The Company did not record any material accruals for the matters described below in our Consolidated Balance Sheets as of February 28, 2021 and May 31, 2020.
Delaware Shareholder Derivative Lawsuit
As previously disclosed, on April 24, 2020, certain stockholders of the Company (the “Plaintiffs”) filed a derivative action, alleging claims for breach of fiduciary duty and unjust enrichment against the Company’s CEO, current and former CFO, CMO, and current and former members of the Company’s board of directors in connection with certain equity grant awards to these individuals in December 2019 and January 2020 (the “Defendants”). The Company was named a nominal defendant. The Plaintiffs demanded the rescission of the awards, a finding that the named directors breached their fiduciary duty to the Company, and an unnamed amount of damages. The Company appointed a Special Litigation Committee (“SLC”), consisting solely of independent directors not named in the complaint, to investigate the allegations in the complaint.
On December 15, 2020, the Defendants reached an agreement in principle with the SLC (collectively “Parties”) to resolve the lawsuit. On December 18, 2020, the Parties executed a memorandum of understanding outlining the key terms of their agreement. On January 27, 2021, the Parties entered into a proposed Stipulation and Agreement of Compromise, Settlement, and Release (the “Stipulation”) to settle the derivative action. A hearing has been scheduled for April 19, 2021 to consider the fairness of the Stipulation.
Pursuant to the Stipulation, the current directors agreed to implement a series of corporate governance reforms related to director and executive officer compensation and certain Defendants agreed to forfeit a substantial portion of the December 2019 Awards following approval of the settlement by the Delaware Court, in exchange for a release of claims and the dismissal of the Derivative Action with prejudice. Specifically, the December 2019 Awards to Michael A. Klump, Jordan G. Naydenov, and David F. Welch, Ph.D. will be forfeited in their entirety; 60 percent of the December 2019 Awards to Scott A. Kelly, M.D. will be forfeited; and the warrant to acquire 2,000,000 shares of common stock of the Company awarded to Nader Z. Pourhassan, Ph.D. in the December 2019 Awards will be forfeited in its entirety. In addition, Dr. Pourhassan will forfeit vested options to purchase 373,000 shares of common stock of the Company that he currently owns (issued separate and apart from the December 2019 Awards). Executive officers Michael D. Mulholland and Nitya Ray, Ph.D., and former officer Brendan Rae, will retain their December 2019 Awards.
On March 19, 2021, the Plaintiffs filed a brief agreeing to the proposed settlement and seeking an award of approximately $4.1 million for bringing the lawsuit. Plaintiff’s demand is based on the claimed value or benefit to the Company and its stockholders from the value of the rescinded equity awards, in addition to the time incurred by the Plaintiffs’ attorney with regard to this action.
On April 8, 2021, the SLC filed an opposition to the Plaintiff’s motion contending that the amount of the award being demanded is not legally supported as the actions resulting from the derivative action taken by the Company and the Defendants were the result of actions of the SLC, not those of the Plaintiffs’ attorney. The SLC contends the Plaintiffs’ attorney is only entitled to a quantum meruit award equal to a proportional amount of the legal fees incurred, equating to approximately $0.4 million. This amount was calculated by the SLC obtaining the amounts of hours and the various rates of the Plaintiffs’ attorney and then applying the same proportion applied to the award being demanded by the Plaintiff. If the court were to rule in favor of the SLC’s Opposition that the Plaintiff is only entitled to a Quantum Meruit award, the loss is expected to be approximately $0.4 million, alternatively if the court were to rule in favor of the Plaintiff’s full claim for award the loss is expected to be approximately $4.1 million.
In assessing whether the Company should accrue a liability for this litigation in the Consolidated Financial Statements, the Company considered various factors, including the legal and factual circumstances of the case, relevant case law, judge’s history of rulings in similar cases, similar derivative stockholder matters brought against the Company, the current status of the proceedings, the views of the SLC, its legal counsel, and the Company’s legal counsel, and the likelihood an award as requested will be upheld. As a result of this analysis, the Company recorded an immaterial accrual in accordance with applicable accounting standards and determined it is not probable a material loss will be incurred by the Company resulting from this legal proceeding. However, we cannot at this time predict the ultimate outcome of the decision in the current derivative action.