Stay current on changes and developments in corporate law with a wide variety of resources and tools.
Sept. 4 — The U.S. District Court for the Northern District of California Sept. 3 put the brakes on a shareholder derivative lawsuit accusing current and former directors of Impax Laboratories Inc. of breaching their fiduciary duties by failing to comply with FDA requirements.
Applying Delaware law, Judge Haywood S. Gilliam Jr. concluded that the plaintiffs failed to plead particularized allegations that a pre-suit demand on the company's board would have been futile.
“The Court finds that Plaintiffs have failed to allege particularized facts, rather than inferences supported only by hindsight, that establish a reasonable doubt that the Director Defendants ‘could have properly exercised [their] independent and disinterested business judgment in responding to a demand,'” Gilliam wrote.
Accordingly, the court granted the defendants' motion to dismiss but will allow the plaintiffs to amend their complaint if they are able to bring specific allegations.
The plaintiffs argued, among other claims, that demand was excused because a majority of the company's directors faced a substantial likelihood of liability for their failure to take corrective actions in response to problems identified by the Food and Drug Administration.
Under Delaware law, directors can be subject to liability for failing to act after learning about “proverbial red flags”—evidence of illegality, the court observed.
The court reasoned that a May 2011 “Warning Letter” sent by the FDA to Impax identifying actual violations of the law likely qualified as a “red flag,” reasonably creating a known duty to act on the part of the director defendants.
However, the court concluded that even assuming that the defendant directors had a duty to act, the plaintiffs failed to allege a failure to act.
Specifically, the court found allegations in the complaint suggested that the defendant directors “did take some actions in response to the May 2011 Warning.”
The court was also persuaded by the fact that the FDA never instituted an enforcement action against the company.
“Given that the FDA issues Warning Letters only ‘for violations of regulatory significance, i.e., those that may actually lead to an enforcement action if the documented violations are not promptly and adequately corrected,' the lack of an enforcement action implies that the violations were in fact eventually corrected—or, at the very least, that the FDA was satisfied with the actions taken by Impax to correct the noticed violations,” Gilliam wrote.
Accordingly, the court found that the plaintiffs relied on hindsight inferences, instead of specific allegations of action or inaction on the part of the defendants.
The court also concluded that the plaintiffs failed to plead particularized facts supporting their allegations that the directors knowingly disseminated false statements and deliberately adopted a business strategy based on non-compliance with regulatory requirements.
To contact the reporter on this story: Michael Greene in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Yin Wilczek at email@example.com
The opinion is available at http://www.bloomberglaw.com/public/document/IN_RE_IMPAX_LABORATORIES_INC_SHAREHOLDER_DERIVATIVE_LITIGATION_No
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)