1
2
3
4
5
6
7
8
SUPERIOR COURT OF THE STATE OF CALIFORNIA
9
COUNTY OF SANTA CLARA
10
11
IRA J. GAINES, IRA, and
MATTES FRIESEL,
12
13
14
15
16
17
Plaintiffs,
ORDER
v.
LELAND F. WILSON, PETER Y. TAM,
MARK B. LOGAN, LINDA M. DAIRIKI
SHORTLIFFE, CHARLES J. CASAMENTO,
ERNEST MARIO, ROBERT N. WILSON, J.
MARTIN CARROLL, JORGE PLUTZKY,
TIMOTHY E. MORRIS, and DOES 1 through
25, Inclusive,
18
Defendants,
19
- and -
20
VIVUS, INC.,
21
Case No. 1-13-CV-249436
Nominal Defendant.
22
23
24
25
26
27
28
ORDER
1
2
3
4
5
This is a shareholder derivative action brought by Ira J. Gaines, IRA and Mattes Friesel
(“Plaintiffs”), shareholders of nominal defendant Vivus, Inc. (“Vivus”), a Delaware corporation
headquartered in Mountain View, California that develops therapies to address obesity.1
According to the Verified Shareholder Derivative Complaint (the “Complaint”), Vivus sells the
Federal Drug Administration (“FDA”) approved drug “Qsymia” for weight loss.2
6
7
8
9
10
11
The named defendants include Vivus (nominally), members of its Board of Directors
including Leland F. Wilson (“L. Wilson”), Peter Y. Tam (“Tam”), Mark B. Logan (“Logan”),
Linda M. Dairiki Shortliffe (“Shortliffe”), Charles J. Casamento (“Casamento”), Ernest Mario
(“Mario”), Robert N. Wilson (“R. Wilson”), J. Martin Carroll (“Carroll”), and Jorge Plutzky
(“Plutzky”), and Vivus’s Senior Vice President, Finance and Global Corporate Development and
Chief Financial Officer Timothy E. Morris (“Morris”) (collectively the “Individual Defendants”).
12
13
14
15
16
17
18
19
20
21
22
23
24
25
The case arises out of Vivus’s unsuccessful launch of Qysmia, as well as allegations that
L. Wilson, Tam, Logan, Shortliffe, Casamento and Morris (the “Insider Trading Defendants”)
sold $26.5 million worth of Vivus stock while in possession of material, non-public information
that Vivus would be unable to profitably launch Qysmia.3 Specifically, Plaintiffs allege that the
Insider Trading Defendants sold their shares in Vivus while in possession of the following nonpublic material information: “(1) Vivus could not profitably launch Qsymia on its own, (2) its
use of a ‘rented’ sales force instead of partnering with a major pharmaceutical, would cause
Vivus’s SG&A (Selling, General and Administrative) expenses to skyrocket dramatically; (3)
given these skyrocketing costs, and the limitations which the FDA placed on Vivus’s distribution
of Qysmia, known as Risk Evaluation and Mitigation Strategies or REMS, which only allowed
Vivus to distribute through a very limited number of mail order pharmacies, Vivus would be
unable to earn sufficient revenues to cover its skyrocketing costs; (4) Vivus had not sufficiently
test marketed the price sensitivity of Qysmia to consumers, later resulting in patient abandonment
of the drug due to their unwillingness or inability to use the drug at full cost and/or, in order to
26
27
28
1
2
3
Verified Shareholder Derivative Complaint (“Compl.”) ¶ 15.
Compl. ¶ 15.
Compl. ¶¶ 3, 26.
