Delaware Federal Court Dismisses Shareholder Derivative Suit Concerning Lack of Board Diversity

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Delaware Federal Court Dismisses Shareholder Derivative Suit Concerning Lack of Board Diversity; California Federal Court Dismisses Shareholder Class Action Against Sorrento Therapeutics Regarding COVID-19 Treatment; Delaware Court of Chancery Dismisses Cannabis Company Investors' Suit as Sanction for “Contumacious” Discovery Conduct

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DELAWARE FEDERAL COURT DISMISSES SHAREHOLDER DERIVATIVE SUIT CONCERNING LACK OF BOARD DIVERSITY

On November 15, 2021, Judge Richard G. Andrews of the U.S. District Court for the District of Delaware dismissed a derivative suit filed by Qualcomm Inc. stockholders asserting that Qualcomm’s 2019 and 2020 proxy statements included false statements and misleading omissions regarding its commitment to board diversity. In dismissing the case, Judge Andrews concluded that the challenged statements were inactionable puffery or were not alleged to be false and that the challenged omissions were not alleged to have rendered the proxy misleading.

Plaintiffs alleged that “Qualcomm ha[d] repeatedly falsely represented that it has made substantial progress towards diversity and inclusion in its workplace and on the board,” that Qualcomm “is one of the few remaining publicly-traded companies without a single African American director,” and that women and other minority groups face discrimination throughout the company.

Plaintiffs asserted that Qualcomm’s directors had violated Section 14(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder, by approving proxy statements for 2019 and 2020 that contained false statements and misleading omissions and also by alleged oversight failures. Plaintiffs also asserted that Qualcomm’s directors had breached their fiduciary duties by failing to ensure board diversity and the company’s compliance with federal and state anti-discrimination and diversity laws.

With respect to the Section 14(a) claims, the court concluded that plaintiffs had failed to sufficiently allege an actionable false statement or misleading omission in Qualcomm’s proxy statements. For example, Judge Andrews noted that the company’s goal of assembling a board that “brings to us a diversity of perspectives and skills,” as stated in the 2019 proxy statement, amounted to puffery and was immaterial. The court also noted that plaintiffs failed to allege that Qualcomm’s 2020 proxy statement, which referred to the company’s plan to instruct its recruiters to search for and include female and “racially/ethnically diverse” candidates in the recruiting pool from which directors would be selected, was false or misleading. The court also rejected plaintiffs’ Section 14(a) claim based on alleged oversight failures as impermissibly “bootstrapping” a federal securities claim to a breach of fiduciary duty claim.

With respect to the breach of fiduciary duty claims, the court concluded that plaintiffs had failed to sufficiently allege that a demand that the Qualcomm board pursue plaintiffs’ claims would have been futile. Under Delaware law, pleading demand futility requires alleging particularized facts creating a reasonable doubt that a majority of the board would be disinterested with respect to the underlying claims or independent of any interested director. The court rejected plaintiffs' efforts to show that Qualcomm directors faced a substantial likelihood of personal liability, which, in light of the exculpation provision in Qualcomm’s certificate of incorporation, requires alleging particularized facts showing a breach of the duty of loyalty. The court found that the complaint lacked the necessary particularized facts because “[p]laintiffs never identify any specific laws governing racial/ethnic diversity or discrimination that were violated” and “if . . . laws were violated ..., [p]laintiffs never allege the who, what, where, when, and how of those violations.” The court also noted that “if the [b]oard [had in fact] decided to implement a business strategy designed to circumvent federal and state laws prohibiting racial discrimination, there are no particularized facts regarding either the decision or the strategy.”

While the court dismissed the complaint in its entirety, the court granted plaintiffs leave to amend certain of their causes of action.

