PAUL WITMER, Plаintiff, v. ARMISTICE CAPITAL, LLC, ARMISTICE CAPITAL MASTER FUND LTD., STEVEN BOYD, JOSHUA DISBROW, GARY CANTRELL, JOHN DONOFRIO, JR., CARL DOCKERY, and KETAN B. MEHTA, Defendants, and AYTU BIOPHARMA, INC., Nominal Defendant.
C.A. No. 2022-0807-MTZ
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
August 14, 2025
Date Submitted: April 14, 2025
ZURN, Vice Chancellor.
Matthew F. Davis, Adriane M. Kappauf, POTTER ANDERSON & CORROON LLP, Wilmington, DE; Douglas A. Rappaport, AKIN GUMP STRAUSS HAUER & FELD LLP, Attorneys for Defendants Armistice Capital, LLC and Armistice Capital Master Fund Ltd.
MEMORANDUM OPINION
ZURN, Vice Chancellor.
A stockholder of the nominal defendant company alleges that company overpaid on two transactions that benefitted the company‘s largest investor. The stockholder also alleges the investor improperly traded on inside information. The stockholder brought derivative claims against the investor for breach of fiduciary duty, insider trading, aiding and abetting, and unjust enrichment. The investor moved to dismiss, presenting five questions for adjudication.
The first is whether a company‘s decision to permit a stockholder to pursue derivative claims against an investor should be set aside because the company granted that permission in a settlement agreement. I conclude the company‘s decision remains paramount in that context. It follows that demand is excused.
The second is whether the stockholder pled the investor exerted transaction-specific control over the asset purchases via the investor‘s large stake in the company, the investor‘s board designee, his role in the process and ties to manаgement, and the company‘s disclosure that the investor could exercise control. I conclude the plaintiff did not plead actual control and so failed to saddle the investor with fiduciary duties at the pleading stage.
The third is whether the stockholder pled the investor owed fiduciary duties for purposes of an insider trading claim based solely on its board designee‘s access to confidential company information. I conclude that theory has no foothold in Delaware law.
The fourth is whether the stockholder pled an aiding and abetting claim against
The fifth is whether the stockholder pled an unjust enrichment claim. I find he did not.
I. BACKGROUND1
The facts are drawn from the operative complaint, the documents integral to it, and those incorporated by reference. The stockholder demanded and received books and records before filing its complaint in this action.2
A. Aytu and Armistice
Plaintiff Paul Witmer is a stockholder of nominal defendant Aytu Biopharma, Inc. (“Aytu“), a publicly traded pharmaceutical company incorporated in Delaware.3 Armistice Capital, LLC is a Delaware-incorporated hedge fund primarily focused on the health care and consumer sectors.4 It operatеs Armistice Capital Master Fund Ltd., a Cayman Island limited company and investment fund (together with Armistice Capital, “Armistice“).5 Armistice held Aytu equity from 2017 to 2020.6 Steven Boyd is Armistice Capital‘s founder, Chief Investment Officer, and Managing Partner.7 He sat on Aytu‘s board from April 2019 to August 2021.8
In November 2018, Armistice lent Aytu $5 million at 8% for three years.9 The promissory note was guaranteed by Aytu‘s revenues from a contemporaneous licensing agreement with Tris Pharma, Inc.10 Boyd learned of the Tris deal through his service as a director at Cerecor Inc., and Boyd brokered the deal between Tris and Aytu.11 In January 2019, Armistice exchanged the promissory note for Aytu common stock at a discounted rate and warrants to purchase additional common stock.12
When Aytu approved the promissory note and Tris deal, it also expanded its board by two seats so Boyd and a non-Armistice-affiliated director could join.13
As of April 2019, Armistice had a 41.1% stake in Aytu.16 At this time, Aytu‘s board noted Armistice would be an interested stockholder for purposes of
B. The Challenged Transactions
In late 2019 and early 2020, Aytu entered into two transactions with Armisticе portfolio companies. At that time, Aytu‘s board consisted of seven directors.19 First, Aytu acquired Innovus Pharmaceuticals Inc. (“Innovus” and the “Innovus Transaction“), which included a “portfolio of over thirty consumer products competing in large therapeutic categories, including diabetes, men‘s health, sexual wellness and respiratory health.”20 Armistice held 10% of Innovus‘s equity.21
Negotiations began in summer 2019. Boyd was a member of a two-person special committee (the “Review Committee“) that reviewed Aytu‘s proposed terms for purchasing Innovus before the full board did.22
