Arcturus Therapeutics Ltd. v. Payne

ARCTURUS THERAPEUTICS LTD., Plaintiff, v. JOSEPH E. PAYNE; PETER FARRELL; ANDREW SASSINE;BRADLEY SORENSON; and JAMES BARLOW, Defendants.

Case No.: 18cv766-MMA (NLS)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

May 22, 2018

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION AND EXPEDITED DISCOVERY

[Doc. No. 10]

Plaintiff Arcturus Therapeutics Ltd. ("Arcturus" or "Plaintiff") has filed a complaint for injunctive relief against Defendants Joseph E. Payne, Peter Farrell, Andrew Sassine, Bradley Sorenson, and James Barlow (collectively, "Defendants"). Doc. No. 1 ("Compl."). Presently before the Court is Plaintiff's motion for preliminary injunction and expedited discovery. Doc. No. 10-1 ("Mtn."). Payne and Sorenson have opposed the motion [Doc. Nos. 24 ("Payne Oppo."), 25 ("Sorenson Oppo.")] and Plaintiff replied [Doc. No. 31 ("Reply")]. Also, Farrell, Sassine, and Barlow joined Payne's opposition. Doc. No. 32. The Court found the matter suitable for determination on the papers and without oral argument pursuant to Civil Local Rule 7.1.d.1. Doc. No. 36. For reasons set forth below, the Court GRANTS IN PART AND DENIES IN PART Arcturus' motion.

BACKGROUND

Plaintiff alleges that Defendants violated and are continuing to violate Section 13(d) of the Securities Exchange Act of 1934 ("Exchange Act"), and Regulation 13D promulgated thereunder by the United States Securities Exchange Commission ("SEC") by depriving shareholders of basic information needed to fairly assess the facts to inform their votes at an upcoming Extraordinary General Meeting¹ ("EGM") of shareholders to vote on the composition of Arcturus' Board of Directors (the "Board"). Compl., ¶ 1. Payne is alleged to be a leader of a group of the Defendants and other unknown shareholders (hereinafter, the "Payne Group") who have "unlawfully and secretly agreed to buy, sell, and vote a controlling block of Ordinary Shares" of Arcturus in support of Payne's proxy contest to take control of the Board. Id.; Mtn. at 8. Specifically, Plaintiff alleges that Payne's and Sorenson's Schedules 13D and amendments filed with the SEC violate the disclosure and reporting rules because they fail to disclose: (1) the existence of the Payne Group; (2) the identities of the members in the Payne Group; and (3) the accompanying beneficial ownership of Arcturus' securities held by such members.² Compl., ¶¶ 3-4.

A. The Parties

Plaintiff Arcturus is a corporation organized and existing under the laws of Israel and headquartered in San Diego, California that is "working to develop and commercialize [ribonucleic acid] [("]RNA[")] technologies to treat various diseases," including cancer. Compl., ¶ 10; Mtn. at 8. Defendant Payne is a shareholder and Director of Arcturus, a former Director of Arcturus Therapeutics, Inc. ("ATI"),³ and the former President and CEO of both ATI and Arcturus until he was terminated in late January 2018. Compl., ¶ 11. Defendants Farrell, Sassine, and Barlow are Payne'snominees for the Board. Compl., ¶¶ 12, 13, 15. Plaintiff alleges, upon information and belief, that Farrell controls the "Farrell Trust" which is a shareholder of Arcturus and that Barlow and Sassine are Arcturus shareholders. Compl., ¶¶ 12, 34-36. Defendant Sorenson is also a shareholder in Arcturus and has filed a Schedule 13D that does not disclose an agreement to work with Payne. Compl., ¶ 14. Sorenson is also the CEO of a competing firm called Providence Therapeutics Inc. ("Providence"). Compl., ¶ 25.

B. Factual Background

On September 27, 2017, Alcobra Ltd. (now Arcturus) and ATI announced the signing of the merger agreement, under which ATI would become a wholly owned subsidiary of Alcobra. Compl., ¶ 20. The merger agreement stated that Payne would become one of seven members of the Board. Id. At the time of the merger, Payne was a director and officer of ATI. Compl., ¶ 21. As part of the merger transaction, Payne received 1,465,097 Shares of Arcturus. Compl., ¶ 22. His most recent Schedule 13D filing reveals that he currently owns 13.7% of Arcturus' shares, making him the single largest shareholder. Id.

Plaintiff alleges that "[t]hroughout his tenure at ATI and [Arcturus], Payne demonstrated a general lack of care and an ignorance of his responsibilities as President and CEO, including working with Defendant Sorenson - a childhood friend and, upon information and belief, a Payne Group member - to harm Arcturus," which ultimately led to Payne's termination for cause. Compl., ¶ 23. For example, in August and September 2017, Plaintiff alleges that Payne and Sorenson colluded to attempt to transfer significant amounts of Arcturus' intellectual property rights from Arcturus to Sorenson and Providence. Compl., ¶ 25. When the ATI Board became aware of the attempted transfer it immediately notified Providence it would not agree to the terms. Id. Sorenson then threatened to initiate a proxy fight against Arcturus if Arcturus did not accede to his and Payne's demands. Id. Also in September 2017, Payne and Sorenson, upon information and belief, held secret negotiations for financing a transaction in which Sorenson wouldprovide $10 million in financing to ATI in exchange for a convertible debt and a seat on the ATI Board. Compl., ¶ 26. Payne did not inform the ATI Board of this plan. Id.

