On September 20, 2004, BIO submitted an amicus curiae brief in a California Court of Appeal supporting Gilead Sciences Inc's efforts to overturn a lower-court ruling in a shareholders' derivative action.
Under California law, a corporation has the right to insist that plaintiffs make a demand on the corporation's board of directors before pursuing a derivative action. The California state court ruled that the mere fact that Gilead stated in an SEC filing that the company intended to defend itself against a class action by raising "meritorious" defenses constituted a waiver of this right - because the demand would have been "futile."
Gilead appealed, and BIO's brief supported the appeal, arguing that "the trial court's decision eviscerates one of the principal legal mechanisms used to filter out unwarranted litigation - the demand requirement …which properly gives a company's board of directors, in the first instance, the power to decide whether, when, how, and against whom to proceed with a corporate claim. This is a fundamental, universally accepted precept of corporate governance."
BIO's brief focused on the destructive nature of derivative lawsuits to the biotechnology industry, the fact that variations in stock price are typical in our industry, and the difficulty in getting a biotech drug on the market. In advancing these arguments, BIO demonstrated to the court that facilitating derivative suits - the result of the lower court's ruling - is not in the public interest.
The biotechnology industry already is sued in a disproportionately high number of securities suits. Despite a 19 percent decline in securities fraud class action filings in 2003, the number of such actions brought against biotechnology firms jumped by more than 39 percent. Of all the securities class actions filed last year, at least 17 percent were filed against biotechnology firms, even though they make up only 2 percent of the publicly traded firms in the United States.
We are pleased to report that on October 7th 2004, the Court of Appeal overturned the lower court's ruling, holding that the statement in the SEC filing "does not show, by itself or together with the other allegations of demand futility, that a majority of the directors could not fairly evaluate the claims of the shareholders".