Courts Address Obligations (or Not) to Disclose Back and Forth with FDA. Read more about it and other key decisions in this edition.

Court Partially Dismisses Shareholder Suit Against Pharma CEO

On March 11, 2024, the U.S. District Court for the Northern District of California dismissed, in part, claims against the CEO of biopharmaceutical company Tricida, Inc. alleging that the CEO made false or misleading statements about the outlook for its New Drug Application (NDA) for a chronic kidney disease drug, veverimer. In dismissing certain claims, the court held that the company’s CEO did not violate Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) by failing to disclose “every detail arising from the back-and-forth dialogue with the FDA [Food and Drug Administration]” or to “adopt the FDA’s position as correct and share it with the public.”

The ruling stems from a 2021 class action, in which stockholders sued Tricida and its CEO after the FDA denied Tricida’s NDA for veverimer, alleging that, between 2018 and 2021, the company’s stock price was artificially inflated through false or misleading statements touting the success of clinical trials of veverimer and professing optimism about the FDA’s review of its NDA. The plaintiff alleged these statements were misleading as to the likelihood that veverimer would obtain accelerated approval by the FDA because Tricida and its CEO failed to disclose concerns raised by the FDA regarding treatment effects and data deficiencies. The court rejected that argument, finding that the challenged statements were mere opinions that the plaintiff failed to allege were insincere or objectively untrue. Moreover, the court acknowledged that the process of FDA review and approval is complex, involving a lengthy dialogue between companies and the agency, and “there is no general requirement under the securities laws for a company to engage in a rolling, communication-by-communication disclosure of every detail arising from the back-and-forth dialogue with the FDA throughout its complex review and approval process, or to adopt the FDA’s position as correct and share it with the public when discussing its product.” Thus, the fact that Tricida did not continuously convey the FDA’s views and accept them as true was insufficient to plead falsity.

However, the court declined to dismiss other claims arising from a factual statement made by the company’s CEO during a May 2020 earnings call that an upcoming FDA Advisory Committee meeting was canceled “due in part to the logistical challenges posed by COVID-19.” Relying on documents produced by the FDA detailing communications from the FDA to Tricida, the plaintiff alleged that the FDA never cited COVID-19 logistics as the reason for the cancellation; rather, those documents showed that the FDA believed there were too many problems with the NDA to warrant an Advisory Committee meeting. The court found this sufficient to support a claim, noting it was “plausible that a seasoned pharmaceutical executive . . . would be aware that the FDA’s reasons for canceling a critical meeting would be highly significant to investors.” The court further held that the plaintiff’s allegations that the CEO was party to extensive communications with the FDA about its concerns and their potential impact on the meeting were sufficient to plead scienter because they “plausibly plead ‘an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers’ that was either known to [the CEO] or so obvious that he must have been aware of it.”

This case is noteworthy for pharmaceutical companies engaging with the FDA on new drug approvals. While a company is still obligated to report significant FDA findings accurately, it can offer its own opinions about the process without necessarily triggering a duty to disclose all of the “back-and-forth” to investors.

Court Grants Biotechnology Company’s Motion to Dismiss Shareholder Class Action

On March 18, 2024, the US District Court for the Northern District of California dismissed without prejudice a putative securities class action against Ardelyx Inc., its CEO, its CFO, and its Chief Development Officer, relating to statements that Ardelyx made regarding its application for FDA approval of its drug, tenapanor.

In a fact pattern similar to that of the Tricida case, the lawsuit alleged that Ardelyx made false and misleading statements in violation of Section 10(b) and Rule 10b-5 of the Exchange Act, among other provisions, concerning its positive interactions with the FDA, the success of clinical trials, the potential of tenapanor to transform treatment for hyperphosphatemia, and the expectation of FDA approval, while knowing that the FDA had “significant concerns” about the magnitude of the treatment effect of tenapanor. According to the complaint, when Ardelyx finally disclosed in July 2021 that the FDA identified deficiencies in the company’s application, the company’s share price dropped 74% the following day.

In dismissing all claims against the company, the court found that the challenged statements were nonactionable statements of opinion, reasoning that the plaintiffs failed to allege sufficient facts that the defendants did not hold the optimistic beliefs they expressed or that those beliefs were objectively untrue. The court explained that Ardelyx had no legal obligation to disclose “each detail of every communication with the FDA” because the company had not received feedback that contradicted its statements, presented risks that were “out of the ordinary,” or implicated a special challenge to approval. The court further explained that Ardelyx had, in fact, disclosed many of the allegedly omitted facts, including warnings that success depended on whether tenapanor’s efficacy profile satisfied the FDA and that there was a higher likelihood of not obtaining FDA approval because the drug was first in class.

The court also found that the plaintiffs failed to adequately allege scienter, reasoning that “the FDA communications did not convey the type of serious and express concerns that could establish the knowing falsity of the challenged statements of opinion” and that simply failing to divulge all of the back-and-forth with the FDA “alone cannot support an inference of scienter.” The court also rejected the plaintiff’s theory that suspicious stock sales supported scienter, holding that a sixfold increase in stock sales during the class period generally cannot support a “strong inference” of scienter absent some corroborating evidence not present here. It further held that simply alleging that because tenapanor was “important” to Ardelyx Defendants must have known every possible adverse fact about it was insufficient to plead scienter through the core operations theory.

