Liang v. Berger et al
Judge Indira Talwani: MEMORANDUM AND ORDER entered. For the reasons set forth herein, Defendants Motion to Dismiss the Verified First Amended/Consolidated Shareholder Derivative Complaint 29 is ALLOWED. (MacDonald, Gail)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
HARVEY J. BERGER, et al.,
HARVEY J. BERGER, et al.,
Civil Action No. 13-cv-12816-IT
Civil Action No. 13-cv-13097-IT
MEMORANDUM & ORDER
March 9, 2015
Plaintiff brings this shareholder suit derivatively on behalf of ARIAD Pharmaceuticals,
Inc. (“ARIAD”), against eleven directors and officers of ARIAD (collectively, “Defendants”) for
alleged breaches of fiduciary duty, misappropriation of confidential information and insider
trading, and a violation of the Securities Exchange Act. In their Motion to Dismiss the Verified
First Amended/Consolidated Shareholder Derivative Complaint [#29], Defendants contend that
Plaintiff may not bring this suit to enforce rights of the corporation because he has not made a
demand on the board of directors and has not sufficiently alleged that demand would have been
futile. For the reasons set forth herein, Defendants’ motion is ALLOWED.
Yu Liang initiated this action on November 6, 2013, and on December 6, 2013, Arkady
Livitz initiated a related action, which was consolidated with this case [#8]. Liang and Livitz
subsequently designated Liang’s complaint as the operative complaint [#17]. After the
Defendants filed their first motion to dismiss [#19], Liang filed his Amended Complaint [#21].
Defendants’ Motion to Dismiss the Verified First Amended/Consolidated Shareholder Derivative
Complaint [#29] is now before this court.
A. The Parties
Plaintiff has been a holder of ARIAD common stock. Verified 1st Am./Consol. S’holder
Derivative Compl. ¶ 23 [#21] [hereinafter Am. Compl.].
Defendant Harvey J. Berger was ARIAD’s Chairman of the Board, President and Chief
Executive Officer. Id. ¶ 25. He served on ARIAD’s Board of Directors together with Defendants
Jay R. LaMarch, Athanese Lavidas, Massimo Radaelli, Norbert Riedel, Sarah Schlesinger,
Robert M. Whelan, Jr., and Wayne Wilson. Id. ¶¶ 25-32, 37. Five of these Defendants—Berger,
LaMarche, Radaelli, Whelen and Wilson—also served on the Audit Committee. Id. ¶¶ 26, 28-29,
31, 32, 38.
Defendants Timothy P. Clackson, Frank G. Haluska and Edward M. Fitzgerald are not
members of the Board of Directors. Clackson was ARIAD’s President of Clinical Research and
Development and Chief Scientific Officer. Id. ¶ 34. Haluska was ARIAD’s Senior Vice President
Because the issues analyzed here arise in the context of a motion to dismiss, this court presents
the facts as they are related in Plaintiff’s amended complaint, see Trans-Spec Truck Serv., Inc. v.
Caterpillar, Inc., 524 F.3d 315, 321 (1st Cir. 2008), and construes those facts in the light most
favorable to Plaintiff, see Pettengill v. Curtis, 584 F. Supp. 2d 348, 362 (D. Mass. 2008) (quoting
Rodriguez-Ortiz v. Margo Caribe, Inc., 490 F.3d 92, 96 (1st Cir. 2007)).
of Clinical Research and Development and Chief Medical Officer. Id. ¶ 33. Fitzgerald was the
Company’s Executive Vice President, Chief Financial Officer and Treasurer. Id. ¶ 35.
All of the Defendants, except Schlesinger, are also named in a securities class action
pending in this district. Id. ¶ 19 (citing In re ARIAD Pharm., Inc. Sec. Litig., No. 13-cv-12544WGY (alleging securities fraud against ARIAD and Defendants Berger, Clackson, Fitzgerald,
and Haluska and strict liability claims for violations of sections 11 and 15 of the Securities
Exchange Act against Berger, Fitzgerald, LaMarche, Lavidas, Radelli, Riedel, Whelan, and
B. The Statements and Disclosures
ARIAD’s focus is the discovery, development, and commercialization of medicines to
treat cancer patients. Id. ¶ 1. For years, ARIAD’s primary focus has been on the development
and commercialization of Iclusig (also known by its generic name, ponatinib), a medicine
developed to treat certain forms of leukemia. See id. ARIAD has spent hundreds of millions of
dollars developing Iclusig and has run increasingly large accumulated deficits in the process. See
id. ¶ 4. ARIAD has repeatedly acknowledged that the commercial success of Iclusig is critical to
ARIAD’s success and viability. See id. ¶¶ 4 & n.1, 12.
