Court Opinion

ID: 4472629
Source: CourtListenerOpinion
Date Created: 2020-01-14 17:03:35.018854+00
Date Added: 2024-06-11T08:48:30.610512
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

    IN RE NANTHEALTH, INC.                      Lead C.A. No. 2018-0302-AGB
    STOCKHOLDER LITIGATION

            ORDER GRANTING IN PART AND DENYING IN PART
                  DEFENDANTS’ MOTION TO DISMISS

       WHEREAS:1

       A.    Nominal defendant NantHealth, Inc. (“NantHealth” or the “Company”)

is a healthcare company. Its core product is a proprietary process to diagnose

patients at the molecular level and predict the patient’s response and resistance to

particular treatments.     NantHealth offers this process, the Genomic Proteomic

Spectrometry (“GPS”) solution, under the brand name GPS Cancer. Plaintiff Erik

Petersen allegedly purchased NantHealth stock on June 14, 2016, and has held it

continuously since then.

       B.    Defendant Patrick Soon-Shiong founded the Company in July 2010 and

has served as the Company’s CEO and Chairman since then. Soon-Shiong is also

the Founder and CEO of three nonprofit entities: the Chan Soon-Shiong Family

1
  The facts recited herein are taken from the Amended Complaint filed on October 29, 2018
(Dkt. 29), 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).
Foundation, the Chan Soon-Shiong NantHealth Foundation, and the Chan Soon-

Shiong Institute of Molecular Medicine (collectively, the “Nonprofits”).

        C.     Defendant Paul A. Holt was the CFO of NantHealth until he resigned

in August 2018. Defendant Edward Miller is a former director of the Company,

serving from May 2016 to June 2017. The remaining four defendants—Michael

Blaszyk, Mark Burnett, Kirk K. Calhoun, and Michael S. Sitrick—served on the

board when this action was filed.

        D.     On September 15, 2014, the Nonprofits entered into an agreement with

the University of Utah to donate $12 million to support the Heritage 1K project—a

research project on the genetic causes of certain hereditary diseases (the “Gift

Agreement”).2 Soon-Shiong signed the Gift Agreement on behalf of the Nonprofits.

        E.     The Gift Agreement provided that the University of Utah could use $10

million of the donation from the Nonprofits to pay outside entities to analyze patient

data or perform work for the Heritage 1K project.3 Any outside provider, however,

was required to meet specific standards set out in the Gift Agreement that only

NantHealth allegedly could satisfy.4

2
    Am. Compl. ¶¶ 44-45.
3
  Id. ¶ 46; Will Aff. Ex. D (“Gift Agreement”) ¶ 4 (Dkt. 38). The remaining $2 million of
the $12 million gift was designated “to provide scientific and administrative support for
the Project and its scientific staff at the University.” Gift Agreement ¶ 2.
4
    Am. Compl. ¶¶ 46-47.
                                           2
         F.     Before the Gift Agreement was executed, the University of Utah

entered into a Memorandum of Understanding (“MOU”) providing that “[d]onor-

affiliated Scientists shall have the right to analyze the sequence data for any or all of

the Heritage 1K projects” and requiring that the genetic analysis be performed “by

a bioinformatics team associated with the Donor [i.e., defendant Soon-Shiong].”5

         G.     On January 28, 2015, the University of Utah and NantHealth entered

into an agreement to provide comprehensive whole genome sequencing and other

research services for the Heritage 1K project (the “Services Agreement”).6 In

exchange for the services, NantHealth received the $10 million from the Nonprofits.

Soon-Shiong signed the Services Agreement for NanthHealth.

