Court Opinion

ID: 4406704
Source: CourtListenerOpinion
Date Created: 2019-06-13 21:02:29.45188+00
Date Added: 2024-06-11T14:27:48.628131
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
THOMAS S. HOWLAND, JR.,                   )
derivatively on behalf of ANIXA           )
BIOSCIENCES, INC. (f/k/a ITUS             )
CORPORATION),                             )
                                          )
                   Plaintiff,             )
                                          )
      v.                                  )   C.A. No. 2018-0804-KSJM
                                          )
AMIT KUMAR, LEWIS H.                      )
TITTERTON, JR., ARNOLD M.                 )
BASKIES, JOHN MONAHAN,                    )
MICHAEL J. CATELANI, JOHN A.              )
ROOP, ANTHONY CAMPISI, and                )
DALE FOX,                                 )
                                          )
                   Defendants,            )
                                          )
      and                                 )
                                          )
ANIXA BIOSCIENCES, INC. (f/k/a            )
ITUS CORPORATION),                        )
                                          )
                   Nominal Defendant.     )

                          MEMORANDUM OPINION
                          Date Submitted: March 22, 2019
                           Date Decided: June 13, 2019

Sidney S. Liebesman, Johnna M. Darby, Wali W. Rushdan II, FOX ROTHSCHILD
LLP, Wilmington, Delaware; Counsel for Plaintiff Thomas S. Howland, Jr.

Bradley D. Sorrels, Daniyal M. Iqbal, WILSON SONSINI GOODRICH &
ROSATI, P.C., Wilmington, Delaware; Counsel for Defendants Amit Kumar, Lewis
H. Titterton, Jr., Arnold M. Baskies, John Monahan, Michael J. Catelani, John A.
Roop, Anthony Campisi, and Dale Fox.
Stephen E. Jenkins, ASHBY & GEDDES, P.A., Wilmington, DE; Counsel for
Nominal Defendant Anixa Biosciences, Inc. (f/k/a ITUS Corporation).

McCORMICK, V.C.
      In this derivative action, a stockholder of Anixa Biosciences, Inc. (“Anixa”)

challenges the 2017 repricing of stock options held by Anixa’s directors and officers.

The repricing occurred shortly before those directors and officers publicly

announced news of a key patent’s issuance to a subsidiary of Anixa. According to

the plaintiff, Anixa’s directors and officers timed the repricing to precede the public

announcement of the issuance so as to effectively “spring-load” the options for the

benefit of the directors and officers.

      The defendants have moved to dismiss this action under Court of Chancery

Rule 12(b)(6) for failure to state a claim upon which relief can be granted and Rule

23.1 for failure to adequately plead demand excusal. 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. The plaintiff has established also that demand is excused

because a majority of the Anixa board in office when the complaint was filed was

interested by virtue of having received the repriced options. Thus, the defendants’

motion to dismiss is largely denied.

                                          1
I.       FACTUAL BACKGROUND
         The facts are drawn from the allegations in the Verified Shareholder

Derivative Complaint (the “Complaint”), 1 documents incorporated therein, and

judicially noticeable facts.

         Anixa is a publicly traded Delaware corporation headquartered in San Jose,

California. Anixa develops biotechnology that uses the power of the immune system

to diagnose and fight cancer. At the time this litigation commenced, Anixa’s Board

of Directors (the “Board”) comprised Chairman, President, and CEO Amit Kumar

and four outside directors—Lewis H. Titterton, Jr., Arnold M. Baskies, John

Monahan, and David Cavalier.

         In mid-2017, Anixa was developing a cancer-testing platform that Kumar had

invented called Cchek. From Cchek, Anixa “expect[ed] to launch a series of non-

invasive, inexpensive cancer diagnostic blood tests.”2 To protect its cancer detection

technology, Anixa filed patent applications with the United States Patent and

Trademark Office (“USPTO”), including Patent Application No. 15/209,616.3 On

May 10, 2017, Anixa issued a press release announcing that the USPTO had issued

a Notice of Allowance as to the first of Anixa’s patent applications.4 Anixa’s stock

1
    C.A. No. 2018-0804-KSJM Docket (“Dkt.”) 1.
2
    Compl. Ex. A at 1.
3
    See id. at 1; Compl. Ex. B. at 1.
4
    See Compl. Ex. A at 1.

