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Howland v. Kumar

Court of Chancery of Delaware

June 13, 2019

THOMAS S. HOWLAND, JR., derivatively on behalf of ANIXA BIOSCIENCES, INC. (f/k/a ITUS CORPORATION), Plaintiff,
v.
AMIT KUMAR, LEWIS H. TITTERTON, JR., ARNOLD M. BASKIES, JOHN MONAHAN, MICHAEL J. CATELANI, JOHN A. ROOP, ANTHONY CAMPISI, and DALE FOX, Defendants, and ANIXA BIOSCIENCES, INC. (f/k/a ITUS CORPORATION), Nominal Defendant.

          Date Submitted: March 22, 2019

          Sidney S. Liebesman, Johnna M. Darby, Wali W. Rushdan II, FOX ROTHSCHILD LLP, Wilmington, Delaware; Counsel for Plaintiff Thomas S. Howland, Jr.

          Bradley D. Sorrels, Daniyal M. Iqbal, WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; Counsel for Defendants Amit Kumar, Lewis H. Titterton, Jr., Arnold M. Baskies, John Monahan, Michael J. Catelani, John A. Roop, Anthony Campisi, and Dale Fox.

          Stephen E. Jenkins, ASHBY & GEDDES, P.A., Wilmington, DE; Counsel for Nominal Defendant Anixa Biosciences, Inc. (f/k/a ITUS Corporation).

          MEMORANDUM OPINION

          McCORMICK, V.C.

         In this derivative action, a stockholder of Anixa Biosciences, Inc. ("Anixa") challenges the 2017 repricing of stock options held by Anixa's directors and officers. The repricing occurred shortly before those directors and officers publicly announced news of a key patent's issuance to a subsidiary of Anixa. According to the plaintiff, Anixa's directors and officers timed the repricing to precede the public announcement of the issuance so as to effectively "spring-load" the options for the benefit of the directors and officers.

         The defendants have moved to dismiss this action under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted and Rule 23.1 for failure to adequately plead demand excusal. Giving the plaintiff all inferences to which he is entitled at the pleadings stage, it is reasonably conceivable that the defendants (with one exception) breached their fiduciary duties and were unjustly enriched by delaying the public announcement of the issuance to permit the repricing of options. The plaintiff has established also that demand is excused because a majority of the Anixa board in office when the complaint was filed was interested by virtue of having received the repriced options. Thus, the defendants' motion to dismiss is largely denied.

         I. FACTUAL BACKGROUND

         The facts are drawn from the allegations in the Verified Shareholder Derivative Complaint (the "Complaint"), [1] documents incorporated therein, and judicially noticeable facts.

         Anixa is a publicly traded Delaware corporation headquartered in San Jose, California. Anixa develops biotechnology that uses the power of the immune system to diagnose and fight cancer. At the time this litigation commenced, Anixa's Board of Directors (the "Board") comprised Chairman, President, and CEO Amit Kumar and four outside directors-Lewis H. Titterton, Jr., Arnold M. Baskies, John Monahan, and David Cavalier.

         In mid-2017, Anixa was developing a cancer-testing platform that Kumar had invented called Cchek. From Cchek, Anixa "expect[ed] to launch a series of non-invasive, inexpensive cancer diagnostic blood tests."[2] To protect its cancer detection technology, Anixa filed patent applications with the United States Patent and Trademark Office ("USPTO"), including Patent Application No. 15/209, 616.[3] On May 10, 2017, Anixa issued a press release announcing that the USPTO had issued a Notice of Allowance as to the first of Anixa's patent applications.[4] Anixa's stock price increased by approximately 48% on May 10, closing at $1.70, but steadily declined thereafter. Anixa's stock price closed out the month of May 2017 at $0.84.

         On August 3, 2017, Kumar and Anixa's Senior Vice President of Engineering, John A. Roop, received an email from Anixa's outside patent counsel regarding the pending patent application. The email stated that "the patent will issue on August 22, 2017" and be assigned "U.S. Patent Number 9, 739, 783" (the "'783 Patent").[5] The USPTO in fact issued the '783 Patent on August 22, 2017.