This case reinforces that a company is under no obligation to disclose all of its communications with the FDA and that it is not necessarily false or misleading to express genuinely held optimism in the face of negative FDA feedback.

Delaware Chancery Court Approves $4.6 Million Reduction in Goldman Executive Compensation in Settlement Deal

On February 27, 2024, the Delaware Chancery Court approved a settlement in which Goldman Sachs Group, Inc. agreed to reduce nonemployee executives’ compensation by an estimated $4.6 million.

The settlement arises out of direct and derivative claims by a stockholder against nonemployee Goldman directors, alleging that the directors breached their fiduciary duties by approving payments of excessive compensation to themselves, made inadequate disclosures pertaining to certain stock incentive plans and stock issued thereunder, and made inadequate disclosures concerning tax deductibility of cash-based incentive awards to executive officers. This is the third version of the settlement to come before the court. The court deemed the first proposed settlement inadequate, finding that additional and enhanced disclosures did not justify a broad release of claims because it largely remedied only disclosure claims without providing value for release of disgorgement claims for overpayment to nonemployee directors. The second proposed settlement included a reduction in the annual compensation of Goldman directors going forward by $4.6 million and incorporated changes to Goldman’s compensation practices in exchange for a broad release of current and future claims. The Delaware Chancey Court approved this settlement, but the Delaware Supreme Court reversed, finding the release of theoretical future claims that might arise from any stockholder-approved incentives through 2024 to be improper.

On remand, the operative (third) settlement agreement was approved by the Delaware Chancery Court as fair and reasonable. It omitted the release of claims that could arise in the future found to be objectionable by the Delaware Supreme Court and released only the plaintiff’s actual claims at issue in this case. The rest of the settlement terms remained the same as those approved by the Delaware Chancery Court in the second settlement agreement. Specifically, Goldman agreed, again, to reduce total nonemployee director pay by an estimated $4.6 million — the maximum amount that could be recovered in regard to the derivative claim — and amend its compensation practices, including capping compensation for nonemployee directors through 2024. The settlement also provided for governance changes, including a review of director compensation incorporated into the company’s business practices and a binding stockholder consideration of the defendants’ compensation through 2024.

This case illustrates how Delaware courts are becoming more and more reluctant to approve broad releases that go beyond the claims asserted in a case in settlement agreements but will approve settlements that are more narrowly tailored in exchange for meaningful consideration, which may include corporate governance changes.

Court Denies Dismissal of Securities Fraud Claims Against Chinese Ride-Hailing Company

On March 14, 2024, the US District for the Southern District of New York denied a motion to dismiss a putative class action brought by shareholders of Didi Global Inc. against the company, certain of the company’s executives and directors, and underwriters of the company’s initial public offering (IPO).

The plaintiffs alleged that Didi, a Chinese ride-hailing company, omitted material facts from SEC (U.S. Securities and Exchange Commission) filings in connection with the company’s June 2021 IPO and listing on the New York Stock Exchange in violation of Sections 11, 12, and 15 of the Securities Act of 1933 (Securities Act) and Section 10(b) and Rule 10b-5 of the Exchange Act, among other provisions. According to the second amended complaint, Didi failed to disclose that (1) Chinese regulators directed Didi to postpone its IPO until it resolved cybersecurity and privacy concerns and that (2) Didi faced harsh penalties if it went forward with the IPO without addressing regulators’ concerns. Just days after Didi’s IPO, Chinese regulators announced they would prohibit the company from registering any new customers and would require the company to remove its application from app stores in China due to serious violations of laws and regulations, causing the company’s stock price to drop by more than 40% in less than a month.

The court held that plaintiffs plausibly alleged that Didi’s general disclosures about the “uncertainties and risks of the Chinese legal and regulatory landscape” were insufficient because the company failed to disclose the far more specific and known risk that it faced harsh penalties if it proceeded with the IPO. The court reasoned that such “information might well have been of interest to a potential investor.” Moreover, the court held that the plaintiffs plausibly alleged that Didi had an affirmative obligation to disclose the regulators’ directives and risks of noncompliance because Didi’s management was aware of the directives, Didi was reasonably likely to be sanctioned by the Chinese government if it did not comply, and the resulting sanctions were reasonably likely to have a material effect on the company.

The court also found that the plaintiffs adequately pleaded scienter by showing, among other things, that the defendants had opportunity (i.e., access to the omitted facts) and a concrete and personal economic motive (i.e., billions in proceeds and stock value if the IPO went forward) to conceal omitted facts at a time when the Chinese government appeared poised to crack down on technology companies and when disclosure of and compliance with the regulators’ directives could have caused the company to delay or ultimately never go forward with the IPO. The court rejected Didi’s and the officer defendants’ arguments that a fraudulent motive could not be imputed to them where they ultimately suffered economic losses as a result of the IPO. In making this determination, the court ruled that the plaintiffs adequately alleged that the defendants hoped to sell their inflated stock when their lock-up period ended and “[t]he fact that things did not turn out as planned d[id] not exonerate” them.

