With all due respect to Coach Norman Dale, Al Pacino's character in Any Given Sunday delivers one of the all-time best locker-room speeches in movie history. It's the so-called "Life's a Game of Inches" speech. Pacino's message is a play on the old axiom – "timing is everything."
"You find out life's a game of inches, so's football. Because in either game, life or football, the margin for error is so small. I mean, one-half a step too late or too early and you don't quite make it. One-half second too slow, too fast, you don't quite catch it. The inches we need are everywhere around us. They are in every break of the game. Every minute, every second."
Pacino's speech feels relevant when reviewing Parseghian v. Frequency Therapeutics, Inc., No. 2021-0551-PAF (Del. Ch. June 21, 2022). It's a painful read for anyone watching their investments, 529 accounts, and IRAs plummet over the past few months.
In Parseghian, two stockholders in Frequency Therapeutics decided to sell their shares. The stockholders asked the company's stock transfer agent to transfer their shares to their brokerage account. But some technical and paperwork issues caused a six-week delay. The day before the transfer agent finally transferred the shares, Frequency Therapeutics got hit with bad news. Clinical trial data showed an in-development drug didn't work. The company's share price dropped precipitously from $36.29 to $7.99 per share in a single day. The stockholders' shares dropped about $3 million in value in those 24 hours.
Inches – they're everywhere.
The stockholders understandably were enraged at their loss and brought suit in the Delaware Court of Chancery. Stockholders asserted Frequency Therapeutics' CEO breached his fiduciary duties by obstructing the stockholders' share-transfer while simultaneously selling millions of dollars' worth of shares under his 10-b-5-1 plan. The stockholders' other claims were against Frequency Therapeutics and its transfer agent for conversion and negligence. The stockholders sought only money damages. All defendants filed motions to dismiss for failure to state a claim under Rule 12(b)(6).
The court's decision is an important reminder of the Delaware Court of Chancery's limited jurisdiction. The Court of Chancery has jurisdiction only when equitable claims are asserted or equitable relief is sought. Stockholders' only equitable claim was for the CEO's breach of fiduciary duty, and the court determined that claim was woefully deficient.
Stockholders alleged the CEO obstructed the stock transfer, but made no factual allegations to support the claim. The best stockholders could muster were conclusory allegations that the CEO "was likely" aware of the clinical trial results. The stockholders had no proof sufficient to support an allegation that the CEO took any steps to delay or obstruct the transfer of stockholders' shares.
Both stockholders and defendants urged the Court of Chancery to decide the remaining claims under the "clean-up doctrine." But the court refused. Without the fiduciary-duty claim, the court concluded it had no other jurisdictional hook to decide stockholders' negligence and conversion claims. The parties are now forced to file in a different court.
- The parties' desire to have the Court of Chancery hear their dispute is understandable. It's one of the most sophisticated benches in the country, with a well-developed body of business law and significant resources to support the court's work. But even when both parties agree, the Court of Chancery will still closely scrutinize its limited jurisdiction. Much like federal district courts, the first question on the Court of Chancery's mind is whether it has the power to decide the case.
- The court's reluctance to exercise jurisdiction makes sense here. The stockholders' sole equitable claim for fiduciary-duty breach was bare-bones and predicated on complete conjecture. If the court exercised jurisdiction over the stockholders' other, more meritorious tort claims, it would incentivize future litigants to concoct equitable claims they know will lose in order to gain entry to the Court of Chancery.
- This case will be interesting to monitor when refiled. The transfer agent's excuse for the six-week delay was an "inconsistency" between the accounts on the transfer agent's records and those of the broker. Accurate and complete records are important, but it's hard to see any justification for such an extended delay in a simple stock transfer. Stockholders will no doubt "claw with their fingernails for that inch" to make defendants pay.
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