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In-Depth Blog The Refined Demand Futility Standard Takes Shape

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In recent months, a number of Delaware court rulings have begun to grapple with the new Zuckerberg standard of futility of the three-part claim announced by the Delaware Supreme Court in September. Many cases highlight the need to assess the futility of administrator-by-administrator request. But at least one recent decision has highlighted another aspect of the test, and instead focuses on the need to assess the futility of demand on a transaction-to-transaction basis. In In re Vaxart, Inc. Shareholder Litigation, Vice-Chancellor Fioravanti dismissed several claims in a shareholder derivative action allegedly filed on behalf of Vaxart, Inc. because the plaintiffs did not allege that a majority of the directors received a personal benefit material or have faced a substantial probability of liability for the specific transaction which would have been the subject of the prior request.


In the early months of the pandemic, biotechnology company Vaxart began developing a vaccine against COVID-19. In late June 2020, Vaxart announced that it had been selected to participate in a primate study sponsored by Operation Warp Speed, the federal government’s program to accelerate vaccine development, and that it had reached an agreement manufacturing process to produce its oral vaccine. The price of Vaxart stock has skyrocketed at this news.

This lawsuit stems from the decision of Vaxart’s board of directors earlier in June 2020 to approve changes to two 2019 mandate agreements between Vaxart and Armistice Capital LLC (a former majority shareholder). The modifications to the warrants approved by the Board of Directors enabled Armistice to hold a greater number of Vaxart shares when exercising the warrants and to dispose of these warrants shares more quickly than under previous agreements. Separately, in a series of meetings in the spring of 2020, the board of directors also voted to issue options to multiple directors as compensation for their services, and shareholders subsequently approved an amendment to the plan. incentive in shares which allowed these options grants. A few days after the public announcement of Vaxart’s selection to participate in the Operation Warp Speed ​​study, Armistice began exercising its warrants and selling most of the underlying stocks. During the following weeks, several members of the board of directors also exercised their stock options.

The plaintiff shareholders have brought forward claims against Armistice and the board of directors of Vaxart, alleging that the members of the board of directors were aware of the selection of Vaxart for the study at the end of May before approving the modification of the mandate and option grants, which they exercised for their own benefit after the publication of the positive news. . Several of the claims – including the breach of fiduciary duty and unjust enrichment claims against the directors and Armistice – were derived in a derivative manner on behalf of Vaxart. The applicants did not first make a prior request to the board of directors of Vaxart.

Dismissal for failure to apply

Applying the “refined” claim futility test adopted by the Delaware Supreme Court earlier this year in Zuckerberg, the Court of Chancery concluded that the derived complaints relating to the modifications of the mandate should be rejected for failure to present a prior request. The court initially rejected the argument that the request to the board of directors (which included two directors appointed by Armistice) would have been unsuccessful because Armistice was a “controlling” shareholder. As a first step, the Court noted that Armistice was no longer a “controlling” shareholder at the time the tenure changes were approved, as it held less than 10% of the outstanding shares. Further, even if Armistice were a “controlling” shareholder, this alone would not excuse the claim because the claimants did not allege that at least half of the claim committee members were unable to do so. Fairly consider a request for changes to the mandate.

The Court first rejected the arguments that two of the directors lacked independence or were indebted to the two directors appointed by the Armistice under the third branch of the Zuckerberg test simply because the directors appointed by the Armistice supported the granting of stock options to the other directors and the appointment of the other directors as officers and directors.

The court then analyzed whether any directors derived personal benefit or risked being held liable for the transaction allegedly claimed – the approval of tenure changes. The plaintiffs argued that five of the directors were “interested” in the mandate changes because they shared a common goal with the two directors employed by the Armistice to keep the study of Operation Warp Speed ​​a secret in order. that they can grant themselves advantageous stock options with a short exercise. the price. But the court rejected this argument because the stock option grants, which were granted to individual directors over a four-month period, were “completely separate transactions” from the changes to the warrants. of Armistice approved at a separate meeting. Thus, any alleged “material benefit” that the directors derived from the stock options does not arise from the alleged misconduct in approving the changes to the mandate underlying the pre-action request.

In addition, a majority of directors did not face a substantial likelihood of liability arising from the approval of the tenure changes because the exculpatory provision in section 102 (b) (7) of Vaxart protected directors from any responsibility. The Court rejected the applicants’ argument that a “fairness” review should be triggered. There were no controlling shareholders at the time of the approval of the amendment to the warrants and, as the stock option grants were a separate transaction from the amendments to the warrants, the majority of the board administration was not in conflict. And the plaintiffs’ allegations that the board acted in bad faith by “offering” the tenure changes for no consideration were nothing more than questioning the business judgment of the board.

Based on this analysis, the Court concluded that the claim was not excused with respect to any claim relating to the tenure changes and dismissed both the claims for breach of fiduciary duty and the claims for unjust enrichment.


The practical implications of the Delaware Supreme Court’s refinement of the demand-futility standard in the Zuckerberg decision will continue over the next few months. However, it became clear that the test does not tolerate the mismatch between the alleged misconduct that would be the subject of the prior claim and the alleged wrongdoing that would expose directors to liability or bring them a material advantage. Before the prior claim is excused, complainants must establish the futility of the claim by claim, administrator by administrator, and operation by operation.