1
ORDER
1
2
3
4
5
6
7
encourage sales, the Company having to engage in large price discounts; (5) the Company’s
excessive cash burn rate would cause the Board to seek emergency financing at disadvantageous
rates and terms to the Company; (6) the Company’s pay structure to both inside and outside
directors was exorbitant and more than those of competitors, thereby increasing the Company’s
cash burn rate; and (7) that given these limitations, the Company would only be able to engage in
a ‘controlled’ or ‘staged’ launch of Qysmia, and thus would be unable to capture the full market
then available for the drug.”4
8
9
10
11
12
13
14
15
Plaintiffs allege that the Individual Defendants touted Vivus’s ability to successfully
launch Qsymia without disclosing the non-public material information, and that during the
“Insider Trading Period” of February 23, 2012 to August 20, 2012,5 the Insider Trading
Defendants took advantage of positive analysts’ estimates of Vivus’s earnings that were based on
the misleading statements.6 Plaintiffs allege that historical data shows the Insider Trading
Defendants exercised options and sold their common stock during periods in which Vivus’s
common shares traded at historical highs, with substantial sales during June and July 2012, before
the failed launch of Qsymia.7
16
17
18
19
20
21
22
23
Plaintiffs allege that by the third quarter of 2012, it was apparent that the Qysmia launch
was a failure, and in November of 2012, two major institutional investors in Vivus, First
Manhattan Co. (“First Manhattan”) and QVT Financial LP, met with L. Wilson to discuss their
concerns about the failing launch and marketing plans for Qysmia.8 Plaintiffs allege that during
the fourth quarter of 2012, Vivus reported a loss of $0.40 per share, revenues from the sale of
Qsymia of only $41,000 for only 656 prescriptions, an increase of 148.4% in research and
development costs, and $31.3 million in SG&A expenses.9 Yet, despite Vivus’s dismal results,
the Compensation Committee of the Board allegedly authorized and approved cash bonus
24
25
26
27
28
4
5
6
7
8
9
Compl. ¶¶ 4, 34.
Compl. ¶ 3.
Compl. ¶¶ 5-6.
Compl. ¶¶ 69-73.
Compl. ¶ 75.
Compl. ¶ 8.
2
ORDER
1
2
3
4
payments for L. Wilson, Tam, and Morris, and as well as changes to the equity compensation
arrangement for non-employee directors, giving them the election to receive either a stock option
or restricted stock units (RSUs), and increasing the amount of the RSU award from 15,000 to
21,125.10
5
6
7
8
9
10
11
12
13
Plaintiffs further allege that First Manhattan initiated a proxy fight with Vivus
management and stated in a May 7, 2013 SEC filing that the Vivus Board was underqualified and
overpaid.11 Thereafter, the Board rushed Vivus into two expensive and risky financings: (1) a
loan agreement (the “Loan Agreement”) which was impossible or nearly impossible for Vivus to
pay back and tied default to a loss of the rights to Qsymia; and (2) a dilutive debenture offering
(the “Debentures”) that included a provision that would trigger expensive “Holder rights” if
Vivus merged into or entered into a binding share exchange with another company of a majority
of Vivus’s stock. Plaintiffs allege the Debentures were “effectively a poison pill” that prevented
Vivus from putting itself up for sale or taking steps to maximize shareholder value.12
14
15
16
17
18
19
20
21
22
Plaintiffs allege that a pre-suit demand on the Board is futile because a majority of the
Board has acted in bad faith and breached their fiduciary duty of loyalty by trading or allowing
the Insider Trading Defendants to trade Vivus stock based upon material, non-public information,
and they approved the wasteful Loan and the dilutive Debentures in order to entrench the current
Board in the midst of the proxy fight with First Manhattan.13 Plaintiffs further allege that a presuit demand regarding the Board’s approval of the excessive cash bonuses and equity
compensation arrangements as well as the Loan Agreement and Debentures is futile because there
is a substantial basis for liability against at least a majority of the current Board that approved
these measures.14
23
24
The Complaint asserts six causes of action for: (1) breach of fiduciary duty (against the
Individual Defendants); (2) misappropriation of confidential information (against the Insider
25
26
27
28
10
11
12
13
14
Compl. ¶¶ 81-82.
Compl. ¶¶ 85-86.
Compl. ¶ 95.
Compl. ¶¶ 100-103.
Compl. ¶ 107.