         At the time, stock options held by Anixa's directors and officers were underwater. The Board under Kumar's leadership called a special meeting of the Compensation Committee to consider "a proposal to re-price certain issued and outstanding stock options for all of the current officers, directors, and employees of the Company."[6] The special meeting was held on September 6, 2017. Two of three committee members, Titterton and Baskies, were present and constituted a quorum. Kumar and Anixa's Chief Operating Officer and Chief Financial Officer, Michael J. Catelani, also attended the September 6 meeting. At the meeting, the Compensation Committee approved the repricing of 2, 029, 600 stock options to $0.67, the closing price for Anixa stock that day (the "Repricing"). The original strike prices ranged from $0.82 to $5.30.

         Nearly 95% of the repriced options belonged to Anixa directors or officers: Kumar held 880, 000; Roop held 385, 000; Titterton held 262, 400; Catelani held 250, 000; Anthony Campisi, Anixa's Vice President of Engineering, held 59, 200; Dale Fox, who was on the Board at the time of the Repricing but resigned in September 2017, held 42, 000; Baskies held 18, 000; and Monahan held 18, 000.[7] Of Anixa's five Board members at the time this litigation commenced, all but the newest member, Cavalier, held stock options that were repriced.[8] Anixa publicly disclosed the Repricing on September 8, 2017.

         On September 18, 2017, Anixa issued a press release publicly announcing the issuance of the '783 Patent (the "September 18 Press Release"). The September 18 Press Release allegedly affected Anixa's stock trading price and volume significantly. On September 15, 2017, the trading day before the September 18 Press Release, Anixa's stock price closed at $0.69 with a trading volume of 209, 959. On September 18, Anixa's stock price closed at $1.28, [9] with a trading volume of 22, 764, 730, up by approximately 85% and over 10, 000%, respectively, from September 15. Anixa's stock price "peaked on September 26, 2017, when it closed trading at $4.99."[10]

         On October 16, 2017, Fox exercised 42, 000 repriced options. On October 19, 2017, Titterton exercised 2, 400 repriced options.

         The Complaint alleges that this pattern-a repricing preceding an Anixa press release announcing positive news-happened once before in Anixa's history. In 2015, the Board authorized the repricing of stock options the day before Anixa issued a press release announcing that it had experienced an 840% increase in revenue over the previous fiscal year. According to the Complaint, Kumar, Titterton, and Fox all personally benefitted from the 2015 repricing.

         With documents obtained pursuant to 8 Del. C. § 220, plaintiff Thomas S. Howland, Jr. ("Plaintiff") commenced this litigation on November 5, 2018. The Complaint names as defendants: current directors Kumar, Titterton, Baskies, and Monahan; current officers Roop, Catelani, and Campisi; and former director Fox (together, the "Individual Defendants"). The Complaint names Anixa as nominal defendant (together with the Individual Defendants, "Defendants"). Defendants moved to dismiss the Complaint on November 29, 2018. The parties completed briefing on Defendants' motion on March 12, 2019, [11] and presented oral arguments on March 22, 2019.[12]

         II. LEGAL ANALYSIS

         The Complaint asserts two derivative counts against the Individual Defendants: Count I for breach of fiduciary duty and Count II for unjust enrichment. Defendants have moved to dismiss the Complaint pursuant to Court of Chancery Rules 12(b)(6) and 23.1. This decision addresses Defendants' Rule 12(b)(6) motion first, as the questions it raises are "logically prior" to the question of whether demand is excused.[13]

         A. Plaintiff's Claims Survive Under Rule 12(b)(6).

         On a motion to dismiss pursuant to Court of Chancery Rule 12(b)(6), the Court accepts "all well-pleaded factual allegations in the Complaint as true, [and] accept[s] even vague allegations in the Complaint as 'well-pleaded' if they provide the defendant notice of the claim[.]"[14] "A trial court is not, however, required to accept as true conclusory allegations 'without specific supporting factual allegations.'"[15]The Court "draw[s] all reasonable inferences in favor of the plaintiff, and den[ies] the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[16]

         1. Count I-Breach of Fiduciary Duty

         Count I asserts that the Individual Defendants breached their fiduciary duties by withholding from the public news of the '783 Patent's issuance, so as to allow the Individual Defendants' stock options to be repriced prior to announcing the patent's issuance. This had the effect, according to the Complaint, of repricing the options at an artificially low exercise price for the Individual Defendants' financial benefit.

