Exhibit 10.1

 

MEMORANDUM OF UNDERSTANDING

 

This memorandum of understanding (“MOU”) is entered into as of December 13, 2010
by and among the parties in the action captioned Ron Phillips and Scott
Moorehead, Derivatively on Behalf of CLST Holdings, Inc., v. Timothy S. Durham,
Robert A. Kaiser, and David Tornek, Cause No. 10-07655 (the “State Action”), now
pending in the District Court, 134th Judicial District, Dallas County, Texas
(the “State Court”), and by and among the parties in the action captioned CLST
Holdings, Inc. v. Red Oak Partners, LLC et al., Civil Action No. 3-09CV00291
(the “Federal Action”), now pending in the United States District Court for the
Northern District of Texas, Dallas Division (the “Federal Court”) (the State
Action and Federal Action collectively, the “Actions”). This MOU is intended to
be and is a binding agreement among all parties to the Actions (the “Parties”)
and shall be fully enforceable under Tex. R. Civ. P. 11 and under ordinary
principles of contract law. It outlines the general terms of the Settlement (as
defined herein) that are to be embodied, together with such other consistent
terms as may be agreed by the parties hereto, in a Stipulation (as defined
herein) to be submitted for State Court approval as provided herein.

 

WHEREAS, on February 13, 2009, CLST Holdings, Inc. (“CLST” or the “Company”)
filed its Original Complaint and Application for Injunctive Relief against Red
Oak Fund, L.P., Red Oak Partners, LLC, and David Sandberg (“Sandberg”) in the
Federal Action;

 

WHEREAS, on March 2, 2009, Red Oak Partners, LLC, Pinnacle Fund LLLP, Bear
Market Opportunity Fund, L.P., and Jeffrey S. Jones, filed a Shareholder
Derivative Petition Based Upon Self-Dealing. Breach of Fiduciary Duty, Waste of
Corporate Assets, and Unjust Enrichment against the Directors in the State
Action, in which the plaintiffs asserted putative shareholder derivative claims
on behalf of CLST against the Directors:

 

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WHEREAS, on April 6, 2009, CLST filed its First Amended Complaint and
Application for Injunctive Relief in the Federal Action against Red Oak
Partners, LLC, Red Oak Fund, L.P., Pinnacle Partners, LLC, Pinnacle Fund LLLP,
Bear Market Opportunity Fund, L.P., and Sandberg (collectively, the “Red Oak
Parties”);

 

WHEREAS, on March 17, 2010, Red Oak Partners, LLC, Red Oak Fund, L.P., Pinnacle
Partners, LLC, and Pinnacle Fund LLLP filed their “Counterclaims and Third-Party
Complaint” (the “Federal Counterclaims”) against Timothy S. Durham (“Durham”),
Robert A. Kaiser (“Kaiser”), and David Tornek (“Tornek”) (collectively, the
“Directors”) in the Federal Action;

 

WHEREAS, on June 23, 2010, Ron Phillips (“Phillips”) and Scott Moorehead
(“Moorehead”) (the “State Plaintiffs”) filed their Shareholder Derivative
Petition Based Upon Self-Dealing, Breach of Fiduciary Duty, Waste of Corporate
Assets, and Unjust Enrichment against the Directors in the State Action, in
which the State Plaintiffs asserted putative shareholder derivative claims on
behalf of CLST against the Directors (the State Action and the March 2, 2009
shareholder derivative petition collectively, the “State Litigation”);

 

WHEREAS, after litigating their respective claims and/or defenses in the
Actions, counsel for the Parties have engaged in arm’s-length negotiations
concerning the terms and conditions of a potential resolution of the Actions,
including an arm’s length mediation in two sessions before a neutral mediator
and numerous follow-up communications with the mediator;

 

WHEREAS, following the above-referenced mediation and negotiations between the
Parties, counsel for the Parties have reached an agreement providing for the
complete settlement of the Actions on the terms and conditions set forth below
(the “Settlement”), and the Parties believe that the Settlement is in the best
interests of the parties;

 

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WHEREAS, all Parties recognize the time and expense that would be incurred by
further litigation in the Actions and the uncertainties inherent in such
litigation and that the interests of the parties would best be served by a
settlement of the Actions herein;

 

WHEREAS, subject to confirmatory discovery as provided for herein, the State
Plaintiffs and their counsel have preliminarily determined that the Settlement
is fair, reasonable, adequate and in the best interest of CLST and its
stockholders;

