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  • Delaware Court Of Chancery Dismisses Derivative Breach Of Fiduciary Duty Claims In Connection With Publication Of Non-Final Drug Trial Results For Lack Of Demand Futility
     
    03/06/2018
    On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed claims against the directors of Orexigen Therapeutics Inc. (“Orexigen”) for alleged breaches of fiduciary duty in connection with the company’s clinical drug trials.  Orexigen Therapeutics Inc. v. Michael A. Narachi, et al., C.A. No. 12412-VCMR (De. Ch. Feb. 28, 2018).  Plaintiffs asserted that the directors violated the law because they failed to follow best practices with respect to clinical trials; consequently, plaintiffs argued that demand was futile because a majority of the board faced substantial risk of liability.  The Court dismissed these claims, finding that the Company’s actions were not “so egregious or irrational” as to violate the business judgment rule and, accordingly, demand futility had not been adequately pleaded.

    Plaintiffs alleged that, during the clinical trial phase of an obesity drug, the Orexigen directors caused the company to violate the law by publicizing early results suggesting that the drug might have unexpected cardiovascular benefits.  The information became public after the company sought to patent the drug for cardiovascular treatment.  According to plaintiffs, the publicity not only compromised the ongoing trial, which required Orexigen to undertake a costly new clinical trial, but also ultimately resulted in a stock drop once it was revealed in the subsequent trial that the cardiovascular benefits were an aberration.  Plaintiffs asserted that the directors faced a high likelihood of liability for causing the company to violate positive law and argued that demand on the board in advance of litigation was therefore excused.

    The Court rejected this argument, finding that the company broke no laws and describing the suit as “a prime example of the difference between a best practice and a legal obligation.”  Specifically, the Court explained, “Plaintiff sets forth an in-depth explanation of best practices in clinical drug trials . . . but Plaintiff fails to point to a single legal obligation the directors violated.”  The Court also rejected plaintiffs’ alternative argument that the board’s actions were so egregious that they were not a valid exercise of the business judgment rule, constituted waste, and violated the duty of loyalty by breaching confidentiality obligations.  Given that early data did in fact indicate that the drug had cardiovascular benefits, and that the directors acted to try to protect potential profits in connection with those benefits, the Court did not have “reason to doubt that [the outcomes alleged by plaintiffs] stemmed from rational, good faith decisions of faithful, loyal directors.”
    CATEGORIES: Demands on Boards, Fiduciary Duties

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