Thursday, October 01, 2020

Clovis investor can’t ‘bootstrap’ state law fiduciary duty claims

By Anne Sherry, J.D.

A derivative plaintiff failed to plead a valid Exchange Act Section 14(a) claim and instead unsuccessfully attempted to "bootstrap" such a claim on state-law allegations of breach of fiduciary duty. Dismissing the action, the district court in Colorado determined that the plaintiff’s allegations that Clovis directors breached their fiduciary duties by misrepresenting the state of a drug trial were run-of-the-mill state law claims that did not rise to the level of self-dealing sufficient to create a standalone Section 14(a) claim. Even if this were not the case, the plaintiff pointed to no outright false statements, nor statements that were rendered false due to nondisclosure (Guo v. Mahaffy, September 29, 2020, Jackson, R.).

Clovis was in close competition with AstraZeneca PLC to develop a drug to treat lung cancer. AstraZeneca’s drug candidate, Tagrisso, hit required milestones using "confirmed" results. Clovis reported that its drug candidate, rociletinib, exhibited a 58 percent objective response rate. In fact, this number was not confirmed and thus misrepresented the true ORR. When investors learned that the confirmed ORR was only 28-34 percent, Clovis’s stock price dropped 70 percent in one day, a loss of $2.6 billion in market capitalization. Despite the defendants’ assurances that rociletinib could still be a success, the drug’s outlook grew even worse when the FDA disclosed that the drug’s life-threatening side effects would require it to bear the strongest safety warning if it were approved. In 2016, Clovis withdrew the drug’s FDA application and terminated clinical trials.

Litigation ensued. Clovis settled an investor class action for $142 million. The SEC also brought charges, which Clovis settled for $20 million; two individual defendants each paid six-figure penalties. Stockholders also filed a derivative action in the Delaware Court of Chancery, which is currently stayed pending an internal investigation. The instant case, also a derivative stockholder action, alleged that the individual defendants violated Securities Act Section 14(a) and breached their fiduciary duties. But the court found the plaintiff failed to state a claim under Section 14(a) and that the breach-of-duty claim was restricted to Delaware state court under a forum-selection clause in Clovis’s certificate of incorporation.

The court first determined that the complaint improperly bootstrapped a state-law fiduciary duty claim onto a federal Section 14(a) claim. While there was no law directly on point in the circuit, other circuit courts of appeals have held that mere breaches of fiduciary duty cannot form the basis for a Section 14(a) claim in the absence of self-dealing or other director misconduct. Furthermore, the District of Colorado has declined to allow bootstrapping in the context of Section 10(b) claims. The court followed the reasoning of its own caselaw in the 10(b) context and of sister circuits’ opinions in 14(a) cases to hold that Section 14(a) does not extend to state breach-of-duty claims absent allegations of self-dealing.

Furthermore, the plaintiff’s allegations did not plead self-dealing sufficient to state a Section 14(a) claim. The closest the complaint came was alleging that the defendants were reelected to the board and retained their "undeserved director compensation," but this was insufficient as it would render an insider liable under Section 14(a) for virtually any action, even if it only benefitted the company. The complaint lacked any allegation that an officer or director received extra compensation, garnered personal business opportunities, or engaged in self-serving deceitful behavior.

Even taking the allegations on their merits, the plaintiff would fail to allege false or misleading statements in Clovis’s proxy statement. The plaintiff identified statements concerning Clovis’s governance structure and responsibilities and characterized them as "affirmative statements of compliance with law, regulations, and Company governance rules." But even if stockholders could make inferences from the disclosures, Section 14(a) requires a false or misleading statement, not an inference or interpretation. The complaint lacked any allegations that the board and its committees did not conduct the roles described in the proxy disclosure. Similarly, while it was undisputed that the proxy statement did not disclose the alleged fraud at the company, the plaintiff did not point to any disclosures rendered false or misleading due to that nondisclosure.

The court also addressed the defendants’ argument that the breach-of-duty claim was restricted to the Delaware Court of Chancery by a forum-selection clause in the certificate of incorporation. The plaintiff did not contest the enforceability of this clause, and the court held that it governed the claim for breach of fiduciary duty, which the plaintiff may refile in the Delaware court.

The case is No. 17-cv-00706.