Case Name:   In Re Affymax, Inc. Shareholder Derivative Litigation.

Case No.:       1-13-CV-243259

 

This is a consolidated shareholder derivative action by plaintiffs Christopher Scott (“Scott”) and Michael Markland (“Markland”) on behalf of nominal defendant Affymax, Inc. (“Affymax”) against certain of its officers and directors arising out of the recall of Affymax’s product, OMONTYS® (peginesatide) Injection (“OMONTYS”).  The first of the consolidated actions, Scott v. Orwin, case no. 1-13-CV-23259, was filed by Scott on March 19, 2013.  The second consolidated action, Markland v. Orwin, 1-13-CV-243962, was filed by Markland on filed April 2, 2013.  The Stipulation and Order to Consolidate Related Actions was entered by the Court on May 31, 2013.  On June 11, 2013, Plaintiffs filed a notice designating the Markland Complaint as the operative pleading.

 

In the operative Shareholder Derivative Complaint, Plaintiffs allege that Affymax’s directors and officers John A. Orwin, Robert F. Venteicher, Jeffrey H. Knapp, Anne-Marie Duliege, Herb Cross, Kathleen LaPorte, Ted W. Love, Daniel K. Spiegelman, John P. Walker, Christine van Heek, Keith R. Leonard, Jr., and Hollings C. Renton (collectively the “Individual Defendants”) disregarded red flags alerting them of hypersensitivity or allergic reactions experienced by patients using OMONTYS during the drug’s Phase 3 clinical trials and failed to implement additional testing to develop a better understanding of the problem.[1]  In addition, the Individual Defendants did not disclose the full extent of the safety issues associated with using OMONTYS, but touted the Company’s business prospects in order to drive up the stock price.[2]  Plaintiffs allege that while the Company’s stock price was inflated, certain “Insider Selling Defendants”[3] sold over $12 million worth of their stock at prices as high as ten times the share price.[4]  Plaintiffs allege that on February 23, 2013, Affymax issued a press release announcing a nationwide recall of OMONTYS caused by reports of severe “life threatening or fatal” hypersensitivity reactions in kidney disease patients.[5]  Thereafter, Affymax’s market capitalization plunged by over 85%, Affymax was forced to cut more than 200 jobs and is now considering selling itself or filing for bankruptcy, and the Company is now the subject of numerous securities class action lawsuits filed in the United States District Court for the Northern District of California (the “Securities Class Actions”) on behalf of Affymax investors.[6]  The Shareholder Derivative Complaint asserts three causes of action for: (1) breach of fiduciary duty (against the Individual Defendants); (2) waste of corporate assets (against the Individual Defendants); and (3) unjust enrichment (against the Individual Defendants).

 

On August 6, 2013, the Court entered the parties’ Stipulation and Order to Stay the Action until the entry of ruling on an anticipated motion to dismiss in the Securities Class Action captioned Bartelt v. Affymax, Inc., et al., Case No. 3:13-cv-01025-WHO.  On January 31, 2014, the Court entered the parties’ Stipulation and Order to Stay the Action until resolution of the Securities Class Action.

 

Plaintiffs now move for preliminary approval of derivative settlement.

 

Under the parties’ Stipulation of Settlement, for a period of no less than five years, Affymax will formally implement and maintain various corporate governance reforms set forth in section I.A. of Exhibit A to the Stipulation of Settlement.  All other provisions set forth in Exhibit A will be implemented and maintained for five years if Affymax reintroduces OMONTYS to the market or initiates plans to develop any new drug, medical device, product or other related venture and Affymax continues to be a publicly traded company.[7]

 

The corporate governance reforms set forth in section I.A. of Exhibit A pertain to insider trading.  Affymax agrees to amend and publish on its website its Insider Trading Policy.  The amendments to the policy include requiring directors and executive level employees to adopt a 10b5-1 trading plan, prohibiting the Board and senior executive officers and designated employees from holding Affymax securities tied to the performance of Affymax other than Affymax common stock and stock options delivered directly to employees under the current or future option and incentive plans, and regulating transactions of company securities by Section 16 officers and directors, with the ability to sanction or obtain disgorgement of profits from any individual who has not complied with insider trading policy.  Section I.B. of Exhibit A sets forth provisions for the creation of a Compliance and Risk Management Committee.  Section I.C. sets forth provisions for the creation of the position of Director of Internal Audit.  Section I.D. sets forth the Audit Committee’s responsibilities.

 

Discussion

 

“A court reviewing a settlement agreement considers whether the proposed settlement is fair and reasonable in light of all relevant factors.  [Citations.]  A court reviews the settlement of a derivative suit as a means of protecting the interests of those who are not directly represented in the settlement negotiations.”  (Robbins v. Alibrandi (2005) 127 Cal.App.4th 438, 445.)  “The duty of a court reviewing a settlement of a class action provides a useful analogy because the court in such cases seeks to protect the members of the class who, like the corporation and non-named shareholders in a derivative suit, may have no independent representation and little control over the action.”  (Id., at p. 449, fn. 2.)  Thus, in evaluating the fairness of this derivative settlement, the Court’s analysis should be guided by relevant legal authorities regarding approval of class action settlements.

