IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MICKAEL A. FLAA,

Plaintiff, )

) )

v. ) ) ) Civil Action No. 9146-VCG DANIEL C. MONTANO, VIKTORIYA T. MONTANO, JOHN W. JACOBS, ERNEST C. MONTANO, ERNEST MONTANO III and JOONG KI BAIK,

Defendants,

and

CARDIOVASCULAR BIOTHERAPEUTICS, INC.

Nominal Defendant. )

) ) ) ) ) ) ) ) ) ) ) )

MEMORANDUM OPINION Date Submitted: May 2, 2014 Date Decided: May 29, 2014 Richard P. Rollo, of Richards, Layton & Finger, P.A ., Wilmington, Delaware; OF COUNSEL: Barry F. Cannaday, of Dentons US LLP, Dal las, Texas, Attorneys for the Plaintiff. David L. Finger, of Finger & Slanina, LLC, Wilmingt on, Delaware, Attorney for the Defendants.

GLASSCOCK, Vice Chancellor2

This Memorandum Opinion concerns the latest skirmi sh in the battle for control of CardioVascular BioTherapeutics, Inc. (“C ardio,” or the “Company”), between forces allied with its founder, Daniel Mont ano, and those supporting a large creditor of Cardio, Calvin Wallen. Although Cardio has not yet been able to monetize any product, both parties view the Company as on the cusp of success. The current dispute is over the second written cons ent action taken on behalf of the Wallen faction in less than a year, seeking to seat a board of directors amenable to him, and purporting to remove Montano and his suppo rters from the Cardio board. The stockholders’ view, as revealed by the written consent actions, is in near equipoise. The deciding votes in both consent acti ons were cast by Vizier Investment Capital Limited (“Vizier”), an entity cr eated by Montano to hold Cardio stock he held jointly with his then-wife, Vi ctoria “Vicki” Montano. Vicki, 1 now divorced from Montano, purported to consent wit h respect to the Vizier shares

in favor of the Wallen slate in the first consent a ction; I found those consents to be invalid, as Vicki lacked the authority to vote the shares. Montano has since entered personal bankruptcy, and the Vizier shares are now under the control of a trustee in bankruptcy. The trustee provided a prox y to Wallen which he used to

vote the Vizier shares in favor of his slate of dir ectors in the second consent action; for the reasons below, I find that the agreement be tween Wallen and the trustee

1 I refer to Vicki Montano by her first name to avoi d confusion. No disrespect is intended.3

was inadequately disclosed to stockholders of Cardi o, and that the second consent

action is invalid. Shortly after the first consent action, the Wallen faction was seated as the “new” Cardio board, and one of the board members, P laintiff Mickael A. Flaa, brought the first incarnation of this action under Section 225 to confirm the validity of that board. I entered a status quo order leavin g the Wallen faction in place as the interim board of directors, with its ability to act limited to actions in the normal course of business, pending resolution of the dispu te in this Court. After I found that the first consent action was invalid, the Plai ntiff appealed, and the parties agreed that the status quo order should remain in e ffect. That appeal was delayed, however, as Wallen mounted the second consent actio n. Because this second action had the potential to moot all issues on appe al, the Supreme Court stayed consideration of the appeal, and the current litiga tion ensued. Cardio has been, effectively, in limbo for nearly a year, with a board of directors unable to exercise plenary authority over the corporation. Moreover, the record indicates that it has been years since an an nual meeting of the stockholders has taken place. A stockholder meeting presided ov er by the interim board would inevitably drive more litigation, and seating the o ld Montano-faction board would put back in place directors last elected years ago, who have not served in nearly a year. In order to ensure a board of directors repr esenting the preference of the4

stockholders as expressed by exercise of their fran chise, I employ my discretion to order a stockholder meeting to be held promptly, pr esided over by a special master.

I. FACTS

1. Flaa I As explained in a prior iteration of this action, Flaa I , 2 Cardio is a Delaware corporation that, due to its as-yet unsuccessful ef forts to develop a drug candidate for treating coronary artery disease, peripheral ar tery disease, venous ulcers, and diabetic foot ulcers, has faced a serious liquidity crisis. 3 This litigation involves the second Court of Chancery action within a matter of months brought pursuant to

8 Del. C. § 225, seeking to confirm the removal of certain d irectors of Cardio, including its founder Daniel Montano, by way of a w ritten consent action led by one of Cardio’s largest creditors, Calvin Wallen. As presented in more detail in Flaa I , in January 2013, Wallen, hoping to salvage some of his investment in Cardio, sent a le tter to the Company’s board of directors, in which he set forth a financing propos al intended to infuse $8,500,000 of capital into the Company, contingent on the imme diate resignation of the director Defendants, including Montano, and on Mont ano waiving all claims

2 Flaa v. Montano , 2013 WL 5498045 (Del. Ch. Oct. 4, 2013). 3 See Defs.’ Op. Pre-Trial Br. at 2 (“Finding investors who wanted to invest in a company with no saleable products was difficult.”).5

against Cardio. 4 When the Cardio board rejected his financing prop osal, Wallen initiated a written consent action (the “First Cons ent Action”), requesting that stockholders consent to (1) amending the Company’s bylaws with respect to director removal and appointments, (2) removing the Defendant directors from the Cardio board, and (3) directing the remaining direc tors to consider his financing proposal. As a result of Wallen’s written consent solicitation, the Company received consents from 51.22% of shares outstanding , and the Plaintiff filed suit in this Court in June 2013, seeking to confirm the eff ectiveness of the First Consent Action. However, I determined in Flaa I that a dispositive consent delivered on behalf of Vizier, a Bahamian company jointly owned by Montano and his ex-wife, Vicki, was executed without actual or apparent auth ority; accordingly, I found that

the First Consent Action was ineffective to remove the Defendant directors from

the Cardio board. At the start of litigation in Flaa I , a status quo order was put in place (the “Status Quo Order”), permitting incumbent directors Grant Gordon and Mickael Flaa, as well as the incoming directors seated purs uant to the First Consent Action—Wallen, Jon Ross, and Robert Schleizer—(coll ectively, the “Interim

