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Chancery Addresses Spring-Loading of Options

By | June 14, 2019

In Howland Jr. v. Kumar et al the Delaware Court of Chancery addressed the alleged spring-loading of options in connection with the repricing of options when considering a motion to dismiss.

In that case, a stockholder of Anixa Biosciences, Inc. challenged the 2017 repricing of stock options held by Anixa’s directors and officers. The repricing occurred shortly before those directors and officers publicly announced news of a key patent’s issuance to a subsidiary of Anixa. According to the plaintiff, Anixa’s directors and officers timed the repricing to precede the public announcement of the issuance so as to effectively “spring-load” the options for the benefit of the directors and officers.

At the time the repricing occurred, Anixa’s Board of Directors was comprised of Chairman, President, and CEO Amit Kumar and four outside directors—Lewis H. Titterton, Jr., Arnold M. Baskies, John Monahan, David Cavalier and Dale Fox.

On August 3, 2017, Kumar and Anixa’s Senior Vice President of Engineering, John A. Roop, received an email from Anixa’s outside patent counsel regarding a pending patent application. The email stated that “the patent will issue on August 22, 2017” and be assigned “U.S. Patent Number 9,739,783” (the “’783 Patent”).  The USPTO in fact issued the ’783 Patent on August 22, 2017.  The Board did not immediately announce this information to the public.

At the time, stock options held by Anixa’s directors and officers were underwater. The Board under Kumar’s leadership called a special meeting of the Compensation Committee to consider “a proposal to re-price certain issued and outstanding stock options for all of the current officers, directors, and employees of the Company.”  The special meeting was held on September 6, 2017. Two of three committee members, Titterton and Baskies, were present and constituted a quorum. Kumar and Anixa’s Chief Operating Officer and Chief Financial Officer, Michael J. Catelani, also attended the September 6 meeting. At the meeting, the Compensation Committee approved the repricing of 2,029,600 stock options to $0.67, the closing price for Anixa stock that day (the “Repricing”). The original strike prices ranged from $0.82 to $5.30. Nearly 95% of the repriced options belonged to Anixa directors or officers.  All of the Board member at the time of Repricing held options that were repriced.

Anixa publicly disclosed the Repricing on September 8, 2017.  On September 18, 2017, Anixa issued a press release publicly announcing the issuance of the ’783 Patent (the “September 18 Press Release”). The September 18 Press Release allegedly affected Anixa’s stock trading price and volume significantly. On September 15, 2017, the trading day before the September 18 Press Release Anixa’s stock price closed at $0.69 with a trading volume of 209,959. On September 18, Anixa’s stock price closed at $1.28, with a trading volume of 22,764,730, up by approximately 85% and over 10,000%, respectively, from September 15.

The Complaint named as defendants: directors Kumar, Titterton, Baskies, Monahan and Fox and current officers Roop, Catelani, and Vice President of Engineering Campisi (together, the “Individual Defendants”).  The Complaint alleged that the Individual Defendants breached their fiduciary duties by withholding from the public news of the ’783 Patent’s issuance, so as to allow the Individual Defendants’ stock options to be repriced prior to announcing the patent’s issuance.

Giving Plaintiff the benefit of all inferences to which he was entitled at this stage, the Court found  that  it was reasonably conceivable that each of the Individual Defendants (other than Campisi) breached their fiduciary duty of loyalty by misusing corporate information and processes to benefit themselves rather than Anixa. Moreover, because Titterton and Baskies approved their own compensation under the Repricing, rendering themselves interested in the transaction, the entire fairness standard of review applied.

The Court noted it was reasonable to infer from the Complaint that the Repricing was the product of an unfair process.  The Court also noted the Complaint alleged that the “timing, structure, and disclosure of the 2017 Re-pricing were unfair.” According to the Court, Plaintiff had adequately alleged facts sufficient to support an inference that Titterton and Baskies had knowledge that the ’783 Patent would issue and repriced stock options in advance of Anixa publicly announcing this information to benefit from any resulting stock surge.

Accordingly, the motion to dismiss for breach of fiduciary duty against Kumar, Titterton, Baskies, Monahan, Catelani, Roop and Fox was denied.  The Court then turned its attention to defendant Campisi.  The Complaint’s individualized allegations regarding Campisi were limited to a single paragraph, alleging that Campisi was the Vice President of Engineering of Anixa, a member of Anixa’s management team, and that he personally benefitted from the Repricing. Rather than plead the role Campisi played in the events at issue, the Complaint lumped Campisi in with the other Individual Defendants. The Complaint provided no basis from which to infer knowledge of the patent issuance prior to the Repricing, involvement in the decision to withhold news of the patent issuance, or involvement in the Repricing by Campisi. Because there are no well-pled facts sufficient to suggest any wrongdoing by Campisi, Plaintiff’s breach of fiduciary duty claim as pled against Campisi was dismissed.

It is important to note that the Court did not find that any of the defendants were involved in wrongful conduct, only that the Complaint survived a motion to dismiss.

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