                                          2
price increased by approximately 48% on May 10, closing at $1.70, but steadily

declined thereafter. Anixa’s stock price closed out the month of May 2017 at $0.84.

         On August 3, 2017, Kumar and Anixa’s Senior Vice President of Engineering,

John A. Roop, received an email from Anixa’s outside patent counsel regarding the

pending patent application.        The email stated that “the patent will issue on

August 22, 2017” and be assigned “U.S. Patent Number 9,739,783” (the “’783

Patent”). 5 The USPTO in fact issued the ’783 Patent on August 22, 2017.

         At the time, stock options held by Anixa’s directors and officers were

underwater. The Board under Kumar’s leadership called a special meeting of the

Compensation Committee to consider “a proposal to re-price certain issued and

outstanding stock options for all of the current officers, directors, and employees of

the Company.” 6 The special meeting was held on September 6, 2017. Two of three

committee members, Titterton and Baskies, were present and constituted a quorum.

Kumar and Anixa’s Chief Operating Officer and Chief Financial Officer, Michael J.

Catelani, also attended the September 6 meeting. At the meeting, the Compensation

Committee approved the repricing of 2,029,600 stock options to $0.67, the closing

price for Anixa stock that day (the “Repricing”). The original strike prices ranged

from $0.82 to $5.30.

5
    Compl. Ex. B at 1 (emphasis omitted).
6
    Compl. Ex. D. at 1.

                                            3
         Nearly 95% of the repriced options belonged to Anixa directors or officers:

Kumar held 880,000; Roop held 385,000; Titterton held 262,400; Catelani held

250,000; Anthony Campisi, Anixa’s Vice President of Engineering, held 59,200;

Dale Fox, who was on the Board at the time of the Repricing but resigned in

September 2017, held 42,000; Baskies held 18,000; and Monahan held 18,000. 7 Of

Anixa’s five Board members at the time this litigation commenced, all but the newest

member, Cavalier, held stock options that were repriced.8 Anixa publicly disclosed

the Repricing on September 8, 2017.

         On September 18, 2017, Anixa issued a press release publicly announcing the

issuance of the ’783 Patent (the “September 18 Press Release”). The September 18

Press Release allegedly affected Anixa’s stock trading price and volume

significantly. On September 15, 2017, the trading day before the September 18 Press

Release, Anixa’s stock price closed at $0.69 with a trading volume of 209,959. On

September 18, Anixa’s stock price closed at $1.28,9 with a trading volume of

22,764,730, up by approximately 85% and over 10,000%, respectively, from

7
    See Compl. Ex. D at 4–6 (ITUS Corporation Re-Priced Stock Options 9/6/2017).
8
    Cavalier was not named as a defendant in this action.
9
 Dkt. 23, Transmittal Aff. of Phillip R. Sumpter in Supp. of the Opening Br. in Supp. of
Defs.’ Mot. to Dismiss the Verified S’holder Deriv. Compl. Ex. 2 at 4 (historical stock
price data for “ANIX,” as maintained by The Wall Street Journal). This Court “may take
notice of the state of the markets” and a company’s “share price.” Cty. of York Emps. Ret.
Plan v. Merrill Lynch & Co., 2008 WL 4824053, at *7 (Del. Ch. Oct. 28, 2008).

                                              4
September 15. Anixa’s stock price “peaked on September 26, 2017, when it closed

trading at $4.99.”10

         On October 16, 2017, Fox exercised 42,000 repriced options. On October 19,

2017, Titterton exercised 2,400 repriced options.