4 That letter was preceded by both a June 2012 reque st by Wallen that Cardio convert his debt to equity, which request was rejected by the Cardio bo ard, and a September 2012 Nevada action in which Wallen sought to enforce Montano’s personal g uarantee of loans from Wallen to Cardio. Those transactions are described in additional deta il in Flaa I

. See Flaa , 2013 WL 5498045, at *2.6

Board”) to sit on the Cardio board of directors pen ding resolution of the litigation. 5 After I issued my October 4, 2013 Memorandum Opinio n, the Plaintiff filed an appeal of that decision in our Supreme Court. Pend ing that appeal, the parties stipulated to abide by the Status Quo Order. As ex plained in more detail below, the appeal of my October 4 Memorandum Opinion has b een stayed pending resolution of this 225 action, 6 and the Interim Board continues to manage the Company pursuant to the Status Quo Order.

2. The Second Consent Action On November 6, 2013, as the parties were briefing the Defendants’ appeal in

Flaa I , Wallen caused Cardio stockholder CCM Partners Fun d LP (“CCM”) to deliver a written consent to Cardio’s registered ag ent, initiating a new written consent action (the “Second Consent Action”). In a November 16, 2013 press release, the Company said of the Second Consent Act ion, “[t]o avoid any potential confusion, the solicitation is being made by Calvin Wallen III, a [Cardio] stockholder, and not by [Cardio].” 7 Upon delivery of CCM’s written consent, Wallen circulated proxy solicitation materials, con sisting of a proxy statement and proxy card dated November 11, 2013, to Cardio’s sto ckholders. The proxy card included in Wallen’s solicitation ma terials stated, in part:

5 Flaa v. Montano , No. 8632–VCG (Del. Ch. July 12, 2013) (ORDER). 6 Flaa v. Montano , No. 577,2013 (Del. Jan. 30, 2014) (Letter to Coun sel). 7 JX 82.7

The undersigned hereby acknowledges receipt of the proxy statement in connection with the proposals to amend the Amend ed and Restated Bylaws of [Cardio] and to remove all members of the Board of Directors of the Corporation other than Mickael Fla a and Grant Gordon . . . . The undersigned hereby constitutes and appoints Cal vin A. Wallen, III, as his, her or its true and lawful agent and p roxy with full power of substitution and re-substitution, to execute a w ritten consent, withhold consent, or abstain on behalf of all of th e shares held by the undersigned as of the Record Date, in accordance wi th the instructions given herein. 8 The proxy statement included in the solicitation ma terials described Wallen’s “proposals” in more detail: Proposition 1 purporte d to amend the Cardio bylaws with respect to removal and appointments, and Propo sition 2 to remove certain directors. Specifically, Proposition 2 stated: BE IT RESOLVED, that the undersigned hereby consent s to, adopts and approves the removal of all of the members of t he Board of Directors of the Corporation in office immediately prior to the effective time of [the] Written Consent other than Mickael A. Flaa and Grant Gordon (each director so removed, a “Removed Director,” and all directors so removed, collectively, the “Remove d Directors”), and without limiting the intent of the stockholders to remove all such Removed Directors, the Removed Directors shall spec ifically include each of Daniel C. Montano, Viktoriya Tamlenova Mont ano, Ernest C. Montano, Ernest Montano III, John (Jack) W. Jacobs and Joong Ki Baik, if he or she is in office immediately prior t o the effective time of this Written Consent. 9 Though stockholders received identical proxy solici tation materials, Wallen obtained proxies in the Second Consent Action by th ree methods: (1) Vizier and

8 Pl.’s Pre-Trial Answering Br. at 5. 9 Compl. Ex. E at 1799982.2.8

certain other stockholders not at issue here execut ed proxies by hand-delivery of completed paper proxy cards; (2) certain Cardio sto ckholders of record executed electronic proxies by telephone and internet, purpo rting to permit Wallen to deliver written consents on their behalves; and (3) certain brokerage firms executed powers of attorney to a proxy tabulating agency, Br oadridge, which in turn executed proxies purporting to permit Wallen to del iver written consents on behalf of the stocks’ record owners. On November 27, 2013 and January 2, 2014, Wallen delivered written consents to Cardio’s registered a gent supported by proxies obtained from these other Cardio stockholders, by w hich a majority of the Cardio shares purported to consent to the removal of the “ Removed Directors”—the

Defendants in this action. A. The Vizier Proxy

In Flaa I , I determined that a written consent, executed by Montano’s exwife Vicki on behalf of Vizier, was executed withou t actual or apparent authority. At that time, Vizier held 30 million shares of Card io, jointly owned by Daniel and Vicki Montano. I found that Montano, as President of Vizier, had authority to vote the Cardio shares, and that Vicki, in her capacity as either Vice President or stockholder, did not. In July 2013, Montano filed for bankruptcy under C hapter 7 of the U.S. Bankruptcy Code. As a result of that filing, U.S. Bankruptcy Trustee Dotan9

Melech (the “Trustee”) obtained control over Montan o’s interest in 4 million directly-held shares of Cardio, as well as his fift y-percent interest in the 30 million Cardio shares held by Vizier. Soon after this Cour t issued its Memorandum Opinion on October 4, 2013 in Flaa I , the Trustee began to discuss with Wallen

and the other members of the Cardio Interim Board t he Company’s financial status. Specifically, in late October, the Trustee “request ed a copy of the [Cardio] business plan and copies of the financial proposals [from Wallen] that will fund the business plan,” 10 which Flaa provided in detail by email dated Novem ber 1, 2013. Around the same time in early November, Wallen com municated with the Trustee via email and conference call in an attempt to secure Vizier’s proxy in the

