The Delaware Court of Chancery found that plaintiffs’ allegations that the board of directors of Allergan, Inc. (“Allergan”) knowingly approved and oversaw a business plan that required company employees to market Allergan’s Botox product for uses that were not approved by the Food and Drug Administration (the “FDA”) stated a claim for breach of fiduciary duty. In so finding, the Court concluded that plaintiffs’ success in stating a claim that corporate fiduciaries knowingly caused the corporation to commit illegal acts to obtain profits was attributable to plaintiffs’ use of a Section 220 books and records demand, which demand permitted plaintiffs to obtain materials reviewed by Allergan’s board that promoted the marketing of Botox for non-FDA approved uses. According to the Court, only the extremely rare complaint will be able to establish the necessary linkage between the occurrence of illegal conduct (in this case, off-label marketing of Botox) and board level action without having referred to internal corporate documents. The Court noted that because plaintiff cannot otherwise seek “discovery” at the pleading stage, the Section 220 action is plaintiff’s key “tool at hand” for obtaining the particularized facts necessary for a complaint to survive a motion to dismiss. See slip op. at p. 51 n. 22.
The Court also addressed whether a Rule 23.1 dismissal (for failure to make a demand or plead demand futility) has preclusive effect on a subsequent derivative action brought by a different plaintiff. Contrary to the Chancery Court decision in In re Career Educ. Corp. Derivative Litig., C.A. No. 1398-VCP (Del. Ch. Sept. 28, 2007), the Court held that the earlier Rule 23.1 dismissal does not have preclusive effect because, as the earlier Rule 23.1 decision itself established, the prior plaintiff lacked authority to sue on behalf of the corporation and therefore was not in privity with the corporation or its other stockholders.