         H.     In 2016, the Company hired Ernst & Young LLP (“EY”) to perform an

audit. EY determined in an April 2016 report that the Gift Agreement and the

Services Agreement “were linked,” which NantHealth did not disclose.7

         I.     On June 1, 2016, NantHealth commenced an initial public offering.

The registration statement for the IPO disclosed that the Nonprofits had provided

“partial” funding for the Heritage 1K project and that the University of Utah was not

obligated to use NantHealth as part of the gift it received from the Nonprofits:

5
    Am. Compl. ¶¶ 4, 48, 50, 57.
6
    Id. ¶ 50; Will Aff. Ex. E.
7
    Am. Compl. ¶ 51; see also Will Aff. Ex. H (“EY Report”) at 10.
                                             3
           At the request of the university, certain public and private charitable
           501(c)(3) non-profit organizations provided partial funding for the
           sequencing and related bioinformatics costs associated with the
           project. . . . The university was not contractually or otherwise required
           to use [NantHealth] as part of the charitable gift.8

           J.    In early August 2016, the Audit Committee of NantHealth’s board,

consisting of Blaszyk, Calhoun, and Sitrick, met three times and reviewed

accounting methods and expected revenue for GPS Cancer.9 On August 9, 2016,

during an investor call, Soon-Shiong stated that NantHealth’s “machines are running

at full tilt” and the Company was “processing 350-whole genome simultaneously.”10

At this time, the Company was only expecting $85,000 in revenue from GPS Cancer

for the quarter, yet the average price per sequence was $6,787.11 On August 15,

2016, the Company filed its Form 10-Q, which included the same statements about

the Heritage 1K project, quoted above, that appeared in the IPO documents.

           K.    On October 6, 2016, the Audit Committee met to discuss, among other

matters, the Company’s financial results for the third quarter ended September 30,

2016, and how to calculate revenue for GPS Cancer.

8
    Am. Compl. ¶ 51 (emphasis added).
9
    Id. ¶¶ 66-69.
10
     Id. ¶ 70.
11
     Id.
                                              4
           L.    On November 7, 2016, the Company issued a press release highlighting

the financial results for the third quarter.12 The Company said that it had received

524 GPS Cancer orders, although NantHealth had only completed 334 GPS Cancer

tests.13 The Company stated that 180 of those orders were for the Heritage 1K

project, which prevented the Company from recognizing any revenue from them.14

           M.    On March 6, 2017, a medical publication, STAT, published an article

that raised suspicions about the propriety of NantHealth’s arrangement with the

University of Utah and the commercial demand for GPS Cancer.15 The article

contended that this arrangement “made it possible for [the] company to inflate, by

more than 50 percent, the number of test orders it reported to investors late last year

while updating them on interest in . . . GPS Cancer . . . even though the work for the

university did not have anything to do with diagnosing or recommending treatments

for cancer patients.”16

           N.    On March 27, 2017, the entire board discussed, among other matters,

GPS Cancer.17 On March 31, 2017, the Company filed its Annual Report on Form

12
     Id. ¶ 75.
13
     Id.
14
     Id.
15
     Id. ¶ 84.
16
     Id. ¶ 85.
17
     Id. ¶ 82.
                                            5
10-K, which included the same statements about the Heritage 1K project that

appeared in the IPO documents and its August 2016 Form 10-Q.18

          O.     On June 26, 2017, investors filed an amended complaint in a securities

class action in the United States District Court for the Central District of California

against all of the defendants in this action and other parties (the “Securities

Action”).19 On March 27, 2018, the district court denied defendants’ motion to

dismiss the Securities Action except as to one claim against Holt.20

          P.     On April 23, 2018, Petersen filed his initial complaint in this action,

which the court consolidated with a related case on July 30, 2018. On October 29,

2018, Petersen filed an Amended Complaint asserting three derivative claims for

breach of fiduciary duty (Count I), waste of corporate assets (Count II), and unjust

enrichment (Count III).21

          Q.     On November 14, 2018, defendants moved to dismiss the Amended

Complaint in its entirety under Court of Chancery Rules 12(b)(6) and 23.1. During

briefing, Petersen withdrew Count II.22

18
     Id. ¶ 83.
19
     Will Aff. Ex. S (“Securities Action Complaint”) ¶ 23.
20
     Id. Ex. T (“Securities Action Ruling”), at 10.
21
     Am. Compl. ¶¶ 138-50.
22
     Pl.’s Opp’n Br. 60 n.20 (Dkt. 43).
                                                6
         NOW THEREFORE, the court having considered the parties’ submissions,

