Stay current on changes and developments in corporate law with a wide variety of resources and tools.
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.
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 firstname.lastname@example.org
To contact the editor responsible for this story: Seth Stern at email@example.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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)