results, the court found that it failed to explain why a lower reported increase would have been material to investors or would have even suggested that the drug was less effective. For instance, it could be the case that a 30-fold increase would have provided no marginal increase in effectiveness over a 15-fold increase.
The court also found that plaintiffs had failed to establish an additional element of their securities fraud claims: that plaintiffs’ losses were caused by the alleged misstatements regarding the interim EXCEL trial results. The court noted that to satisfy the loss causation element of their securities fraud claims, the plaintiffs needed to adequately allege that the purported “corrective disclosures” — i.e. the PIVOT trial results or the short-seller report — caused Nektar’s stock price to drop because they exposed that the earlier interim EXCEL trial data disclosed by Nektar was false or misleading, and not merely because these disclosures revealed unrelated negative information.
First, the court found that the reported disappointing later results from the PIVOT trial did not suggest that the earlier reported interim results from the separate EXCEL trial were incorrect or flawed, because differences between the two trials could explain the different results. The PIVOT trial used a different treatment (NKTR-214 along with another drug, as opposed to NKTR-214 by itself) and different diagnostic measurements (tumor shrinkage rather than biomarker data) than the EXCEL trial. Second, the court also rejected plaintiffs’ argument that the market would have viewed the anonymous short-seller report as revealing new information indicating that the interim EXCEL results were false or misleading. While the court found that the report might have revealed new information to the market because “(i)ts analysis pulled together disparate sources and connected data in ways that were not plainly obvious,” the court concluded that it was not plausible that the market would have believed that the anonymous report actually revealed that the interim EXCEL results were false. The court reasoned that because the report disclosed that it was made by self-interested short-sellers who disclaimed any representations regarding the accuracy of the report, investors “would have taken its contents with a healthy grain of salt.” Plaintiffs have not yet filed any petition for further appellate review.