CALIFORNIA FEDERAL COURT DISMISSES SHAREHOLDER CLASS ACTION AGAINST SORRENTO THERAPEUTICS REGARDING COVID-19 TREATMENT

On November 18, 2021, Judge Anthony J. Battaglia of the U.S. District Court for the Southern District of California dismissed a putative class action suit filed by Sorrento Therapeutics Inc. shareholders asserting that the biopharmaceutical company and two of its executives had made false statements and misleading omissions regarding the efficacy of a monoclonal antibody known as STI-1499, which Sorrento had discovered, against COVID-19. In dismissing the case, Judge Battaglia concluded that the complaint not only failed to allege adequately that the challenged statements and omissions were false or misleading, but also that it failed to allege adequately that defendants acted with scienter.

Plaintiffs asserted claims under Section 10(b), and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Securities Exchange Act of 1934. In May 2020, Sorrento announced that it discovered an antibody that “demonstrated 100% inhibition of SARS-CoV-2 virus infection” and Sorrento’s executives made similar statements, including Sorrento’s CEO describing the antibody as a 100% “cure.” Plaintiffs asserted that those statements mislead investors because the antibody was only in preclinical testing and that Sorrento’s share price fell when Sorrento later clarified that the antibody “might be” or “potentially” could be a cure and stated that the antibody could not “cure late-stage patients.”

The court concluded that plaintiffs failed to sufficiently allege an actionable false statement or misleading omission, noting that the complaint “fail[ed] to provide specific information to successfully argue that defendants allegedly made false statements about the effectivity of the antibody, lied or misled investors about its preclinical testing status, or schemed to bolster test results to increase Sorrento’s stock prices.” In particular, Judge Battaglia noted that the CEO’s statement that the antibody was a 100% “cure” amounted to puffery and was immaterial. The court also noted that plaintiffs’ contentions about the alleged misstatements were undercut when the statements were viewed in the context. For example, certain of the challenged statements appeared in articles that noted that the antibody was not yet approved by the FDA. The court further concluded that it found “nothing about the representation of [the antibody’s] success that [was] inaccurate or misleading.” The court also found that plaintiffs’ allegations failed to establish a strong interference of scienter, concluding that the “allegations that defendants were motivated by improper financial motives” lacked the requisite particularity “to indicate that defendants’ motivations were anything other than routine business objectives.” Finally, the court dismissed the Section 20(a) claims based on its dismissal of the primary violation claims.

While the court dismissed the complaint in its entirety, the court granted plaintiffs leave to file an amended complaint.

DELAWARE COURT OF CHANCERY DISMISSES CANNABIS COMPANY INVESTORS' SUIT AS SANCTION FOR “CONTUMACIOUS” DISCOVERY CONDUCT

On November 19, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery dismissed an investors' fraud suit relating to cannabis company American General Resources LLC, citing plaintiffs’ “pattern of contumacious behavior” during discovery. The dismissal order came after the court cancelled the scheduled trial and indicated that it intended to dismiss the case based on plaintiffs’ discovery misconduct.

Plaintiffs filed the suit against AGR and its principals, who operate the cannabis business Bloom Farms, in June 2020. Plaintiffs alleged that AGR and its principals lured them him into investing $5 million into AGR with fraudulent financial projections and other misrepresentations that painted an overly optimistic picture of the company.

In August 2021, Vice Chancellor Zurn found plaintiffs in contempt of court for a litany of intentional discovery misconduct, including failing to search for and produce electronic information from the laptops and email accounts used by plaintiffs, failing to institute a litigation hold, deleting text messages, giving away laptops with relevant information, refusing to answer written discovery questions regarding plaintiffs’ due diligence in connection with their investment in AGR, and failing to comply with a number of related court orders.

The Vice Chancellor concluded that plaintiffs’ discovery misconduct warranted the “ultimate sanction” of entry of a default judgment because, among other reasons, plaintiffs’ violations were willful, highly prejudicial to defendants, and persisted even after the court gave plaintiffs several opportunities to correct their course. The order also awarded defendants fees associated with the discovery issues and ordered further briefing regarding defendants’ entitlement to additional fees.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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