A shareholder’s letter requesting that Intercept Pharmaceuticals Inc. take “all necessary action” to address its allegedly excessive director-compensation policy qualified as a presuit litigation demand that opened the door for business judgment rule protections to be invoked, a Manhattan judge ruled last week.
New York Supreme Court Justice Charles E. Ramos on March 23 ruled that plaintiff John Solak’s March 2017 correspondence with the biopharmaceutical firm’s board met a requirement under Delaware law that a shareholder must exhaust all corporate remedies before filing suit on behalf of the company.
Solak, who is no stranger to the courtroom, argued that his letter could not have satisfied the threshold demand issue because he never explicitly insisted that Intercept’s directors explore the possibility of taking legal action on their own. Instead, Solak asked Ramos to review his complaint under the more stringent entire-fairness standard, arguing that a demand on the board would have been futile.
But Ramos, in a 17-page memorandum opinion, said the broad wording of Solak’s letter “obviously includes” the proper legal action necessary to achieve his stated goal of scaling back or eliminating the policy.
“While some directors may have elected to cancel parts of their compensation when requested to do so, the board would most likely need to have taken legal action to cancel options and restricted stock awards that had already been issued. Such a move would have ruffled feathers,” Ramos, a New York County judge, wrote.
Solak had challenged a nonemployee director compensation structure that Intercept had in place since Feb. 16, 2017. Under that policy, qualifying board members received a $50,000 annual cash retainer, $232,000 in options to buy shares of Intercept common stock and an award of $174,800 in shares of restricted stock.
The following month, Intercept, which is incorporated in Delaware, adopted a revised policy, in which it kept in place the annual cash retainer but drastically cut the options award. The new policy also included a slight decrease to the awards of restricted stock, but raised compensation for nonemployee directors’ serving as board chair from $25,000 to $30,000.
The Intercept board responded to Solak’s demand last July in a letter from Skadden, Arps, Slate, Meagher & Flom partner Edward B. Micheletti. In it, Micheletti said that the board had conducted a factual investigation and determined that Solak’s allegations would have an “extremely low probability of success on the merits.”
Solak denied that his initial letter was a demand for litigation and sued the Intercept board in August, alleging breaches of fiduciary duty, corporate waste and unjust enrichment. The board moved to dismiss the case in September, saying Solak had conceded the directors’ independence when he first requested that the board look into the matter.
In his opinion, Ramos said the Intercept directors were entitled to business-judgment protections, which insulate board-level actions taken in the best interest of a company. Solak, he said, had failed to meet the few carve-outs under Delaware law that would have triggered heightened scrutiny of the case.
“Under the business judgment rule, courts must give deference to directors’ decisions, and may not substitute their own business judgment for that of the board,” he wrote. “Having failed to demonstrate that the board’s refusal to take legal action was grossly negligent or in bad faith, Solak cannot bring a derivative action on behalf of Intercept.”
Attorneys for the Intercept directors did not return calls on Monday seeking comment on the case. The Skadden team included Micheletti, from the firm’s Delaware office, partners Scott D. Musoff in New York and Graham Robinson in Boston.
Jeffrey M. Norton, a partner with Newman Ferrara in New York, represented Solak. In a statement, he said the firm was “disappointed” with Ramos’ decision and is “considering our options, up to and including an appeal.”
The case was captioned Solak v. Fundaro.