YVONNE WILLIAMS, on behalf of herself and similarly situated Sorrento Therapeutics, Inc. stockholders and derivatively on behalf of Sorrento Therapeutics, Inc., Plaintiff,
HENRY JI, WILLIAM S. MARTH, KIM D. JANDA, JAISIM SHAH, DAVID H. DEMING, DOUGLAS EBERSOLE, GEORGE NG, and JEFFREY SU, Defendants, and SORRENTO THERAPEUTICS, INC., a Delaware corporation, Nominal Defendant.
Submitted: May 31, 2017
Friedlander, Christopher M. Foulds, and Christopher Quinn,
FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Mark
Lebovitch, David Wales, Christopher J. Orrico, and Alla
Zayenchik, BERNSTEIN LITOWITZ BERGER & GROSSMAN LLP, New
York, New York; Francis Bottini Jr., BOTTINI & BOTTINI,
INC., La Jolla, California; Attorneys for Plaintiff.
Clayton Athey and John G. Day, PRICKETT, JONES & ELLIOTT,
P.A., Wilmington, Delaware; Peter M. Stone and Rachana N.
Fischer, PAUL HASTINGS LLP, Palo Alto, California; Attorneys
MONTGOMERY-REEVES, Vice Chancellor
action arises out of an alleged scheme in which the directors
of a Delaware corporation granted themselves options and
warrants for the stock of five subsidiaries over which the
corporation has voting control. Shortly before or after the
options grants, the board transferred valuable assets and
opportunities of the corporation to the subsidiaries.
Plaintiff, a stockholder of the corporation, challenges the
options and warrant grants as a breach of fiduciary duty. In
addition, Plaintiff challenges a voting agreement that the
corporation entered in connection with a private placement as
illegal vote buying. Under the voting agreement, the private
placement investor is required to vote its shares of the
corporation as the corporation's board directs.
move to dismiss asserting that the business judgment rule
should apply. They argue that the options and warrant grants
are permissible director compensation for service on the
boards of the subsidiaries and that the voting agreement is a
means of ensuring that the private placement investor does
not vote its shares against the corporation's interests.
Defendants also move to stay in favor of an earlier-filed
case in this Court. In this opinion, I deny Defendants'
motion to dismiss because the options and warrant grants and
the voting agreement are subject to entire fairness review,
and Defendants have not carried their burden of proving
entire fairness at this stage. Defendants' motion to stay
is denied as moot because the earlier-filed case has settled.
facts in this opinion derive from Plaintiff's Verified
Class Action and Derivative Complaint (the
"Complaint") and the documents it incorporates by
Parties and Relevant Non-Parties
Therapeutics, Inc. is a Delaware corporation with its
principal place of business in San Diego, California
("Sorrento"). Sorrento is in the business of
biopharmaceutical development and marketing. The
company's shares are publicly traded on the Nasdaq
Capital Market under the ticker symbol SRNE.
Biosystems, Corp. ("Concortis"), TNK Therapeutics,
Inc. ("TNK"), LA Cell, Inc. ("LA Cell"),
Sorrento Biologics, Inc. ("Biologics"), and
Scintilla Pharmaceuticals, Inc. ("Scintilla") are
subsidiaries of Sorrento. Sorrento allegedly has voting
control over each of the subsidiaries.
Yvonne Williams is a stockholder of Sorrento.
Henry Ji, William S. Marth, Kim D. Janda, Jaisim Shah, David
H. Deming, and Douglas Ebersole were the Sorrento directors
at the time of the challenged options and warrant grants and
the voting agreement. By the time of the Complaint, non-party
Yue Alexander Wu had replaced Douglas Ebersole on the board.
George Ng and Jeffrey Su-officers of Sorrento-are named
Defendants in the Complaint, but Plaintiff has voluntarily
dismissed her claims against them.
The options and warrant grants
March 15, 2016-five days before nominations were due for
Sorrento directorships-Sorrento issued its form 10-K for the
2015 fiscal year, disclosing that Sorrento subsidiaries had
granted a series of stock options and warrants to certain
Sorrento personnel, directors, and consultants (the
"Grants"). On April 29, 2016, after the deadline
for director nominations had passed, Sorrento filed an
amendment to the form 10-K, disclosing that all of the
Sorrento directors were recipients of the Grants. The
Sorrento stockholders did not approve the Grants. Only the
Sorrento directors approved the Grants pursuant to the
subsidiaries' stock option plans, and the Sorrento
stockholders never approved the stock option
plans. The Sorrento directors also adopted or
amended the certificates of incorporation of the five
subsidiaries to allow for the issuance of Class B stock with
10 to 1 voting rights. Those decisions were not approved by
the Sorrento stockholders.
