Chancery Court Tosses Stockholder Complaint Against Ultragenyx Pharma

(CN) – The Delaware Chancery Court shot down an investor lawsuit against Ultragenyx Pharmaceutical alleging excessive compensation to non-employee directors, finding that a pre-suit demand letter rejected by the board sunk the stockholder’s legal options.

The ruling by Vice Chancellor Kathleen S. McCormick states that in June 2018, plaintiff John Solak sent a letter through his lawyers to the board of directors for the California-based company “to suggest that the [Board] take corrective action to address excessive director compensation as well as compensation practices and policies pertaining to directors.” According to Solak’s letter, non-employee directors were compensated more than $400,000 per year since 2014.

The letter also stated that it was intended only as a “good-faith attempt to encourage corrective action by the board. We do not seek or expect the Board to initiate any legal action against its members,” adding that it should not be taken as a pre-suit litigation demand under the court’s rules. The board responded in October 2018, rejecting Solak’s suggested changes to the company’s compensation policy, spurring the derivative lawsuit in November 2018 against eight directors.

According to the ruling, Chancery court rules require would-be plaintiffs to first request the board take action in a pre-suit demand or prove demand futility.

“This requirement exists at the threshold, first to insure that a stockholder exhausts his intracorporate remedies, and then to provide a safeguard against strike suits,” the ruling states. Ultragenyx’s board argued that the letter was a pre-suit demand, while Solak countered that the letter was not a pre-suit demand.

Vice Chancellor McCormick found that a pre-suit communication constitutes a pre-suit demand for purposes of Rule 23.1 if it provides the “identity of the wrong-doers, the wrongdoing they allegedly perpetrated and the resultant injury to the corporation, and the legal action the shareholder wants the board to take on the corporation’s behalf.”

Solak’s letter provided all this information and his disclaimer that the letter was only a good-faith attempt does not negate the letter’s meaning and intent.

“The similarities between the letter and the complaint in this case therefore weigh in favor of deeming the letter a pre-suit demand,” McCormick ruled..

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