         The Complaint alleges that this pattern—a repricing preceding an Anixa press

release announcing positive news—happened once before in Anixa’s history. In

2015, the Board authorized the repricing of stock options the day before Anixa

issued a press release announcing that it had experienced an 840% increase in

revenue over the previous fiscal year.         According to the Complaint, Kumar,

Titterton, and Fox all personally benefitted from the 2015 repricing.

         With documents obtained pursuant to 8 Del. C. § 220, plaintiff Thomas S.

Howland, Jr. (“Plaintiff”) commenced this litigation on November 5, 2018. The

Complaint names as defendants: current directors Kumar, Titterton, Baskies, and

Monahan; current officers Roop, Catelani, and Campisi; and former director Fox

(together, the “Individual Defendants”). The Complaint names Anixa as nominal

defendant (together with the Individual Defendants, “Defendants”). Defendants

moved to dismiss the Complaint on November 29, 2018. The parties completed

10
     Compl. ¶ 35.

                                           5
briefing on Defendants’ motion on March 12, 2019, 11 and presented oral arguments

on March 22, 2019.12

II.      LEGAL ANALYSIS
         The Complaint asserts two derivative counts against the Individual

Defendants: Count I for breach of fiduciary duty and Count II for unjust enrichment.

Defendants have moved to dismiss the Complaint pursuant to Court of Chancery

Rules 12(b)(6) and 23.1. This decision addresses Defendants’ Rule 12(b)(6) motion

first, as the questions it raises are “logically prior” to the question of whether demand

is excused.13

         A.     Plaintiff’s Claims Survive Under Rule 12(b)(6).
         On a motion to dismiss pursuant to Court of Chancery Rule 12(b)(6), the Court

accepts “all well-pleaded factual allegations in the Complaint as true, [and] accept[s]

even vague allegations in the Complaint as ‘well-pleaded’ if they provide the

defendant notice of the claim[.]” 14 “A trial court is not, however, required to accept

11
  See Dkt. 23, Opening Br. in Supp. of Defs.’ Mot. to Dismiss the Verified S’holder Deriv.
Compl. (“Defs.’ Opening Br.”); Dkt. 27, Answering Br. in Opp’n to Defs.’ Mot. to Dismiss
the Verified S’holder Compl. (“Pl.’s Ans. Br.”); Dkt. 29, Reply Br. in Further Supp. of
Defs.’ Mot. to Dismiss the Verified S’holder Deriv. Compl. (“Defs.’ Reply Br.”).
12
     Dkt. 35, Tr. of Oral Argument on Defs.’ Mot. to Dismiss and Mot. to Stay Disc.
13
     Steiner v. Meyerson, 1995 WL 441999, at *4 (Del. Ch. July 19, 1995).
14
  Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del.
2011) (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).

                                              6
as true conclusory allegations ‘without specific supporting factual allegations.’”15

The Court “draw[s] all reasonable inferences in favor of the plaintiff, and den[ies]

the motion unless the plaintiff could not recover under any reasonably conceivable

set of circumstances susceptible of proof.”16

                1.     Count I—Breach of Fiduciary Duty
         Count I asserts that the Individual Defendants breached their fiduciary duties

by withholding from the public news of the ’783 Patent’s issuance, so as to allow

the Individual Defendants’ stock options to be repriced prior to announcing the

patent’s issuance. This had the effect, according to the Complaint, of repricing the

options at an artificially low exercise price for the Individual Defendants’ financial

benefit.

         To plead a claim for breach of fiduciary duty, the Complaint must allege

“(1) that a fiduciary duty exists and (2) that the fiduciary breached that duty.” 17 In

the compensation context, “[a]n officer or a director can breach fiduciary duties . . .

by accepting compensation that is clearly improper or by wrongfully influencing

15
  In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting In
re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 65–66 (Del. 1995)).
16
     Cent. Mortg., 27 A.3d at 536 (citing Savor, 812 A.2d at 897).
17
  In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *18
(Del. Ch. June 25, 2018) (internal quotation marks omitted) (quoting York Linings v.
Roach, 1999 WL 608850, at *2 (Del. Ch. July 28, 1999)), aff’d sub nom. IDT Corp. v.
JDS1, LLC, 206 A.3d 260 (Del. 2019) (TABLE).

