Goldstein v. Denner, et al., C.A. No. 2020-1061-JTL (Del. Ch. June 2, 2022) (Laster, V.C.)
In this memorandum opinion, the Court of Chancery held that a plaintiff stockholder had standing, after the closing of a merger, to bring a direct claim against company fiduciaries alleging insider trading under Brophy, and that the plaintiff had stated conceivable Brophy and aiding-and-abetting claims. The Court therefore denied defendants’ motion to dismiss.
This litigation arose following a merger between Bioverativ, Inc. (the “Company”) and Sanofi S.A. (“Sanofi”). Defendant Denner was a director of the Company and was also the founder and controlling principal of an activist hedge fund, affiliated with Sarissa Capital Management, L.P. (“Sarissa”). In May 2017, Sanofi approached Denner and another Company director with an offer to buy the Company for a price representing a 64.1% premium over the then-current market price. Instead of informing the rest of the Board of this offer, however, Denner and his fellow director secretly rejected this and subsequent offers, allegedly in an attempt to delay any deal until after the expiration of the “short-swing” period under Section 16(b) of the Securities Exchange Act of 1934, which requires an insider to disgorge short-swing profits from any sale that occurs within six months of a purchase. In the meantime, Denner caused Sarissa to purchase more than a million shares of the Company’s common stock, octupling his holdings, allegedly in anticipation of a future acquisition by Sanofi.
Following the expiration of the short-swing period, the Board finally became aware of a $98.50 per share offer by Sanofi which, while higher than the initial, undisclosed offer, was still over one-third less than the Company’s standalone valuation set forth in its long-range plan. The parties ultimately reached an agreement at $105 per share. As a result of the transaction, Sarissa’s stock purchases in the Company generated $49.7 million in profit. The plaintiff challenged the deal, alleging that members of the Board and three Company officers had breached their fiduciary duties in connection with the sale and that Denner had breached his fiduciary duties by engaging in insider trading. The plaintiff also asserted that Sarissa had aided and abetted that breach. Prior to this decision on these latter claims, the Court had largely denied a motion to dismiss the traditional fiduciary duty claims based in part on Revlon. Remaining for decision were the Brophy and aiding-and-abetting claims.
In connection with the Brophy claim, defendants argued that the plaintiff lacked standing to bring the claim, which Delaware law generally characterizes as derivative, because, upon the closing of the merger, the plaintiff ceased to be a stockholder of the Company, thereby losing the authority to bring the claim on the Company’s behalf. However, the Court held that, under the Court’s precedent, a stockholder may, following a merger, assert a direct claim challenging how the merger treated an underlying derivative claim, such as a Brophy claim. This exception applies, however, only when the underlying conduct gives rise to a viable derivative claim. The Court thus turned to an analysis of whether the plaintiff’s Brophy claim could survive a motion to dismiss under Rule 12(b)(6).
The Court began by noting the required elements of a Brophy claim: namely, (1) the possession of material, nonpublic company information and (2) the improper use of that information through trades motivated, in whole or in part, by that information (i.e., scienter). As to the first element, the Court rejected the defendants’ argument that the initial offer was a non-material “casual inquiry” and instead held that, under the standard set forth in Alessi v. Beracha, 849 A.2d 939 (Del. Ch. 2004), Sanofi’s initial offer was sufficiently serious to constitute material, non-public information. In doing so, the Court “respectfully disagree[d]” with the prior explanation in Oracle that the analysis of whether information is sufficiently material under Brophy is identical to the analysis of whether information is sufficiently material that it must be disclosed to stockholders.
Next, under the second prong of Brophy, the Court held that the plaintiff had adequately pled that Denner, in causing Sarissa to purchase Company stock, was motivated by the material, non-public information (i.e., Denner had acted with scienter). In making this determination, the Court relied in part on the unusually large amounts of stock purchased by Sarissa, as compared to the amount of stock already held by Sarissa. Because the plaintiff had adequately pled an underlying Brophy claim, the Court held that the plaintiff had standing to directly challenge the merger on the basis that it did not extract separate consideration for that claim.
Because Sarissa only challenged the aiding-and-abetting claim on the basis that the plaintiff had failed to sufficiently plead an underlying breach of fiduciary duty, given that the Court sustained the breach of fiduciary duty claim, it also allowed the aiding-and-abetting claim to survive.
Lastly, the Court addressed the defendants’ argument that a direct claim based on Brophy would be duplicative of the plaintiff’s traditional fiduciary duty claims, based in part on Revlon, which the Court had previously upheld in a separate opinion. The Court rejected this argument, explaining that a requirement that a plaintiff must plead distinct, non-duplicative legal theories would be “a throwback to common law pleading” rules that no longer apply. The Court reasoned that, acting as a court of equity, it may fashion different remedies under each of the plaintiff’s claims. In connection with a traditional fiduciary duty claim, for example, a plaintiff’s potential remedy would be a class-wide damages award based on the value that the stockholders would have received if the transaction process was reasonable and resulted in the best price reasonably available. On a Brophy claim, however, the plaintiff’s remedy would be a full disgorgement of the profits obtained from the insider trades. The Court further explained that, while a plaintiff may theoretically prove liability under a traditional fiduciary duty claim, it may still fail to prove that it is entitled to damages. In that event, disgorgement may prove an alternative means of recovery. As such, the Court held that the plaintiff’s Brophy claim was not duplicative of its other fiduciary duty claims.