After the Review Committee reviewed the proposed terms, the full board met to review and discuss Aytu‘s letter of intent on July 24, 2019.23 The board received materials from management about Innovus, including its recent revenue generation and potential synergies.24 But the board was not informed of Innovus‘s financial issues: that Innovus had never earned a profit, operated at a large deficit, and was in financial distress.25 The board did not review Innovus‘s financial reports.26 The board was not told of Armistice‘s stake in Innovus at this meeting.27 After discussion, the board determined the LOI‘s terms were acceptable to Aytu and its stockholders, and voted to authorize Aytu management to negotiate the deal.28
On September 10, the board met again to discuss the Innovus Transaction and to vote.29 Disbrow gave the board а summary of discussions with Innovus and “discussed the structure of the transaction, key deal terms, and the potential timeline for completing the acquisition.”30 The terms had not substantially changed since July.31
As consideration, Aytu agreed to pay Innovus stockholders $8 million, lend Innovus $1.4 million in bridge financing, and pay $1.1 million in stock to retire Innovus warrants largely held by Armistice.36 Aytu agreed to pay Innovus stockholders additional money if Innovus‘s business achieved certain revenue metrics from 2019 through 2023.37 Aytu assumed $3.5 million in debt from Innovus.38
A few months later, on February 12, 2020, and shortly before the stockholder vote was scheduled, the Aytu board was advised of new developments about Innovus.39 The board learned of a significant increase in accounts payable, an increased debt load, concerns over nonpayment of key vendors, and potential termination by a servicе provider.40 Aytu did not disclose this new information to stockholders.41
The board considered moving the stockholder vote.42 But the board held the vote because Boyd agreed to provide bridge financing to Innovus until its next financing.43 Stockholders, including Armistice, approved the transaction on February 13.44 The Innovus Transaction closed on February 14, 2020.45
At the same time Aytu was considering the Innovus Transaction, Aytu was negotiating an asset purchase agreement with Cerecor to purchase a portfolio of six pediatric and primary care products (the “Cerecor Transaction,” and together with the Innovus Transaction, the “Challenged Transactions“).46 At the time, Armistice owned 64.3% of Cerecor‘s voting stock and Boyd sat on Cerecor‘s board.47
On September 30, 2019, Aytu‘s board met to discuss the Cerecor Transaction.48 The board received materials about the Cerecor portfolio‘s historical revenues; those materials did not disclose that Cerecor had written off and abandoned sales efforts with respect to one product in the portfolio, or that Cerecor purchased four of the products less than two years earlier
The Aytu board met again on October 10 to discuss and vote on the Cereсor Transaction; the board was informed that Boyd was “interested in the [Cerecor] Transaction.”53 Meeting materials failed to disclose that the Cerecor portfolio was unprofitable, and that one of the products was discontinued.54
The Aytu board approved the Cerecor Transaction.55 Boyd did not recuse himself from the vote.56 The Aytu board did not retain a financial advisor or receive a fairness opinion.57
Aytu purchased the portfolio for a cash payment of $4.5 million and issued Aytu convertible preferred stock to Cerecor stockholders, valued at $12.5 million.58 Aytu also assumed certain Cerecor financial and royalty obligations.59 The Cerecor Transaction closed on November 1.60
Through the Challenged Transactions, Armistice nearly tripled its Aytu stake.61
C. Goodwill
In the months after the Challenged Transactions, Aytu wrote off millions of dollars in goodwill from the Cerecor Transaction.62 Aytu initially recorded $8.4 million in goodwill from the Innovus Transaction; that number increased to $8.6 million by the end of 2020.63 And as of December 2019, Aytu recorded $15.4 million in goodwill from the Cerecor Transaction;64 by June 2020, that number increased to $19.5 million.65 In June 2021, Aytu disclosed it had “concluded that [it] had a material weakness in internal control over financial reporting related to [its] analysis for the accounting of goodwill and other intangibles and accounting for impairment of longlived assets.”66 In September 2021, Aytu disclosed it found a goodwill impairment based on its determination that the fair value of onе of the Cerecor portfolios it purchased was less than the portfolios’ carrying value.67 Ultimately, Aytu wrote off the entire amount of goodwill recorded for the Cerecor Transaction.68
Shortly after the Challenged Transactions, Armistice liquidated its holdings in Aytu. Armistice was considered an Aytu insider and was subject to Aytu‘s insider trading policy (the “Insider Trading Policy“).