 

WHEREAS, each of the Parties denies having committed any violation of law or
breach of duty, including breach of any duty to CLST or its stockholders; and

 

WHEREAS, there has been no admission or finding of facts or liability by or
against any party and nothing herein should be construed as such:

 

NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among the Parties:

 

1.             Settlement Stipulation: The Parties shall use their good faith
best efforts to agree upon and execute an appropriate stipulation of settlement
on customary terms acceptable to all Parties (the “Stipulation”) and such other
documentation as may be required in order to obtain Final Approval (as defined
below) of the settlement of the State Action and the dismissal of the Actions
upon the terms set forth herein (collectively, the “Settlement Documents”). The
Stipulation shall include the terms, covenants, and releases set forth in this
MOU and shall provide for the final resolution and dismissal of both Actions
with prejudice.

 

2.             Presentation to State Court: The State Plaintiffs, Directors, and
CLST shall present the Stipulation to the State Court for hearing and approval
as soon as reasonably practicable following appropriate notice to CLST’s
stockholders, as may be ordered by the State Court, and will use their
individual and collective best efforts to obtain Final Approval of the

 

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settlement of the State Action by the State Court and the dismissal of the
Actions with prejudice as to all claims asserted or which could have been
asserted in the Actions and without costs to any party, except as expressly
provided herein. CLST shall disseminate and administer notice, as may be ordered
by the State Court, and shall be solely responsible to pay the costs and
expenses related to providing such notice, in a form to be agreed by the Parties
and approved by the State Court. As used herein, “Final Approval” of the
settlement of the State Action means that the State Court has entered an order
approving the settlement of the State Action in accordance with the Stipulation
and the dismissal of the State Action with prejudice, and such order is finally
affirmed on appeal or is no longer subject to appeal and the time for any
petition for re-argument, appeal or review, by leave, certiorari or otherwise,
has expired. The date on which Final Approval is achieved shall be called the
“Effective Date.”

 

3.             Resignation of Durham: Durham shall resign as Chairman of the
CLST Board of Directors (the “Board”) but may remain a member of the Board.

 

4.             Stock Grants: No additional grants of CLST securities shall be
made to the Directors or to any other past, current, or future CLST directors or
officers. The foregoing provision shall not limit vesting of any previously
granted and disclosed restricted stock.

 

5.             Related Party Transactions:  CLST shall not engage in any
business transactions with any Directors or with any persons or entities who are
affiliates of the Directors except as provided herein; provided that for these
purposes, “business transactions” shall not include existing and previously
disclosed Directors’ compensation arrangements, Mr. Kaiser’s employment related
compensation and benefits as previously disclosed nor the reimbursement of
business expenses incurred in the ordinary course of business, consistent with
past practice.

 

6.             No Increase in Compensation: The cash compensation plan for
members of the Board will not be modified, and the cash compensation payable to
Kaiser as an employee of the Company for services rendered will not increase,
during the term of the dissolution of the Company.

 

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7.             No Rescission: No rescission of dissolution will be recommended
by the Board unless it is subject to the further consent of a majority of the
shares held by non-affiliates of the Board.

 

8.             Durham Deciding Vote: Durham will refrain from voting on any
matter in his capacity as a member of the Board, except for a vote consistent
with the unanimous vote of the other members of the Board.

 

9.             No Issuance of Company Stock; No Waiver of Rights Plan: The
Company will not issue additional shares of its common stock or other equity
securities and will not sell any such shares from its treasury unless its
dissolution shall be rescinded. The Company will not waive the application of
its Stockholder Rights Plan with respect to any acquisition of the Company’s
equity securities prior to a rescission of its dissolution.