ARIAD announced the development of Iclusig in March 2010. See id. ¶ 50. From mid2010 through mid-2012, ARIAD shepherded Iclusig through a Phase I clinical study and the
Phase II “PACE” clinical trial—necessary steps toward gaining FDA approval of the product.
See id. ¶¶ 52, 53, 68. In July 2012, ARIAD announced its submission of a rolling New Drug
Application to the FDA for Iclusig. Id. ¶¶ 10, 63; see id. ¶¶ 58, 61. With its New Drug
Application, ARIAD submitted clinical data, including safety data, from the PACE trial collected
through July 2012. See id. ¶¶ 10, 58, 61, 63.
On October 25, 2012, ARIAD’s Director of Regulatory Affairs (who is not a defendant in
this action) learned that the FDA harbored serious concerns regarding the safety of Iclusig. See
id. ¶¶ 2, 8, 66. The FDA requested a face-to-face meeting to discuss its concerns “regarding the
risks including liver failure, arterial occlusive and thromboembolic events observed in the safety
population.” Id. ¶¶ 66, 70. In its pre-meeting materials, the FDA explained that it “has taken the
approach of labeling all clinically significant [treatment-emergent adverse events] regardless of
attribution in prior approvals based on single-arm clinical trial(s),” id. ¶ 66, and recommended
to ARIAD that it “should designate arterial thromboembolic events, vascular stenosis, or any
other requirement for a vascular diagnostic or therapeutic procedure as adverse events of special
interest, which would require enhanced data collection and submission of narratives for ongoing
or planned clinical trials with ponatinib,” id. ¶ 67.
On November 1, 2012, the FDA met with at least ten senior ARIAD representatives,
including Defendants Clackson and Haluska. Id. ¶ 69; see id. ¶¶ 8, 66, 70. At the meeting, the
FDA requested that the labeling for Iclusig be revised to address the FDA’s safety concerns. See
id. ¶¶ 8, 66, 70.
On November 5, 2012, ARIAD’s Director of Regulatory Affairs submitted to the FDA a
revised draft Iclusig label that had no box warning. Id. ¶ 71; see id. ¶ 9. The FDA responded the
next day, reiterating its position that the label must include a box warning for arterial
thromboembolic events, arterial stenosis, and hepatic toxicity. The FDA stated: “The Division’s
position regarding the inclusion of box warnings is firm. We refer you to our discussion during
our face-to-face meeting on November 1, 2012.” Id. ¶ 71; see id. ¶ 9.
On November 9, 2012, ARIAD filed with the SEC its Form 10-Q for the third quarter of
2012 without disclosing the FDA’s concerns about Iclusig’s safety and the box warnings
required by the FDA. Id. ¶¶ 10, 72. Instead, the Form 10-Q represented that the FDA was
continuing to review ARIAD’s Iclusig New Drug Application and that there had been no
material changes to the risk factors included in ARIAD’s 2011 Annual Report and second
quarter 2012 Form 10-Q. See id. ¶¶ 72–75. Defendants Berger and Fitzgerald signed and
certified this filing. Id. ¶ 72. The Audit Committee, which included outside directors/Defendants
LaMarche, Radaelli, Whelan and Wilson, approved the Form 10-Q. See id. ¶¶ 10, 18, 75; see
also id. ¶¶ 72–74.
Between December 9 and 11, 2012—over a month after the FDA had communicated its
safety concerns and box warning requirements for Iclusig—ARIAD issued three press releases
about Iclusig.2 See id. ¶¶ 54–55, 76–79. Each of these press releases included safety profiles. See
id. None of these press releases, however, mentioned any of the FDA’s safety concerns from the
previous month, nor did they mention the FDA’s requirement that Iclusig be marketed with a
black box warning. See id.
On December 14, 2012, ARIAD announced that the FDA had granted accelerated
approval of Iclusig to treat patients with specified leukemia indications. See id. ¶¶ 11, 80, 81, 83.
With this announcement, ARIAD disclosed for the first time the fact that serious arterial
thrombosis had occurred in eight percent of Iclusig-treated patients. See id. ARIAD also
disclosed for the first time that hepatoxicity, liver failure, and death had also occurred in Iclusigtreated patients; and that the FDA required ARIAD to market Iclusig with a black box warning.