                                              7
compensation decisions.”18 Further, “[t]he essence of a duty of loyalty claim is the

assertion that a corporate officer or director has misused power over corporate

property or processes in order to benefit himself rather than advance corporate

purposes.”19

           Giving Plaintiff the benefit of all inferences to which he is entitled at this

stage, it is reasonably conceivable that: On August 3, 2017, Kumar and Roop

learned that the USPTO would issue the ’783 Patent on August 22, 2017. On

August 22, 2017, the USPTO did in fact issue the ’783 Patent. This issuance was a

significant development for Anixa. Kumar informed the Board then in place that the

’783 Patent was issued on August 22 or, at the very least, that the patent was likely

to issue on August 22, 2017. The Board did not immediately announce this

information to the public. Kumar called a special meeting of the Compensation

Committee to reprice director and officer stock options. In calling that meeting,

Kumar informed Titterton and Baskies of the reasons for holding the meeting. On

September 6, 2017, Titterton and Baskies voted on and approved the Repricing of

options.20 Kumar and Catelani attended this meeting.21 Each of the Individual

18
   Friedman v. Dolan, 2015 WL 4040806, at *9 (Del. Ch. June 30, 2015) (citation and
internal footnote omitted).
19
     Steiner, 1995 WL 441999, at *2.
20
     Compl. ¶ 27.
21
     Id.

                                              8
Defendants held options subject to the Repricing. 22 Approximately 94.4% of the

repriced options belonged to the Individual Defendants. 23 On September 8, 2017,

Anixa filed a Form 10-Q with the Securities Exchange Commission disclosing the

Repricing, but failing to announce news of the ’783 Patent’s issuance. 24 On

September 18, 2017, Anixa issued the September 18 Press Release, publicly

announcing the ’783 Patent’s issuance. 25 The September 18 Press Release caused

Anixa’s stock price and trading volume to surge.26

          Based on these facts and inferences, it is reasonably conceivable that each of

the Individual Defendants (other than Campisi, as discussed below), breached their

fiduciary duty of loyalty by misusing corporate information and processes to benefit

themselves rather than Anixa.27

22
     See Compl. Ex. D at 4–6.
23
     See id.
24
     Compl. ¶ 33.
25
     Id. ¶ 34.
26
     See id. ¶ 35.
27
   Defendants’ argument that Plaintiff’s breach of fiduciary duty claim is “essentially” an
insider trading claim does not change this result. See Defs.’ Opening Br. at 21. Defendants
specifically contend that claim fails because the Complaint fails to adequately plead that
the Individual Defendants “(1) possessed material, non-public information, and (2) used
that information improperly by adopting the 2017 Repricing to reap a financial benefit to
the detriment of Anixa’s stockholders.” Id. at 21–22. As discussed above, it is reasonable
to infer from the facts alleged that all Individual Defendants (aside from Campisi) were
aware of the issuance of the ’783 Patent and the special meeting to approve the Repricing,
and delayed publicly announcing the patent’s issuance to permit the Repricing to occur in
advance of the announcement in order to further their financial interests. Further,
Plaintiff’s allegations that Anixa’s stock price and trading volume surged following the
                                             9
        Moreover, because Titterton and Baskies approved their own compensation

under the Repricing, rendering themselves interested in the transaction, the entire

fairness standard of review applies. 28 “The possibility that the entire fairness

standard of review may apply tends to preclude the Court from granting [a

defendant’s] motion to dismiss under Rule 12(b)(6) . . . .” 29 That is the effect in this

case.

