Biotech Company Is Facing Corporate Governance Reforms in Derivative Suit Over Repricing of Stock Options

June 14, 2019 – Press Releases

The Delaware Court of Chancery has green-lighted a shareholder’s lawsuit that alleges the directors and officers of a biotech company rushed to reprice their own stock options just before announcing the company had secured a patent for a cutting-edge cancer diagnosis tool, which led to a sharp rise in the stock price.

The ruling in Howland v. Kumar et al., is an important early-round victory for a Fox Rothschild litigation team led by Sidney S. Liebesman and Wali W. Rushdan II who filed the derivative suit on behalf of Thomas S. Howland, Jr., who holds significant shares of Anixa stock.

In her 21-page decision, Vice Chancellor Kathaleen McCormick found there was evidence to support allegations that the officers of Anixa Biosciences, Inc. had unjustly enriched themselves and breached their fiduciary duty to shareholders.

“This is essentially a case about corporate governance,” Liebesman said. “Our goal in bringing this suit was to secure a package of important reforms that will ensure that Anixa’s officers understand their fiduciary responsibilities.”

The suit alleges that Anixa Chairman, President and CEO Amit Kumar and four outside directors were aware in 2017 that the company’s stock had dropped to just 67 cents per share and that their own stock options were “under water” because they range from 85 cents to more than $5.

But the company’s future suddenly looked much brighter when the officers learned in early August 2017 that a patent was set to be issued later that month to a subsidiary of Anixa for a cancer diagnostic blood test.

The suit asserts that the officers and directors responded to the good news by hastily voting to reprice their own stock options to match the company’s low trading price, and waiting to announce the news of the patent to the following month.

As a result, the suit alleged, the officers effectively “spring-loaded” the options to be worth much more when the stock price spiked.

On September 15, 2017, the last 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 and peaked on September 26, 2017, when it closed at $4.99.

In her ruling, Judge McCormick refused to dismiss the suit, and found instead that Howland alleged valid claims that Kumar and other officers had “breached their fiduciary duty of loyalty by misusing corporate information and processes to benefit themselves rather than Anixa.”

McCormick also wrote that, based on Howland’s allegations, “it is reasonable to infer … that the repricing was the product of an unfair process.”