ARIAD promptly lost twenty percent of its stock-market valuation. Id. ¶ 11. ARIAD
Plaintiff does not specify which Defendant or Defendants were responsible for the press
releases. The complaint states only that “one or more of the Individual Defendants caused
[ARIAD] to issue” the press releases. Id. ¶¶ 76–78.
continued to reassure investors and the public that Iclusig was safe, that its commercial market
was broad, and that adverse events reported from patients treated with Iclusig were likely caused
by preexisting conditions.3 Id.
July 2012 was the cutoff for the PACE trial safety data submitted to the FDA with
ARIAD’s Iclusig New Drug Application. See id. ¶ 98. Since July 2012, ARIAD had been
internally collecting and analyzing multiple months of additional safety data from the PACE trial
which, by March 2013, showed that serious adverse cardiovascular events suffered by patients
were increasing and that doctors were continuing to reduce dosage levels of Iclusig administered
to patients. See id. ARIAD’s continued collection and analysis of safety data from the PACE
trial, collected from March 2013 through August 2013, likewise showed that serious adverse
cardiovascular events suffered by Iclusig patients were increasing and doctors were continuing to
reduce dosage levels for Iclusig. See id. ¶¶ 88, 99, 102–04, 109–10.
In March 2013, the enrollment criteria for the Phase III EPIC study were modified,
expanding existing criteria and adding new criteria to exclude a broader universe of patients who
had suffered certain cardiovascular events during the six-month period before enrollment. See id.
¶ 14. In July 2013, the dosage of Iclusig being administered to patients in another ongoing study
was reduced downward from 45 mg (the FDA-approved dose) to 30 mg. Id.; see id. ¶¶ 52, 83,
105, 109, 123.
Despite these warning signs, ARIAD continued to make statements about Iclusig,
including in its 2012 Annual report, filed March 1, 2013; in a April 2013 proxy statement; in its
first-quarter 2013 quarterly report, filed in May 2013; and in its second-quarter 2013 quarterly
Plaintiff does not specify which Defendants were responsible for these reassurances. The
complaint states only that “the Individual Defendants continued to cause ARIAD to reassure the
investing public.” Id. ¶ 11.
report, filed in August 2013, that Plaintiff contends were false and misleading. See id. ¶¶ 84, 87,
96, 98, 99, 100, 107, 173, 177, 178, 185. Defendants Berger, Fitzgerald, LaMarche, Lavidas,
Radaelli, Riedel, Whelan, and Wilson signed the March 1, 2013 filing. Id. ¶ 84. With regard to
the April 2013 proxy statement, Plaintiff alleges that “the Audit Committee and/or Board made
[the] decision to file the Proxy Statement.” Id. ¶ 99. Defendants Berger and Fitzgerald signed the
May 2013 filing, and Defendants LaMarche, Radaelli, Whelan, and Wilson reviewed and
approved some of the statements made in that filing. Id. ¶ 100. With regard to the August 2013
filing, Plaintiff alleges that “one or more of the Individual Defendants caused [ARIAD] to file
[the] quarterly report” but specify that Defendants Berger and Fitzgerald signed a certification on
the report. Id. ¶ 107.
Plaintiff further alleges that during the same period in which Defendants learned of
Iclusig’s deteriorating safety profile but withheld information from the investing public,
Defendants Berger, Clackson, Fitzgerald, and Haluska, who had closest access to and detailed
knowledge of non-disclosed internal ARIAD information regarding Iclusig’s safety profile,
collectively unloaded hundreds of thousands of shares of their ARIAD stock, for proceeds of
over $14.5 million. See id. ¶ 112.
On October 9, 2013, ARIAD disclosed Iclusig’s safety profile, including an increase in
serious arterial thrombosis among Iclusig-treated patients. See id. ¶¶ 15, 122, 127, 128. ARIAD
further announced that enrollment in all Iclusig clinical studies would be paused, dosage of
patients already enrolled in the EPIC study would be reduced, and eligibility criteria would be
changed in clinical trials to further restrict the universe of patients who qualified for those trials.
Two days later, the FDA announced that it was “investigating an increasing frequency of
reports of serious and life-threatening blood clots and severe narrowing of blood vessels (arteries
and veins) of patients taking . . . Iclusig.” Id. ¶ 126. Further, the FDA warned,
[i]n clinical trials conducted before approval, serious arterial blood clots occurred in 8
percent of Iclusig-treated patients, and blood clots occurred in 3 percent of Iclusig-treated
patients. In the most recent clinical trial data submitted by the manufacturer to the FDA,
at least 20% of all participants treated with Iclusig have developed blood clots or
narrowing of blood vessels.