IT IS HEREBY ORDERED, this 14th day of January, 2020, as follows:

         1.     Legal Standards. The standard governing a motion to dismiss under

Court of Chancery Rule 12(b)(6) for failure to state a claim for relief is 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.”23

         2.     Under Court of Chancery Rule 23.1, a stockholder who wishes to bring

a derivative claim on behalf of a corporation must “allege with particularity the

efforts, if any, made . . . to obtain the action the plaintiff desires from the

directors . . . and the reasons for the plaintiff’s failure to obtain the action or for not

making the effort.” There are two different tests for determining whether demand is

excused under Delaware law:

         The test articulated in Aronson v. Lewis applies when a decision of the
         board of directors is being challenged in the derivative suit. The test
         set forth in Rales v. Blasband, on the other hand, governs when the
         board that would be considering the demand did not make a business
         decision which is being challenged in the derivative suit, such as
         instances where directors are sued derivatively because they failed to
         do something.24

23
     Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations omitted).
24
  Feuer ex rel. CBS Corp. v. Redstone, 2018 WL 1870074, at *8 (Del. Ch. Apr. 19, 2018)
(citations and quotations marks omitted).
                                              7
Under either test, a plaintiff “must impugn the ability of at least half the directors in

office when [he] initiated [his] action . . .            to have considered a demand

impartially.”25 To do so, a plaintiff must allege a “constellation of facts that, taken

together, create a reasonable doubt about [the director]’s ability to objectively

consider a demand.”26

         3.     Count I. This claim asserts that the individual defendants breached

their fiduciary duty of loyalty “by allowing defendants to cause, or by themselves

causing, the Company to make a series of false statements concerning the

Company’s relationship with the University and orders of GPS Cancer tests.”27

         4.     Pre-IPO Statements. Defendants assert that Petersen lacks standing to

bring a fiduciary duty claim based on pre-IPO statements because he was not a

stockholder of the Company at that time.28 Citing Chirlin v. Crosby,29 Petersen

counters that he can pursue claims for statements that pre-date his ownership under

25
  Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 57 (Del. Ch.
2015) (citation omitted).
26
     In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *18 (Del. Ch. Mar. 19, 2018).
27
     Am. Compl. ¶ 29.
28
   See 8 Del. C. § 327 (“In any derivative suit instituted by a stockholder of the corporation,
it shall be averred in the complaint that the plaintiff was a stockholder of the corporation
at the time of the transaction of which such stockholder complains or that such
stockholder’s stock thereafter devolved upon such stockholder by operation of law.”).
NantHealth’s IPO occurred on June 1, 2016, before Petersen purchased NantHealth stock
on June 14, 2016. Am. Compl. ¶¶ 3, 16.
29
     1982 WL 17872, at *1 (Del. Ch. Dec. 7, 1982).
                                              8
the continuing wrong doctrine because “the misleading nature of the public

statements demonstrate a pattern and overall plan to inflate the perceived demand

for GPS Cancer that constitutes a continuing wrong.”30

         5.    In Chirlin, the court explained that if “the wrong is a continuing wrong,

the stockholder need only to have been the owner of stock during any time the wrong

continued.”31 As then-Vice Chancellor Strine explained in Desimone v. Barrows,

however, if the alleged wrongs can be “easily segmented,” the “continuing wrong”

doctrine does not apply even if the “earlier wrongs that pre-date [one’s] stock

ownership . . . may be similar or related.”32 Here, the alleged post-IPO “wrongs”

easily can be segmented because each allegedly misleading statement during this

period was made at different times with distinct contents.33 Accordingly, the

continuing wrong doctrine does not apply and Count I is dismissed for lack of

standing insofar as it seeks to challenge pre-IPO statements.