Second Consent Action. 11 As a preliminary matter, for the Trustee to obtai n the authority to execute the requested proxy on Vizier’ s behalf, the Trustee and Montano’s ex-wife Vicki, acting as stockholders of Vizier, (a) . . . executed a Unanimous Written Consent (i) removing the current directors of Vizier and appointing the Trus tee and [Vicki] Montano as the sole Directors of Vizier, and (ii) r emoving [Montano] as President of Vizier and appointing the Trustee a s President and [Vicki] Montano as the Vice President of Vizier, an d (b) [Vicki] Montano and the Trustee, as the sole Directors of V izier, executed a

10 JX 72 at 2014CVBT00005103. 11 Although the final written agreement into which Wa llen and the Trustee ultimately entered, as described in more detail below, did not include a r equirement that the Trustee vote in favor of the Second Consent Action, such was clearly the parties ’ intent. See, e.g. , JX 113 at 2014CVBT00003066 (“I fear that the vote will not ge t done unless we can get [the Trustee] additional insurance re the below.”); id. at 2014CVBT00003067 (“Here is [Wallen’s] signature on the share purchase agreement. Please let me kno w whether you now have everything you need in order for the Trustee to be able to vote to day.”).10

Unanimous Written Consent of Board of Directors (i) appointing the Trustee as President and [Vicki] Montano as the Vic e President of Vizier, (ii) affirming that, in accordance with the Memorandum of Association and Articles of Association of Vizier, it is the sole responsibility of the Trustee, as the President of Vizier, to manage the day to day affairs of Vizier, including, but not li mited to voting the Vizier shares of [Cardio]. 12 In seeking to secure the Trustee’s commitment to ex ecute a proxy on Vizier’s behalf, Wallen and the Trustee also began negotiating a deal whereby Wallen would purchase 1 million shares of Cardio fr om the Montano bankruptcy Estate, in exchange for a sum of money (described b y the Trustee as five times its actual value) and

a director seat on the Cardio board of directors; such an agreement would provide the Montano Estate some muc h-needed liquidity in addition to an ability to protect its only asset, C ardio stock. According to a series

of emails between counsel for the Trustee and Walle n, the Trustee’s bankruptcy counsel “propos[ed] (subject to Bankruptcy Court ap proval) that the Trustee would vote the Vizier shares ‘as requested,’ the Trustee would designate a member of the [Cardio] board to replace a member of the Interim B oard, Mr. Wallen or another party would purchase 1 million shares of [Cardio] s tock from Vizier for $1.00 per share, and the estate would receive certain undefin ed minority stockholder rights.” 13 Wallen countered that “the Trustee’s vote would b e irrevocable, [the Trustee’s board designee] Mr. Moran would be appoin ted as an additional, and not

12 JX 78 at AR11. 13 Defs.’ Op. Pre-Trial Br. at 11-12.11

a replacement, director, and Mr. Wallen would pay 5 cents a share for the 1 million shares of [Cardio].” 14 The parties eventually settled on an exchange und er which Wallen would purchase from the Montano Estate 1 mil lion shares of Cardio at $0.25 per share, in addition to granting the Truste e certain other rights described in more detail below. Further, Wallen’s counsel expla ined to the Trustee that: Under Delaware law, the Cardio Board of Directors h as a fiduciary duty to the shareholders to consider the qualificat ions of any proposed addition to the Board and to make an independent de termination that it will be in the best interest of the shareholders of Cardio to appoint the person who is put up for a vacant position on t he Board (which is what will happen here). They cannot agree in advan ce to simply appoint anyone the Trustee designates. 15 While the Trustee initially responded that the Card io Interim Board’s inability to commit to appointing the Trustee’s board designee w as a “deal breaker,” 16 the parties eventually agreed to the following language in a November 22, 2013 Agreement for the Purchase and Sale of Stock (the “ Stock Purchase Agreement”): If Wallen is able to confirm the Wallen Group’s rig ht to manage [Cardio] . . . then Wallen will use his best effort s, consistent with his fiduciary duties, to cause the Board of Directors t o add an additional two members, with one to be selected by the Wallen [sic] and the other by the Trustee. If Wallen and his aligns are confirmed as management of [Cardio] and these two positions are not added through no fault of the Trustee, Wallen shall retur n the Shares to the

14 Id. at 12. 15 JX 86 at 6. 16 Id. at 5.12

Trustee for no consideration, but the Trustee shall be entitled to retain the Purchase Price and apply it to the Montano Esta te asset base. 17 In addition, the parties agreed that if the Second Consent Action was unsuccessful or ineffective, “then the Trustee [would] promptly repurchase from Wallen 500,000 shares of [Cardio] stock for $0.25 per shar e with such $125,000 payment to [be] made from the Purchase Price funds. The Tr ustee [would] then apply the remaining $125,000 of the Purchase Price to the Mon tano Estate asset base.” 18 In other words, Wallen and the Trustee agreed that , in exchange for the Trustee’s proxy, Wallen would purchase 1 million Ca rdio shares from the Montano Estate for $250,000. If the Second Consent Action was successful, Wallen would

use his best efforts to secure an additional seat o n the Cardio board for the Trustee’s designee; if, despite his best efforts, h e failed to secure that seat, Wallen

would return all 1 million shares but the Trustee w ould retain the entire $250,000. If the Second Consent Action was unsuccessful, Wall en would return 500,000 shares and the Trustee would return $125,000. Prior to executing the November 22 Stock Purchase Agreement, on November 8, 2013, the Trustee filed a Motion for Or der Authorizing Trustee to

Take Certain Actions and Sell Certain Assets Free a nd Clear of Liens, Claims and

