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Delaware Court of Chancery Allows Shareholder to Pursue Fiduciary Duty Claims Against Directors and Officers for Insider Trading

In a New Year’s Eve decision, Vice Chancellor Parsons of the Delaware Court of Chancery allowed a shareholder of biotech company Dendreon to pursue derivative claims against certain of the company’s officers and directors for allegedly breaching their fiduciary duties by engaging insider trading.  See Silverberg v. Gold, C.A. No. 7646-VCP (Dec. 31, 2013).  The decision serves as a potent reminder that insider trading by corporate directors and officers – buying or selling company stock based on material, non-public information – isn’t just a violation of the securities laws. It’s also a breach of fiduciary duty under Delaware law, even when the corporation itself does not suffer any resulting loss.The plaintiff alleged that, shortly after the FDA had approved the company’s prostate cancer treatment in 2010, the defendants had sold over $70 million in Dendreon stock based on undisclosed concerns that physicians would be reluctant to prescribe the drug due to its high cost ($93,000 for a one-month course of treatment) and associated questions about reimbursement. The plaintiff sought to compel the defendants to disgorge all profits made on these stock sales. The defendants moved to dismiss the claims on the ground that the plaintiff had failed to make a pre-suit demand on Dendreon’s board to take action, as required by Delaware law. But the Court of Chancery held that the shareholder’s failure to make a pre-suit demand should be excused as futile, because the plaintiffs had sufficiently alleged that a majority of the directors faced a substantial likelihood of liability on the insider trading claims, and therefore would have been unable to evaluate a demand in a disinterested and independent way.



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Chip Phinney