Delaware Court Again Finds Bad Faith Adequately Pled Against Directors: Court of Chancery Sustains Bad Faith Claim Alleging That the Board Ignored “Red Flags” Revealing Pharma Company’s Published Clinical Trial Data Flouted Governing Industry Protocols

Sullivan & Cromwell LLP - October 4, 2019

In a decision issued earlier this week in In re Clovis Oncology, Inc. Derivative Litigation, No. 2017-0222-JRS (Del. Ch. Oct. 1, 2019), the Delaware Court of Chancery declined to dismiss a stockholder derivative lawsuit against the members of the board of directors and one officer of Clovis, an early stage biopharmaceutical firm focused on cancer treatments. The lawsuit arose out of the failure of a once promising lung cancer treatment Rocilentinib (“Roci”), which Clovis withdrew from FDA consideration in 2016 after disappointing clinical trials. When Clovis announced those adverse clinical results, which were substantially less favorable than previous public reports, and the withdrawal of its FDA application, Clovis’ stock price cratered, erasing the vast majority of its market capitalization. The Court of Chancery, applying the “duty to monitor” doctrine that was recently expanded upon by the Delaware Supreme Court in Marchand v. Barnhill, 212 A.2d 805 (Del. 2019), held that the facts pled, even if arguably in conflict with internal Clovis documents, adequately alleged the requisite bad faith by the members of the Clovis board. As has become common, Plaintiffs did so by using board records obtained in a Section 220 books and records demand to show facts deemed sufficient to support their contention that the Board was aware that the Company had been reporting publicly, including in recent convertible note and equity offering documents, favorable interim clinical trial results for Roci that did not comport with the governing clinical trial protocols. The Court of Chancery found these facts sufficient to allege a conscious failure on the part of the Board members to monitor or oversee Clovis’ operations, and thus declined to dismiss a claim that the directors breached their duty of loyalty, potentially exposing directors to non-exculpated (and potentially not indemnifiable) monetary damages.