A week later, ARIAD ceased enrollment in the EPIC clinical trial, again because of
Iclusig’s deteriorating safety profile. See id. ¶ 128. On October 31, 2013, ARIAD announced that
it was temporarily withdrawing Iclusig from the market at the FDA’s insistence. See id. ¶ 130.
From October 9, 2013 through October 31, 2013, ARIAD’s stock declined by over
eighty-seven percent, and ARIAD lost over $2.5 billion of market capitalization. See id. ¶¶ 127,
129, 131, 133.
Defendants move to dismiss the amended complaint on two grounds: (1) that Plaintiff has
failed to state a claim upon which relief may be granted; and (2) that Plaintiff failed to make a
demand on the Board of Directors of ARIAD and failed to plead with particularity adequate
reasons to excuse their failure to make such a demand.
On a motion to dismiss, a federal court “must assume the truth of all-plead[ed] facts and
give the plaintiff the benefit of all reasonable inferences therefrom.” Ruiz v. Bally Total Fitness
Holding Corp., 496 F.3d 1, 5 (1st Cir. 2007) (citing Rogan v. Menino, 175 F.3d 75, 77 (1st Cir.
1999)). But a court need not accept a pleading that offers “labels and conclusions” or “a
formulaic recitation of the elements of a cause of action.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007).
Rule 23.1 and Demand Futility
Federal Rule of Civil Procedure 23.1 imposes an additional pleading requirement on
plaintiffs in stockholder derivative actions. Rule 23.1 contains, inter alia, a “demand”
requirement. Specifically, a derivative complaint must “state with particularity (A) any effort
by the plaintiff to obtain the desired action from the directors or comparable authority and, if
necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or
not making the effort.” Fed. R. Civ. P. 23.1(b)(3); cf. Kamen v. Kemper Fin. Servs., Inc., 500
U.S. 90, 96 (1991) (“Rule 23.1 clearly contemplates both the demand requirement and the
possibility that demand may be excused . . . .” (emphasis omitted)).
In applying Rule 23.1, a court “must identify the source and content of the substantive
law that defines the demand requirement.” Kamen, 500 U.S. at 97. “[T]he circumstances in
which a demand is required or, conversely, excused are determined by reference to the law of the
state in which the corporation is incorporated.” Unión de Empleados de Muelles de P.R. PRSSA
Welfare Plan v. UBS Fin. Servs. Inc., 704 F.3d 155, 163 (1st Cir. 2013). Here, because ARIAD
is incorporated in Delaware, the parties agree that substantive Delaware law governs. Thus, the
court must decide, as a matter of Delaware law, whether a pre-suit demand was necessary.
Under Delaware law, “the right of a stockholder to prosecute a derivative suit is limited
to situations where the stockholder has demanded that the directors pursue the corporate claim
and they have wrongfully refused to do so or where demand is excused because the directors are
incapable of making an impartial decision regarding such litigation.” Rales v. Blasband, 634
A.2d 927, 932 (Del. 1993) (citing Levine v. Smith, 591 A.2d 194, 200 (Del. 1991)). The
Delaware Supreme Court has established “two interrelated tests for demand futility.” Unión de
Empleados de Muelles de P.R. PRSSA Welfare Plan, 704 F.3d at 163 (citing Rales and Aronson
v. Lewis, 473 A.2d 805, 813 (Del. 1984), overruled in part on other grounds by Brehm v. Eisner,
746 A.2d 244 (Del. 2000)). If a plaintiff alleges that the board has made a conscious business
decision in violation of its fiduciary duty—that is, the plaintiff challenges a board of directors’
action or “conscious decision to refrain from acting”—the test under Aronson is used. Id. Under
that test, the court must consider “‘whether, under the particularized facts alleged, a reasonable
doubt is created that: (1) the directors are disinterested and independent [or] (2) the challenged
transaction was otherwise the product of a valid exercise of business judgment.’” Rales, 634
A.2d at 933 (alteration in original) (quoting Aronson, 473 A.2d at 813). If, alternatively, the
board that would be considering the demand did not make a business decision that is being
challenged, such as where a plaintiff alleges that the board failed to discharge its oversight
duties, the test under Rales is used. Id. at 934. Under Rales, a demand is considered futile and is
excused if “the particularized factual allegations of a derivative stockholder complaint create a
reasonable doubt that, as of the time the complaint is filed, the board of directors could have
properly exercised its independent and disinterested business judgment in responding to a
demand.” Id.; see also Unión de Empleados de Muelles de P.R. PRSSA Welfare Plan, 704 F.3d
“Reasonable doubt” means “that there is a reason to doubt.” Grimes v. Donald, 673 A.2d
1207, 1217 (Del. 1996), overruled in part on other grounds by Brehm, 746 A.2d 244 (“[The]
concept [of reasonable doubt] is sufficiently flexible and workable to provide the stockholder
with the keys to the courthouse in an appropriate case where the claim is not based on mere
suspicions or stated solely in conclusory terms.” (internal quotation omitted)). Reasonable doubt
does not mean “that a plaintiff must demonstrate a reasonable probability of success on the
merits.” Rales, 634 A.2d at 934.
