IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JAMES A. FELDMAN, individually
and derivatively on behalf of Precision
Biologics, Inc.,
Plaintiff,
v. C.A. No. 2017-0487-AGB
PATRICK SOON-SHIONG,
CHARLES KIM, CHRISTIAN ZAPF,
and NANTCELL, INC.,
Defendants,
and
PRECISION BIOLOGICS, INC.,
Nominal Defendant.
\/\/\/\./\/\./\_/\./\/V\./\/\_/\./\./\/\_/\/\./
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS’ MOTION TO DISMISS
WHEREAS':
A. Nominal defendant Precision Biologics, Inc. (“Precision” or the
“Company”) is a research-and-development stage company that develops drugs
l The facts recited herein are taken from the Amended Complaint filed on November 6,
2017 (Dkt. 28), and documents incorporated therein. See Winshall v. Viacom Int’l, Inc.,
76 A.3d 808, 818 (Del. 2013) (citation and internal quotations omitted) (“[P]laintiff may
not reference certain documents outside the complaint and at the same time prevent the
court from considering those documents’ actual terms” in connection With a motion to
dismiss).
intended to extend survival and improve the quality of life of cancer patients, as Well
as diagnostic products intended to enable earlier detection of cancer.2 Plaintiff J ames
A. Feldman and his family have been investors in Precision and its predecessor since
their respective formations in 2012 and 2005.3
B. On October 2, 2015, Precision and defendant NantCell, Inc.
(“NantCell”) entered into a stock purchase agreement (the “Purchase Agreement”)
pursuant to Which NantCell purchased 40,964,051 shares of Precision’s Series A
Preferred Stock, representing 60.24% of the Company, for $50 million (the
“Transaction”).“
C. Defendant Patrick Soon-Shiong controls several affiliated companies,
one of Which is NantCell, and serves as NantCell’s CEO.5 Defendants Charles Kim
and Christian Zapf are executives at NantCell afflliates.6 Pursuant to a Voting
Agreement entered into in connection With the Transaction, NantCell secured the
right to appoint three of five directors and have permanent voting control of the
Precision board of directors (the “Board”) regardless of vacancies.7 At all relevant
2 Am. Compl.1l 3.
3 Am. Compl. 1111 26-27, 31, 36.
4 Am. Compl. 11 42; Defs.’ Opening Br. Ex. l § l.l(b) (Dkt. 34).
5 Am. Compl. 11 4.
6 Am. Compl. W 5, 49.
7 Am. Compl. W 46-47; Defs.’ Opening Br. Ex. 2 §§ l.l, l.2(a).
2
times, the NantCell appointees have been Soon-Shiong, Kim, and Zapf (the
“Individual Defendants”).8
D. Simultaneously With the execution of the Purchase and Voting
Agreements, Precision and certain of its investors, including NantCell and Feldman,
entered into an Investors’ Rights Agreement (the “Rights Agreement”).9 Among
other things, the Rights Agreement directs how the proceeds from the NantCell
investment are to be maintained and used, imposes certain governance obligations
on the Board, and establishes information rights for the Company’s “Major
Investors,” including plaintiff10
E. With respect to the management of the proceeds, Section 5.2 of the
Rights Agreement requires that the $50 million paid by NantCell be deposited in a
Company-owned account (the “Financing Account”) to be “maintained by NantCell
on behalf of the Company” and over Which Soon-Shiong has sole signature
authority.ll Section 5.2 further requires the Board to “direct the transfer of funds
from the Financing Account to [an Operating Account] in amounts (i) sufficient to
satisfy at all times at least three (3) months of budgeted expenses consistent With the
8 Am. Compl.11 48.
9 Am. Compl.11 53; Am. Compl. Ex. 1.
10 Am. Comp1.1111 53-61; Am. Compl. Ex. 1 §§ 3.1, 3.2, 5.2, 5.3.
" Am. Compl.1111 55-58; Am. Compl. Ex. l § 5.2.
3
Company’s business plan and budget as the same shall be approved and/or modified
by the Board, and (ii) necessary to satisfy other expenditures approved by the
Board.”12
F. Sometime in October 2015, Within thirty days of the closing of the
Transaction, Soon-Shiong Withdrew from the Financing Account approximately $47
million, representing about 94% of the Transaction consideration.13 Soon-Shiong
took this action Without notifying or consulting the Board.14 Over the next two years,
Soon-Shiong provided only sporadic ad hoc payments, totaling approximately $9
million to $10 million, to fund Precision’s operations.'5 As a result, the Company
allegedly lacked access to the three months of operating funds, as required under the
Rights Agreement, and Was months behind in paying its suppliers by mid-2016.16
G. On May 2, 2017, after the Company had not provided any of the
information required under the Rights Agreement, fifteen “Major Investors” sent a
Written request for the required information.17 On May 30, 2017, after Precision did