3
ORDER
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Trading Defendants); (3) corporate waste (against the Individual Defendants); (4) unjust
enrichment (against the Individual Defendants); (5) violations of California Corporations Code
section 25402 (against the Insider Trading Defendants); and (6) violations of California
Corporations Code section 25403 (against L. Wilson, Tam, Logan, Shortliffe, Casamento, and
Mario).
Vivus now demurs to the Complaint in its entirety on the grounds that Plaintiffs fail to
allege they made a pre-suit demand on Vivus’s Board of Directors and have not pled demand
futility with sufficient particularity.
JUDICIAL NOTICE
With its moving papers, Vivus requests judicial notice of 29 documents attached to the
Declaration of Matthew J. Dolan ISO Vivus’s demurrer. Vivus contends these documents are
quoted, cited, referred to, and/or relied on in the Complaint. Dolan Exhibits 1-22 contain filings
by Vivus with the Securities and Exchange Commission (“SEC”) from February 28, 2012 to May
13, 2013. Dolan Exhibit 23 contains L. Wilson’s Form 4 filed with the SEC on June 13, 2012.
Dolan Exhibit 24 contains Tam’s Form 4 filed with the SEC on June 18, 2012. Dolan Exhibits 25
and 26 contain filings by First Manhattan with the SEC on January 18 and March 8, 2013. Dolan
Exhibits 27-28 contain transcripts of calls Vivus held to publicly disseminate information about
the company. Dolan Exhibit 29 contains Vivus’s Certificate of Incorporation, filed May 16, 1996.
Plaintiffs oppose the request for judicial notice on the grounds that many of the Dolan
Exhibits are irrelevant to the issues raised in the demurrer, and are reasonably subject to dispute.
Plaintiffs argue the request should be denied as to Dolan Exhibits 1-5, 7, 9-11, 20, 21, and 28.
As set forth on page two of Vivus’s request for judicial notice, Dolan Exhibits 1-28 are
referenced in Plaintiffs’ Complaint and form the basis for some of its allegations. Thus, the
existence of these filings is not subject to dispute and may be judicially noticed. (See Ingram v.
Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3; Evid. Code, § 452, subd. (h).) Judicial notice
may be taken of the fact that these filings were made with SEC and that they say what they say.
(See StorMedia Inc. v. Sup. Ct. (1999) 20 Cal.4th 449, 456-457 [judicial notice of proxy statement
28
4
ORDER
1
2
3
4
5
and registration statement filed with SEC]; Evid. Code § 452, subd. (h) [facts not reasonably in
dispute].) Dolan Exhibit 29 is Vivus’s certificate of incorporation, and the Court may take
judicial notice of this as an official record of an executive department of the State of Delaware
and a document whose existence is not reasonably subject to dispute. (See Evid. Code, § 452,
subds. (c), (h).)
6
7
8
9
10
11
12
The parties dispute whether Vivus cites hearsay or disputed portions of the judiciallynoticed documents. The Court GRANTS Vivus’s request only as to the fact of or the existence of
the documents, and not the truthfulness or proper interpretation of the matters stated therein. (See
Aquila, Inc. v. Superior Court (2007) 148 Cal. App. 4th 556, 569.) Judicially-noticing the
existence of the SEC filings also supports the fact that the statements therein were publicly made.
(See Ampex Corp. v. Cargle (2005) 128 Cal.App.4th 1569, 1573, fn. 2 [documents offered to
show they “existed in the public eye”].)15
13
DISCUSSION
14
15
16
17
18
19
20
21
22
23
Vivus argues that the Complaint is merely critical of business decisions the Board made in
connection with the Qysmia launch, including the decision to use a third party to manufacture the
drug and to sell the drug through contracted sales representatives, but this does not amount to a
showing that the Board is so conflicted that a pre-suit demand on them is futile. Regarding the
insider trading allegations, Vivus argues that Plaintiffs fail to plead particularized facts to support
this theory, and judicially-noticed facts demonstrate that the directors’ stock sales are linked not
with possession of undisclosed negative information but with public announcements of positive
events in the FDA approval process. As for the allegations of excessive executive and director
compensation, Vivus argues that Plaintiffs fail to allege that a majority of the directors had a
material personal interest in challenged decisions or that the compensation terms were so
24
25
26
27
28
15
Vivus cites Scott v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 743, 754 for the
position that as to “legally operative documents” like contracts, the Court can take judicial notice
not only of the fact of the document and its recording or publication, but also facts that clearly
derive from its legal effect. However, to the extent Vivus is referring to SEC filings in 2013 that
described the terms of the Loan Agreement and Debentures, these filings are not the contracts
themselves and therefore are not legally operative documents for purposes of Scott.