The Insider Trading Policy defined material nonpublic information (“MNPI“) to include, among other things: “news of pending or proposed acquisitions“; “news of the disposition or acquisition of significant assets“; “significant developments involving collaboration relationships“; “known but unannounced future earnings or losses“; and “new equity or debt offerings.”69 The Insider Trading Policy imposes a special black-out period for Aytu insiders until three days after a disclosure of material company developments.70 The policy also prohibits insiders with MNPI from trading on that information until it has been known by the public for two days.71 Aytu‘s Insider Trading Policy has a pre-clearance requirement that prohibits directors, and entities controlled by directors, from trading until:
(i) the person trading has notified the Chief Financial Officer in writing of the amount of the proposed trade(s), and (ii) the person trading has certified to the Chief Financial Officer in writing no earlier than one business day prior tо the proposed trade(s) that (a) he or she is not in possession of Material Nonpublic Information concerning the Company, and (b) the proposed trade(s) do not violate the trading restrictions of Section 16 of the Exchange Act or Rule 144 of the Securities Act.72
Because directors may possess MNPI about the company‘s financials, Aytu‘s policy imposes a financial information blackout period prohibiting director trading beginning ten days before the end of each fiscal quarter and ending three days after Aytu publicly discloses its quarterly financial results.73 Lastly, the Insider Trading Policy prohibits insiders from tipping others about MNPI, or providing trading advice about Aytu securities while possessing MNPI.74
1. March Trades
On March 9, 2020, Disbrow advised Aytu‘s board that Aytu was signing an exclusive distribution agreement to commercialize a rapid COVID-19 test.75 Aytu announced this agreement to the public the next day, March 10. Aytu‘s stock price jumped 400% by the end of that day.76
Also on March 10, Armistice sold 23.5 million shares, representing $31.2 million.77 These sales were not made pursuant to a Rule 10b5-1 plan.78 Before making those trades, Armistice‘s counsel emailed Disbrow, Aytu‘s CFO, and Aytu‘s outside counsel requesting permission to trade.79 Disbrow confirmed Armistice was not in possession of MNPI and authorized Armistice to trade.80
2. April Trades
On April 27, Armistice emailed Disbrow, and Aytu‘s CFO and outside counsel, requesting clearance to trade.84 Disbrow gave Armistice the go-ahead.85 Later that day, Armistice liquidated the rest of its stock (together with the March trades, the “Trades“).86 Under Aytu‘s Insider Trading Policy, April 27 fell within a financial blackout period.87
E. Litigation And Partial Settlement
Plaintiff filed this derivative action on September 12, 2022.88 He amended his complaint on April 10, 2023,89 and again on April 3, 2024 (the “Amended Complaint“).90 Plaintiff brought claims against Armistice and Boyd for breach of fiduciary duty, aiding and abetting, and unjust enrichment, and against certain current and former Aytu directors and officers (the “Directors“) for breach of fiduciary duty, aiding and abetting, and unjust enrichment.
On March 13, 2024, Plaintiff and the Directors entered into a Stipulation and Agreement of Settlement, Compromise, and Release to settle all claims against them (the “Settlement“).91 I approved that settlement on January 13, 2025.92 As part of the Settlement, Plaintiff voluntarily dismissed Boyd from this action.93 In the Settlement, Aytu agreed to maintain a position of neutrality with respect to the derivative claims against Armistice.94
Armistice is the sole remaining defendant. Plaintiff presses claims against Armistice for breach of fiduciary duty as to the Challenged Transactions, breach of fiduciary duty as to the Trades, aiding and abetting breach of fiduciary duty, and unjust enrichment.
II. ANALYSIS
Armistice seeks dismissal of this action under Court of Chancery Rule 23.1 for failure to plead demand futility and under
