NU Investigate Shareholder Rights in Corporations Discussion

Instructions

Shareholders of Clovis Oncology Inc. brought a shareholder derivative suit alleging that the board of directors ignored red flags in the testing of a lung cancer treatment called Rocilentinib. The clinical trials for Rocilentinib failed to follow standard protocol, which would prevent the drug from gaining FDA approval. The company allegedly made public statements about the success of trials that were inconsistent with the information the board received. When Clovis withdrew the drug from FDA consideration in 2016, the stock price plummeted. Will a court allow the shareholder derivative suit to go forward? [In re: Clovis Oncology, Inc. Derivative Litigation, C.A. No. 2017-0222-JRS (Del. Ch.)]

Responses to Classmates: Respond to a minimum of 2 of your classmates’ posts. In your responses, do you agree or disagree? Why?

student#1 For claimed breaches of fiduciary responsibility, fraud, or other misconduct, shareholders may bring a shareholder derivative action against the corporation’s directors or officers on behalf of the corporation. It is generally employed when the management or board of directors are unable or unwilling to confront the alleged malfeasance on their own.

In the case of Clovis Oncology, shareholders claim that the board of directors disregarded warning signs while the lung cancer treatment Rocilentinib was being tested and gave contradictory public statements about the trial’s success, which caused a drop in company’s stock price when the drug was removed from FDA consideration. According to Koh, (2020) the shareholder derivative lawsuit’s viability will be determined by the court after considering a number of variables.

First, the shareholders must show that they have a case to bring. They must demonstrate that they were shareholders at the time of the alleged misbehavior and that the directors’ actions directly caused them harm (Koh, 2020). In this instance, shareholders will probably have standing if they can demonstrate that the board’s decisions caused their investment in Clovis to lose value. The shareholders must demonstrate that their demand was erroneously denied or that making such a demand would be pointless before they can make a demand of the board to correct the alleged misbehavior (Fisch, 2022). In this case, a court might decide that making a demand would have been pointless if the board had disregarded significant and reliable evidence of misbehavior. Additionally, the court will determine if the accusations cast a reasonable doubt on the directors’ ability to operate honestly and in the corporation’s best interests (“In re Clovis Oncology, Inc. Derivative Litigation, C.A. No. 2017-0222”).

In conclusion, the court will should approve the derivative litigation if the Clovis shareholders can meet these prerequisites. However, the final decision rests with the court. This choice will have a big impact on the company and the shareholders, and it will influence how Clovis Oncology handles responsibility and corporate governance.

student#2 In the case filed from the share holders of Clovis Oncology, inc. against the board of directors in which they claimed that protocol was not followed for the testing of the new drug submitted for FDA approval and had it been followed, it would not qualify. The claim went on to say that the trial results were inconsistent to what the public statements being made about the new drug were reporting and the drug got pulled from the FDA consideration in 2016, after which, stock price plummeted. The question was if the courts would stilll here this case or not. I would say yes based on the following violations still applicable to the case, despite the drug being pulled:

Securities Exchange Act of 1934: Shareholders could accuse the company of violating Section 10(b) of the Securities Exchange Act, which prohibits fraudulent practices in connection with the purchase or sale of securities. Shareholders may argue that the deliberate withholding of material information constituted fraud or a deceptive practice. Rule 10b-5: Shareholders could also claim a violation of Rule 10b-5, which is a regulation under the Securities Exchange Act; it prohibits deceptive practices, including the omission of material facts, in connection with the purchase or sale of securities. Fiduciary Duty: Shareholders could allege that the company and its officers or directors breached their fiduciary duty to the shareholders. Fiduciary duty typically includes the obligation to act in the best interests of the company and its shareholders, including the duty to disclose material information.

Although the drug was pulled for approval, the shareholders were not given information that was true and honest and the reports given to them regarding the trials were different than what the company was making claims of publicly regarding drug effects in trials. The claim still stands that had the proper protocol been followed , the drug would have never passed FDA standards and most likely would have not only saved them a lot of money in advertising (false) but submission efforts required to get the drug to that point in testing with the FDA. Of course, pulling the product caused stocks to fall, which probably would not have happened had the public not received false and misleading information about the new drug, which effected the share holders pockets from dividends/returns on investment into their stock but also looks bad in the industry to be associated with such a corrupt and negative business and product afterward, which may effect the long term success of the company because they will not be seen as credible and remembered for scandal of misleading information to public and stocks doing poorly, costing everybody money.

So, yes, I do believe they would hear it as they do still have a case and depending on how they filed, may need to file claiming different violations but there are violations relevant to this case.