“Independence” “‘means that a director’s decision is based on the corporate merits of the
subject before the board rather than extraneous considerations or influences.’” Id. at 936 (quoting
Aronson, 473 A.2d at 816). A director’s independence “may be compromised if he or she is so
personally or financially beholden to an interested person, or an interested entity, that ‘his or her
discretion [is] sterilized.’” Unión de Empleados de Muelles de P.R. PRSSA Welfare Plan, 704
F.3d at 164 (quoting Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) (citations omitted)). A
director is considered interested “‘whenever divided loyalties are present, or where the director
will receive a personal financial benefit from a transaction that is not equally shared by the
stockholders, or when a corporate decision will have ‘a materially detrimental impact’ on a
director but not the corporation or its stockholders.’” Id. (quoting In re Verisign, Inc. Deriv.
Litig., 531 F.Supp.2d 1171, 1189 (N.D. Cal. 2007); see also Rales, 634 A.2d at 936 (“In such
circumstances, a director cannot be expected to exercise his or her independent business
judgment without being influenced by the adverse personal consequences resulting from the
Finally, for a court to find that demand is futile due either to director interest or lack of
independence, “a majority of the board of directors, or one-half of an evenly numbered board,
must be interested or lack independence.” Resnik v. Woertz, 774 F. Supp. 2d 614, 634 (D. Del.
2011) (citing Beam, 845 A.2d at 1046 n.8). A plaintiff’s allegations of interest or lack of
independence must be pled with specificity as to specific directors. Unión de Empleados de
Muelles de P.R. PRSSA Welfare Plan, 704 F.3d at 164 (“[W]e look to the individual directors
rather than the board as a whole”). “[B]road group allegations about the director defendants” are
not permitted, In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 134 (Del. Ch. 2009)
(citing In re AIG, Inc., 965 A.2d 763, 797 (Del. Ch. 2009)), because such allegations do not
allow for “an analysis of the state of mind of the individual director defendants,” id. (explaining
that only “specific factual allegations . . . would allow for such an inquiry”). Likewise, simply
pleading “that the director defendants ‘caused’ or ‘caused to be allowed’ the [c]ompany to issue
certain statements is not sufficiently particularized pleading to excuse demand under Rule 23.1.”
Id. at 133 n.88 (explaining that vague allegations of causation do not specify “how the board was
actually involved in creating or approving the statements, factual details that are crucial to
determining whether demand on the board of directors would have been excused as futile”).
Counts I Through III: Demand Futility
Plaintiff argues that, pursuant to Rule 23.1 and related Delaware case law, demand was
futile as to ARIAD’s board of directors because there is reason to doubt that a majority of the
board is independent and disinterested. See Opp’n Defs.’ Mot. Dismiss Verified 1st Am./Consol.
S’holder Derivative Compl., 11–17 [#31] [hereinafter Opp’n]. Defendants argue that Plaintiff has
failed to plead particularized facts justifying their failure to make a pre-suit demand. See Mem.
Supp. Defs.’ Mot. Dismiss Verified 1st Am./Consol. S’holder Derivative Compl., 8–11 [#30]
[hereinafter Defs.’ Mem.].
Because ARIAD’s board is comprised of eight members, Plaintiff is required to plead
that demand would have been futile as to only four ARIAD board members. See Resnik, 774 F.
Supp. 2d at 634. As to Defendant Berger—ARIAD’s President, CEO, and Chairman of the
Board—the amended complaint adequately alleges that he is disqualified from exercising
independent, disinterested judgment. See Am. Compl. ¶¶ 187–89; see also id. ¶¶ 19, 169–70.
