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Law360 (February 8, 2022, 8:20 PM EST) -- An FSD Pharma Inc. stockholder's derivative Delaware complaint alleging breaches of fiduciary duty and corporate waste should be dismissed because he failed to first establish standing in Ontario, the Canadian company told Delaware's Court of Chancery Tuesday.
The lawsuit, filed in July by FSD Pharma stockholder Maheep Goyal, alleged that two directors and an officer of wholly owned subsidiary FSD BioSciences Inc. schemed to destroy the Delaware-incorporated unit so they could acquire another company for personal gain.
Goyal's "purported derivative claims are really a sideshow," FSD's attorney Euripides D. Dalmanieras of Foley Hoag LLP said in virtual arguments Tuesday to dismiss the case. "The thrust of the allegations of harm really relate to the parent level."
Defendants Anthony Durkacz and Zeeshan Saeed, two directors of FSD BioSciences, live in Ontario and are founders and directors of the parent company, FSD Pharma. The third defendant, Donal Carroll, is FSD BioSciences' CEO and is also a FSD Pharma director.
The suit alleged that the three defendants abandoned efforts at FSD BioSciences to develop an anti-inflammatory COVID-19 treatment drug and instead poured their energy and resources into the acquisition of a start-up where they allegedly held a financial interest.
To pursue a double derivative action, Goyal needed to establish that he has standing to bring both tiers of derivative claims, Dalmanieras said at the hearing Tuesday. Goyal's standing to sue derives from his stock in the Toronto-based parent, so he has to go through Ontario first, he said.
"Mr. Goyal is a stockholder in an Ontario corporation. He is not a stockholder in a Delaware corporation," Dalmanieras said.
To file a derivative claim on behalf of FSD Pharma, which is organized under the Ontario Business Corporations Act, Goyal first needed to submit an application with the Ontario Superior Court of Justice, which he did not do, Dalmanieras continued. The OBCA treats an Ontario corporation and its subsidiaries as "one unit" for purposes of derivative litigation, he argued.
"It is undisputed in this case that Mr. Goyal has not satisfied those rules and has not tried to satisfy those rules," Dalmanieras said.
Vice Chancellor Lori W. Will asked if there was any case law showing the Ontario court exercising jurisdiction over a Delaware-incorporated subsidiary, or a Delaware court exercising jurisdiction over an Ontario-incorporated parent.
Dalmanieras said he found no case law either way. "That question, to the extent that it's unsettled, should be addressed by the Ontario Court, not this court," Dalmanieras answered.
Goyal's attorney, Roger A. Lane of Holland & Knight LLP, argued that the OBCA did not apply to this case, and that FSD Pharma had misunderstood the law. FSD Pharma's interpretation of the OBCA is wrong, unsupported by Ontario case law, and should be rejected, Lane said.
Ontario courts are clear that matters involving "internal affairs" of a corporation must be heard in the state where the corporation is domiciled — and for FSD BioSciences, that state is Delaware, Lane argued.
"What about the parent level? Are you asserting claims that go to FSD Pharma?" the vice chancellor asked.
"My client's complaint is solely concerned with the Delaware corporation," Lane answered. "Dr. Goyal's complaint does not allege any harm to the parent."
The vice chancellor took the matter under advisement and said she would issue a ruling "in due course."
Maheep Goyal is represented by Roger A. Lane and Courtney Worcester of Holland & Knight LLP and Paul D. Brown and Joseph B. Cicero of Chipman Brown Cicero & Cole LLP.
FSD Pharma Inc. and FSD BioSciences Inc. are represented by Euripides D. Dalmanieras and James Fullmer of Foley Hoag LLP, and Larry R. Wood Jr., Brandon W. McCune, Jason A. Snyderman and John P. Wixted of Blank Rome LLP.
The case is Maheep Goyal, derivatively on behalf of FSD BioSciences Inc. v. Anthony Durkacz et al., case number 2021-0629, in the Court of Chancery of the State of Delaware.
--Additional reporting by Hannah Albarazi. Editing by Dave Trumbore.
For a reprint of this article, please contact reprints@law360.com.