17 JX 87 at ¶ 5. Wallen’s counsel noted that “Wallen would not be doing this deal if he had any uncertainty about being able to fulfill his obligat ions to have new directors appointed. If he doesn’t meet his commitment, he forfeits $250,000 a nd the Trustee gets all the stock back. That is a pretty drastic penalty for not performing, but [Wallen] is willing to agree to this because he is very comfortable that he can fulfill this obliga tion.” JX 113 at 3087. 18 JX 87 at ¶ 3.13

Encumbrances without Further Court Approval (the “M otion”) in the District of Nevada U.S. Bankruptcy Court. 19 In that Motion, the Trustee submitted to the

court that: [Cardio] is . . . currently at a crossroads, where either (a) [Cardio] will resolve its litigation and obtain sufficient fundin g to launch a new product that may result in significant returns to i ts shareholders, or (b) [Cardio] will not resolve its litigation, will not obtain funding, and may ultimately wind up in its own bankruptcy procee ding, leaving this Estate’s creditors with little to no return on account of their claims. 20 The Trustee sought in his Motion “authority, out of an abundance of caution, to take actions necessary to allow the estate to vote the [Cardio] shares that it owns [in Vizier],” as well as permission to sell 1 milli on Cardio shares held by the bankruptcy estate to Wallen for $0.25 per share, in order “to provide for an immediate return to the Estate, limiting the Estate ’s downside should [Cardio] ultimately be unsuccessful in its business endeavor s.” 21 The Trustee also represented in his Motion that, based on “multiple meetings with Calvin Wallen, [Montano], related parties, and their representativ es to determine how to proceed with regard to [Cardio],” “the Trustee ha[d] determ ined that it may be prudent to

19 JX 78. 20 Id. at AR8. 21 Id. at AR9.14

take action with regard to the composition of [Card io’s] board of directors to poise [Cardio] for future success.” 22 The bankruptcy court granted the Trustee’s Motion on November 18, 2013.

The court’s order indicated that: The Trustee is authorized to take the following act ions which are consistent and fall within the Trustee’s ordinary c ourse duties under 11 U.S.C. § 704: a. to vote the Vizier Investment Capital Limited (“ Vizier ”) shares to serve as President and director of Vizier and take all actions attendant to serving as President and direc tor . . . ; [and] b. to sell up to 2 million of the 19 million shares at a price of no less than $0.25 per share, provided any such sale s hall include a commitment to add a Trustee appointed representativ e to the board of [Cardio], and the [Montano] Estate retains a right to repurchase the shares within 1 year of any public o ffering of such shares for 110% of the purchase price . . . . 23 The Trustee noted in his declaration appended to th e Motion that “$.25 per share . . . appears to be at least five times what the shares are currently worth,” as

well as his belief that the Interim Board on which the Defendants are not directors “provides the best opportunity for success of [Card io] (because, in part, it will result in necessary funding to [Cardio]), and there fore it is in the best interest of the Estate to keep the [Interim] Board intact.” 24

22 Id. at AR11. 23 JX 84 at ¶ 2(a)-(b). 24 JX 79 at ¶¶ 5, 7.15

Wallen’s November 11 proxy solicitation materials failed to describe negotiations—then well-advanced—leading up to the b ankruptcy court’s November 18 order or the resulting November 22 Stoc k Purchase Agreement between Wallen and the Trustee. Instead, with resp ect to that transaction, the proxy statement provided only that “[b]ased on the opinion of bankruptcy counsel, it is my belief that the Trustee, with the cooperat ion of Montano’s ex-wife, has or will obtain the right to grant a proxy with respect to the shares held by [Vizier],” 25 and that “[i]t is anticipated that the Board might appoint one or two additional directors after these initial designations.” 26 On November 15, 2013, Montano disseminated “proxy revocation” materials to the Ca rdio stockholders, “writing to explain the full facts of the matter, to tell [stoc kholders] what [Montano had] done for [Cardio], and to explain how [those] efforts ar e imminently poised to bring in millions of dollars in partnering agreements that w ill save the company without destroying the interests of the existing shareholde rs,” and urging stockholders not to grant proxies in the Second Consent Action. 27 Montano did not describe the details of the Stock Purchase Agreement in those ma terials, although he had notice of, objected to, and appeared before the bankruptcy court to oppose the Trustee’s November 8 Motion seeking approval of, that Agreeme nt.

25 JX 80 at 3. 26 Id. at 8. 27 JX 81 at 1.16

B. The Parties’ Contentions The Defendants contend (1) that the transaction des cribed above constitutes improper vote-buying, and (2) that because “Wallen had been negotiating (and was continuing to negotiate) to place a director design ated by the Trustee on the [Cardio] board in connection with his purchase of [ Cardio] stock, [and] he did not disclose that fact in [his proxy solicitation] mate rials,” 28 the Court should

invalidate the transaction under Portnoy v. Cryo-Cell International, Incorporated

. 29 The Plaintiff responds that (1) the Vizier proxy is not the result of improper vote-buying; (2) Montano acquiesced to the transaction in the bankruptcy court proceedings; (3) the proxy statement disclose d all it could have given that the parties were still in the process of negotiating th e Stock Purchase Agreement when the solicitations were sent to stockholders; and (4 ) the failure to disclose the terms of the Stock Purchase Agreement does not result in the same unfairness present

under the facts in Portnoy

. II. STANDARD OF REVIEW The Plaintiff brings this action to confirm the va lidity of the Second Consent Action pursuant to 8 Del. C. § 225, in accordance with which, “[u]pon applicati on of any stockholder or director, or any officer whos e title to office is contested, the Court of Chancery may hear and determine the validi ty of any election,

28 Defs.’ Op. Pre-Trial Br. at 14-15. 29 940 A.2d 43 (Del. Ch. 2008).17

appointment, removal or resignation of any director or officer of any corporation, and the right of any person to hold or continue to hold such office . . . .” 30 Such a proceeding is summary in nature. Further, in a Sec tion 225 action, “[t]he burden of proving that a director’s removal is invalid rests with the party challenging its validity” 31 —here, the Defendants. The Court conducted a one-day trial in this action on May 2, 2014. The following is my determination of the merits of the Section 225 dispute.