         To plead a claim for breach of fiduciary duty, the Complaint must allege "(1) that a fiduciary duty exists and (2) that the fiduciary breached that duty."[17] In the compensation context, "[a]n officer or a director can breach fiduciary duties . . . by accepting compensation that is clearly improper or by wrongfully influencing compensation decisions."[18] Further, "[t]he essence of a duty of loyalty claim is the assertion that a corporate officer or director has misused power over corporate property or processes in order to benefit himself rather than advance corporate purposes."[19]

         Giving Plaintiff the benefit of all inferences to which he is entitled at this stage, it is reasonably conceivable that: On August 3, 2017, Kumar and Roop learned that the USPTO would issue the '783 Patent on August 22, 2017. On August 22, 2017, the USPTO did in fact issue the '783 Patent. This issuance was a significant development for Anixa. Kumar informed the Board then in place that the '783 Patent was issued on August 22 or, at the very least, that the patent was likely to issue on August 22, 2017. The Board did not immediately announce this information to the public. Kumar called a special meeting of the Compensation Committee to reprice director and officer stock options. In calling that meeting, Kumar informed Titterton and Baskies of the reasons for holding the meeting. On September 6, 2017, Titterton and Baskies voted on and approved the Repricing of options.[20] Kumar and Catelani attended this meeting.[21] Each of the Individual Defendants held options subject to the Repricing.[22] Approximately 94.4% of the repriced options belonged to the Individual Defendants.[23] On September 8, 2017, Anixa filed a Form 10-Q with the Securities Exchange Commission disclosing the Repricing, but failing to announce news of the '783 Patent's issuance.[24] On September 18, 2017, Anixa issued the September 18 Press Release, publicly announcing the '783 Patent's issuance.[25] The September 18 Press Release caused Anixa's stock price and trading volume to surge.[26]

         Based on these facts and inferences, it is reasonably conceivable that each of the Individual Defendants (other than Campisi, as discussed below), breached their fiduciary duty of loyalty by misusing corporate information and processes to benefit themselves rather than Anixa.[27]

         Moreover, because Titterton and Baskies approved their own compensation under the Repricing, rendering themselves interested in the transaction, the entire fairness standard of review applies.[28] "The possibility that the entire fairness standard of review may apply tends to preclude the Court from granting [a defendant's] motion to dismiss under Rule 12(b)(6) . . . ."[29] That is the effect in this case.

         Despite Defendants' argument to the contrary, it is reasonable to infer from the Complaint that the Repricing was the product of an unfair process. The Complaint alleges that the "timing, structure, and disclosure of the 2017 Re-pricing were unfair."[30] And, as discussed above, Plaintiff has adequately alleged facts sufficient to support an inference that Titterton and Baskies had knowledge that the '783 Patent would issue and repriced stock options in advance of Anixa publicly announcing this information to benefit from any resulting stock surge. At the pleadings stage, it is likewise reasonable to infer that the process affected the price.[31]

         For these reasons, Defendants' motion to dismiss Count I as to Kumar, Titterton, Baskies, Monahan, Catelani, Roop, and Fox under Court of Chancery Rule 12(b)(6) is denied.[32]

         Campisi is a different story. The Complaint's individualized allegations regarding Campisi are limited to a single paragraph, alleging that Campisi is the Vice President of Engineering of Anixa, a member of Anixa's management team, and that he personally benefitted from the Repricing.[33] Documents incorporated by reference further demonstrate that Campisi owns 59, 200 repriced options.[34] Rather than plead the role Campisi played in the events at issue, the Complaint lumps Campisi in with the other Individual Defendants. The Complaint provides no basis from which to infer knowledge of the patent issuance prior to the Repricing, involvement in the decision to withhold news of the patent issuance, or involvement in the ...


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