12 Am. Compl. Ex. l § 5.2.
13 Am. Compl. 11 72.
14 Am. Compl.11 73.
15 Am. Comp1.1111 63-65.
16 Am. Compl. 1111 63-71.
17 Am. Compl.11 16.
not respond to this request, plaintiff made a formal demand for information pursuant
to 8 Del. C. § 220.18
H. On June 15, 2017, the Board held its first meeting since before the
Transaction and terminated all of Precision’s administrative and accounting
employees.19 The Board outsourced these functions to NantCell or other companies
affiliated With Soon-Shiong in exchange for payments of hundreds of thousands of
dollars per month.20 That same day, shares of stock of two public corporations With
a market value of approximately $38.7 million Were deposited in the nearly depleted
Financing Account.21 On June 29, 2017, one of the two directors on the Board who
had not been appointed by NantCell, Stan Archibald, resigned from the Board out of
frustration and concern over how defendants Were operating the Company.22
I. On July 5, 2017, Feldman filed his initial complaint, Which he amended
on November 6, 2017.23 The Amended Complaint asserts six claims.24
18 Am. Compl.1111 16-17.
19 Am. Compl.1111 73, 82.
20 Am. Compl. 1111 82-83.
21 Am. Compl.11 107.
22 Am. Compl.11 51.
23 Dkt. l, 28.
24 Am.Comp1.1111115-157.
J. On November 21, 2017, defendants moved to dismiss the Amended
Complaint in its entirety under Court of Chancery Rules l2(b)(6) and 23.1.25
NOW THEREFORE, the court having considered the parties’ submissions,
IT IS HEREBY ORDERED, this 8th day of May, 2018, as follows:
l. The standards governing a motion to dismiss for failure to state a claim
for relief are Well-settled:
(i) all Well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “Well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the “plaintiff Would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.”26
2. Count I. This claim asserts that NantCell and the Individual
Defendants breached the Rights Agreement, including the implied covenant of good
faith and fair dealing therein. Defendants’ motion to dismiss Count I is DENIED in
part and GRANTED in part because the Amended Complaint (l) alleges facts from
Which it is reasonably conceivable that NantCell breached the express terms of
Section 5.2 of the Rights Agreement by failing to maintain the Financing Account
in accordance With that provision,27 but (2) does not allege facts sufficient to support
25 Dkt. 31.
26 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations omitted).
27 Am. Compl.1111 74, 118(b); Am. Compl. Ex. l § 5.2.
6
a claim (i) for breach of the implied covenant of good faith and fair dealing, or (ii)
against the Individual Defendants.
3. The core issue in Count I concerns Section 5 .2 of the Rights Agreement
That provision requires the Financing Account to be “established and maintained by
NantCell on behalf of the Company.”28 The term “maintained” is not defined in the
Rights Agreement A reasonable interpretation of that term in the context of the
agreement is that NantCell agreed to preserve the Transaction proceeds in the
Financing Account and only Would Withdraw funds from the Financing Account to
transfer them to the Operating Account in amounts necessary to satisfy certain
specified obligations, e.g., funds sufficient to satisfy three months of budgeted
expenses.29 NantCell did not operate the Financing Account in this manner. To the
contrary, Soon-Shiong, NantCell’s controller, Withdrevv $47 million of the $50
million in Transaction proceeds Within thirty days of the Transaction. Accordingly,
plaintiff has advanced a reasonable interpretation of Section 5.2 to state a claim for
relief and preclude dismissal of that aspect of Count I as to NantCell.30
28 Am. Compl. Ex. 1 § 5.2.
29 Id.
30 See VLIW Tech., LLC v. Hewlett-Packara’ Co., 840 A.2d 606, 615 (Del. 2003) (citations
omitted) (“Because the provisions at issue in the Agreement are susceptible to more than
one reasonable interpretation, for purposes of deciding a motion to dismiss, their meaning
must be construed in the light most favorable to the non-moving party. A trial court must
not dismiss any claim pursuant to Rule l2(b)(6) unless it appears With reasonable certainty
7
4. NantCell cannot be liable for the other alleged breaches of the express
terms of the Rights Agreement that Feldman asserts,31 because the obligations
arising from those provisions are owed by the Company or the Board, and not by
NantCe11.32 For similar reasons, the Individual Defendants, who are not parties to
the Rights Agreement, cannot be liable for breaching that contract,33 including any
implied covenant within the Rights Agreement.34 Thus, Count I is dismissed as to
the Individual Defendants.
5. Feldman also has failed to state a claim for breach of the implied
covenant of good faith and fair dealing against NantCell. “The covenant is best
that the plaintiff cannot prevail on any set of facts which might be proven to support the
allegations in the complaint.”).