A. Demand Is Excused.
I begin with demand futility. “In a derivative suit, a stockholder seeks to displace the board‘s authority over a litigation asset and assert the corporation‘s claim.”96 “‘In order for a stockholder to divest the directors of their authority to control the litigation asset and bring a derivative action on behalf of the corporation, the stockholder must’ (1) make a demand on the company‘s board of directors or (2) show that demand would be futile.”97 Plaintiff did not bring a demand on the board, so he must show the demand requirement is excused as futile.98
Because Aytu has taken a position of neutrality on the claims against Armistice, demand is excused. “A cardinal precept’ of Delaware law is ‘that directors, rather than shareholders, manage the business and affairs of the corporation.‘”99 And “[t]he board‘s authority to govern corporate affairs extends to decisions about what remedial actions a corporation should take after being harmed, including whether the corporation should file a lawsuit against its directors, its officers, its controller, or an outsider.”100 The corporation‘s position is paramount over any court consideration of demand futility:
When the defense of failure to make a demand is asserted, the court is required to examine the position or policy espoused by the corporation which it seeks to protect. Therefore, before a court can apply the traditional standards for determining when demand is excused it must first examine whether the corporation on whose behalf the action is brought has taken a position concerning the propriety of the derivative litigation. Stated differently, if the demand rule requires deference to the prerogative of management, its invocation must advance management‘s position, vis-a-vis, the claims in question, otherwise, the rule serves no function.101
Built on Delaware‘s board-centric foundation, Kaplan v. Peat, Marwick, Mitchell & Co. explains a company‘s enunciated position on a derivative claim takes precedence over the Court‘s Rule 23.1 assessment of the position the company might be able to take.102
In keeping with that precept, the Delaware Supreme Court held that “when a corporation chooses to state its position in
Under Kaplan, Aytu‘s position of neutrality excuses demand for the claims against Armistice. Aytu committed to a position of neutrality with regard to Plaintiff‘s claim against Armistice.106 Kaplan tells us Aytu‘s stance must be viewed as approval for Plaintiff to sue Armistice derivatively.107
Armistice does not dispute that interpretation of Aytu‘s stance.108 Rather, Armistice argues a statement of neutrality made in connection with a settlement should not, as a policy matter, permit a plaintiff to bypass Rule 23.1.109 Armistice stresses that a “position of neutrality thus becomes a bargaining chip” or a “weapon” to “avoid the otherwise imperative standing obligation.”110 In Armistice‘s view, this “defies the policy underlying Rule 23.1‘s demand requirement.”111
At bottom, Armistice is asking the Court to disregard the boаrd‘s decision that Plaintiff can pursue Aytu‘s claim against Armistice, and make the Court‘s own Rule 23.1 determination, because Aytu enunciated that position after negotiating with Plaintiff. Asking the Court to substitute its judgment for a board‘s is a big ask. Doing so requires some reason to doubt the board‘s competence, loyalty, or independence; Armistice offers none.112 Whether
Finally, the mere fact that the company‘s position appears in a settlement agreement does not support the Court substituting its judgment for the company‘s.
Still, one way to read the Settlement is as an exchange of a statement of neutrality toward Armistice for a release of claims against the Directors (and dismissal of Boyd): throwing Armistice to a stockholder plaintiff in exchange for peace at home. I make no comment on the loyalty of any such exchаnge, nor do I consider if or how the Court might probe whether a statement of neutrality—promoting monetization of a derivative claim—should be disregarded as wrongful because it bought a release for directors. See, e.g., Zapata Corp. v. Maldonado, 430 A.2d 779, 786-89 (Del. 1981) (concluding a special litigation committee‘s decision to dismiss demand-excused derivative litigation presents sufficient risk of disloyalty to warrant judicial evaluation, and establishing a framework); In re Straight Path Commc‘ns Inc. Consol. S‘holder Litig., 2017 WL 5565264, at *4 (Del. Ch. Nov. 20, 2017). My holding today is limited to Armistice‘s argument that a statement of neutrality offered to a plaintiff in a settlement allows that plaintiff to bypass
In the settlement context, Delaware‘s board-centric governance model dovetails with two more foundational precepts. First, “Delaware is famously contractarian.”115 “We uphold[] the freedom of contract and enforce[] as a matter of fundаmental public policy the voluntary agreements of sophisticated parties.”116 And second, “Delaware law, as a general proposition, favors the voluntary settlement of contested issues.”117 When a board pronounces its neutrality as to a derivative action in a settlement agreement, these precepts favor respecting that neutrality, not overriding it. Demand is excused.
B. Court of Chancery Rule 12(b)(6)
Next, I turn to
the Court accepts as true all well-pled factual allegations contained in the amended complaint, but conclusory statements—those unsupported by well-pled factual allegations—are not accepted as true. The Court will draw all inferences logically flowing from the amended complaint in favor of the plaintiff but
only if such inferences are reasonable. The Court will not dismiss under Rule 12(b)(6) any claim unless it appears to a reasonable certainty that the plaintiff cannot prevail on any set of facts which might be proven to support the allegations in the amended complaint.118
Armistice has moved to dismiss Counts I and II for breach of fiduciary duty, Count III for unjust enrichment, and Count VII for aiding and abetting.119 I grant the motion in full.