5
ORDER
1
2
3
4
exorbitant that they amount to waste, serving no legitimate corporate purpose. As for the
allegations of financing transactions sought by Vivus in March and May 2013 (the Loan
Agreement and Debentures), Vivus argues that Plaintiffs fail to plead sufficient facts that the
directors were interested in these transactions.
5
6
7
8
9
10
In general, disputes regarding the internal affairs of a corporation are governed by the
state of incorporation, and demand futility requirements involve the internal affairs of the
corporation. (See State Farm Mutual Automobile Ins. Co. v. Superior Court (2003) 114
Cal.App.4th 434, 442; Kamen v. Kemper Fin. Servs. (1991) 500 U.S. 90, 101.) Here, the
Complaint alleges that Vivus is a Delaware corporation.16 The parties do not dispute that
Delaware law applies.
11
“[T]he demand requirement of Rule 23.1 is a rule of substantive
right designed to give a corporation the opportunity to rectify an
alleged wrong without litigation, and to control any litigation which
does arise. [Citation.] . . . . [T]he test of futility is ‘whether the
Board, at the time of the filing of the suit, could have impartially
considered and acted upon the demand’. [Citation.]” (Aronson v.
Lewis (Del. 1984) 473 A.2d 805, 809, overruled on other grounds
by Brehm v. Eisner (Del. 2000) 746 A.2d 244.)
12
13
14
15
In cases involving board approval of a challenged transaction, “in determining demand
16
17
futility the [court] in the proper exercise of its discretion must decide whether, under the
18
particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested
19
and independent and (2) the challenged transaction was otherwise the product of a valid exercise
20
of business judgment.” (Aronson, supra, 473 A.2d at p. 814.)
“The [Rales v. Blasband (Del. 1993) 634 A.2d 927] test applies
where the subject of a derivative suit is not a business decision of
the Board but rather a violation of the Board’s oversight duties. The
Rales test requires that the plaintiff allege particularized facts
establishing a reason to doubt that the board of directors could have
properly exercised its independent and disinterested business
judgment in responding to a demand.” [Citation.] This reasonable
doubt in the board’s independence and disinterestedness must be
shown to exist “as of the time the complaint is filed… .” (See Rales,
supra, 634 A.2d at p. 934.) “[T]he mere threat of personal
liability…is insufficient to challenge either the independence or
disinterestedness of directors”; a reasonable doubt that a majority of
21
22
23
24
25
26
27
28
16
Compl. ¶ 15.
6
ORDER
1
directors is incapable of considering demand is only found where
there is “a substantial likelihood” of personal liability. (See Rales,
supra, 634 A.2d at p. 936.)
2
In the instant Complaint, the Rales test applies to analyze whether Plaintiffs allege
3
4
particularized facts establishing a reason to doubt that the Vivus Board could have properly
5
exercised its independent and disinterested business judgment in responding to shareholder
6
demand regarding the exercise of stock options and sales by the Insider Trading Defendants
7
during the Insider Trading Period. The Aronson test applies to the Board’s approval of cash
8
bonuses and equity compensation, as well as the decisions in 2013 to enter into the Loan
9
Agreement and Debentures.
INSIDER TRADING
10
According to the Complaint, there were nine directors on the Board when this action was
11
12
filed: L. Wilson, Tam, Logan, Shortliffe, Casamento, Mario, R. Wilson, Carroll, and Plutzky. 17
13
Five of the nine directors (L. Wilson, Tam, Logan, Shortliffe, Casamento) are also Insider
14
Trading Defendants in the Complaint. Under Rales, demand futility as to the Insider Trading
15
Defendants is established where there are particularized fact allegations establishing that they
16
face “a substantial likelihood” of personal liability.