 

10.           Mutual Releases: THE PARTIES HEREBY MUTUALLY RELEASE, effective as
of the Effective Date, all claims between the State Plaintiffs and CLST on the
one hand and the Directors on the other, and between the Red Oak Parties on the
one hand and the Directors and CLST on the other of any type or nature, known
and unknown, arising prior to the Effective Date, including but not limited to
claims for negligence, fraud, breach of fiduciary duty or any other legal duty,
violation of any statute or regulation, or recoupment, reimbursement, or any
similar theory, and also including but not limited to claims that have been,
could have been, or in the future might be or could be asserted in any forum by
CLST shareholders derivatively on behalf of CLST relating to, arising out of, or
derived from the allegations, facts, transactions, or claims made the subject of
any pleading or allegation in either of the Actions (the “Released Claims”) (the
releases effectuated hereby shall hereinafter be referred to as the “Releases”).
Notwithstanding the foregoing, the Released Claims shall not include any claims
by the

 

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Directors for indemnity and advancement under the Company’s certificate of
incorporation, charter, and bylaws, nor shall the Released Claims include any
claims by the Company or the Directors under any insurance policy maintained by
the Company. If requested by the Directors, the State Plaintiffs shall file any
necessary amended pleadings to provide maximum effect to the foregoing and agree
to meet and confer with counsel for the Directors in good faith to determine
whether to file an amended petition before Final Approval of the Settlement
alleging all factual allegations known to the State Plaintiffs and all legal
theories reasonably supported by such allegations. The filing of any further
pleadings referred to in this Section shall not in any way limit the scope of
the Releases, including the application of the Release to unknown claims.

 

11.           Insurance Contribution: XL Specialty Insurance Company (“XL”) will
not seek contribution or reimbursement from the Directors or CLST for any funds
expended or advanced by XL (or that XL is obligated to expend or advance) under
the applicable policy of directors and officers liability insurance, including
without limitation, in connection with the Actions or the Settlement.

 

12.           Monetary Consideration: As a material term of the settlement of
the State Action, the sum of $2,700,000 will be paid to the Company by XL on or
before the Effective Date.

 

13.           Confirmatory Discovery. The State Plaintiffs may obtain reasonable
and mutually agreeable confirmatory discovery from CLST and the Directors, to be
completed prior to January 28, 2011, for the purpose of confirming whether the
settlement of the State Action is in the best interests of CLST and its
stockholders. The State Plaintiffs shall maintain the confirmatory discovery as
confidential and shall enter into any reasonable agreements or agreed

 

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orders as requested by CLST or the Directors to preserve and effectuate such
confidentiality. No other discovery shall be permitted in the Actions other than
as expressly provided herein.

 

14.           Attorneys’ Fees. The Directors agree to cause XL to pay $2,250,000
to Robbins Umeda LLP, counsel for the plaintiffs in the State Litigation, within
five business days of the Effective Date as compensation for the fees and
expenses incurred by counsel for the plaintiffs in the State Litigation and in
recognition of the value provided by plaintiffs and their counsel to CLST
through the filing and litigation of the State Litigation.

 

15.           Payment to Red Oak: The Directors agree to cause XL to pay
$550,000 to the Red Oak Parties within five business days of the Effective Date,
pro rata in accordance with their holdings of Company common stock, in
satisfaction of all known and unknown claims of the Red Oak Parties and their
affiliates against the Company, the Directors, and their respective affiliates
and agents, including but not limited to all claims asserted in the Federal
Action.

 

16.           No Limit on Truthful Testimony: Nothing in this MOU or the
Settlement shall limit the right of any person to testify truthfully about any
matter in any proceeding or to engage in any activity protected under Section
21F of the Securities Exchange Act of 1934, as amended.

 

17.           Timing: The Settlement of the Federal Action and the State Action
is conditioned on the settlement of the State Action receiving Final Approval,
and the Settlement of both Actions will become effective on the Effective Date
and will close simultaneously at that time.

 

18.           Cooperation by Red Oak Parties: The Red Oak Parties and their
affiliates will not object to the settlement of the State Action and will take
such steps as requested by counsel for the Company and the Directors to ensure
that the Red Oak Parties become parties to the State Action and are bound by the
Settlement.

 

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19.           Dismissal:  The Parties shall file appropriate motions and
stipulations as necessary to dismiss the Federal Action and State Action with
prejudice. The Stipulation shall provide for the entry of a final judgment
dismissing the State Action with prejudice upon Final Approval of the settlement
of the State Action. The Red Oak Parties shall file an agreed motion to dismiss
the Federal Action with prejudice within three business days after the Effective
Date.

 

20.           Covenant Not To Sue: The Company and the Directors, on the one
hand, and the Red Oak Parties and State Plaintiffs, on the other, agree not to
directly or indirectly initiate, participate in, file, assert, or encourage any
other person or entity to file or assert, any action, proceeding, or lawsuit
against one another, other than (i) an action to enforce the terms of the MOU or
Settlement; or (ii) an action against the Company for failing to treat the Red
Oak Parties or their affiliates in a fashion pari passu with other stockholders
of the Company with respect to the distribution of money or property. This
covenant not to sue will not limit the Red Oak Parties’ and State Plaintiffs’
ability to seek to compel an annual stockholders’ meeting in the event that the
Company’s dissolution shall be rescinded.