        Despite Defendants’ argument to the contrary, it is reasonable to infer from

the Complaint that the Repricing was the product of an unfair process. The

Complaint alleges that the “timing, structure, and disclosure of the 2017 Re-pricing

announcement of the ’783 Patent’s issuance make it reasonably conceivable that news of
the patent issuance was material.
28
   Calma v. Templeton, 114 A.3d 563, 578 (Del. Ch. 2015) (“[T]he Compensation
Committee approved their own compensation and that of the other non-employee directors.
Thus, in my view, Plaintiff has rebutted the presumptive business judgment standard of
review.”); see also Telxon Corp. v. Meyerson, 802 A.2d 257, 265 (Del. 2002) (“Like any
other interested transaction, directorial self-compensation decisions lie outside the business
judgment rule’s presumptive protection, so that, where properly challenged, the receipt of
self-determined benefits is subject to an affirmative showing that the compensation
arrangements are fair to the corporation.”); Valeant Pharm. Int’l v. Jerney, 921 A.2d 732,
745 (Del. Ch. 2007) (“Self-interested compensation decisions made without independent
protections are subject to the same entire fairness review as any other interested
transaction.” (citing Telxon, 802 A.2d at 265)).
29
  Klein v. H.I.G. Capital, LLC, 2018 WL 6719717, at *16 (Del. Ch. Dec. 19, 2018); see
also Stein v. Blankfein, 2019 WL 2323790, at *7 (Del. Ch. May 31, 2019) (“A finding that
entire fairness, with its burden on the defendant, is the applicable standard usually
precludes dismissal under Rule 12(b)(6).”); Sciabacucchi v. Liberty Broadband Corp.,
2018 WL 3599997, at *15 (Del. Ch. July 26, 2018) (a determination that entire fairness
review applies “typically precludes dismissal of a complaint under Rule 12(b)(6)” (citing
Orman v. Cullman, 794 A.2d 5, 21 n.36 (Del. Ch. 2002)).

                                             10
were unfair.” 30 And, as discussed above, Plaintiff has adequately alleged facts

sufficient to support an inference that Titterton and Baskies had knowledge that the

’783 Patent would issue and repriced stock options in advance of Anixa publicly

announcing this information to benefit from any resulting stock surge. At the

pleadings stage, it is likewise reasonable to infer that the process affected the price.31

         For these reasons, Defendants’ motion to dismiss Count I as to Kumar,

Titterton, Baskies, Monahan, Catelani, Roop, and Fox under Court of Chancery Rule

12(b)(6) is denied.32

30
     Compl. ¶ 71.
31
   See Stein, 2019 WL 2323790, at *8 (Plaintiff bears a “low pleading burden regarding
director compensation: to point to ‘some facts’ implying lack of entire fairness, which will
require a unified review of both process and price.” (citation omitted)); Reis v. Hazelett
Strip-Casting Corp., 28 A.3d 442, 467 (Del. Ch. 2011) (“process can infect price” (citation
omitted)).
32
   Defendants also sought to dismiss Count I “[t]o the extent [it] purports to plead a
disclosure claim[.]” Defs.’ Opening Br. at 39 (citing Compl. ¶¶ 37, 69). While the
Complaint alleges that “Defendants breached their fiduciary duties by failing to disclose
adequate financial and material information respecting the Company[,]” Compl. ¶ 69,
Plaintiff’s answering brief makes no mention of this allegation. With respect to disclosure,
Plaintiff’s answering brief is limited to argument regarding the materiality of the ’783
Patent’s issuance, and this argument is expressly made in support of Plaintiff’s
“showstopper” claim that the Individual Defendants breached their fiduciary duties by
withholding from the public news of the ’783 Patent’s issuance, so as to allow the Repricing
to occur in advance of such announcement and work a benefit on the Individual
Defendants. See Pl.’s Ans. Br. at 28 (“It is the confluence of the facts alleged in the
Complaint that the Defendants strategically withheld material information that would
significantly increase the value of the stock until after the re-pricing that make this action
a breach of fiduciary duty. This theory has been properly pled and, therefore, survives
Defendants’ motion to dismiss.”). Accordingly, Plaintiff has waived any disclosure claim
distinct from his primary breach of fiduciary duty claim. Forsythe v. ESC Fund Mgmt. Co.
                                             11
         Campisi is a different story. The Complaint’s individualized allegations

regarding Campisi are limited to a single paragraph, alleging that Campisi is the Vice

