Photo: Shutterstock.com

A Delaware Chancery Court judge has allowed an investor in a Silicon Valley biosciences firm to proceed with a derivative lawsuit claiming that the company's board had delayed publicly announcing the issuance of a key patent in order to “spring-load” their own stock options.

Vice Chancellor Kathaleen S. McCormick ruled Thursday that plaintiff Thomas S. Howland Jr. and his Fox Rothschild attorneys had supported claims for breaches of fiduciary duty and unjust enrichment against the officers and directors of Anixa Biosciences Inc. stemming from the September 2017 transaction.

According to the complaint, Anixa, which is based in San Jose, California, was issued a patent Aug. 22 for a cancer-testing platform that it planned to use to launch a series of noninvasive and inexpensive diagnostic blood tests for cancer. But the firm, Howland said, waited to publicly disclose the news until Sept. 18, 12 days after the board voted to approve the repricing of more than 2 million stock options belonging mostly to Anixa's directors and officers.

The filing claimed that Anixa's stock soared on news that it had obtained the patent, allowing the corporate defendants to exercise their options and cash in at the company's expense.

“Defendants used their insider knowledge of the patent to secure a financial windfall in the wake of the September press release,” the complaint said.

Anixa officials, who were represented by Wilson Sonsini Goodrich & Rosati, moved to dismiss the suit in December. Counsel for the defendants argued that Howland had failed to allege that the members of the board's compensation committee, which approved the repricing, were even aware of the patent issuance at the time, and the complaint ignored other “positive disclosures” associated with the stock's movement.

“Because the entire premise of his claims surrounding alleged misuse of inside information fails, plaintiff's complaint must be dismissed,” they said in a court filing.

But McCormick said Thursday that it was “reasonable to infer” from the complaint that the repricing was the result of an unfair process.

Because the complaint alleged that two directors had approved their own conversation, McCormick applied the less onerous entire fairness standard and found that demand was excused in the case because a majority of the Anixa board was affected by the transaction.

Only one defendant, Anixa's vice president of engineering, was dismissed from the suit, over insufficient factual allegations.

“Giving the plaintiff all inferences to which he is entitled at the pleadings stage, it is reasonably conceivable that the defendants (with one exception) breached their fiduciary duties and were unjustly enriched by delaying the public announcement of the issuance to permit the repricing of options,” McCormick said.

An attorney for the Anixa directors and officers Friday declined to comment on the ruling.

Sidney S. Liebesman, who represents Howland, said he views the litigation as “essential as a corporate governance case.”

“These officers and directors need to understand what it means to be a fiduciary and not elevate their own interests above those of the company and the shareholders,” he said.

Howland is represented by Liebesman, Johnna M. Darby and Wali W. Rushdan of Fox Rothschild.

The defendants are represented by Bradley D. Sorrels and Daniyal M. Iqbal of Wilson Sonsini.

The case is captioned Howland v. Kumar.