In Liang v. Berger, the plaintiff in a derivative action alleged the officers and directors of ARAID Pharmaceuticals failed to disclose material negative information about a drug under development in a timely manner.  Among other things, plaintiff claimed that a proxy statement which asked the company’s shareholders to approve executive compensation on an advisory basis failed to disclose:

  • the FDA’s concerns about the drug’s safety;
  • the agency’s demand that ARIAD continue to monitor and document safety data from a trial;
  • ARIAD’s resulting monitoring efforts; and
  • changes that ARIAD had made to the enrollment criteria for the trial.

The plaintiff further contended that disclosure “of the truth would have ended the shareholders’ support for compensation of the senior executives and reelection of directors.”

The court noted that to state a claim a proxy statement is false and misleading under Section 14(a) of the Exchange Act, a plaintiff must allege that:

  • a proxy statement contained a material misrepresentation or omission;
  • which caused the plaintiff injury; and
  • that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.

The court held the complaint did not sufficiently allege a causal link between the proxy statement and ARIAD’s alleged injury.  Insofar as plaintiff claims that ARIAD was injured by the payment of compensation to officers, the claim fails to allege that the underlying corporate transaction (between ARIAD and the compensated executives) required shareholder approval. The proxy statement told the shareholders that their votes were sought on “an advisory basis” with respect to executive compensation but told them that “[b]ecause your vote is advisory, it will not be binding on our Compensation Committee or our Board of Directors.”

The amended complaint also failed insofar as plaintiff claimed that ARIAD was injured because a full disclosure in the proxy statement “would have ended the shareholders’ support for . . . reelection of directors.”  Although shareholders’ votes were binding on this issue, the reelection of directors does “not create any cognizable harm [for purposes of the Exchange Act] because the shareholders’ votes did not authorize the transactions that caused the losses.”