In the latest D&O lawsuit based on allegations related to the COVID-19 outbreak, a plaintiff shareholder has filed derivative lawsuit against the board of a vaccine developer, Vaxart, claiming that corporate insiders and the company’s largest investor profited when the company falsely claimed that it was part of the federal government’s accelerated program for the development of a COVID-19 vaccine. The complaint in the lawsuit, which alleges that the defendants violated their fiduciary duties and federal securities laws regarding proxy disclosures, can be found here.
Vaxart is a clinical-stage biotechnology company focused on the development of oral vaccines. Until recently, Armistice Capital, a hedge fund, was Vaxart’s largest investor. Armistice’s founder and one of its managing directors sit on Vaxart’s board. At the beginning of 2020, Armistice owned shares and warrants representing about a 30% ownership stake in the company.
The complaint in the derivative lawsuit alleges that on June, 8, 2020, the company amended Armistice’s warrant agreements, allowing Armistice to exercise its warrants immediately. The company also issued millions of dollars of stock options to Vaxart’s most senior executives.
On June 25, 2020, the company issued a press release announcing that it had entered an agreement to enable production of one billion or more COVID-19 vaccine doses annually. The company’s share price doubled on the announcement, from $3.61 per share to $6.26 per share.
On June 26, 2020, the company issued another press release stating that Vaxart’s vaccine had been selected for the U.S. government’s “Operation Warp Speed” (a government initiative to encourage development of a COVID-19 vaccine). This announcement caused the company’s share price to rise to a high of $14.30.
According to the derivative complaint, immediately following the company’s June 26 announcement, Vaxart exercised its warrants and purchased Vaxart stock much more quickly than it would have been able to before the warrant terms were modified. Armistice allegedly made a profit of more than $197 million. The stock options awarded to the company’s executives increased in value from about $4.3 million when granted to more than $28 million. The derivative complaint alleges that the well-timed stock grants and the warrant changes are an “illegal use of inside information termed spring-loading and are a breach of defendants’ fiduciary duties.”
On July 25, the New York Times published an article entitled “Corporate Insiders Pocket $1 Billion in Rush for Coronavirus Vaccine” (here), reporting, among other things, on Vaxart’s executives and major shareholders significant profits in trading in the company’s shares following the company’s announcement of its participation in Operation Warp Speed. The Times article reported that Vaxart “is not among the companies selected to receive significant financial support from Warp Speed.” The complaint alleges that the company’s share price declined on this news.
The Derivative Lawsuit
The derivative complaint was filed in the Northern District of California on September 17, 2020. The complaint names as defendants the individual members of Vaxart’s board, as well as Armistice Capital, and also names Vaxart itself as nominal defendant.
The complaint asserts derivative claims against all defendants for breach of fiduciary duty and for unjust enrichment. The complaint also asserts a separate claim against the individual board members under Section 14(a) of the Securities Exchange Act of 1934, based on allegations misrepresentations and omissions in the company’s 2020 Proxy Statement relating to the grant and exercise of the stock options.
The derivative complaint alleges “defendants’ fiduciary failures have … subjected the Company to a complex and expensive-to-defend securities class action lawsuit alleging violations of federal securities laws.” The securities lawsuit, which was filed in August 2020, is discussed in detail here. The derivative complaint also alleges that because of the individual board members’ complicity in these events, making a pre-suit demand on the board to pursue the claims asserted in the derivative complaint would be futile.
The complaint seeks an award of damages against the defendants and in favor of the company based on the defendants alleged legal violations; an order directing the company to improve its corporate governance and internal procedures; equitable or injunctive relief to impose a constructive trust on the proceeds of the defendants’ trading activities; awarding Vaxart restitution of all of defendants’ profits, benefits and compensation; and awarding the plaintiff the costs of the action, including attorneys’ fees.
By my count, the latest lawsuit represents the fifth coronavirus-related shareholder derivative lawsuit filed since the U.S. outbreak began in March of this year. The four previously filed pandemic-related derivative lawsuits involve Inovio; Zoom; SC Werx; and Chembio. The five cases share one feature in common; in each case, the companies involved also had previously been named as defendants in securities class action lawsuits. (By my count, there have been a total of 20 COVID-19-related securities class action lawsuits filed.)
A total of five derivative lawsuits over the course of six months does not represent a significant amount of litigation. Even considered in combination with the securities class action lawsuit that have been filed, there has just not been a massive amount of coronavirus-related D&O litigation. There is still the possibility for further mismanagement claims, as well as misrepresentation claims, as companies struggle to reopen, the manage the ongoing public health crisis, and attempt to deal with the consequences and effects of the economic downturn. However, so far at least, the coronavirus lawsuits in general, and the coronavirus-related derivative litigation in particular, have to date not been a significant phenomenon, especially by comparison to the amount of litigation that followed in the wake of the global financial crisis.
It also remains to be seen whether or not the lawsuits that have been filed will be successful. The allegations in this latest lawsuit, particularly with respect to the warrant exercise and stock options issues, appear serious. However, derivative lawsuit are notoriously difficult to sustain, particularly given the various defenses available to defendants, including the demand requirement and the business judgment rule.