 

21.           Non-Interference: The Red Oak Parties and the State Plaintiffs
covenant not to interfere, directly or indirectly, in the current or prospective
business relationships of the Company and/or Directors and will refrain from
seeking to influence any third parties dealing with the Company and/or the
Directors, provided that the Red Oak Parties, Pinnacle, and State Plaintiffs may
communicate with other stockholders of the Company with respect to matters in
which the vote, consent or action of stockholders is sought or required;
provided further, however, that the foregoing proviso shall not allow any
communication or action in opposition to the approval of the Settlement, or that
would violate or could reasonably be expected to result in the violation of
Paragraph 20 above.

 

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22.           Denial of Liability: The Directors and CLST have denied, and
continue to deny, that they have committed or aided and abetted in the
commission of any violation of law or engaged in any of the wrongful acts
alleged in the Actions, and expressly maintain that they diligently and
scrupulously complied with their fiduciary and other legal duties.

 

23.           Stay of Litigation: The Parties agree that except as expressly
provided herein, the Actions and all proceedings therein (including all
discovery) shall be stayed pending submission of the proposed Settlement to the
State Court for its consideration. Counsel shall enter into such documentation
as the Parties may agree to be required or advisable to effectuate the stay.

 

24.           Broad Interpretation: The covenants, releases, and promises
contained in this MOU shall be given the broadest possible interpretation.

 

25.           Conditions of Settlement: The settlement of the Federal Action and
the settlement of the State Action shall become effective on the Effective Date
and shall close simultaneously. The consummation of the Settlement is subject
to: (a) the drafting, execution and filing of the Stipulation and Settlement
Documents for both Actions in a form mutually acceptable to the parties; (b)
Final Approval of the settlement of the State Action and dismissal of the
Actions with prejudice; and (c) State Plaintiffs’ determination, within three
business days following completion of reasonable confirmatory discovery as
provided in Paragraph 13 above, that the proposed settlement of the State Action
is fair, reasonable and in the best interests of CLST and its stockholders. In
addition, the closing of the settlement of the State Action will be a condition
of the settlement of the Federal Action, and the closing of the settlement in
the Federal Action will be a condition of the settlement of the State Action.
This MOU shall be null and void and of no force and effect (including. without
limitation, with respect to any intervention by

 

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the Red Oak Parties in the State Action) in the event that any of the foregoing
conditions is not met, or if, for any reason, the State Court fails to enter an
order finally approving the settlement of the State Action. In such an event,
the Parties shall be deemed to be in the position they were in prior to the
execution of this MOU, and this MOU and the statements made therein shall not be
deemed to prejudice, compromise, or impact in any way any of the positions of
the Parties with respect to the Actions (including, without limitation, any
positions that are the subject of various pending motions in the Actions), or to
constitute an admission of fact or wrongdoing by any Party, and shall not
entitle any Party to recover any costs or expenses incurred in connection with
the implementation of this MOU.

 

26.           Binding Agreement: This MOU is an enforceable contract and is
binding on all of the Parties. The Parties agree that all of the covenants set
forth in this MOU are supported by adequate consideration. The MOU will only
become null and void and of no force and effect upon occurrence of the events
specifically set forth in Paragraph 25 above.

 

27.           No Admission Of Liability: The provisions contained in this MOU
shall not be deemed a presumption, concession or admission by any Party of any
fault, liability or wrongdoing as to any facts or claims that have been or might
be alleged in the Actions or in any other action or proceeding.

 

28.           Entire Agreement/No Third-Party Beneficiaries: Each Party
severally acknowledges that no promise, inducement or agreement not expressed
herein has been made to it or him or her, that this MOU contains the entire
agreement between or among the parties concerning the matters described in this
MOU, and, except as expressly provided herein, that there are no third-party
beneficiaries to this MOU.

 

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29.           Counterparts: This MOU may be executed in counterparts by any of
the signatories hereto, including by telecopier or by email PDF, and as so
executed shall constitute one agreement.

