Delaware Business Litigation Report

Chancery Dismisses Breach of Fiduciary Duty Claims Involving Bio-Tech Company Developing a COVID-19 Vaccine

In re Vaxart, Inc. Stockholder Litigation, Consol. C.A. No. 2020-0767-PAF (Del. Ch. Nov. 30, 2021)
Plaintiffs challenged amendments to warrant agreements between Vaxart and its former controlling stockholder, Armistice, alleging that the board intentionally withheld information significantly affecting the company’s share price, which permitted Armistice to engage in insider trading in violation of the board’s and Armistice’s fiduciary duties. Defendants moved to dismiss for failure to state a claim and for failure to make demand on the board. The Court granted the motion in part and dismissed derivative claims against Armistice and the board, finding that plaintiffs had failed to establish that Armistice was a controller and (relatedly) that demand on the Vaxart board would be futile. 

Vaxart is a small biotech company that was involved in developing a COVID-19 vaccine in its early stages. In 2019, Vaxart entered into common stock purchase warrants with Armistice, a hedge fund focused on the health and consumer sectors. Later that year, Armistice became Vaxart’s controlling stockholder and was given two appointees on Vaxart’s board. In March 2020, Vaxart completed an offering that diluted Armistice’s equity stake to below 50%. After steadily selling off its Vaxart stock, Armistice’s stake dropped to under 10% by June 2020. In May 2020, Armistice and Vaxart discussed amending the warrant agreements to adjust certain beneficial ownership limitations, which permitted Armistice to exercise and dispose of warrant shares faster than under the warrants’ previous terms. The Vaxart board approved the amendments.

Plaintiffs alleged that prior to the board approval of the warrant amendment, the board knew that Vaxart had been chosen to participate in Operation Warp Speed, a government program to accelerate distribution and development of a COVID-19 vaccine. Following the public announcement of Vaxart’s participation, Vaxart’s share price rose quickly. Shortly thereafter, Armistice exercised the amended warrants and sold its shares on the open market for a considerable profit.

Plaintiffs claimed that the board breached its fiduciary duties by approving the amendments and that Armistice breached its duties as a controller by accepting the amended warrants and by engaging in insider trading. Plaintiffs also claimed that Armistice was unjustly enriched and that it aided and abetted the Vaxart board’s alleged fiduciary breaches. In dismissing the claims, the Court first found that Armistice was no longer a controlling stockholder that owed duties as such at the time of the challenged transactions. Based on this same reasoning, the plaintiffs’ argument that demand on the board would be futile also failed. There were only two Armistice appointees on Vaxart’s eight-member board, and neither of them was alleged to have taken action to exert control over Vaxart in connection with the challenged transactions. Nor were there adequate allegations that the other Vaxart directors lacked independence. 

The Court further explained that, even if Armistice was a controller, this alone would not excuse demand. Applying the demand futility test laid out by the Delaware Supreme Court in Zuckerberg, the Court found that plaintiffs had not alleged facts establishing that at least half of the relevant directors could not fairly and impartially consider a litigation demand relating to the warrant amendments. While plaintiffs argued that the warrant amendments would be subject to entire fairness review and that demand should be excused pursuant to the second prong of the Zuckerberg analysis, the Court disagreed, explaining again that Armistice was not a controller, the majority of the board was not conflicted, and there were not sufficient allegations that the board acted in bad faith. Because plaintiffs had failed to demonstrate that demand was futile, the Court also dismissed plaintiffs’ derivative claims against the Armistice directors for breach of fiduciary duty, unjust enrichment, and aiding and abetting. The Court reserved decision on certain claims related to alleged spring-loaded option grants.

Share