Plaintiff, however, has not sufficiently pled that demand would have been futile as to any
other director. Plaintiff contends that the outside directors are interested because they face
A director may be interested if he or she faces a “substantial likelihood” of personal
liability, Guttman v. Huang, 823 A.2d 492, 502 (Del. Ch. 2003); see Rales, 634 A.2d at 936
(citing Aronson, 473 A.2d at 815). The mere existence of a lawsuit against the directors,
however, is insufficient to excuse demand. See In re Sonus Networks, Inc., S’holder Derivative
Litig., 499 F.3d 47 (1st Cir. 2007) (“[T]he fact that the director himself is named as a defendant
in the suit does not create a reasonable doubt about whether the director is ‘interested’ in the
decision about whether to bring the suit on behalf of the corporation.” (citing Aronson, 473 A.2d
at 809, 818)); see also Grimes, 673 A.2d at 1216 n.8 (“Demand is not excused simply because
plaintiff has chosen to sue all directors. . . . To hold otherwise would permit plaintiffs to subvert
the particularity requirements of Rule 23.1 simply by designating all directors as targets.”
(internal citation omitted)). Instead, “[t]he operative question is whether the Board could
impartially consider the merits of a demand without being influenced by improper
considerations.” Pfeiffer v. Toll, 989 A.2d 683, 689 (Del. Ch. 2010), abrogated on other grounds
by Kahn v. Kolberg Kravis Roberts & Co., 23 A.3d 831, 842 (Del. 2011).
Plaintiff argues that the directors, and in particular, those on ARIAD’s Audit Committee,
face a substantial likelihood of liability for (1) knowingly or recklessly authorizing the disclosure
of materially false or misleading statements in certain of the company’s public filings, and/or (2)
failing to act in good faith to discharge their duties to exercise reasonable inquiry, oversight, and
supervision over the company. See Am. Compl. ¶¶ 171-75. Plaintiff argues that “the massive
liability exposure posed by the instant litigation rendered each Director Defendant interested.”
See Opp’n, 12.
Liability based on these allegations is premised on the directors (1) violating the
securities laws, or (2) committing a breach of the duty of loyalty, see In re Caremark Int'l
Derivative Litig., 698 A.2d 959 (Del.Ch.1996); Stone v. Ritter, 911 A.2d 362 (Del. 2006),
respectively. As to (2), liability under Caremark “requires a showing that the directors breached
their duty of loyalty by failing to attend to their duties in good faith” and is premised “on a
showing that the directors were conscious of the fact that they were not doing their jobs.”
Guttman, 823 A.2d at 506. It is not enough for a plaintiff to allege that defendants “‘should have
known or must have know[n] about matters relating to the corporation’s core business.’” In re
Coinstar Inc. S’holder Derivative Litig., No. C11-133, 2011 WL 5553778, at *4 (W.D. Wash.
Nov. 14, 2011) (quoting In re Accuray, Inc. S’holder Derivative Litig., 757 F. Supp. 2d 919, 928
(N.D. Cal. 2010)). As to (1), liability for knowingly or recklessly authorizing the disclosure of
materially false or misleading statements in violation of the securities laws requires that the
outside directors acted with scienter.
Plaintiff has not put forth sufficient particularized factual allegations demonstrating that
the outside directors are subject to a substantial likelihood of liability based on these claims
because they do not sufficiently plead that the outside directors either consciously ignored their
duties under Caremark or acted with intent in authorizing the disclosure of materially false or
misleading statements. In the amended complaint, Plaintiff alleges that the Audit Committee
approved certain public filings, such as the 2012 Annual Report, an April 2013 Proxy Statement,
the Q1 2013 Form 10-Q, and the Q2 2013 Form 10-Q, that contained materially false or
misleading statements or omissions, despite those directors’ actual or constructive knowledge of
such statements or omissions. For example, in connection with the filing of the 2012 Annual
Report, Plaintiff alleges that the “Audit Committee Defendants directly or indirectly received (or,
in order to discharge their duties to remain vigilant and knowledgeable about the clinical data
being collected and Iclusig’s evolving safety profile, should have demanded and received)”
certain reports relating to the ongoing collection of clinical safety data for Iclusig. Am. Compl.
¶ 88. Plaintiff includes no facts to support the claim of actual knowledge that the challenged
disclosures contained false or misleading statements. The court must, therefore, consider only the
claim that such defendants should have had such knowledge.4
The amended complaint describes the role and responsibilities of the Audit Committee,
and, based on this role and responsibility, imputes constructive knowledge to the directors of the
Audit Committee that the company’s disclosures, which they approved, were deficient. These
allegations, however, “leave . . . too much to the imagination,” Rattner v. Bidzos, No. Civ. A.