1. Armistice Is Not A Controlling Stockholder.
First, I turn to Plaintiff‘s claim for breach of fiduciary duty in connection with the Challenged Transactions. Plaintiff asserts Armistice breached its fiduciary duties “by causing Aytu to enter into transactions that benefitted . . . [Armistice] and were not in the best interest of [Aytu] or its minority stockholders.”120 A threshold question is whether Armistice owed fiduciary duties. I find it did not.
“As a general rule, stockholders do not owe fiduciary duties to the corporation or its stockholders and are free to act in their self-interest.”121 But “Delaware law imposes fiduciary duties on those who effectively control a corporation.”122 “[A] stockholder who owns or controls over 50% of a Delaware corporation‘s stock is presumed to exercise ‘hard’ control and assumes fiduciary duties in certain circumstances. This is because a majority stockholder controls the levers of power within the corporation.”123 “Conversely, a stockholder who owns or controls less than 50% of a corporation‘s voting power is not presumed to be a controlling stockholder with fiduciary duties.”124 “Under recent Delaware Supreme Court precedent, a minority stockholder may exercise actual control (i) ‘over the corporation‘s business and affairs’ or (ii) ‘over a specific transaction.‘”125 Here, Plaintiff asserts Armistice exercised actual control over the Challenged Transactions.126
“The test for actual control by a minority stockholder ‘is not an easy one
“[T]he potential ability to exercise control is not sufficient.”129 “At the pleadings stage, a reasonable inference of actual control rests on the totality of the facts and circumstances considered in the aggregate.”130 Indeed, “there is no magic formula to find control; rather, it is a highly fact specific inquiry.”131 Plaintiff has failed to allege facts supporting an inference that Armistice conceivably “dominated or controlled [the Board‘s] ‘corporate decision-making process[.]‘”132
Plaintiff pleads the following indicia of control133:
- Armistice‘s 41% stake in Aytu;134
- Armistice‘s ownership in Innovus and Cerecor;135
- Boyd‘s membership on the board and Review Committee;136
- the process surrounding the Challenged Transactions;137
- Boyd‘s business relationship with Disbrow;138 and
- Aytu‘s disclosure that “Armistice could be able to exert significant control.”139
I will consider each factor in turn before evaluating them holistically.
i. Ownership Stake
First, Armistice‘s stake. Our control jurisprudence “do[es] not reveal any sort of linear, sliding-scale approach whereby a larger share percentage makes it substantially more likely that the court will find the stockholder was a controlling stockholder. Instead, the scatter-plot nature of [prior] holdings highlights the importance
ii. Process-Based Arguments
“Process inquiries are fact-intensive. Evaluating process integrity for the purpose of determining actual control considers all ‘possible sources of influence’ and ‘[b]roader indicia of effective control.‘”143 Boyd‘s mere presence while the seven-member Aytu board discussed the Challenged Transactions, without any allegation that his presence slanted discussion or cowed directors, offers no support for an inference of control.144
Plaintiff has not pled that Boyd participated in either Challenged Transaction‘s process in any way that tainted the process or affected the outcome. In connection with the Innovus Transaction, Boyd‘s alleged conduct is limited to his inclusion on the Review Committee. The Review Committee was a “special committee” that “reviewed the proposed” terms of the Innovus Transaction before they were presented to the full board.145 Plaintiff does not plead that the Review Committee was empowered in any manner to negotiate, recommend, or approve the Innovus Transaction.146 As pled, the Review Committee was not empowered to do much at all. Boyd “reviewed” the potential terms before the full board did thе same. As to the Cerecor Transaction, Plaintiff provides even less about Boyd‘s conduct,147 alleging only his presence at board meetings.