 

30.           Choice of Law and Forum: This MOU and the Settlement contemplated
by it shall be governed by and construed in accordance with the laws of the
State of Texas without regard to conflict of laws principles. Any action arising
out of or relating to this MOU shall be brought exclusively in the courts of the
State of Texas in Dallas County, Texas.

 

31.           No Oral Modifications: This MOU may be modified or amended only by
a writing signed by all of the signatories hereto.

 

32.           Representation of Authority: Each of the attorneys executing this
MOU has been duly empowered and authorized by his/her respective client(s) to do
so. This MOU shall be fully enforceable pursuant to the terms set forth herein
and shall constitute a binding agreement pursuant to Rule 11 of the Texas Rules
of Civil Procedure.

 

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EXECUTED AND AGREED:

 

 

 

 

 

 

/s/ Mark T. Josephs

 

 

Mark T. Josephs

 

 

State Bar No. 11031400

 

 

Andrew D. Graham

 

 

State Bar No. 24041002

 

 

JACKSON WALKER L.L.P.

 

 

901 Main Street, Suite 6000

 

 

Dallas, Texas 75202

 

 

Telephone: (214) 953-6000

 

 

Facsimile: (214) 953-5822

 

 

Attorneys for Defendant Robert A. Kaiser and for Nominal Defendant CLST
Holdings, Inc.,

 

 

 

 

 

 

 

 

/s/ Ken Carroll

 

 

Ken Carroll

 

 

State Bar No. 03888500

 

 

Jennifer Evans Morris

 

 

State Bar No. 24013198

 

 

Bryan Erman

 

 

State Bar No. 24040870

 

 

CARRINGTON, COLEMAN, SLOMAN & BLUMENTHAL, L.L.P.

 

 

901 Main Street, Suite 5500

 

 

Dallas, Texas 75202

 

 

Telephone: (214) 855-3000

 

 

Facsimile: (214) 855-1333

 

 

 

 

 

Attorneys for Defendant Timothy S. Durham

 

 

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/s/ Michael A. Swartzendruber

 

 

Michael A. Swartzendruber

 

 

State Bar No. 19557702

 

 

Peter Stokes

 

 

State Bar No. 24028017

 

 

Barton Wayne Cox

 

 

State Bar No. 24065087

 

 

FULBRIGHT & JAWORSKI L.L.P.

 

 

2200 Ross Avenue, Suite 2800

 

 

Dallas, Texas 75201-2784

 

 

Telephone: (214) 855-8000

 

 

Facsimile: (214) 855-8200

 

 

 

 

 

Attorneys for Defendant David Tornek

 

 

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/s/ George Aguilar

 

 

Joe Kendall

 

 

State Bar No. 11260700

 

 

Jamie McKey

 

 

State Bar No. 24045262

 

 

KENDALL LAW GROUP, LLP

 

 

3232 McKinney Avenue, Suite 700

 

 

Dallas, Texas 75204

 

 

Telephone: (214) 744-3000

 

 

Facsimile: (214) 744-3015

 

 

 

 

 

ROBBINS UMEDA

 

 

Brian J. Robbins

 

 

George C. Aguilar

 

 

Ashley R. Palmer

 

 

Jay N. Razzouk

 

 

600 B Street, Suite 1900

 

 

San Diego, CA 92101

 

 

Telephone: (619) 52503990

 

 

Facsimile: (619) 525-3991

 

 

 

 

 

Attorneys for Ron Phillips and Scott Moorehead

 

 

 

 

 

 

 

 

/s/ Daniel F. Wake

 

 

Daniel F. Wake

 

 

SANDER INGEBRETSEN & WAKE, P.C.

 

 

1660 17th Street, Suite 450

 

 

Denver, Colorado 80202

 

 

Telephone: (303) 285-5544

 

 

Facsimile: (303) 285-5301

 

 

 

 

 

SULLIVAN & COOK LLC

 

 

Frank P. Skipper

 

 

State Bar No. 18471200

 

 

2301 Cedar Springs Road, Suite 200

 

 

Dallas, Texas 75201

 

 

Telephone: (214) 520-7494

 

 

Facsimile: (214) 528-6925

 

 

 

 

 

Attorneys for Red Oak Partners, LLC, Red Oak Fund, L.P., Pinnacle Partners, LLC,
Pinnacle Fund LLLP, Bear Market Opportunity Fund, L.P., and David Sandberg

 

 

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