As a result, on January 25, 2018, the Board dismissed Payne as President and CEO of Arcturus. Compl., ¶ 29. On February 2, 2018, Arcturus reported Payne's termination to the public. Compl., ¶ 30. On that same day, Payne sent a letter alleging procedural flaws in the resolution of the Board that led to his dismissal. Compl., ¶ 31. At Payne's request, the Board convened a meeting on February 5, 2018 to discuss Payne's letter and the resolutions that had been passed during the January 25, 2018 Board meeting. Compl., ¶ 32. During this meeting, "it was once again explained that Payne's dismissal had been against the backdrop of the Board's loss of faith in his abilities as President and CEO" and the vote was passed again with a majority. Id.

On February 12, 2018, Payne sent a letter to the Board announcing his slate of candidates to replace the Board. Compl., ¶ 33. The next day, Payne filed an amended Schedule 13D filing, attaching his letter. Id. The Payne nominees include: Farrell, Sassine, Magda Marquet,⁴ and Barlow. Id. Barlow, Farrell, and Sassine signed nomination agreements, which were filed with Payne's amended Schedule 13D. Id. Shortly after being nominated, Barlow and Sassine began purchasing shares. Compl., ¶¶ 35-36. Barlow allegedly purchased 10,000 shares and Sassine allegedly purchased 1.72% of the outstanding shares. Id. Plaintiff also believes that the Farrell Trust has been coordinating to accumulate and purchase Arcturus shares to increase the Payne Group's voting power and influence the decisions of Arcturus shareholders without disclosing that it is part of a group. Mtn. at 15.

On February 26, 2018, Arcturus held "what would normally have been a routine shareholder vote to ratify the appointment of a new independent auditor." Compl., ¶ 37. Plaintiff claims the appointment was necessary because of the merger with Alcobra. Id.The Board, including Payne, had unanimously resolved to preliminarily appoint the auditor. Id. However, the appointment was not ratified because Payne and others voted against it. Compl., ¶ 38. Plaintiff alleges that the appointment of an independent auditor is "so uncontroversial and also so vital, there can be no explanation for this outcome other than that Payne encouraged a majority of the Company's shareholders to vote against ratification out of spite for having been terminated as CEO." Id. The shareholders who voted against the independent auditor ratification included Payne (13.79% interest), Sorenson (5.4%), and the Farrell controlled Farrell Trust (0.49%), which comprised of nearly 50% of the votes cast. Compl., ¶ 39.

On April 4, 2018, Payne filed an amended Schedule 13D "in which he tacitly admitted that he is engaging with other shareholders without disclosing the existence of the Payne Group" and claimed "he was coordinating with his 'team of supporters' to keep the Board 'under the microscope.'" Compl., ¶ 40. On April 13, 2018, Payne filed another amended Schedule 13D, which stated that "[c]hange in Arcturus board is needed on an urgent basis" and cited to "[o]verwhelming support" for his nominees, but which does not mention any other Payne Group member, and does not mention changes in beneficial ownership for Payne individually, or collectively for the Payne Group. Compl., ¶ 43.

C. Procedural Background

Plaintiff filed a Complaint initiating this lawsuit on April 19, 2018. Compl. On April 24, 2018, Plaintiff filed the instant motion for a temporary restraining order ("TRO"), preliminary injunction, and expedited discovery. Mtn. The Court set the motion for hearing on May 1, 2018 at 10:00 a.m. and issued a briefing schedule requiring Defendants to file an opposition to the motion by April 27, 2018. Doc. Nos. 11, 15. On April 25, 2018, Payne filed an ex parte motion for an extension of time to file an opposition and to continue the hearing date. Doc. No. 17. In his motion, Payne indicated there was no currently scheduled EGM, which indicated no exigency in deciding the TRO. Id. Plaintiff did not address Payne's contention that an EGM had not beenscheduled at that time. Doc. No. 18. Accordingly, on April 26, 2018, the Court denied Plaintiff's motion for a TRO and set a hearing for May 21, 2018 on Plaintiff's motion for preliminary injunction and expedited discovery. Doc. No. 19.

On May 3, 2018, Plaintiff filed a motion for reconsideration of the Court's April 26, 2018 order. Doc. No. 20. For the first time, Plaintiff contended it needed expedited discovery "to more fully inform its motion for preliminary injunction," and asked the Court to re-schedule the hearing to allow limited discovery prior to the parties filing...