19700, 2003 WL 22284323, at *14 (Del. Ch. Sept. 30, 2003), and are insufficient to establish a
substantial likelihood of liability based on the directors’ conscious disregard of their duties or an
intent to deceive. Merely alleging, for example, that the outside directors should have received
reports relating to the FDA’s issues with Iclusig’s safety and labeling, without more, does not
amount to a substantial likelihood of liability. Although the amended complaint may have
alleged the threat of personal liability to the directors on the Audit Committee, where such threat
is not substantial it “does not constitute a disabling interest for a director considering a derivative
plaintiff’s demand.” Id. at *9.
Other than in connection with certain of the company’s public filings, the amended
complaint does not allege that any outside directors were responsible for any other of ARIAD’s
In one paragraph of the Amended Complaint, Plaintiff omitted the qualification that the Audit
Committee directors may have only possessed constructive knowledge of that information. Am.
Compl. ¶ 75. At the March 2, 2015 hearing on the motion to dismiss, Plaintiff’s counsel clarified
that Plaintiff had no additional facts concerning the outside director Defendants’ knowledge, and
that the allegation contained in paragraph 75 should have contained the qualification that the
Audit Committee directors may have only possessed constructive knowledge.
alleged misstatements or misleading omissions. With respect to the two misstatements made on
conference calls with investors, Plaintiff alleges that Berger made these misstatements but does
not allege that any of the outside directors participated in the calls or were even aware of the
calls or Berger’s statements. See Am. Compl. ¶¶ 93, 106. With respect to the four misstatements
made in ARIAD’s press releases, Plaintiff alleges only that “one or more of the Individual
Defendants caused the Company to issue” the press releases. Am. Compl. ¶¶ 76, 77, 78, 104.
Because the “Individual Defendants” include both director and non-director defendants, this
allegation is insufficient to show that all outside directors were interested. Further, the allegation
is insufficient under Rule 23.1 because simply pleading “that the director defendants ‘caused’ or
‘caused to be allowed’ the [c]ompany to issue certain statements is not sufficiently particularized
pleading to excuse demand.” In re Citigroup, 964 A.2d at 133 n.88.
Plaintiff also points to a securities action currently pending in this district in which six of
the outside directors are named defendants. See Opp’n, 11. In that action, the plaintiffs contend
that the outside directors are strictly liable under Section 11 of the Securities Act of 1933 for the
alleged materially false and misleading statements made in connection with the company’s
January 24, 2013 stock offering. Whether the directors face a substantial likelihood of liability in
that action appears to have little bearing here, where Plaintiff does not base any of his claims on
the January 2013 stock offering, and Plaintiff fails to plead otherwise in his amended complaint.
See Am. Compl. ¶ 19 (stating only that “a securities class action complaint against the
Company’s officers and directors” had asserted “violations of Section 11 of the Exchange Act”).
In sum, Plaintiff has failed to show that pre-suit demand would have been futile and
Defendants’ motion to dismiss is therefore allowed as to Counts I through III.
Count IV: Violation of Section 14(a) of the Securities Exchange Act
Count IV asserts a violation of Section 14(a) of the Securities Exchange Act and Rule
14a-9, promulgated thereunder. Count IV is premised on Plaintiff’s contention that a proxy
statement which asked the company’s shareholders to approve executive compensation on an
advisory basis failed to disclose (1) the FDA’s concerns about Iclusig’s safety; (2) the agency’s
demand that ARIAD continue to monitor and document safety data from the PACE trial; (3)
ARIAD’s resulting monitoring efforts, which were ongoing in April 2013; or (4) changes that
ARIAD had made to the enrollment criteria for the Phase 3 trial of Iclusig. Am. Compl. ¶¶ 95,
212. Plaintiff contends that disclosure “of the truth would have ended the shareholders’ support
for compensation of the senior executives and reelection of directors.” Id. ¶ 215.