30
  Pl.’s Opp’n Br. 49-50. Petersen also argues he has standing because pre-IPO statements
were incorporated by reference into offering materials for a December 15, 2016 private
placement of senior notes. See Pl.’s Opp’n Br. 49. This argument fails because the
Amended Complaint does not identify which statements allegedly were incorporated by
reference into the private placement. See Am. Compl. ¶ 81.
31
     Chirlin, 1982 WL 17872, at *1.
32
     Desimone v. Barrows, 924 A.2d 908, 924-25 (Del. Ch. 2007).
33
     See Am. Compl. ¶¶ 63-83.
                                            9
           6.   Post-IPO Statements. The Amended Complaint challenges post-IPO

statements that were made from July 25, 2016 to March 31, 2017 in two press

releases, during investor calls, in two quarterly reports, and in one annual report.34

The challenged disclosures fall into three categories, i.e., (i) misrepresentations that

the Nonprofits’ $12 million gift to the University of Utah did not obligate the

University to obtain services from NantHealth when, in actuality, it did; (ii)

misrepresentations that the Nonprofits provided only partial funding for the Heritage

1K project when, in actuality, they provided the entire funding; and (iii) statements

portraying the commercial demand for GPS Cancer to be greater than it was.35

Defendants’ lead argument for dismissal of Count I insofar as it challenges post-IPO

disclosures is that plaintiff failed to make a demand under Rule 23.1.

           7.   Demand Futility. When this action was filed, there were five directors

on the Company’s board: Soon-Shiong, Blaszyk, Burnett, Calhoun, and Sitrick (the

“Demand Board”).36 The question before the court is whether plaintiff has plead

with sufficient particularity facts that create a reasonable doubt concerning the

34
     Id.
35
  See id. ¶¶ 45-49, 63, 72-73, 75-78, 83, 85, 88; see also Mot. to Dismiss Hr’g Tr. 18-25
(Sept. 25, 2019) (Dkt. 58).
36
     Am. Compl. ¶ 101.
                                           10
disinterestedness or independence of three of these individuals so as to impugn the

ability of at least half of the Demand Board to consider a demand impartially. 37

         8.     Defendants concede for purposes of this motion, as they credibly must,

that Soon-Shiong is interested.38 The gravamen of the Amended Complaint is that

Soon-Shiong caused the Nonprofits he controlled to make a donation to the

University of Utah with the understanding—which was not disclosed—that the

University would be required to turn around and pay those funds (less some

“scientific and administrative support” costs) to NantHealth to use its GPS

technology. As NantHealth’s controlling stockholder, Soon-Shiong stood to benefit

from this scheme to make it appear as if a prestigious institution independently had

endorsed NantHealth’s technology and that there was greater commercial demand

for GPS Cancer than there actually was.

         9.     Petersen asserts two different theories for demonstrating demand

futility as to Count I depending on the target of the claim. With respect to Soon-

Shiong, the inquiry is whether two or more of the other four directors on the Demand

Board lacked independence from Soon-Shiong so as to raise a reasonable doubt

about their impartiality to bring a claim against him. With respect to the remaining

37
  As noted above, this is the key inquiry under either the Aronson or Rales test. The
parties’ submissions analyze the demand futility question in this manner, as will the court.
38
     Defs.’ Opening Br. 18 (Dkt. 37).
                                            11
six defendants, the inquiry is whether Blaszyk, Burnett, Calhoun, and Sitrick faced

a substantial likelihood of liability with respect to the claim so as to raise a

reasonable doubt about their impartiality to bring a claim against themselves as well

as against Holt and Miller.39 The court begins with the second theory.

       10.     NantHealth’s certificate of incorporation contains a provision

exculpating its directors for breaches of the duty of care,40 and Petersen has not

alleged that any of the directors other than Soon-Shiong stood to receive a personal

benefit from the challenged conduct. Thus, to demonstrate that Blaszyk, Burnett,

Calhoun, and Sitrick face a substantial likelihood of liability with respect to the

disclosure issues described in paragraph 6, Petersen must allege with particularity

facts demonstrating that they acted in bad faith. This means that Petersen must plead

facts demonstrating that these directors “intentionally fail[ed] to act in the face of a