This case is a notable reminder that general risk disclosures will not suffice when specific risks to the company are known. It also serves as a reminder that concrete and particularized economic motives, in combination with opportunity, may satisfy the scienter requirement.

Court Partially Denies Motion to Dismiss Against Mobile Technology Company

On March 12, 2024, the US District Court for the Southern District of New York granted in part and denied in part Grab Holdings Limited’s motion to dismiss a putative class action brought against it and certain of its officers and directors alleging violations of Sections 11 and 15 of the Securities Act and Sections 14(a), 10(b), and 20(a) and Rules 14a-9 and 10b-5 of the Exchange Act relating to statements made in its proxy statement filed in connection with its 2021 de-SPAC transaction with Altimeter Growth Corp. The court dismissed the Section 10(b) claims but allowed many of the other claims to survive.

Grab’s core business involves a mobile application that provides food delivery and ride-hailing services across Southeast Asia. To encourage use of the application, Grab offers incentives in the form of additional cash or rebates to drivers and consumers. In its proxy statement filed with the SEC in connection with the de-SPAC transaction, Grab disclosed the importance of incentives in attracting drivers and consumers as well as risk factors that it may increase incentives in the future and that such increases may negatively impact profitability for the business. The plaintiffs alleged that Grab’s statements in the proxy were false or misleading because the company was already experiencing driver shortages, the shortages were already negatively affecting operations, and the company was already increasing partner incentives to combat driver shortages. According to the plaintiffs, the proxy “did not accurately portray Grab’s then-current financial situation or business prospects.”

The court agreed with the plaintiffs that these statements were misleading because the company did not disclose the truth about the already-realized risks of driver shortages and the negative effects of such shortages. The court held that Grab, by issuing statements on its driver retention and incentive amounts, had a legal obligation to “tell the whole truth” with respect to these issues. The court rejected the defendants’ arguments that the challenged statements were literally true because “half-truths” may provide a basis for liability in situations where omissions related to the content of the statements make them materially misleading. Moreover, the court rejected the defendants’ arguments that Grab’s statements were forward-looking and accompanied by cautionary language that is ordinarily insulated from litigation, finding the cautionary language to be inadequate where the risk already transpired.

The court dismissed claims relating to certain other statements made in the proxy, press releases, interviews, and conference calls, holding that such statements constituted nonactionable descriptions of accurate historical data or fact or nonactionable puffery. The court also dismissed claims relating to certain forward-looking statements in a press release dated August 2, 2021 — months before the proxy’s final publication on November 19, 2021 — because such statements were accompanied by sufficient cautionary language when the risk relating to driver shortages and excess incentives had not yet transpired at this earlier point in time.

This case emphasizes that a company may create an obligation for itself to disclose information that it otherwise would not have had a duty to disclose. When a company chooses to speak on an issue, it must tell the whole truth or risk liability.

Delaware Supreme Court Upholds Dismissal of Derivative Suit Against Baker Hughes Through Special Litigation Committee

On February 1, 2024, the Delaware Supreme Court upheld the Court of Chancery’s termination of a derivative lawsuit against Baker Hughes sought by a special litigation committee, rejecting arguments that the Chancery Court inappropriately weighed evidence and witness credibility by relying on the testimony of a single director.

The case began in 2019, when two Baker Hughes investors alleged that a 2018 multipart, multibillion-dollar separation agreement unfairly benefited General Electric. Baker Hughes formed a special litigation committee to investigate the allegations. The board appointed Gregory Ebel as the sole member of the committee and conducted a nine-month investigation that concluded the transactions were fair to Baker Hughes, recommending dismissal of the case. In 2023, the Chancery Court found that, although the special litigation committee’s investigation had flaws, the single-person committee was independent and had conducted a good-faith probe into the shareholders’ allegations. The court therefore terminated the lawsuit on the grounds that the thoroughness of the investigation and the reasonableness of the committee’s conclusions were not in doubt.

Shareholders appealed to the Delaware Supreme Court, arguing that the Chancery Court’s reliance on Ebel’s live testimony during oral argument violated summary judgment standards, which are applicable to motions to terminate derivative litigation under Zapata Corp. v. Maldonado. The Delaware Supreme Court disagreed, noting that Zapata explicitly held that when considering a special litigation committee’s motion to terminate derivative litigation, the Chancery Court may hold “a discretionary trial of factual issues.” The shareholders in this case did not object to Ebel being called as a witness and, in fact, cross-examined him extensively. Therefore, while the Delaware Supreme Court acknowledged that “an evidentiary hearing where the credibility of witnesses [is] weighed poses a risk of procedural unfairness,” because plaintiffs acquiesced to Ebel’s testimony, it was not an abuse of discretion for the Chancery Court to rely on it.

This case confirms that courts may hold trials to decide whether or not to adopt a special litigation committee’s recommendation to terminate a derivative litigation. And any questions of procedural unfairness at such a discretionary trial must be raised in the lower court or will likely be forfeited.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.