President of Engineering of Anixa, a member of Anixa’s management team, and that

he personally benefitted from the Repricing. 33 Documents incorporated by reference

further demonstrate that Campisi owns 59,200 repriced options. 34 Rather than plead

the role Campisi played in the events at issue, the Complaint lumps Campisi in with

the other Individual Defendants. The Complaint provides no basis from which to

infer knowledge of the patent issuance prior to the Repricing, involvement in the

decision to withhold news of the patent issuance, or involvement in the Repricing

by Campisi. 35 Because there are no well-pled facts sufficient to suggest any

wrongdoing by Campisi, Plaintiff’s breach of fiduciary duty claim as pled against

Campisi is dismissed.

                2.     Count II—Unjust Enrichment
         Count II asserts that the Individual Defendants were unjustly enriched by the

2017 Repricing. To plead a claim for unjust enrichment, the Complaint must allege

(U.S.), Inc., 2007 WL 2982247, at *11 (Del. Ch. Oct. 9, 2007) (“The plaintiffs have waived
these claims by failing to brief them in their opposition to the motion to dismiss.”).
33
     Compl. ¶ 12.
34
     Compl. Ex. D. at 4.
35
  See Shandler v. DLJ Merch. Banking, Inc., 2010 WL 2929654, at *12 (Del. Ch. July 26,
2010) (dismissing claim against director where “[t]he complaint [was] largely silent as to
the role of [the director] in any of the events and simply lump[ed] him in with the other
directors”).

                                           12
“(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.” 36 Defendants argue that Plaintiff has not alleged facts sufficient

to support the first four elements. 37 The Court disagrees. At the pleadings stage,

this Court is required to accept Plaintiff’s well-pled allegations as true and draw all

reasonable inferences in Plaintiff’s favor. Plaintiff’s allegations, taken together,

adequately plead the first four elements.

         The Complaint alleges facts sufficient to support an inference that the

Repricing enriched the Individual Defendants. Specifically, on any given date after

the Repricing, each Individual Defendant was enriched by each repriced option he

held by at least the difference between (i) the lower of Anixa’s trading price and the

option’s original strike price, and (ii) the $0.67 strike price set by the Repricing.38

Plaintiff’s allegations similarly support an inference of an impoverishment. Indeed,

Defendants point out that Anixa suffered a $261,000 non-cash charge as a result of

the Repricing.39 There is direct relationship between the alleged enrichment and

36
     Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
37
     Defs.’ Opening Br. at 42–43; Defs.’ Reply Br. at 32.
38
     See Compl. ¶ 29.
39
  Defendants argue that this charge was “negligible” and therefore should not qualify as
an impoverishment. Defs.’ Opening Br. at 42 & n.18, 44 n.19. But a plaintiff is not
required to plead a non-negligible impoverishment to withstand a dismissal motion. See
Nemec, 991 A.2d at 1130 (providing the elements of an unjust enrichment claim).
Defendants further argue that the Repricing served “legitimate business reasons” and
                                             13
impoverishment, as the Complaint alleges that the purpose of the Repricing was to

provide a financial benefit to the Individual Defendants at the expense of Anixa and

its non-employee stockholders.40          It is also reasonably conceivable that the

Individual Defendants acted without justification; as discussed above, Plaintiff will

have the opportunity to litigate his claim for breach of fiduciary duty.

         Accordingly, Defendants’ motion to dismiss Count II under Rule 12(b)(6) is

denied.