39
   Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984) (“[T]he mere threat of personal
liability . . . standing alone, is insufficient . . . [.] [It must be apparent] on its face that board
approval cannot meet the test of business judgment, and a substantial likelihood of director
liability therefore exists.”). Petersen also argues that Blaszyk, Burnett, Calhoun, and
Sitrick face a substantial likelihood of liability in the Securities Action. Pl.’s Opp’n Br.
48. This argument is irrelevant to the demand futility analysis here because these four
individuals were named as defendants in the Securities Action only with respect to a
Section 11 claim regarding pre-IPO statements. See Securities Action Complaint ¶ 166.
As discussed above, Petersen lacks standing to challenge pre-IPO statements in this action.
40
  Will. Aff. Ex. U (NantHealth Certificate of Incorporation) Article X, Section 1. Perhaps
because of the existence of this exculpation provision, Petersen has not asserted an
oversight claim under In re Caremark Int’l Inc. Deriv. Litig., 689 A.2d 959 (Del. Ch. 1996).
Pl.’s Opp’n Br. 46.
                                                 12
known duty to act, demonstrating a conscious disregard for [their] duties”41 or, as

the authorities cited in Petersen’s own brief explain, that they knew of the falsity of

the challenged disclosures when they were made.42 Petersen has not done so.

         11.   With respect to the first two categories of challenged disclosures—

concealing that the University of Utah was required to use the funds from the

Nonprofits to obtain services from NantHealth and that those funds accounted for

all of the funding for the Heritage 1K project—the Complaint contains allegations

that cut against demonstrating scienter on the part of these directors. To start, the

Complaint acknowledges that Blaszyk, Burnett, Calhoun, and Sitrick each joined the

board in May 2016, after the Gift Agreement, MOU and the Services Agreement

were in place.43 More importantly, referencing documents Petersen received in

response to an inspection demand, the Complaint alleges the board lacked

knowledge about the MOU and did not discuss key documents relevant to the

Company’s relationship with the University that should have put them on notice that

the Nonprofits were the sole source of funding for the Heritage 1K project:

41
  Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009) (citation and internal
quotations omitted).
42
  See Pl.’s Opp’n Br. 44-45 (citing City of Hialeah Emps.’ Ret. Sys. v. Begley, 2018 WL
1912840, at *2 (Del. Ch. Apr. 20, 2018) (ORDER) (“directors in fact knew about the
misleading nature of [the Company’s statements]”) and Malone v. Brincat, 722 A.2d 5, 14
(Del. 1998) (directors “deliberately misinformed shareholders”)).
43
     Am. Compl. ¶¶ 20-24.
                                          13
         The books and records produced show that the Board never reviewed
         any other documents related to [Soon-Shiong’s gift] to the University.
         The board did not discuss the relationship between the University
         retaining the Company for the [Heritage 1K project] and defendant
         Soon-Shiong’s . . . gift. . . . In fact, the Board never discussed the STAT
         article despite its revelations driving down the stock price.44

         12.   Petersen alleges that the four outside directors nonetheless had scienter

with respect to the first two categories of statements because they were familiar with

EY’s audit report.45 In its report, EY finds linkage between the Gift and Services

Agreements because the University had to receive funding from the Nonprofits

before paying NantHealth.46 Critically, however, EY’s report does not disclose that

the University could only use the funds it received from the Nonprofits to obtain

services from NantHealth; nor does it rule out that other funds were available for the

Heritage 1K project. Thus, the fact that EY linked the two agreements is insufficient

44
  Id. ¶ 12; see also id. ¶ 106. Contrary to Petersen’s suggestion that the importance of the
product to the Company permits an inference of knowledge, the “core operations” doctrine
only applies when the directors are alleged to have received notice of the wrongdoing. See
In re Fitbit, Inc. S’holder Deriv. Litig., 2018 WL 6587159, at *15 & n.179 (Del. Ch. Dec.
14, 2018) (discussing the core operations doctrine and finding enough facts to support a
reasonable inference of knowledge because, among other things, “management was
keeping the Board apprised of the problems and the efforts to address them, and that, all
the while, Fitbit was touting the promise and success of [the technology] to the market”).
Here, although Petersen alleges that the Company’s success hinged on GPS Cancer,
Petersen does not allege that the directors were aware of any wrongdoing.
45
  Am. Compl. ¶¶ 53, 106. It is reasonable to infer that the outside directors read the EY
report because they acknowledged that the financial statements contained in the IPO
documents were prepared in reliance on the EY audit, and the report is addressed to
NantHealth’s board. EY Report at 1.
46
     EY Report at 10.
                                             14
to infer knowledge on behalf of Blaszyk, Burnett, Calhoun, or Sitrick about an illicit

