Chancery Court Denies In Part Motion to Dismiss Breach of Contract and Breach of Fiduciary Duties Claims

By Shoshannah Katz and Priya Chadha

In Feldman v. Soon-Shiong, et al. (C.A No. 2017-0487-AGB), the Delaware Court of Chancery denied in part and granted in part a motion to dismiss claims involving, among other things, breach of contract and breach of the fiduciary duty of loyalty, following a defendant’s withdrawal of $47 million from a company bank account.

On October 2, 2015, nominal defendant Precision Biologics, Inc. (the “Company”) and defendant NantCell, Inc. (“NantCell”) entered into a stock purchase agreement (“SPA”) under which NantCell purchased shares representing 60.24% of the Company for $50 million.  At the same time, the Company and NantCell entered into a Voting Agreement pursuant to which NantCell obtained the right to appoint three of the five directors on the Company’s board and maintain permanent voting control regardless of vacancies.  NantCell is controlled by defendant Patrick Soon-Shiong (“Soon-Shiong”) who serves as its CEO and also controls several affiliated companies.  NantCell appointed Soon-Shiong and Defendants Charles Kim (“Kim”) and Christian Zapf (“Zapf”) (with Soon-Shiong, the “Individual Defendants”), both executives at NantCell affiliates, to the Company’s Board.

The Company also entered into an Investors’ Rights Agreement (“Rights Agreement”) with NantCell and investors in the Company, including plaintiff James Feldman (“Feldman”).  Under the Agreement, the $50 million paid by NantCell was deposited in a Company-owned account (the “Financing Account”) maintained by NantCell on the Company’s behalf.  Soon-Shiong had sole signature authority for the account.  The Rights Agreement required the Board to transfer enough funds from the Financing Account to an operating account to cover “at all times at least three (3) months” of the Board-approved budget and any other Board-approved expenditures.  The Rights Agreement also required that the Company provide certain information to its major investors.

Approximately one month after the transaction closed, Soon-Shiong withdrew $47 million from the Financing Account without notifying or consulting the Board.  He funded the Company with sporadic payments totaling $9-10 million over the next two years, but the Company fell months behind paying its suppliers by mid-2016.  In June 2017, after stockholder demands for information pursuant to the Rights Agreement and DGCL Section 220, the Board fired all of the Company’s administrative and accounting employees, outsourcing their duties to NantCell or its affiliates at a cost of hundreds of thousands of dollars per month.

In July 2017, Feldman filed a complaint, later amended in November 2017, asserting a variety of direct and derivative claims against the Company, NantCell, and the Individual Defendants, which defendants moved to dismiss.

Chancellor Bouchard denied in part the motion to dismiss the claim that NantCell had breached the Rights Agreement, holding that it was “reasonably conceivable” that NantCell had breached the agreement by failing to maintain sufficient funds in the Company’s operating account.  He granted the motion, however, with respect to that claim as alleged against NantCell, as the obligations under the Rights Agreement were owed by the Company, and against the Individual Defendants, as they were not signatories to the Rights Agreement.  Chancellor Bouchard also granted the motion with respect to the claim for breach of the implied covenant of good faith and fair dealing, stating that there were no “gaps” to fill in in the Rights Agreement.  Chancellor Bouchard also granted the motion to dismiss the tortious interference charge against the Individual Defendants because Feldman had not alleged that they were acting outside the scope of their authority.

Feldman also asserted breach of fiduciary duty of loyalty claims against NantCell and the Individual Defendants for alleged failure to disclose information about the status of the Financing Account proceeds and for enriching themselves at the Company’s expense.  Chancellor Bouchard dismissed the direct claim because the named defendants lacked a fiduciary duty to disclose such information, which obligation rested with the Company.  Chancellor Bouchard denied the motion to dismiss the breach of fiduciary duty claim with respect to Soon-Shiong and NantCell, finding that the otherwise required demand on the Board was excused because the Board, controlled by the interested Individual Defendants, could not have impartially considered such a demand with respect to such claims.  He dismissed the claim, however, against Kim and Zapf due to an exculpation provision pursuant to DGCL Section 102(b)(7) in the Company’s certificate of incorporation and a lack of allegations that they personally benefitted from Soon-Shiong’s withdrawal of funds or were derelict in failing to stop it.

Chancellor Bouchard did not dismiss the claim seeking equitable relief via an appointment of a custodian, which the plaintiff requested to protect and preserve the Company’s assets during the pending action, but made clear that he was only doing so to avoid foreclosing a potential form of relief, even if it was highly unlikely that that such relief would ultimately be granted.  He did, however, dismiss Feldman’s claim for fraudulent inducement for failure to show any evidence of defendants’ intent not to perform their contractual obligations or any other material misstatement of fact in conjunction with the execution of the agreements in question.  Likewise, the Court dismissed claims that NantCell and Soon-Shiong violated the state securities laws of California and Texas due to the failure to plead any material misrepresentation as required.

Feldman v. Soon-Shiong, et al.

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