         B.     Plaintiff Has Adequately Pled Demand Excusal Under Rule 23.1.
         “A cardinal precept of the General Corporation Law of the State of Delaware

is that directors, rather than shareholders, manage the business and affairs of the

corporation.”41 “[W]here a plaintiff seeks to file a derivative suit—which ‘[b]y its

very nature . . . impinges on the managerial freedom of directors’—the plaintiff must

cross a threshold framed by Rule 23.1.”42 “To meet the requirements, the plaintiff

must demand that the board pursue the claim or, alternatively, must demonstrate that

demand on the board would be futile such that the demand should be excused.”43

actually benefited Anixa. Defs.’ Opening Br. at 43. Defendants will have an opportunity
to prove that theory in the next stage of this litigation.
40
     See Compl. ¶ 32.
41
  Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled
on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
42
  In re Fitbit, Inc. S’holder Deriv. Litig., 2018 WL 6587159, at *10 (Del. Ch. Dec. 14,
2018) (quoting Aronson, 473 A.2d at 811).
43
     Id. (citing Beam v. Stewart, 845 A.2d 1040, 1048 (Del. 2004)).

                                             14
Here, Plaintiff made no pre-suit demand upon the Board, but Plaintiff asserts that

pre-suit demand was excused as a matter of law.

         Delaware courts apply one of two tests in evaluating whether demand is

excused. As the Delaware Supreme Court has instructed:

                Demand futility under Rule 23.1 must be determined
                pursuant to either the standards articulated in Aronson v.
                Lewis[, 473 A.2d 805 (Del. 1984),] or those set forth in
                Rales v. Blasband[, 634 A.2d 927 (Del. 1993)]. Under the
                two-part Aronson test, demand will be excused if the
                derivative complaint pleads particularized facts creating a
                reasonable doubt that “(1) the directors are disinterested
                and independent or (2) the challenged transaction was
                otherwise the product of a valid exercise of business
                judgment.” In Rales v. Blasband, this Court identified
                three circumstances in which the Aronson standard will
                not be applied: “(1) where a business decision was made
                by the board of a company, but a majority of the directors
                making the decision has been replaced; (2) where the
                subject of the derivative suit is not a business decision of
                the board; and (3) where . . . the decision being challenged
                was made by the board of a different corporation.” In
                those situations, demand is excused only where
                particularized factual allegations create a reasonable doubt
                that, as of the time the complaint was filed, the board of
                directors could have properly exercised its independent
                and disinterested business judgment in responding to a
                demand. 44

44
     Braddock v. Zimmerman, 906 A.2d 776, 784–85 (Del. 2006) (internal footnotes omitted).

                                             15
         In this case, Rales applies because the challenged decision was made by a

“committee consisting of less than half of the directors in office when the lawsuit

was initiated.”45

         For demand to be excused under Rales, the Complaint must allege

particularized facts that create “a reasonable doubt that, as of the time the complaint

is filed, the board of directors could have properly exercised its independent and

disinterested business judgment in responding to a demand.” 46 The Board relevant

to this analysis—the Board in place at the time Plaintiff filed the Complaint—

comprised Kumar, Titterton, Baskies, Monahan, and Cavalier (the “Demand

Board”).

         Plaintiff does not challenge the independence of any of the five members of

the Demand Board. He contends, however, that four of the five members—Kumar,

Titterton, Baskies, and Monahan—were interested because they held stock options

affected by the Repricing.47

         Defendants concede that these four directors benefited from the Repricing.48

They argue, however, that absent self-dealing, directors are not considered

45
  Calma, 114 A.3d at 575. Both Plaintiff and Defendants applied the Rales test in their
briefing. Defs.’ Opening Br. at 45; Pl.’s Ans. Br. at 16.
46
     Rales, 634 A.2d at 934.
47
   The parties appear to agree that Cavalier is disinterested and independent for demand
futility purposes. See Defs.’ Opening Br. at 45; Compl. ¶ 9.
48
     Defs.’ Opening Br. at 47.

