Sorrento Therapeutics Board Must Defend Unfair Stock Grants Suit

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By Yin Wilczek

Sorrento Therapeutics Inc. directors must defend against a shareholder lawsuit alleging they improperly granted themselves subsidiary stock options in a bid to siphon the company’s assets ( Williams v. Ji , Del. Ch., No. 12729-VCMR, 6/28/17 ).

The Delaware Chancery Court June 28 denied the board’s request to dismiss the action. It rejected the board’s argument that the compensation was shielded by the business judgment rule, which defers to corporate decision-making. Instead, the court said the case must be reviewed under the more rigorous “entire fairness” standard because the shareholder sufficiently pleaded that the transactions were unfair.

The burden now is on the board to show that the grants were fair in terms of how they were disclosed and structured, and that they were fair compensation for services rendered to the company, Vice Chancellor Tamika Montgomery-Reeves wrote. “Defendants must prove that the Grants were entirely fair to Sorrento, which they have not done at this stage.”

The company didn’t immediately respond to a request for comment.

Five Subsidiaries

Sorrento Therapeutics is a San Diego-based biopharmaceutical company that researches treatments for cancer, infectious diseases and other health problems.

In September 2016, shareholder Yvonne Williams filed a lawsuit alleging that the Sorrento board granted themselves options and warrants for the stock of five subsidiaries over which the company has voting control. Williams claimed that shortly before or after the options grant, the board transferred valuable corporate assets to the subsidiaries.

The shareholder also challenged a voting agreement in which the board required a private placement investor to vote its shares as directed by the board.

The court, applying entire-fairness review, found that Williams’ allegations gave rise to a reasonable inference of unfair dealing.

The court noted, for example, that Henry Ji, a board member who also is Sorrento’s chief executive officer and president, was granted the right to acquire 25 percent of the voting power of LA Cell, and 18 percent of the subsidiary’s economic value. According to Williams’ complaint, LA Cell had a deal with City of Hope, a medical research and treatment center, that could be worth more than $170 million. “Taken as true, the value of that compensation, especially as a percentage of the value of LA Cell, is large enough to sufficiently plead that the Grants were excessive,” Montgomery-Reeves said.

The court also said the board must prove that the voting agreement was “intrinsically fair and not designed to disenfranchise Sorrento stockholders.”

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

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