California Corporations Code sections 25402 and 25502 prohibit insider trading. Section
17
18
25402 prohibits “an issuer or any person who is an officer, director or controlling person of an
19
issuer or any other person whose relationship to the issuer gives him access, directly or indirectly,
20
to material information about the issuer not generally available to the public, to purchase or sell
21
any security of the issuer in this state at a time when he knows material information about the
22
issuer gained from such relationship which would significantly affect the market price of that
23
security and which is not generally available to the public, and which he knows is not intended to
24
be so available, unless he has reason to believe that the person selling to or buying from him is
25
also in possession of the information.” Section 25502 provides a private right of action against
26
any person who violates section 25402 to the purchaser of the security. “Since insider trading is a
27
28
17
Compl. ¶¶ 16-24.
7
ORDER
1
2
claim that sounds in fraud, it must be pleaded with particularity. [Citations.]” (In re Maxim
Integrated Prods., Inc. Deriv. Lit. (N.D. Cal. 2008) 574 F.Supp.2d 1046, 1070.)
3
4
5
6
7
8
9
10
The Insider Trading Period is February 23, 2012 to August 20, 2012, and the Complaint
alleges sales by L. Wilson in February, June and July of 2012, sales by Tam in June and July
2012, sales by Logan in March and August 2012, sales by Shortliffe in March and August 2012,
sales by Casamento in March and August 2012, and sales by Morris in February and July 2012.18
Plaintiffs allege these Insider Trading Defendants sole almost the entirety of their positions when
Vivus stock was at its highest and before the failed launch.19 As Vivus argues, the timing of the
trades alone does not establish “a substantial likelihood” of personal liability against the Insider
Trading Defendants.
11
12
13
14
15
16
17
18
19
20
21
Regarding the material non-public information, Plaintiffs allege that the Insider Trading
Defendants were aware that Vivus could not successfully launch Qysmia without a large
pharmaceutical partner, and that using a rented sales force would not be effective and would
cause Vivus’s cash burn to drastically increase.20 Plaintiffs further allege that the Insider Trading
Defendants knew that Vivus would not be able to earn sufficient revenues due to the FDA’s
REMS limitations on Vivus’s distribution of Qysmia, that Vivus had not sufficiently test
marketed the price sensitivity of Qysmia to consumers, that Vivus’s excessive cash burn rate
would cause the Board to seek emergency financing at disadvantageous rates and terms, that
Vivus’s pay structure was exorbitant and more than those of competitors, thereby increasing the
cash burn rate, and that given these limitations, Vivus would only be able to engage in a
“controlled” or “staged” launch of Qysmia.21
22
23
24
The problem with these allegations is that most relate to a product launch or financing
events that had yet to occur when the Insider Trading Defendants traded their Vivus stock.
Plaintiffs do not allege particularized facts regarding what specific non-public information the
25
26
27
28
18
19
20
21
Compl. ¶ 71.
Compl. ¶ 73.
Compl. ¶ 42.
Compl. ¶¶ 4, 34.
8
ORDER
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Insider Trading Defendants possessed at the time of their trades that gave them present
knowledge of the impending failure of Qysmia’s launch. It is not clear that the REMS restriction
regarding Qysmia’s distribution through mail-order pharmacies was non-public, since Plaintiffs
specifically allege that in an analyst conference call on February 22, 2012, Miller acknowledged
that “Vivus was in discussions with mail order pharmacies[.]”22 Plaintiffs further allege that L.