III. ANALYSIS The bedrock principles underlying our conception o f corporate governance are that the directors run the corporation on behal f of the owners, the stockholders, who delegate power to the directors through the ope ration of the stockholder franchise. For this reason, both our statutory and common law are protective of the right of stockholders to vote, and by exercising th at vote, to choose the directors. This Court can interfere with an effective operatio n of the franchise, in the consent arena, in two ways, both equally deleterious: by in validating actions properly taken by consent; and by ratifying actions purportedly by consent, where those actions do not represent the will of the stockholders. I have already invalidated one purported vote to remove the Montano board, and I am therefor e cognizant of the risk to exercise of the franchise in invalidating a second. Nonetheless, imposing the

30 8 Del. C. § 225(a). 31 Unanue v. Unanue , 2004 WL 5383942, at *10 (Del. Ch. Nov. 9, 2004).18

results of an uninformed vote is inimical to the ex ercise by the stockholders of their right to elect the board of directors. For t he reasons that follow, the Plaintiff’s request to ratify the results of the Second Consent Action must be denied. The Defendants challenge the validity of the Second Consent Action on four grounds: they contend that (1) the Vizier proxy is invalid as vote-buying or due to inadequate disclosure of the Stock Purchase Agreeme nt in the solicitation materials; (2) the electronic proxies are invalid a s procedurally deficient; (3) the brokerage proxies from the proxy tabulating agency, Broadridge, are invalid as procedurally deficient; and (4) the Second Consent Action should be invalidated because the proxy solicitation materials contained materially misleading disclosures. I address only the Defendants’ first contention, as well as outstanding requests for attorneys’ fees, below. 1. Vote-Buying The Defendants seek to (1) invalidate the Vizier p roxy on the basis that Wallen and the Trustee’s Stock Purchase Agreement c onstitutes impermissible vote-buying, or (2) invalidate the Second Consent A ction in its entirety on the basis that, even if not impermissible vote-buying, the Stock Purchase Agreement

was material such that its existence should have be en disclosed to stockholders considering whether to execute a proxy.19

In Schreiber v. Carney , this Court defined vote-buying as any “voting agreement supported by consideration personal to th e stockholder, whereby the stockholder divorces his discretionary voting power and votes as directed by the

offeror.” 32 Although the Plaintiff suggests that the Stock Pu rchase Agreement did not by its express terms compel the Trustee to deli ver a proxy in favor of the Second Consent Action, it is clear from the record before me that the Trustee’s proxy was a vital part of that Agreement. 33 In other words, because I understand

the transaction at issue involved the sale of both stock and a proxy, the Stock Purchase Agreement constituted vote-buying under th e definition articulated in

Schreiber . The mere existence of an agreement to vote share s in a particular way does not end the inquiry, however. Under Delaware law, “an agreement involving the tr ansfer of stock voting rights without the transfer of ownership is not nec essarily illegal and each arrangement must be examined in light of its object or purpose.” 34 In fact, under most circumstances, “[s]hareholders are free to do whatever they want with their votes, including selling them to the highest bidder .” 35 However, “vote-buying is illegal per se if its object or purpose is to defraud or disenfra nchise the other

32 Schreiber v. Carney , 447 A.2d 17, 23 (Del. Ch. 1982). 33 See JX 113 at 2014CVBT00003071 (indicating that the Tr ustee would vote “as requested”); see also supra note 11. 34 Schreiber , 447 A.2d at 25. 35 Hewlett v. Hewlett-Packard Co ., 2002 WL 549137, at *4 (Del. Ch. Apr. 8, 2002).20

stockholders.” 36 In considering whether a vote-buying scheme has d efrauded or disenfranchised the stockholders, our case law dist inguishes between vote-buying agreements secured by corporate assets and assets o wned by third parties. Accordingly, a third party is prohibited from buyin g votes only where doing so would be “disenfranchising” by “creat[ing] a misali gnment between the voting interest and the economic interest of [the] shares. ” 37 By contrast, even where economic interests remain aligned, “[m]anagement . . . may not use corporate

assets to buy votes in a hotly contested proxy contest ab out an extraordinary transaction that would significantly transform the corporation, unless it can be demonstrated . . . that management’s vote-buying ac tivity does not have a deleterious effect on the corporate franchise.” 38 The Plaintiff suggests that, were I to evaluate th e Stock Purchase Agreement as a third-party transaction, the Stock Purchase Ag reement could not constitute impermissible vote-buying under the authorities cit ed above, as the Agreement did not misalign the Trustee’s voting and economic inte rests as a fiduciary of Vizier. Specifically, the Plaintiff explains that, while th e Trustee transferred to Wallen 1 million shares of Cardio from the Montano Estate, V izier continued to hold an additional 29 million Cardio shares, and therefore retained a significant economic

36 Schreiber , 447 A.2d at 24. 37 Crown EMAK Partners, LLC v. Kurz , 992 A.2d 377, 388 (Del. 2010). 38 Hewlett , 2002 WL 549137, at *4 (emphasis added).21

stake in the Company. 39 The alignment of interests relevant in a vote-buy ing analysis, however, is an alignment of a vote-buyer’s interests upon the exercise of his vote, not of the vote-seller’s interests upon forfeiture of his vote. 40 That is because “what legitimizes the stockholder vote as a decision-making mechanism is the premise that stockholders with economic ownersh ip are expressing their collective view as to whether a particular course o f action serves the corporate goal

of stockholder wealth maximization.” 41 In other words, where a party has no equity stake in the corporation, his vote distorts an effective exercise of the franchise, the ultimate goal of which is the financ ial success of the company for the stockholders’ benefit. Accordingly, it is Wallen’s equity interests, rather than the Trustee’s, that are relevant to a third-party vote- buying analysis. Although Wallen maintains a significant debt and equity stake in th e Company, it is not clear from

the record before me to what extent those interests may be opposed. What is clear is that, independent of the vote-buying arrangement , Wallen has a significant economic interest in the success of Cardio, both as an equity-holder and as a creditor, and that if the Company fails under the m anagement of the Montano slate, his interests will be extinguished as both sharehol der and creditor. It is unlikely,