October 2015, Scintilla, a Sorrento subsidiary, granted
options to purchase 1, 600, 000 shares of Scintilla common
stock to the six Sorrento directors and a warrant to purchase
9, 500, 000 shares of Scintilla Class B stock with 10 to 1
voting rights to Defendant Ji. The options and the warrant
had a $0.01 per share exercise price. Ten months later, on
August 2, 2016, Sorrento, Scintilla, and Scilex
Pharmaceuticals, Inc., a pharmaceutical development company,
("Scilex") agreed to a term sheet under which
Scintilla would purchase all of the Scilex stock. The term
sheet contemplated that upon the closing, Sorrento would
contribute $10 million to Scintilla to fund working capital
expenses. Ji currently owns 6.5% of Scilex's equity,
which Scintilla would purchase under the term sheet. On
August 15, 2016, Sorrento, Scintilla, and Semnur
Pharmaceuticals, Inc. ("Semnur") agreed to a
similar term sheet under which Scintilla would acquire all of
the Semnur equity for a $60 million initial payment of
Sorrento stock and cash. Defendant Shah is a director and
Chief Executive Officer of Semnur and owns 5.5% of
Semnur's outstanding stock.
August 2015, Sorrento entered an exclusive license with
Mabtech Limited ("Mabtech") to develop and sell
four late-stage antibodies in the North American, European,
and Japanese markets. In October 2015, Sorrento transferred
its rights under the Mabtech exclusive license to its
subsidiary Biologics. In the same month, Biologics granted
options to purchase 2, 000, 000 shares of Biologics common
stock to the Sorrento directors with a $0.01 per share
exercise price. Biologics also granted Defendant Ji a warrant
to purchase 9, 500, 000 shares of Biologics Class B shares
with 10 to 1 voting rights for $0.01 per share.
2015, LA Cell, a Sorrento subsidiary, granted options to
purchase 1, 700, 000 shares of LA Cell common stock to the
Sorrento directors and a warrant to purchase 9, 500, 000
shares of LA Cell Class B stock with 10 to 1 voting rights to
Ji. The warrant and the options have an exercise price of
$0.01 per share. The options and warrant give Ji the right to
purchase over 18% of the economic interest and 25% of the
voting interest in LA Cell. Subsequently on September 25,
2015, LA Cell entered an exclusive licensing agreement with
City of Hope, a medical research center, under which LA Cell
licensed to City of Hope certain technology that allows
antibodies to target so-called "undruggable"
disease-causing molecules. Sorrento announced that the total
deal value with City of Hope could be in excess of $170
2013, Sorrento acquired Concortis in exchange for Sorrento
stock worth $11 million. Concortis drove Sorrento's
revenue growth in 2014, and the subsidiary filed five patent
applications in 2013 and 2014. In October 2015, Concortis
granted options to purchase 1, 600, 000 shares of Concortis
common stock to the Sorrento directors and a warrant to
purchase 9, 500, 000 shares of Concortis Class B stock with
10 to 1 voting rights to Ji. The options and the warrant had
an exercise price of $0.25 per share.
18, 2015, Sorrento founded TNK Therapeutics ("TNK")
to focus on developing "CAR.TNK immunotherapies"
for the treatment of cancer and infectious diseases. In the
same month, TNK granted the Sorrento directors options to
purchase 1, 700, 000 shares of TNK common stock and granted
Ji a warrant to purchase 9, 500, 000 shares of TNK Class B
stock with 10 to 1 voting rights. The options and the warrant
had exercise prices of $0.01 per share. Sorrento and TNK then
entered purchase agreements for TNK to acquire (1) all of the
membership interests of CARgenix for $6 million in TNK common
stock and (2) all of the stock of BDL Products, Inc.
("BDL") for $6 million in TNK common stock. Both of
the purchase agreements provide that if TNK does not complete
a financing of at least $50 million or an initial public
offering before certain deadlines in 2016, the original
owners of CARgenix and BDL will become entitled to receive
Sorrento common stock. On November 25, 2015, an analyst
report issued by Brean Capital, LLC allegedly valued TNK at
alleges that the Grants from Scintilla, Biologics, LA Cell,
Concoritis, and TNK were part of an illegal scheme to siphon
assets from Sorrento for the benefit of self-interested
2.The voting ...