Wilson and Miller failed to disclose that certain states would not allow doctors to prescribe
Qsymia through the mail, but this is not alleged or reasonably construed to be non-public
information. Plaintiffs also allege that L. Wilson and Miller failed to disclose that relying on mail
order pharmacies would not produce the level of revenues which the market was predicting, but
Plaintiffs do not allege with particularity that L. Wilson and Miller possessed specific information
about revenue levels from mail order pharmacies. Plaintiffs also allege that on CNBC on
February 27, 2012, L. Wilson touted the experience of the rented sales force,23 but Plaintiffs do
not allege facts regarding L. Wilson’s knowledge that this was, in fact, untrue. Plaintiffs allege
that on July 17, 2012, Vivus announced its agreement with Catalent Pharma Solutions, LLC to
manufacture and supply Qsymia, but “Defendants knew…that the absence of their own
manufacturing facilities would lead to increasing SG&A despite the Company’s lack of
revenues.”24 However, Plaintiffs do not allege with particularity what specific non-public
information regarding revenues and increasing SG&A the Insider Trading Defendants possessed
in July of 2012.
20
21
22
23
24
25
There are no particularized fact allegations supporting the Complaint’s broad assertion
that the Insider Trading Defendants knew Vivus had not sufficiently test marketed the price
sensitivity of Qysmia to consumers. Nor are there particularized fact allegations that the Insider
Trading Defendants knew Vivus’s exorbitant pay structure would increase the company’s cash
burn rate. The Complaint’s only allegations of exorbitant pay pertain to compensation plans
approved in 2013, which preceded the Insider Trading Period.
26
27
28
22
23
24
Compl. ¶ 45.
Compl. ¶ 49.
Compl. ¶¶ 60-61.
9
ORDER
1
2
3
The Court finds that Plaintiffs fail to allege particularized fact allegations establishing that
the Insider Trading Defendants face “a substantial likelihood” of personal liability for purposes of
excusing pre-suit demand under Rales.
4
COMPENSATION
5
6
7
8
9
Plaintiffs allege a pre-suit demand on the Board based on the excessive compensation
claims is futile because “[c]ertain of the executives, including L. Wilson, Tam, and Morris,
received excessive compensation despite the fact that the Qysmia launch has been a dismal
failure” and “at least a majority of the current Board approved the excess compensation and thus
there is a substantial basis for their liability[.]”25
10
11
12
13
14
15
16
Here, Plaintiffs challenge cash bonuses and equity compensation arrangements approved
by the Board in January of 2013.26 Although Plaintiffs point to Morris’s receipt of compensation,
Morris was not a Board member.27 That two of the Board members (L. Wilson and Tam)
received bonuses does not establish that a majority of the Board was not disinterested in the
challenged action at the time the Complaint was filed, especially given that three of the Board
members (Carroll, Plutzky and R. Wilson) had not even joined the Board at the time the
compensation decision was made in January 2013.28
17
18
19
20
21
22
23
24
As for the equity compensation arrangement for non-employee directors, Plaintiffs must
allege facts suggesting that this decision was not the product of a valid exercise of business
judgment (Aronson, supra, 473 A.2d at p. 814). “[D]irectors have the power, authority and wide
discretion to make decisions on executive compensation. [Citation.] . . . . [T]here is an outer limit
to that discretion, at which point a decision of the directors on executive compensation is so
disproportionately large as to be unconscionable and constitute waste. [Citations.]” (Brehm,
supra, 746 A.2d at p. 252, fn. 56.) To meet the “stringent requirements of the waste test,”
Plaintiffs must allege that the “exchange [] is so one sided that no business person of ordinary,
25
26
27
28
25
26
27
28
Compl. ¶¶ 106-107.
Compl. ¶¶ 81-82.
See Compl. ¶ 25.
See Compl. ¶¶ 22 (R. Wilson joined the Board Apr. 26, 2013); 23 (Carroll joined the Board
May 9, 2013); 24 (Plutzky joined the Board May 9, 2013).
10
ORDER
1
2
3
4
5
6
7
8
sound judgment could conclude that the corporation has received adequate consideration.” (Id., at
p. 263, internal quotation marks omitted.) Here, Plaintiffs only allege that the RSUs are not tied to
the value of Vivus’s common shares (which Vivus flatly disputes), that the increase of the amount
of stock options or RSUs was not warranted due to the unprofitable 2012 third quarter financial
results, and that First Manhattan stated in an SEC filing that the Vivus Board’s annual cash
retainer is excessive.29 These allegations are insufficient to meet the stringent requirements of the
test of waste because they do not address in any detail why the equity compensation arrangement
is disproportionately large or one-sided.