                                          16
“interested” under Rales “solely” because they received compensation from the

company. 49 They further argue that to deem a director who did not participate in the

challenged decision “interested,” the director’s compensation must be material to

him or her. Relying on these general rules, Defendants contend that three of the five

members of the Demand Board—Kumar, Monahan, and Cavalier—did not

participate in the challenged decision; thus the Complaint must, but does not, plead

that the Repricing generated material benefits for these three directors.50

      Defendants’ argument fails because Plaintiff has alleged facts from which it

is reasonable to infer that the Repricing generated material benefits for Kumar and

Monahan. The Complaint alleges that Kumar and Monahan respectively held

880,000 and 18,000 stock options that were subject to the Repricing.51 Calculating

for each of these options the difference between the option’s original strike price and

the post-Repricing $0.67 strike price, the resulting benefit provided to Kumar and

49
  Id.; see also Calma, 114 A.3d at 576 (Del. Ch. 2015) (“Under Delaware law, directors
are generally not considered interested under Aronson or Rales ‘simply because [they]
receive compensation from the company.’” (quoting Weiss v. Swanson, 948 A.2d 433, 448
(Del. Ch. 2008))).
50
   Defs.’ Opening Br. at 49–51. Because Titterton and Baskies stood on both sides of the
Repricing, they are deemed “interested” without regard to whether they benefited
materially from the Repricing. Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *5–
6 (Del. Ch. June 26, 2014) (discussing the lack of a materiality standard for self-dealing
transactions).
51
  Compl. ¶ 29; Compl. Ex. D at 4–6. Defendants also concede that “stock option grants[]
formed a critical component of the Company’s employee compensation.” Defs.’ Opening
Br. at 10.

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Monahan by the Repricing could be approximately $1.7 million and $70,000,

respectively. 52 It is reasonably conceivable that these amounts were material to

Kumar and Monahan. 53

         Accordingly, because Plaintiff has alleged with particularity that four of the

five members of the Demand Board—Titterton, Baskies, Kumar, and Monahan—

were interested in the Repricing, demand is excused. 54

52
     See Compl. Ex. D at 4–6; Compl. ¶ 29.
53
   Moreover, the Complaint alleges that Kumar had knowledge of the ’783 Patent’s
issuance, called the September 6, 2017 Compensation Committee meeting, and attended
the meeting. See, e.g., Compl. ¶¶ 24–27. Given the depth of Kumar’s alleged involvement
in the alleged wrongdoing, the Complaint adequately pleads facts demonstrating that
Kumar faces a substantial likelihood of liability for breaching his fiduciary duties, thereby
entitling Plaintiff to a reasonable inference of interestedness as to Kumar on that
independent basis. See Rales, 634 A.2d at 936.
54
   It bears noting that at least one line of Delaware cases suggests that, in the context of a
challenge to director compensation, Plaintiff need not plead materiality as to the directors
who did not participate in the self-dealing transaction to demonstrate “interest.” See Calma
v. Templeton, 114 A.3d 563, 576 (Del. Ch. 2015) (rejecting argument that a plaintiff must
plead that challenged equity awards were material to a director who received those awards
to render that director interested under Rales); Conrad v. Blank, 940 A.2d 29, 38 (Del. Ch.
2007) (finding directors who received the challenged backdated options “clearly not
disinterested under Rales” although they did not participate in the challenged decision).
But see California Public Emps.’ Ret. Sys. v. Coulter, 2002 WL 31888343, at *8–9 & nn.15
& 20 (Del. Ch. Dec. 18, 2002) (holding that alleged ownership of repriced options by
directors who did not participate in challenged repricings was insufficient to render those
directors interested).

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III.   CONCLUSION
       For all these reasons, Defendants’ motion to dismiss Count I as to Individual

Defendant Campisi is GRANTED, and Defendants’ motion to dismiss is otherwise

DENIED.

       IT IS SO ORDERED.

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