In re Clovis Oncology, Inc. Derivative Litigation

Court of Chancery of the State of Delaware · 2019 · Corporations

CorporationsDerivative litigationBoard oversightDemand futilityCaremarkMarchandRalesdemand futility

Facts

Clovis was a biopharmaceutical company with no products on the market, and Rociletinib (Roci) was its mission-critical drug candidate. The TIGER-X clinical trial for Roci incorporated the RECIST protocol, which plaintiffs alleged required objective response rate calculations to include only confirmed responses, yet management publicly reported inflated ORR figures that included unconfirmed responses. The board was repeatedly shown materials indicating that Roci's reported ORR included unconfirmed responses and that protocol and FDA-related compliance problems existed, but the board allegedly did nothing while the company continued to report misleading efficacy data to the market and regulators. When Clovis finally disclosed the lower confirmed ORR, its stock price collapsed, and the company later withdrew its NDA for Roci.

Issue

Whether plaintiffs pled particularized facts excusing demand by showing a majority of the board faced a substantial likelihood of liability for a Caremark claim based on ignoring red flags about mission-critical regulatory compliance. The court also had to decide whether plaintiffs stated viable derivative claims for Brophy insider trading and unjust enrichment.

Rule

Under Rales, demand is excused if particularized facts create a reasonable doubt that the board could impartially consider a demand because a majority faces a substantial likelihood of personal liability or lacks independence. Under Caremark as explained in Marchand, directors must make a good-faith effort to implement an oversight system and then monitor it; liability may arise either from a complete failure to implement reporting or information systems or from consciously failing to monitor such systems after red flags appear, especially where the company operates in a highly regulated area involving mission-critical compliance risk. A Brophy claim requires pleading that a fiduciary possessed material nonpublic information and used it improperly by trading because of that information, with scienter often inferred from unusually large and suspiciously timed trades.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Pine Harbor Therapeutics, a Boston biopharmaceutical company, has no marketed products and depends almost entirely on one gene-therapy candidate. Board packets repeatedly state that the pivotal trial protocol and applicable FDA guidance require two consecutive lab readings before counting a patient as a responder, yet the board also receives slides showing management is publicly touting response rates that include single, unconfirmed readings.

If a stockholder files a derivative suit without first making demand, what is the strongest argument that demand should be excused?

Explanation. Under Rales, demand is excused if particularized facts create a reasonable doubt that the board could impartially consider a demand because a majority faces a substantial likelihood of liability. Under Caremark’s second prong, liability may be inferred where directors had an oversight system but consciously ignored red flags. Here, the company is monoline-like and heavily regulated, the product is mission critical, and the board allegedly received repeated materials showing protocol-required confirmations were not being used while inflated efficacy data were publicized. That is the strongest basis for demand excusal. (Derived from In re Clovis Oncology, Inc. Derivative Litigation (n.d.).)