39 Pl.’s Pre-Trial Answering Br. at 21. 40 To the extent the Trustee’s interests are relevant , he acted under a fiduciary duty to advance Vizier’s interest, and only if he were near-indiffe rent to the Wallen and Montano slates would an ability to provide the Estate liquidity influence t he Trustee’s decision to favor Wallen’s slate over Montano’s. 41 Kurz v. Holbrook , 989 A.2d 140, 178 (Del. Ch. 2010), aff’d in part , rev’d in part sub nom. Crown EMAK Partners, LLC v. Kurz , 992 A.2d 377 (Del. 2010).22

therefore, that the voting rights obtained pursuant to the Stock Purchase Agreement resulted in the agency problems that misalignment o f incentives creates, and about which third-party vote-buying doctrine is concerned

. It is not clear to me, however, that the Stock Pur chase Agreement at issue can rightly be characterized as a third-party trans action. While it is true that Wallen used his personal assets to purchase the 1 m illion Cardio shares from the Montano Estate, there remained another crucial term to be satisfied: the delivery of

a board seat on Cardio’s board of directors. Of co urse, Wallen could not deliver that seat on his own, and the Interim Board’s legal counsel understood that under Delaware law, its fiduciary duties to the Cardio st ockholders prevented it from entering into an enforceable agreement to deliver a seat to the Trustee’s designee. 42 As a result, while Wallen contractually agreed only to use his “best efforts” to secure the seat, he assured the Trustee that the In terim Board saw no reason its fiduciary duties would prevent it from agreeing to the seat despite an inability to enter into an enforceable agreement to that effect. 43 Most revealingly, he

demonstrated his absolute confidence that the board seat would be approved by

42 See JX 86 at 6 (email from Barry Cannaday, counsel for the Plaintiff, to Justin Rawlins, counsel for the Trustee) (“Under Delaware law, the Cardio Board of Directors has a fiduciary duty to the shareholders to consider the qualificat ions of any proposed addition to the Board and to make an independent determination that it will b e in the best interest of the shareholders of Cardio to appoint the person who is put up for a va cant position on the Board (which is what will happen here). They cannot agree in advance to simp ly appoint anyone the Trustee designates.”). 43 See, e.g. , id. at 2 (email from Cannaday, counsel for the Plainti ff, to Wallen, Gordon, and Flaa) (“I have asked that [the Trustee’s counsel] provide [the Trustee’s designee] Al Moran’s resume, so that it can be determined that there is a legiti mate basis for making this statement.”).23

agreeing to forfeit his 1 million purchased shares —while permitting the Trustee to retain the $250,000 consideration—if despite his be st efforts, he proved unable to deliver the board seat. Wallen’s own bankruptcy co unsel, in communications with the Trustee’s counsel, explained that Wallen’s will ingness to put $250,000 worth

of shares on the line if the Interim Board did not approve the Trustee’s designee demonstrated that Wallen was “willing to agree [onl y] because he [was] very comfortable that he [could] fulfill this obligation .” 44 That confidence is unsurprising given that the Interim Board and Walle n’s slate were identical. 45 And, of course, the Plaintiff’s suggestion that the Trustee’s board seat was not an essential term of the Stock Purchase Agreement is b elied by the fact that the Trustee, despite selling the Estate’s Cardio stock at five times its market value, initially considered the Interim Board’s failure to agree to appoint his designee a

“deal breaker.” 46 Based on those considerations, it is conceivable that the Interim Board agreed to deliver a valuable corporate asset— a seat on the Cardio board—in exchange for the Trustee’s proxy. Ultimately, however, I need not determine whether the Stock Purchase Agreement constituted impermissible vote-buying. T he Defendants contend that the Agreement, even if not impermissible vote-buyin g, was a material transaction,

44 JX 113 at 3087. 45 Both the Interim Board and Wallen’s slate include Wallen, Flaa, Grant Gordon, Jon Ross, and Robert Schleizer. JX 80 at 7-8. 46 JX 86 at 5.24

and Wallen’s failure to disclose it in his proxy so licitation materials provides a compelling basis to invalidate the Second Consent A ction. For the reasons detailed below, I agree. Despite the Plaintiff’s suggestion that no duty to disclose could be imputed to Wallen acting in his capacity as a stock holder, even acting in their individual capacities, directors owe a duty of cand or to the stockholders of the corporation for which they serve, 47 and in any event, assuming the Interim Board’s collusion with respect to the Stock Purchase Agreem ent, the Interim Board itself had a duty to update the stockholders regarding its participation in the transaction. It is axiomatic that “directors of Delaware corpor ations are under a fiduciary duty to disclose fully and fairly all material info rmation within the board’s control

when it seeks shareholder action.” 48 Information is material “if there is a

substantial likelihood that a reasonable stockholde r would consider it important in deciding how to vote.” 49 For the reasons that follow, I find that the prom ise to grant the Trustee’s designee a seat on the Company’ s board in connection with the

