Background
Illumina agreed to reacquire GRAIL, a developer of a multi-cancer early-detection test, in a transaction valued at $8.3 billion plus contingent payments. Although U.S. and European regulators challenged the acquisition, Illumina’s board voted to close it in August 2021 before European Commission clearance and while the Commission’s standstill obligation remained in effect. The board received advice from several law firms concerning the regulatory risks, the European Commission’s disputed jurisdiction, the pending FTC proceeding, and the potential consequences of closing.
Illumina stockholders brought derivative claims alleging that the company’s directors and CEO Francis deSouza breached their fiduciary duties by causing Illumina to consummate the merger in violation of European Union merger regulations and Section 7 of the Clayton Act. Invoking the Delaware Court of Chancery’s decision in In re Massey Energy Co., the plaintiffs argued that demand was excused because a majority of the board faced a substantial likelihood of personal liability for knowingly causing the company to violate positive law. The defendants moved to dismiss under Court of Chancery Rules 23.1 and 12(b)(6).
The Court’s Holding
The court granted the motion under Rule 23.1, holding that the plaintiffs had not pleaded particularized facts supporting a reasonable inference that a majority of Illumina’s board faced a substantial likelihood of liability. As to European law, the Court of Justice of the European Union ultimately annulled the European Commission’s acceptance of the referral that triggered the standstill obligation because the Commission lacked statutory authority to review the transaction. Because the challenged regulatory regime was never legally applicable to Illumina and GRAIL, the companies could not have violated it for purposes of a Massey claim.
The plaintiffs also failed to plead a violation of U.S. law. The HSR waiting periods had expired, no U.S. court order barred closing, and no final decision established that the merger violated the Clayton Act: an FTC administrative law judge ruled for Illumina, the FTC Commissioners ruled against it, and the Fifth Circuit reversed the Commissioners for applying the wrong legal standard before Illumina divested GRAIL. The court declined to adjudicate the underlying Clayton Act issue itself merely to support a state-law fiduciary claim.
Nor did the allegations support an inference of bad faith. The board remained informed, received extensive legal advice, understood the regulatory uncertainty, continued to contest the regulators’ positions, and arranged to hold GRAIL separately pending the outcomes. The decision to close was therefore a business judgment made amid uncertain regulatory risk, not a conscious decision to violate a clear legal prohibition. Demand was not excused, and the court dismissed the amended complaint with prejudice.
Key Takeaways
- A Massey theory requires particularized allegations of a knowing violation of applicable positive law, not merely a decision carrying substantial or disputed regulatory risk.
- A regulator’s opposition to a transaction does not itself create a legal bar to closing when the statutory waiting period has expired and no court order prohibits consummation.
- Extensive board deliberations, advice from multiple legal advisers, continued jurisdictional challenges, and hold-separate arrangements undermined the inference that Illumina’s directors acted in bad faith.
Why It Matters
The decision distinguishes a conscious violation of settled law from a board’s informed decision to proceed under a contested and evolving regulatory framework. Even serious enforcement exposure does not automatically establish fiduciary misconduct or excuse derivative demand when the complaint does not plead an actual, knowing legal violation.
The opinion also underscores that demand-futility analysis turns on each director’s potential personal liability. Without particularized facts showing that a majority faced a substantial likelihood of non-exculpated liability, stockholders could not take control of Illumina’s claims from the board.