9
FINANCING
10
11
12
13
14
15
16
17
18
Plaintiffs allege that a pre-suit demand on the Board with respect to the Loan Agreement
and Debentures would be futile because such financings are wasteful and were entered into in part
to entrench the current Board and to win the current proxy fight with First Manhattan.30 Plaintiffs
allege that the March 2013 Loan Agreement has the ability to bankrupt Vivus, but was hurriedly
entered into because of Vivus’s exorbitant cash burn.31 As for the Debentures, Plaintiffs allege
that due to the triggering of very expensive Holder rights, the Debenture Offering “is effectively a
poison pill that prevents the Company from putting itself up for sale or taking steps to maximize
shareholder value” because “in a change of control, the Company would lose its only product on
the market.32
19
“Where…allegations detail the manipulation of corporate
machinery by directors for the sole or primary purpose of
perpetuating themselves in office, the test of Aronson is met and
demand is excused. [Citations.] It is the plaintiff’s burden to allege
with particularity that the improper motive in a given set of
circumstances, i.e., perpetuation of self in office or otherwise in
control, was the sole or primary purpose of the wrongdoer’s
conduct.” (Pogostin v. Rice (Del. 1984) 480 A.2d 619, 627.)
20
21
22
23
The parties engage in different interpretations of the terms of the Loan Agreement and
24
25
26
27
28
Debentures. As discussed above, the Court does not judicially-notice any particular interpretation
29
30
31
32
Compl. ¶¶ 83-85.
Compl. ¶ 103.
Compl. ¶ 91.
Compl. ¶¶ 95-97.
11
ORDER
1
2
or legal effect of the Dolan Exhibits, even those SEC filings that stated the terms of the Loan
Agreement and Debentures, since the filings are not the contracts themselves.
3
4
5
6
7
8
Nevertheless, even without interpreting the contracts at issue, Plaintiffs’ demand futility
allegations are insufficient. On its face, the demand futility allegation states that the financing
decisions were made only “in part” for purposes of entrenchment.33 Elsewhere, the Complaint
alleges that it was the excessive cash burn rate that caused the Board to seek emergency financing
at disadvantageous rates and terms to Vivus,34 which undermines the notion that the sole or
primary purpose of the financing transactions was Board member entrenchment.
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Furthermore, the allegations of the First Manhattan proxy fight are not stated with
sufficient particularity in order to support the inference that the sole or primary purpose of the
Loan Agreement and Debentures was entrenchment. There are scant factual allegations regarding
the proxy battle in the Complaint. Plaintiffs argue the “$110 million Loan was made less than
three weeks after the defendants were notified of the upcoming proxy battle” and cite paragraphs
85 and 87 of the Complaint. However, paragraph 87 states that the Loan Agreement was
announced on March 26, 2013, while paragraph 85 points to a May 7, 2013 SEC filing by First
Manhattan alluding to its “push for change” against Vivus management. As for the Debentures,
Plaintiffs’ conclusory allegation that the Debentures are effectively a “poison pill” are
insufficient to satisfy the particularized pleading requirements set forth in Pogostin. Because a
corporate board’s decisions about financing fall within the business judgment rule (see Protas v.
Cavanagh (Del. Ch. May 4, 2012 )2012 Del. Ch. LEXIS 88, *44-45), the law requires the
pleading of particularized allegations that, if true, would demonstrate that the manipulation of
corporate machinery was for the sole or primary purpose of entrenchment.
///
///
///
26
27
28
33
34
See Compl. ¶ 103.
See Compl. ¶ 4.
12
ORDER
1
2
3
4
5
6
7
///
///
///
///
For all of these reasons, the Court finds that Plaintiffs fail to sufficiently allege demand
futility, and therefore, Vivus’s demurrer to the entire Complaint is SUSTAINED with 30 days’
leave to amend.
8
9
Dated: March ___, 2014
10
HON. PETER H. KIRWAN
JUDGE OF THE SUPERIOR COURT
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
13
ORDER