Facts
- A Dendreon shareholder brought a derivative action against Dendreon’s officers and directors, alleging fiduciary-duty-based insider trading and seeking disgorgement.
- Dendreon’s only FDA-approved product during the relevant period was Provenge, an immunotherapy for advanced prostate cancer.
- Provenge was expensive (about $93,000 per treatment course) and sold under a “buy and bill” model requiring providers to pay up front and later seek reimbursement.
- After FDA approval in April 2010, the company allegedly tracked canceled infusions and other indicators tied to reimbursement uncertainty and provider reluctance to prescribe Provenge.
- Board-level information allegedly identified reimbursement as a key business risk, including analysis that reimbursement problems could reduce revenue by more than $100 million and provider survey results reflecting low confidence in reimbursement.
- While allegedly in possession of this nonpublic information, defendants allegedly sold over $78 million in company stock, including over $56 million within a day of FDA approval.
- In August 2011, the company publicly acknowledged reimbursement issues had significantly depressed actual and forecasted revenues, and the stock price allegedly fell 67% overnight.
Issues
- Whether pre-suit demand on the board was excused as futile under Rule 23.1 because a majority of directors could not exercise disinterested, independent judgment.
- Whether the complaint pled a viable fiduciary-duty insider trading claim under Brophy sufficient to survive dismissal under Rule 12(b)(6).
Decision
- The court denied defendants’ motion to dismiss.
- The court held demand was excused because the allegations created reasonable doubt that a board majority could consider a demand disinterestedly and independently.
- The court held the complaint adequately stated a Brophy claim by alleging material nonpublic information, fiduciary status, and suspiciously timed and sized trades supporting an inference of use of inside information.
- The case was permitted to proceed, with disgorgement of trading profits available as potential relief.
Legal Principles
- Demand is excused under Delaware law when particularized allegations create reasonable doubt that a majority of the board can exercise independent and disinterested judgment in responding to a litigation demand (applying Aronson/Rales principles).
- Under Brophy, a corporate fiduciary who uses confidential corporate information for personal gain may be liable to the corporation, with disgorgement as an equitable remedy.
- At the pleading stage, particularized allegations of internal warnings about a material risk, coupled with unusually timed and significant insider sales, can support an inference that fiduciaries traded while aware of and using material nonpublic information.
Conclusion
The Court of Chancery allowed a derivative insider-trading case to proceed where the complaint plausibly alleged that directors and officers sold stock while aware of serious, undisclosed reimbursement risks affecting the company’s sole product, thereby excusing demand and stating a non-exculpated Brophy fiduciary-duty claim.