SDG llc

A New Corporate Governance Tool for Boards of Directors and General Counsel of Life Science Companies

• Are you aware that courts have ruled that Boards must exercise independent judgment on matters of corporate risk, such as FDA regulatory risk, as part of their fiduciary obligations?


• Does a review of your company’s last offering memorandum identify multiple risk factors related to the regulatory oversight of the U.S. Food and Drug Administration (FDA)?


• Does your Board have independent, experienced FDA counsel to meet its fiduciary obligations?


• Why do 17% of shareholder lawsuits involve life sciences companies?

The risks to Directors of Board passivity with regard to FDA regulatory risk are well illustrated in the Abbott Laboratories Derivative Shareholders Litigation (325 F. 3d 795, 7th Circuit, 2003). After several years of FDA inspections which brought numerous deficiencies to management attention, FDA imposed sanctions leading to significant market losses for the Company. Shareholders sued the Directors personally. The 7th Circuit reversed years of deference to the business judgment of Boards, observing that in order to earn the protection of the business judgment rule, “directors have a duty to inform themselves, prior to making business decisions, of all material information reasonably available to them.” Mere reliance on the assurances of management was not considered adequate to fulfill the Board’s responsibility to exercise independent oversight of management decisions to mitigate corporate risk. The parties subsequently agreed to a settlement which required the company to spend $27MM to implement new compliance measures to strengthen the Board’s oversight of FDA regulatory matters. The Abbott case strongly suggests that life science company Boards have the responsibility to monitor all regulatory risks, whether posed by the SEC or the FDA.

In analogy to a financial audit, SDG’s FDA Regulatory Audit™ involves an examination of records of FDA regulatory communications and filings by experienced FDA regulatory, medical and legal professionals to check accuracy, to verify the execution of necessary regulatory activities, and to identify issues which may have created regulatory uncertainty in the past and which may benefit from fresh review. Results of audit team evaluation are reviewed by experienced attorneys and clinical researchers with FDA regulatory experience. The audit team uses its expertise to identify outstanding FDA regulatory issues that may affect product development timelines and to identify any atypical FDA regulatory risks to its client and reports its findings to the Board, to its Audit Committee or to Corporate Counsel on a periodic basis.

The FDA Regulatory Audit™ is a new corporate governance tool which provides Boards and General Counsel with an independent, informed summary of outstanding risk factors facing their corporate development programs and risk mitigation strategies which can be undertaken to manage corporate risk. It provides a rational basis for Board discussion and action in this complex regulatory arena and supplements the resources of existing corporate Counsel with experienced FDA legal and regulatory review.