From there, Plaintiff simply finds fault in Aytu‘s board‘s process. Plaintiff asserts
“Critically, the Amended Complaint does not allege that [Armistice] ‘steered the negotiations or otherwise dominated’ the Board,” and includes almost no allegations about Boyd‘s conduct, “let alone the type of ‘overt or even subtle bullying’ that this Court has found to support a reasonable inference of control.”151
iii. Control Over Disbrow
Plaintiff also asserts Disbrow was not independent of Armistice because of his business relationship with Boyd. First, even accepting this argument as true, Disbrow was one of seven board members—far from a majority of the board required to plead dominion.152
To the extent Plaintiff challenges the independence of other Aytu directors because “Boyd and Armistice concentrate their investment activities in the same industry” those directors work in, that challenge fails. SAC ¶ 189; see, e.g., Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart (Beam II), 845 A.2d 1040, 1051-52 (Del. 2004) (“Mere allegations that they move in the sаme business and social circles . . . is not enough to negate independence for demand excusal purposes.“); Newman v. KKR Phorm Invs., L.P., 2023 WL 5624167, at *5 (Del. Ch. Aug. 31, 2023) (finding “[t]he Amended Complaint fails to rebut the presumption of independence” where it “alleges no facts suggesting that [defendant stockholder] ‘controlled’ the [Review Committee] or ‘dominated’ them through a ‘close relationship’ or ‘force of will.‘” (quoting Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. March 1, 2002))).
And Plaintiff fails to dislodge the presumption that Disbrow was independent. “Directors are presumed to be independent. To carry their burden, a plaintiff must sufficiently plead that a director‘s ties to the interested party, when judged subjectively, were material such that those ties could have affected that director‘s impartiality. These ties are viewed holistically.”153 Plaintiff asserts only
iv. Aytu‘s Disclosure
Finally, Aytu‘s disclosure that Armistice could generally exert control is not enough to plead control over the Challenged Transаctions. In 2019, Aytu disclosed that “[t]he significant ownership interest Armistice has” and “Boyd‘s position on [the] board of directors could give Armistice the ability to influence [Aytu] through their ownership positions” and that “Armistice could be able to exert significant control over [Aytu].”158
A company‘s public acknowledgment of control or outsized influence is an indicator of control.159 But “Delaware law requires actual control, not merely the potential to control.”160 It follows that a disclosure of the mere possibility of control does not amount to actual control, without more.
Plaintiff relies on In re Zhongpin Inc. Stockholders Litigation.161 In Zhongpin, the company expressly admitted the defendant was its controller, and confirmed he had “significant influence,” that the company relied on him to “manage [their] operations,” and that if he left, it would have a “material adverse effect on [the company‘s] business and operations.”162 The Court found that disclosure, along with other allegations in the complaint, supported a pleading stage inference that the defendant possessed latent and active control over the company‘s business and affairs generally.163
This Court has acknowledged the importance of Zhongpin‘s “outright admission” of control, absent here.164 And here, Boyd
And finally, even in a combination of all factors, I find Plaintiff has not pled actual control. “Whether a constellation of facts supports an inference of control is a fact-specific inquiry, and different constellations of facts can lead to different outcomes.”167 Here, the constellation of facts does not demonstrate control. While Armistice held a large stake in Aytu, it did not control the board, dictate its decision making, or compel the challenged outcomes. Armistice, for example, did not hold board veto power,168 hold “day-to-day managerial supremacy,”169 threaten the board,170 or hold any other lever of control over Aytu‘s board, at all or for purposes of the Challenged Transactions. Armistice was a significant investor with a board designee, who had also invested in products Aytu‘s majority- independent board decided to acquire. That is all.
2. Brophy
Plaintiff next asserts a Brophy claim: he alleges Armistice breached its fiduciary duties by trading on MNPI.171 I disagree on the grounds that Armistice did not owe fiduciary duties.
“[A] plaintiff seeking to prevail on a Brophy claim ultimately must show that: 1) the corporate fiduciary possessed material, nonpublic company information; and 2) the corporate fiduciary used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.”172 Once again, the threshold inquiry is whether Armistice owеd fiduciary duties.
