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Delaware Court Of Chancery Dismisses Stockholder Derivative Suit, Rejecting “Eleventh Hour” Section 220 Demand Tolling Theory
08/04/2026On July 9, 2026, Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed a stockholder derivative action against a biopharmaceutical company (the “Company”), as the nominal defendant, and several of its current and former officers and directors. In re Axsome Therapeutics, Inc. S’holder Deriv. Litig., Consol. C.A. No. 2025-1076-LWW (Del. Ch. July 9, 2026). The Court rejected plaintiffs’ argument that a Section 220 demand necessarily tolls the statute of limitations and held that plaintiffs’ breach of fiduciary duty, unjust enrichment, and waste claims were barred by laches because they were filed after the three-year limitations period expired. The Court explained: “A diligently pursued books and records suit may, in appropriate circumstances, justify equitable tolling. But an eleventh-hour, out-of-court demand pursued with little zeal does not.”
Plaintiffs alleged that defendants breached their fiduciary duties by disseminating false and misleading statements between December 2019 and April 22, 2022 concerning the timing of the Company’s New Drug Application (“NDA”) while omitting known chemistry, manufacturing, and control (“CMC”) deficiencies. On April 25, 2022, the Company disclosed in a Form 8-K that the U.S. Food and Drug Administration (“FDA”) had identified unresolved CMC issues in connection with the NDA, and that it expected to receive a response from the FDA declining to approve the NDA. Thereafter, the Company’s stock price fell by $8.60 per share. A separate securities class action and two derivative complaints (later consolidated as the “Federal Derivative Action”) followed in federal court. The securities action settled in February 2026. Plaintiffs in this Delaware action—two individual stockholders—pursued Section 220 demands; one sent the demand by email on April 24, 2025, and the other formally served the Company on May 2, 2025. Both filed derivative complaints in the Court of Chancery in September 2025, which were consolidated. Defendants moved to dismiss the consolidated complaint under Court of Chancery Rule 23.1 for failure to plead demand excusal and under Rule 12(b)(6) for failure to state a claim, principally on timeliness grounds.
The Court found the complaint presumptively untimely: The claims accrued no later than April 22, 2022, when the last of the challenged public statements were disseminated; and plaintiffs were on inquiry notice no later than April 25, 2022, when the Form 8-K disclosing the NDA issue was filed. Yet plaintiffs did not file suit until September 2025, more than five months after the three-year limitations period expired.
Plaintiffs argued that transmitting their Section 220 demands tolled the statute of limitations until they filed suit, but the Court rejected that theory, explaining that Delaware precedent ties tolling to the filing of a Section 220 enforcement action, not the informal service of a demand. Plaintiffs relied on Lebanon Cnty. Emps.’ Ret. Fund v. Collis, 287 A.3d 1160 (Del. Ch. 2022), which held that a stockholder “should receive credit for serving a demand and obtaining books and records without the need for an enforcement action.” But the Court clarified that “Collis did not create a categorical rule that service of a Section 220 demand supports tolling,” noting that Collis itself required a plaintiff to pursue the demand diligently and with deliberate speed.
The Court highlighted that neither plaintiff here validly served a demand before the limitations period expired: One plaintiff served the demand on May 2, 2025, while the other plaintiff’s counsel improperly emailed a demand weeks before attempting proper service and subsequently stipulated that service was on May 14, 2025. The claims were therefore time-barred.
Because plaintiffs sued after the limitations period expired, defendants were entitled to a presumption of prejudice, rebuttable only by unusual conditions or extraordinary circumstances. Plaintiffs argued no prejudice existed because defendants were defending identical claims in the Federal Derivative Action. The Court rejected this as “self-defeating,” explaining that defending a second, untimely suit while navigating parallel litigation compounds, rather than eliminates, prejudice to the Company and its fiduciaries. The Court granted defendants’ motion to dismiss under Court of Chancery Rule 12(b)(6) and dismissed the action with prejudice, without reaching defendants’ separate Rule 23.1 arguments.
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