arrangement with the University or the exclusive nature of the funding the

Nonprofits provided for the Heritage 1K project.47

         13.   With respect to the third category of statements, Petersen asserts that

Blaszyk, Calhoun, and Sitrick knew the statements about the demand for GPS

Cancer tests were misleading because, as members of the Audit Committee, they

discussed expected GPS Cancer revenues, reviewed quarterly financial results, and

reviewed matters relating to GPS Cancer.48 Petersen fails, however, to allege what

information in these Audit Committee discussions contradicted the statements in the

public filings, or that Blaszyk, Calhoun, and Sitrick attended the investor call where

Soon-Shiong allegedly made misleading statements.49

47
   The Complaint alleges that Sitrick, “as a trustee of [one of the Nonprofits], would also
know about the terms of the ‘gift’ to the University, including that it was effectively a quid
pro quo to use the Company.” Am. Compl. ¶¶ 105-06. This allegation is conclusory and
lacks the necessary particularity to demonstrate scienter on Sitrick’s part. Even if the
allegation were credited, however, it would not change the outcome because it does not
apply to any of the other three outside directors (Blaszyk, Burnett, and Calhoun) who
constitute a majority of the Demand Board.
48
     Am. Compl. ¶¶ 66-69, 74.
49
    See id. ¶¶ 71 (Soon-Shiong’s statements on the August 9, 2016 investor call were
improper because “[a]s he must have known, the Company was only expecting $85,000 in
revenue from GPS Cancer for the quarter. The Company could not have been running ‘full
tilt’ or conducting 350 tests with such little revenue expected.”), 75 (The company’s
November 7, 2016 press release included data on the number of completed GPS Cancer
tests that “stood in stark contrast to defendant Soon-Shiong’s previous statement [on the
August 9, 2016 investor call] that the Company was already processing 350 orders.”). The
                                             15
       14.    For the reasons discussed in paragraphs 7-13, the court concludes that

Petersen has failed to plead with sufficient particularity facts demonstrating that a

majority of the Demand Board (i.e., Blaszyk, Burnett, Calhoun, and Sitrick) faced a

substantial likelihood of liability with respect to Count I. Thus, Petersen has failed

to raise a reasonable doubt about their impartiality to bring a claim against

themselves, Holt and Miller. Accordingly, the motion to dismiss Count I under

Court of Chancery Rule 23.1 is GRANTED as to defendants Blaszyk, Burnett,

Calhoun, Sitrick, Holt, and Miller.

       15.    The court reaches a different conclusion with respect to the pursuit of

Count I against Soon-Shiong because, for the reasons discussed next, Petersen has

adequately pled a constellation of facts that create a reasonable doubt about Burnett

and Sitrick’s independence from Soon-Shiong such that a majority of the Demand

Board could not have impartially considered a demand against Soon-Shiong.

       16.    As to Burnett, the Complaint alleges that he entered into an agreement

with Soon-Shiong in November 2016 when joining the boards of two Soon-Shiong

controlled entities—NantHealth and NantBioSicence, Inc.—whereby Burnett was

provided options to acquire common stock valued at $10 million on the date of grant,

transcript of the August 9, 2016 investor call indicates that Blaszyk, Calhoun, and Sitrick
were not in attendance. See Will Aff. Ex. L.
                                            16
which would vest in 25% tranches over four years.50 When this action was filed,

three tranches had not vested. Thus, a vote in favor of suing Soon-Shiong would put

at risk Burnett’s remaining $7.5 million worth of stock options in addition to the

equity he would receive if NantBioScience were to go public. The Complaint further

alleges that in February 2015, Soon-Shiong provided cancer treatment to Burnett’s

son free-of-charge, that Burnett was not listed as an independent director of the