“Fiduciary duties arise from the separation of ownership and control. The essential quality of a fiduciary is that she controls something she does not own.”175 It follows that “[d]uties of a fiduciary character will only be imposed where the relationship or trust can be characterized as ‘special;’ fiduciary duties will not be imposed in the midst of typical arms-length business relationships.”176 “A fiduciary relationship exists where one party places a special trust in another and relies on that trust, or where a special duty exists for one party to protect the interests of another.”177 “A fiduciary relationship implies a dependence, and a condition of superiority, of one party to another.”178 “It generally requires ‘confidence reposed by one side and domination and influence exercised by the other.‘”179 Traditional corporate fiduciaries like officers, directors, and controlling stockholders control a corporation that stockholders own, and so owe fiduciary duties.180 From there, where control
Plaintiff excavates the foundation of fiduciary duties altogether, asserting Armistice need not exert any control over Aytu to owe them.182 Plaintiff asserts that because Armistice “indisputably had access to Aytu‘s MNPI through Boyd‘s position on the Board,”183 Armistice “occupied a ‘position of trust and confidence’ that gives rise to fiduciary duties with respect to their trading of Aytu securities.”184
Plaintiff relies on three cases as support for his theory: Brophy v. Cities Service Co.,185 Triton Construction Co. v. East Shore Electric Services, Inc.,186 and In re Fitbit, Inc. Stockholder Derivative Litigation.187 They do not support imposing fiduciary duties based on mere access to confidential information.
In Brophy, the defendant was a fiduciary because he was a company employee in a position of trust and confidence, and obtained confidential information through that position. After the company‘s confidential secretary learned through his employment that the company intended to repurchase company shares, the secretary traded on that information.188 A stockholder brought a derivative claim, arguing a constructive trust should be placed on the secretary‘s profits.189 The Court determined the secretary was a fiduciary. The secretary did not owe fiduciary duties that restricted his right to sell merely because he had access to confidential information.190 Nor did he owe fiduciary duties
Armistice was not an Aytu employee. Armistice was not in a position of trust and confidence; as explained, Armistice was not a controller. And while Boyd is an Aytu fiduciary, and learned confidential information during his directorship, neither is true for Armistice.193 Brophy does not support imposing fiduciary duties on Armistice that would restrict Armistice‘s right to sell.
Triton does not help Plaintiff either.194 It considered whether an employee breached fiduciary duties owed to the company employer by performing work for its direct competitor and usurping the employer‘s business opportunities.195 The Court recognized that fiduciary duties flow from an agency relationship.196 It also recognized that the defendant employee “was not a key managerial employee, and, therefore, owed no fiduciary duties to the Company solely by virtue of his position.”197 At the preliminary injunction stage, the Court found it wаs more likely than not that the employee‘s particular job responsibilities made him an agent of the company, specifically his ability to bind the company to contracts.198 Here, Armistice
Finally, Fitbit offers no support either.199 There, the Court declined to dismiss claims against defendant directors who traded on inside information through funds they controlled.200 The defendants were the directors, who of course already owed fiduciary duties—not the funds. The Court explained that “to allow these directors, through their controlled funds, to profit from inside information without recourse would be inconsistent with the policy of ‘extinguish[ing] all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation’ that undergirds Delaware‘s insider trading law.”201 That makes perfect sense. But the defendant here is the fund, not the director. Fitbit does not support imposing fiduciary duties on the fund.
Plaintiff points to no authority holding that possessing confidential information alone creates fiduciary duties. For good reason: if I accepted Plaintiff‘s theory, every stockholder with a director designee would itself be a fiduciary for purposes of a Brophy claim. “The Delaware courts have been
reluctant to extend too broadly the applicability of fiduciary duties.”202 Plaintiff‘s Brophy claim fails.3. Aiding And Abetting
Next, I turn to Armistice‘s aiding and abetting claim. “To survive a motion to dismiss, the complaint must allege facts that satisfy the four elements of an aiding and abetting claim: ‘(1) the еxistence of a fiduciary relationship, (2) a breach of the fiduciary‘s duty, ... (3) knowing participation in that breach by the defendants,’ and (4) damages proximately caused by the breach.”203 Armistice challenges the second and third elements. Plaintiff has not pled knowing participation.
The Amended Complaint alleges the Directors breached their duty of care in approving the Challenged Transactions by not seeking or obtaining enough information about the targets.204 Plaintiff alleges
Plaintiff alleges Armistice “knowingly participated in and facilitated the Director Defendants’ breaches of fiduciary duty by orchestrating the C[hallenged] Transactions and participating in the Board‘s purported consideration of the terms of the Transactions.”206 Plaintiff asserts that while the Directors were inadequately informed about the Challenged Transaction, Armistice “[b]y virtue of its substantial investments in Innovus and Cerecor and Boyd‘s position on the Cerecor board” knew material information about those companies that Boyd withheld from Aytu‘s board.207 I do not reach whether Plaintiff pleads a predicate breach; the claim dies on failure to plead Armistice knowingly participated in the Directors’ shortcomings.