Section 14(a) makes it unlawful to solicit shareholder proxies in contravention of the
SEC’s rules and regulations, 15 U.S.C. § 78n(a), and Rule 14a-9(a) bans proxy solicitations that
contain false or misleading statements of material fact, or that “omit to state any material fact
necessary in order to make the statements therein not false or misleading,” 12 C.F.R. § 240.14a9. To state a claim under Section 14(a), a plaintiff must allege that: “‘(1) a proxy statement
contained a material misrepresentation or omission which (2) caused the plaintiff injury and (3)
that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was
an essential link in the accomplishment of the transaction.’” N.Y.C. Emps.’ Ret. Sys. v. Jobs,
593 F.3d 1018, 1022 (9th Cir. 2010) (quoting Tracinda Corp. v. DaimlerChrysler AG, 502 F.3d
212, 228 (3d Cir. 2007)). “The need to plead and prove a transactional nexus in a proxy
solicitation case is not legitimately in doubt.” Royal Bus. Grp., Inc. v. Realist, Inc., 933 F.2d
1056, 1063 (1st Cir. 1991) (citing Gaines v. Haughton, 645 F.2d 761, 775 (9th Cir. 1981),
overruled in part on other grounds by In re McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984)). A
plaintiff makes a sufficient showing of a causal relationship between a violation and an injury if
he or she proves that the proxy solicitation “‘was an essential link in the accomplishment of the
(corporate) transaction.’” Gaines, 645 F.2d at 775 (quoting Mills v. Elec. Auto-Lite Co., 396
U.S. 375, 385 (1970)). Transactional causation exists only if the underlying corporate transaction
required shareholder approval. Id.; cf. Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1089,
1105 (1991) (holding that an “essential link” cannot be established if the underlying transaction
was put to the shareholders for a purely “cosmetic vote” that was “unneeded to authorize
Here, the amended complaint does not sufficiently allege such a causal link between the
proxy statement and ARIAD’s alleged injury.5 Insofar as Plaintiff claims that ARIAD was
injured by the payment of compensation to Berger, Clackson, Fitzgerald, and Haluska, the claim
fails to allege that the underlying corporate transaction (between ARIAD and the compensated
executives) required shareholder approval. See Gaines, 645 F.2d at 775. Indeed, Plaintiff
acknowledges that the proxy statement asked the company’s shareholders to approve executive
compensation only “on an advisory basis.” Am. Compl. ¶ 95. The proxy statement itself was
even clearer: it told the shareholders that their votes were sought on “an advisory basis” with
respect to executive compensation but told them that “[b]ecause your vote is advisory, it will not
be binding on our Compensation Committee or our Board of Directors.” Defs.’ Mem., Ex. A, at
Specifically, the complaint alleges:
The inaccuracies and omissions in the Proxy Statement were essential for the
continuation of the Individual Defendants’ misconduct. Disclosure of the truth would
have ended the shareholders’ support for compensation of the senior executives and
reelection of directors. Accordingly, as a direct and proximate result of a materially
inaccurate and incomplete Proxy Statement, ARIAD suffered direct and significant harm.
Am. Compl. ¶ 215.
57 [#30]; see also 15 U.S.C. § 78n-1(c) (making clear that shareholder approval is not needed to
determine executive compensation).
The amended complaint also fails insofar as Plaintiff claims that ARIAD was injured
because a full disclosure in the proxy statement “would have ended the shareholders’ support for
. . . reelection of directors.” Am. Compl. ¶ 215. Although shareholders’ votes were binding on
this issue, the reelection of directors does “not create any cognizable harm [for purposes of the
Exchange Act] because the shareholders’ votes did not authorize the transactions that caused the
losses.” Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 933 (3d Cir. 1992) (citations omitted).6
For the foregoing reasons, Plaintiff has failed to state a claim for which relief may be
granted in Count IV. Count IV is therefore dismissed.
For the foregoing reasons, Defendants’ Motion to Dismiss the Verified First
Amended/Consolidated Shareholder Derivative Complaint [#29] is ALLOWED.
IT IS SO ORDERED.
Date: March 9, 2015
/s/ Indira Talwani
United States District Judge
Plaintiff appears to concede that transactional causation exists only if the underlying corporate
transaction required shareholder approval. See Opp’n, 21. That is, Plaintiff argues that
Defendants would be correct that they had no duty to disclose alleged mismanagement in the
proxy statement as long as Plaintiff’s Section 14(a) claim was “based on something other than a
matter the Board sought shareholder approval for and that required shareholder approval.” Id.
Plaintiff argues, rather, that the proxy statement required shareholder approval because a vote on
the Board’s executive compensation decisions was required under the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), 15 U.S.C. § 78n-1. This
argument fails because Dodd-Frank explicitly provides that such shareholder votes are not
binding and do not “create or imply any change to the fiduciary duties” of the Board. See id.
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