Company in a May 2016 public filing and that NantHealth’s board determined that

Burnett was not independent in March 2017—about one year before this action was

filed.51

         17.      As to Sitrick, who also was not listed as an independent director of the

Company in a May 2016 public filing, the Complaint alleges he has known Soon-

Shiong for approximately twenty years and served on the boards of several of his

entities.52 Sitrick is the founder, CEO and Chairman of Sitrick and Company, which

has provided public relations services to at least one Soon-Shiong-controlled entity

and to Soon-Shiong personally since 2002.53 Sitrick also serves as director of one

of the Nonprofits and has served as a trustee of the St. John’s Health Center

50
     Am. Compl. ¶ 115.
51
     Id. ¶¶ 82, 114-16.
52
     Id. ¶ 120.
53
     Id. ¶¶ 114, 126.
                                              17
Foundation with Soon-Shiong, which is the recipient of at least $100 million from

that same Nonprofit affiliated with Soon-Shiong.54 In a book he published in

January 2018, just a few months before this action was filed, Sitrick wrote about

Soon-Shiong in exceptionally glowing terms that, combined with his lengthy

personal and professional relationship with Soon-Shiong, cast further substantial

doubt on his ability to be impartial in deciding whether or not to initiate litigation

against him:

         [Soon-Shiong] is also one of the most compassionate men I have ever
         met, the personification of the caring doctor you used to see in TV
         dramas . . . . [Soon-Shiong] is someone I am honored to call my friend
         and client, and it has been a privilege to work alongside him, both as a
         strategic public relations counsel and as a member of his various boards
         of directors, including those of APP, Abraxis BioScience, and one of
         his two new public companies, NantHealth . . . . The value of his work
         is incalculable. At the risk of using what has become an overused term,
         it is priceless.55

         18.      Having determined that demand is excused as to Count I against Soon-

Shiong, the next question is whether Count I states a claim for relief against him. It

clearly does. As discussed above, Count I alleges that Soon-Shiong orchestrated a

scheme for his personal benefit by secretly directing a contribution from the

Nonprofits he controls to NantHealth through a respected educational institution in

order to burnish the Company’s image and artificially inflate the perceived demand

54
     Id. ¶¶ 103, 129.
55
     Id. ¶ 127.
                                            18
for GPS Cancer. Significantly, the district court in the Securities Action determined

there were sufficient facts regarding the same post-IPO conduct alleged here to infer

scienter on behalf of Soon-Shiong under the heightened pleading standard of the

Private Securities Litigation Reform Act of 1995.56 Based on these facts, it is

reasonably conceivable that Soon-Shiong could be found to have violated his duty

of loyalty to the Company. Accordingly, for the reasons explained above, the motion

to dismiss Count I is DENIED as to defendant Soon-Shiong.

         19.   Count III. This claim asserts that the individual defendants “were

unjustly enriched as a result of the compensation and director remuneration they

received while breaching fiduciary duties owed to NantHealth.”57 A claim for unjust

enrichment under Delaware law includes five elements: “(1) an enrichment, (2) an

impoverishment, (3) a relation between the enrichment and impoverishment, (4) the

absence of justification, and (5) the absence of a remedy provided by law.”58

56
  Securities Action Ruling at 6 (“Soon-Shiong was allegedly, intimately involved with the
nonprofits, the MOU, the Agreements, and was the catalyst of the relationship between
NantHealth and the University. . . . Accordingly, assessing the allegations holistically,
Plaintiffs have alleged sufficient facts to raise a strong inference that Soon-Shiong
intentionally, knowingly, or with deliberate recklessness, misrepresented, or omitted
material facts, regarding the relationship between the University and NantHealth, and
NantHealth’s total orders of GPS Cancer.”).
57
     Am. Compl. ¶ 148.
58
     Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
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