“[A] claim for aiding and abetting often turns on meeting the ‘knowing participation’ element. Therefore, ‘there must be factual allegations in the complaint from which knowing participation can be reasonably inferred.“’208 “[C]onclusory statements that are devoid of factual details to support an allegation of knowing participation will fall short of the pleading requirement needed to survive a Rule 12(b)(6) motion to dismiss.”209
The “knowing participation” element “involves two concepts: knowledge and participation.”210 The requirement that “the aider and abettor must act with scienter” brings in the two distinct concepts of knowledge and participation.211 And “the requirement that the aider and abettor act with scienter makes an aiding and abetting claim among the most difficult to prove.”212
As to the participation prong, “participation in an aiding and abetting claim requires that the aider and abettor provide ‘substantial assistance’ to the primary violator.”217 And where a director‘s affiliate is charged with aiding and abetting, the complaint must plead participation by that affiliate.218 “The requirement of substantial assistance for a finding of ‘knowing participation’ emanates from the Restatement (Second) of Torts § 876(b). Many Delaware cases have cited § 876(b) as persuasive authority for what the ‘knowing participation’ element requires.”219 That section states that “[f]or harm resulting to a third person from the tortious conduct of another, one is subject to liability if he ... (b) knows that the other‘s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself.”220
“[A]n aider and abettor‘s participation in a primary actor‘s breach of fiduciary duty must be of an active nature, ”221 as compared to mere “passive awareness.”222 In Mindbody, the purported aider and abettor reviewed the company‘s proxy, knew it was deficient, but remained silent despite a contractual obligation to inform
Plaintiff‘s aiding and abetting theory appears to be a fallback from his theory of transaction-specific control: that Armistice orchestrated or directed the Challenged Transactions. His brief defended his knowing participation allegations with only four sentences, and no law.225 I have already concluded Plaintiff did not plead transaction-specific control; for the same reasons, the Amended Complaint does not plead that Armistice orchestrated or directed either Challenged Transaction.
That leaves Plaintiff‘s allegation that Armistice “participat[ed] in the Board‘s purported consideration, ”226 and that Armistice knew information the Directors did not know, but did not share it. “[T]here are no allegations whatsoever that [Armistice] took action” with regard to the Challenged Transactions.227 Plaintiff‘s allegation of “participation in the Board‘s consideration” is conclusory.228
Plaintiff does allege Armistice knew information that the board did not, and withheld it. But, under these facts, Armistice did not actively participate; it only had passive awareness. Even assuming Armistice, through Boyd, knew the Directors were working off of inadequate information, Armistice‘s silence was not “affirmativе assistance” and did not “actively further[]” the Directors’ failure to inform themselves.229 Plaintiff does not plead that Armistice created an informational vacuum or misled Aytu‘s board in any way.230 Rather, he asserts the Directors were negligent in their own information-gathering and reliance on management.231 Armistice was not an Aytu fiduciary or advisor, and did not speak for either Innovus or Cerecor in
Plaintiff fails to plead Armistice actively participated in the Challenged Transactions. The aiding and abetting claim fails.
4. Unjust Enrichment
This brings us to Plaintiff‘s unjust enrichment claim against Armistice. Unsurprisingly, this claim is also dismissed. Unjust enrichment is the “unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience.”235 “The elements of unjust enrichment are: (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, [and] (4) the absence of justification . . . .”236 Plaintiff asserts unjust enrichment in connection with the Challenged Transactions and the Trades. Armistice argues the unjust enrichment claim should be dismissed because it is duplicative of Plaintiff‘s now-dismissed claims.237 I agree.
“The Court frequently treats duplicative fiduciary duty and unjust enrichment claims in the same manner when resolving a motion to dismiss. For example, if the Court dismisses a fiduciary duty claim for failure to state a claim, then it very likely also dismisses a duplicative unjust enrichment claim.”238 The Court will do so when “it is fair to say that the unjust enrichment claim depends per force on the breach of fiduciary duty claim” and “[t]here is no evidence in the record or argument submitted to the Court that th[e] unjust enrichment claim is materially broader than or different from the analogous breach of fiduciary duty claim.”239 That is the case here. Plaintiff‘s unjust enrichment claim is based on the wrongdoing underlying its breach of fiduciary duty and aiding and abetting claims, which are dismissed.
III. CONCLUSION
Armistice‘s motion to dismiss is granted with prejudice.
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