 

“The well-recognized factors that the trial court should consider in evaluating the reasonableness of a class action settlement agreement include ‘the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, the risk of maintaining class action status through trial, the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of the class members to the proposed settlement.’ [Citations.]  This list ‘is not exhaustive and should be tailored to each case.’ [Citation.]”  (Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116, 128.)  “[A] presumption of fairness exists where: (1) the settlement is reached through arm’s-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small.  [Citation.]”  (Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1802.)

 

According to Plaintiffs, settlement was reached after formal mediation with the Honorable Layn R. Phillips (Ret.) on May 8, 2014.  There was also informal discovery and exchange of documents.  Plaintiffs submit that they served informal document requests in June of 2013, resulting in Affymax’s production of hundreds of pages of responsive documents in July 2013.  Furthermore, there were documents produced from the Securities Class Action pursuant to the terms of the January 31, 2014 Stipulation and Order to Stay the Action.  The Court finds that the instant settlement was reached through arm’s-length bargaining between experienced counsel after formal mediation, and is entitled to a presumption of fairness.

 

Regarding the fairness of the settlement terms, the issue is whether the corporate governance reforms set forth in Exhibit A to the Stipulation of Settlement will benefit the Affymax shareholders.  The absence of monetary payment does not necessarily preclude approval of the settlement because “a corporation may receive a ‘substantial benefit’ from a derivative suit, justifying an award of counsel fees, regardless of whether the benefit is pecuniary in nature.”  (Mills v. Elec. Auto-Lite Co. (1970) 396 U.S. 375, 395.)  Here, the proposed corporate governance reforms address the Complaint’s allegations of insider trading and inadequate internal controls to prevent corporate waste.  Affymax and its shareholders may substantially benefit from the insider trading controls, as well as the responsibilities of the Compliance and Risk Management Committee, the Director of Internal Audit, and the Audit Committee.

 

The Court has an independent right and responsibility to review the attorney fee provision of the settlement agreement and award only so much as it determines reasonable.  (Garabedian v. Los Angeles Cellular Telephone Co. (2004) 118 Cal.App.4th 123, 127-128.)  In derivative settlements, “[t]he court therefore must consider whether the negotiated fee will result in unwarranted harm to the corporation and the shareholders, such as would be the situation if the cost of the settlement to the corporation far exceeded its value to the corporation and shareholders.”  (Robbins, supra, 127 Cal.App.4th at p. 450.)  Here, the settlement calls for payment of $375,000 for the fees and expenses of Plaintiffs’ counsel, and as discussed above, the corporate governance reforms in the settlement arguably provide a benefit to Affymax and its shareholders.  In the class action settlement context, a lodestar cross-check is a permissible method of evaluating the reasonableness of an attorney’s fee award.  (See Lealao v. Beneficial Cal. Inc. (2000) 82 Cal.App.4th 19, 46-47 [discussing lodestar cross-check].)  The Court preliminarily approves the fee and expense award, subject to a lode star cross-check on final approval.

 

“The content of a class notice is subject to court approval.  If class members are to be given the right to request exclusion from the class, the notice must include the following:

 

A brief explanation of the case, including the basic contentions or denials of the parties;
A statement that the court will exclude the member from the class if the member so requests by a specified date;
A procedure for the member to follow in requesting exclusion from the class;
A statement that the judgment, whether favorable or not, will bind all members who do not request exclusion; and
A statement that any member who does not request exclusion may, if the member so desires, enter an appearance through counsel.”

 

(Cal. Rules of Court, rule 3.766(d).)  Here, the Notice of Proposed Settlement and Settlement Hearing is Exhibit C to the Stipulation of Settlement.  Since this is not a class action, the Notice need not include language regarding exclusion from a class.  “In derivative suits, unlike shareholder class actions, recoveries belong to the corporation on whose behalf the suit was brought” and therefore, “shareholders normally cannot opt out of the class and pursue their own individual action.”  (See Bell Atl. Corp. v. Bolger (3d Cir. 1993) 2 F.3d 1304, 1308, fn. 4.)  Notice is to be provided to the Affymax shareholders through Affymax’s website and a Form 8-K filing with the SEC.[8]  The Court finds that the proposed method of notice is reasonably calculated to apprise the Affymax shareholders of the settlement.

 

The Notice complies with rule 3.766(d) in most respects, as it provides an adequate summary of the case and explains the procedures for objecting.  However, the Notice does not contain a statement that shareholders can enter an appearance “through counsel” as required for approval of class action settlements under rule 3.766(d), and should be amended accordingly.

 

For all of these reasons, the motion for preliminary approval of the proposed derivative settlement is GRANTED, subject to modification of the Notice as set forth above.