31 Am. Compl. 11 118(a), (c)-(h).
32 Am. Compl. Ex. l §§ 3.1 (Company obligations to deliver certain information to each
Major Investor), 5.2 (Board obligations to direct the transfer of funds from the Financing
Account to the Operating Account), 5.3 (Company and/or Board obligations regarding
various Board-related matters). See VLIW, 840 A.2d at 612 (“In order to survive a motion
to dismiss for failure to state a breach of contract claim, the plaintiff must demonstrate,”
inter alia, “the breach of an obligation imposed by that contract”).
Feldman argues that NantCell is responsible for the Company’s and Board’s purported
breaches of the Rights Agreement because NantCell “controlled the Company through its
equity voting control and control of the Board.” Pl.’s Answering Br. 28-29. In effect,
Feldman contends that NantCell should be liable for aiding and abetting a breach of
contract. This argument fails where the claim asserted (Count I) is purely contractual in
nature. See Allen v. El Paso Pipelz'ne GP Co. L.L.C., 113 A.3d 167, 194 (Del. Ch. 2014).
33 See Wood v. Wallace, 752 A.2d 1175, 1180 (Del. Ch. 1999) (“It is a general principle of
contract law that only a party to a contract may be sued for breach of that contract.”).
34 See Brinckerho/j”v. Enbria'ge Energy Co., lnc., 2011 WL 4599654, at *11 (Del. Ch. Sept.
30, 2011) (citation omitted) (“The implied covenant . . . only potentially binds the parties
to an agreement.”).
understood as a way of implying terms in the agreement, whether employed to
analyze unanticipated developments or to fill gaps in the contract’s provisions.”35
Here, it could have been anticipated when the parties entered into the Rights
Agreement that NantCell would withdraw funds from the Financing Account, since
Soon-Shiong was provided sole signature authority over the accourit.36 Further,
Feldman has not identified any “gap” in the Rights Agreement. Rather, his breach
of contract claim is premised on NantCell’s violation of an express term of the Rights
Agreement, i.e., the obligation to “maintain” funds in the Financing Account.
6. Count II. Pled in the alternative to Count I, Count ll asserts that the
Individual Defendants tortiously interfered with the Rights Agreement. Defendants’
motion to dismiss Count II is GRANTED because Feldman has not alleged that the
Individual Defendants were acting outside the scope of their authority as directors
or officers of the Company (or of NantCell) when they purportedly tortiously
interfered with the Rights Agreement. “It is . . . generally accepted that officers or
directors may be held personally liable for tortious interference with a contract of
35 Nemec v. Shrader, 991 A.2d 1120, 1131 (Del. 2010) (citation and internal quotations
omitted).
36 See id. at 1126 (“The implied covenant only applies to developments that could not be
anticipated, not developments that the parties simply failed to consider.”).
0
the corporation if and only if they exceed the scope of their agency in so doing.”37
This pleading deficiency is fatal to Feldman’s tortious interference claim.38
7. Count III. This claim asserts that NantCell (as a controlling
stockholder) and the Individual Defendants (as directors of the Company) breached
their fiduciary duty of loyalty in two respects: (1) by failing to disclose information
to plaintiff “regarding the Financing Account proceeds,”39 and (2) by using “their
control to enrich NantCell and Soon-Shiong at the Company’s expense, most
obviously by taking $47 million in cash from the Company.”“°
8. The first aspect of Count III, which is a direct claim, fails to state a
claim for relief because there is no general fiduciary duty to disclose information to
37 Gola’mcm v. Pogo.com, Inc., 2002 WL 1358760, at *8 (Del. Ch. June 14, 2002) (citation,
internal quotation, and alterations omitted).
38 Feldman argues that “Defendants caused Precision Biologics to breach the Rights
Agreement not because it was in the Company’s best interest, but because it was in the best
interest of Soon-Shiong and NantCell to usurp the Company’s property.” Pl.’s Answering
Br. 34. This argument does not support a tortious interference claim but forms the basis of
a breach of fiduciary duty claim, as explained below with respect to Count III. See
Gola'man, 2002 WL 1358760, at *9 (citation omitted) (“I further note the absence of any
allegation in the Complaint to justify an inference that the directors acted outside the scope
of their authority. The Complaint raises questions as to whether the directors breached
their fiduciary duty of loyalty. Merely because directors are alleged to have acted in part
with adverse motives does not necessarily lead to the conclusion that they acted outside the
scope of their authority for the purposes of holding directors personally liable in tort for
interfering with the contractual rights of a shareholder.”).
39 Am. Compl. 11 130; Pl.’s Answering Br. 37 (Dl