47 See Zaucha v. Brody , 1997 WL 305841, at *4-5 (Del. Ch. June 3, 1997) ( “[The plaintiff] argues that he sought consents not as a director bu t as a stockholder. The statute does not limit the right to seek consents to stockholders. More f undamentally, fiduciary duties are not limited to the board as a body or to the controlling majori ty, but bind directors individually. . . . I see n o sound reason to relieve a director of his fiduciary duty simply on the basis that he is acting in another capacity. One reason for the fiduciary dut y of disclosure is directors’ greater access to knowledge. A dissident director like [the plaintif f] has that knowledge no less when challenging controlling board members. Stockholders have a rig ht to assume that directors always act in what they believe to be the stockholder’s best inte rest, and I see no reason why that assumption should not apply to a dissident director who solici ts stockholders’ consents.”). 48 Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997) (internal quota tion omitted) (citing Arnold v. Society for Savs. Bancorp, Inc. , 650 A.2d 1270, 1277 (Del. 1994)). 49 Id.25

Stock Purchase Agreement was material such that Wal len and the Interim Board had a duty to disclose its existence to the Cardio stockholders, either in Wallen’s initial solicitation materials, or in a supplement to those materials. Several factors, taken together, lead to my conclu sion that the board seat secured by the Trustee pursuant to the Stock Purcha se Agreement was information a stockholder would likely find material. In execu ting a proxy in favor of Wallen’s Second Consent Action, the Cardio stockholders beli eved they were delivering proxies to remove six directors to be replaced by W allen and his two designees, Jon Ross and Robert Schleizer. In reality, a proxy in support of the Second Consent Action effectuated the appointment not only of Wallen, Ross, and Schleizer, but of both the Trustee’s designee, Mora n, and an additional director to be designated by Wallen. 50 I find it likely that the Cardio stockholders wo uld have found it material to know that, by delivering proxi es in favor of the Second Consent Action, they were also supporting Moran’s a ppointment to the Cardio board. Importantly, while the stockholders receive d written biographies on Flaa, Gordon, Wallen, Ross, and Schleizer in their proxy solicitation materials, they received no such information about Moran, and accor dingly were denied any

50 See Portnoy v. Cryo-Cell Int’l, Inc. , 940 A.2d 43, 73 (Del. Ch. 2008) (invalidating an election on the basis that “the disinterested Cryo-Cell elec torate voted in ignorance of the actual board that would govern them in the event the Management Slate won”).26

opportunity to assess his credibility before delive ring the proxies that would effectuate his appointment. 51 Further, in addition to assessing Moran’s credibili ty, the stockholders likely

would have found the existence of the Stock Purchas e Agreement relevant in assessing Wallen’s credibility. Wallen has initiat ed two “successful” written consent actions that squeaked by with majority appr oval only by obtaining the support of a dispositive block of shares—the 30 mil lion shares held by Vizier—in both cases by conduct that has fallen under scrutin y in this Court. Tellingly, the

First Consent Action was invalidated because Vicki Montano, in response to a request by Wallen, executed a written consent on be half of Vizier without authority to do so. While the proxy solicitation materials a ddressed that problem as if it were a technical error that had been corrected, in fact the success of the Second

Consent Action still required that a proxy be delivered to Wallen on Vizier’s behalf, and Wallen sought to secure the support of that dispositive block by promising its fiduciary’s designee a seat on Cardio ’s board. Thus, to the extent stockholders read in the proxy solicitation materia ls that “it [was Wallen’s] belief that the Trustee, with the cooperation of Montano’s ex-wife, has or will obtain the

51 See id. at 72 (“Problematically, the Cryo-Cell stockholder s did not know that [the party to the vote-buying arrangement] clearly intended to design ate [a particular designee], a person whose recent past would have weighed heavily on the mind of a rational stockholder considering whether to seat him as a fiduciary.”).27

right to grant a proxy with respect to the shares h eld by [Vizier],” 52 and rightly understood that statement to indicate that the prim ary concern in the first litigation—Vicki’s authority to vote the Vizier sha res—had been effectively resolved, stockholders would have found it an impor tant clarification that the Trustee, though he had the right to grant the Vizier proxy, had at least in part determined to do so as a result of his bargained-fo r ability to fill a newly-created director seat. The relevant points here are that ( 1) in both the First and Second Consent Actions, even after securing the Vizier blo ck, Wallen’s slate was favored only by a narrow majority of shares, 53 and (2) stockholders would likely have found it material to know that the slate they were supporting felt it necessary to rely on the voting agreement described above in ord er to obtain the requisite number of proxies. The Plaintiff contends that, even if the existence of the Stock Purchase Agreement was information material to the Cardio st ockholders, Wallen could not possibly have disclosed its contents on November 11 when his proxy solicitation materials went sent, as the Agreement was not final ized until it was approved by the bankruptcy court on November 18 and executed on November 22. 54 I find it

52 JX 80 at 3. 53 See Portnoy , 940 A.2d at 72 (“What [the party to the vote-buying agreement] did with his own bought shares is less the point than that the disin terested electorate voted in a razor-thin election without knowledge of very material facts.”). 54 The Plaintiff suggests that the existence of the S tock Purchase Agreement was publically available as it was approved in a public bankruptcy court proceeding and disclosed in Delaware28

telling, however, that, despite his failure to desc ribe the Stock Purchase Agreement even in the conditional, Wallen did find the transa ction sufficiently likely such that it warranted the partial disclosure that “[i]t is a nticipated that the Board might appoint one or two additional directors after these initial designations.” 55 Moreover, the Plaintiff contends that an effective number of proxies were delivered five days after the Agreement was executed, on November 27; as the parties were on the cusp of an agreement since mid- November, Wallen should have provided a supplemental disclosure immediately upon execution of the Agreement. Even so, Wallen continued to accept pro xies through January 2, and even then did not update his solicitation materials

. 56 Because I find that the Trustee’s agreement to del iver its dispositive proxy in exchange for a seat on the Company’s board was mate rial information that should have been disclosed to the Cardio stockholders, I f ind it appropriate to invalidate the Second Consent Action. I do so despite Montano ’s failure to disclose the Stock

Supreme Court filings. Pl.’s Pre-Trial Op. Br. at 29. Though a diligent stockholder might have discovered the existence of the Stock Purchase Agre ement by seeking out and reviewing those filings, as explained above, the Interim Board had a fiduciary duty to disclose all material information—including the existence and terms of th e Agreement—in the proxy solicitation materials provided to stockholders; further, even t he filings to which the Plaintiff refers did not disclose that the Agreement was supported by the Tr ustee’s commitment to deliver a proxy on behalf of the Vizier stock supporting the Second Co nsent Action. 55 JX 80 at 8. 56 The Plaintiff also suggests that “[n]o improper vo te buying could have occurred here, where a federal court explicitly sanctioned the transaction and, further, directed the Trustee be given the ability to appoint a board representative.” Pl.’s Pre-Trial Op. Br. at 23. That the bankruptcy court determined that approval of the Stock Purchas e Agreement was appropriate under the U.S. Bankruptcy Code has no bearing on whether disclosur e of that Agreement was material as a matter of Delaware corporate law.29

Purchase Agreement in his own solicitation, which f ailure in no way justifies depriving the Cardio stockholders of material infor mation to which they should have access when comparing the competing Montano an d Wallen slates. For almost twelve months, since June 2013, the Card io stockholders have had no certainty regarding who constitutes the Comp any’s proper board of directors. Even prior to the First Consent Action, Cardio had not held an annual election since 2008, 57 despite the requirements of the DGCL and in the Co mpany’s bylaws that a director election be held annually. 58 Significantly, were I to

invalidate the Second Consent Action and do no more , the Defendants would return to positions on the Cardio board to which th ey were last elected more than five years ago . Clearly, both Montano and Wallen believe that, i n the right hands, this struggling pharmaceutical company will eventua lly return value to its stockholders, but without a board able to negotiate agreements to sell its drug candidates, this company will at best continue on t he brink of insolvency. Therefore, rather than simply invalidating the Seco nd Consent Action, I find that an appropriate resolution of this action requires o rdering an annual election

57 Montano Dep. (July 12, 2013) 303:2-3. 58 See Bylaws § 3.3 (“Except as provided in Section 3.4 o f these Bylaws [governing resignations and vacancies], directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Each director, incl uding a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.”).30

pursuant to Section 225(a). 59 A special master shall be appointed by this Court to oversee the election. The Cardio stockholders are entitled to certainty and to a process free of the irregularities that have tainte d the First and Second Consent Actions over the last twelve months, as well as a b oard that can manage with certainty the few assets of the Company that remain

. 2. Requests for Attorneys’ Fees

Three issues remain to be decided in this action a nd in the earlier-filed action, Civil Action No. 8632-VCG. Those issues in clude (1) a request by the Defendants for attorneys’ fees in connection with t heir Motion to Compel; (2) the Defendants’ Motion for Sanctions seeking attorneys’ fees for responding to the Plaintiff’s Motion for Relief from the Status Quo O rder; and (3) the Defendants’ Motion to Hold the Interim Board in Contempt for Vi olating the Status Quo Order.

59 See 8 Del. C. § 225(a) (“Upon application of any stockholder or director, or any officer whose title to office is contested, the Court of Chancery may hear and determine the validity of any election, appointment, removal or resignation of an y director or officer of any corporation, and the right of any person to hold or continue to hold such office, and, in case any such office is claimed by more than 1 person, may determine the pe rson entitled thereto; and to that end make such order or decree in any such case as may be jus t and proper . . . . In case it should be determined that no valid election has been held, th e Court of Chancery may order an election to be held in accordance with § 211 or § 215 of this t itle.”) (emphasis added); Portnoy v. Cryo-Cell Int’l, Inc ., 940 A.2d 43, 83 n.208 (Del. Ch. 2008) (ordering an election to be overseen by a special master, noting that “[t]he DGCL gives this court wide discretion to craft a remedy in the case of a tainted election,” and citing both Sectio n 225(a) and Section 227(b)); Magill v. N. Am. Refractories Co ., 129 A.2d 411, 413 (Del. Ch. 1957) (“We think tha t under our statute the reviewing court, which must make ‘such order or dec ree in any such case as may be just and proper,’ is given a discretion to determine whether a new election should be ordered.”) (citation omitted).31

With respect to the Defendants’ requests for attor neys’ fees in connection with defending against the Plaintiff’s earlier-file d Motions, that request is denied. I find that while the parties aggressively litigate d this action, neither party’s

conduct rose to a level of bad faith sufficient to trigger an exception to the American Rule on fees. Specifically, in connection with the Defendants’ Motion to Compel, I find that the Plaintiff’s opposition w as substantially justified, particularly in light of the over-breadth of the De fendants’ request. Further, with respect to the Defendants’ request for attorneys’ f ees for responding to the Plaintiff’s Motion for Relief from the Status Quo O rder, I find that such fees are not warranted as it does not appear that the Plaint iff acted in bad faith in pursuing that Motion. Accordingly, the parties shall bear t heir own fees in connection with

those Motions.

As to the Defendants’ Motion to Hold the Interim Bo ard in Contempt for Violating the Status Quo Order, that Motion is also denied, to the extent that it is not moot in light of this Memorandum Opinion. With out addressing whether the Plaintiff violated the spirit of the Status Quo Ord er by initiating the Second Consent Action, I find that the relief the Defendan ts request—declaring written

consents delivered in the Second Consent Action ine ffective, dissolving the Status Quo Order, and awarding the Defendants attorneys’ f ees—are either inappropriate or moot at this juncture.32 IV. CONCLUSION For the reasons stated above, I find the Second Co nsent Action ineffective to

remove the Defendants from the Cardio board of dire ctors, but order the Company to hold, as soon as is convenient, an annual electi on, to be overseen by a special master appointed by the Court. The parties should submit an appropriate Order.