Court Opinion

ID: 4181589
Source: CourtListenerOpinion
Date Created: 2017-06-28 13:07:41.616377+00
Date Added: 2024-06-11T14:38:28.975436
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

YVONNE WILLIAMS, on behalf of             )
herself and similarly situated Sorrento   )
Therapeutics, Inc. stockholders and       )
derivatively on behalf of Sorrento        )
Therapeutics, Inc.,                       )   C.A. No. 12729-VCMR
                                          )
             Plaintiff,                   )
                                          )
   v.                                     )
                                          )
HENRY JI, WILLIAM S. MARTH,               )
KIM D. JANDA, JAISIM SHAH,                )
DAVID H. DEMING, DOUGLAS                  )
EBERSOLE, GEORGE NG, and                  )
JEFFREY SU,                               )
                                          )
             Defendants,                  )
                                          )
   and                                    )
                                          )
SORRENTO THERAPEUTICS,                    )
INC., a Delaware corporation,             )
                                          )
             Nominal Defendant.           )

                           MEMORANDUM OPINION

                          Date Submitted: May 31, 2017
                           Date Decided: June 28, 2017

Joel Friedlander, Christopher M. Foulds, and Christopher Quinn, FRIEDLANDER
& GORRIS, P.A., Wilmington, Delaware; Mark Lebovitch, David Wales,
Christopher J. Orrico, and Alla Zayenchik, BERNSTEIN LITOWITZ BERGER &
GROSSMAN LLP, New York, New York; Francis Bottini Jr., BOTTINI &
BOTTINI, INC., La Jolla, California; Attorneys for Plaintiff.
J. Clayton Athey and John G. Day, PRICKETT, JONES & ELLIOTT, P.A.,
Wilmington, Delaware; Peter M. Stone and Rachana N. Fischer, PAUL HASTINGS
LLP, Palo Alto, California; Attorneys for Defendants.

MONTGOMERY-REEVES, Vice Chancellor.

                                    1
       This action arises out of an alleged scheme in which the directors of a

Delaware corporation granted themselves options and warrants for the stock of five

subsidiaries over which the corporation has voting control. Shortly before or after

the options grants, the board transferred valuable assets and opportunities of the

corporation to the subsidiaries. Plaintiff, a stockholder of the corporation, challenges

the options and warrant grants as a breach of fiduciary duty. In addition, Plaintiff

challenges a voting agreement that the corporation entered in connection with a

private placement as illegal vote buying. Under the voting agreement, the private

placement investor is required to vote its shares of the corporation as the

corporation’s board directs.

       Defendants move to dismiss asserting that the business judgment rule should

apply. They argue that the options and warrant grants are permissible director

compensation for service on the boards of the subsidiaries and that the voting

agreement is a means of ensuring that the private placement investor does not vote

its shares against the corporation’s interests. Defendants also move to stay in favor

of an earlier-filed case in this Court. In this opinion, I deny Defendants’ motion to

dismiss because the options and warrant grants and the voting agreement are subject

to entire fairness review, and Defendants have not carried their burden of proving

entire fairness at this stage. Defendants’ motion to stay is denied as moot because

the earlier-filed case has settled.

                                           2
I.    BACKGROUND

      The facts in this opinion derive from Plaintiff’s Verified Class Action and

Derivative Complaint (the “Complaint”) and the documents it incorporates by

reference.1

      A.      Parties and Relevant Non-Parties

      Sorrento Therapeutics, Inc. is a Delaware corporation with its principal place

of business in San Diego, California (“Sorrento”). Sorrento is in the business of

biopharmaceutical development and marketing. The company’s shares are publicly

traded on the Nasdaq Capital Market under the ticker symbol SRNE.

      Concortis Biosystems, Corp. (“Concortis”), TNK Therapeutics, Inc.

(“TNK”), LA Cell, Inc. (“LA Cell”), Sorrento Biologics, Inc. (“Biologics”), and

Scintilla Pharmaceuticals, Inc. (“Scintilla”) are subsidiaries of Sorrento. Sorrento

allegedly has voting control over each of the subsidiaries.

      Plaintiff Yvonne Williams is a stockholder of Sorrento.

      Defendants Henry Ji, William S. Marth, Kim D. Janda, Jaisim Shah, David H.

Deming, and Douglas Ebersole were the Sorrento directors at the time of the

challenged options and warrant grants and the voting agreement. By the time of the

1
      In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 659 n.3 (Del. Ch. 2013)
      (“To be incorporated by reference, the complaint must make a clear, definite and
      substantial reference to the documents.” (quoting DeLuca v. AccessIT Gp., Inc.,
      695 F. Supp. 2d 54, 60 (S.D.N.Y. 2010)) (internal quotation marks omitted)).

                                            3
Complaint, non-party Yue Alexander Wu had replaced Douglas Ebersole on the

board.

         Defendants George Ng and Jeffrey Su—officers of Sorrento—are named

Defendants in the Complaint, but Plaintiff has voluntarily dismissed her claims

against them.2

         B.    Facts

               1.      The options and warrant grants

         On March 15, 2016—five days before nominations were due for Sorrento

directorships—Sorrento issued its form 10-K for the 2015 fiscal year, disclosing that

Sorrento subsidiaries had granted a series of stock options and warrants to certain

Sorrento personnel, directors, and consultants (the “Grants”). On April 29, 2016,

after the deadline for director nominations had passed, Sorrento filed an amendment

to the form 10-K, disclosing that all of the Sorrento directors were recipients of the

Grants. The Sorrento stockholders did not approve the Grants. Only the Sorrento

directors approved the Grants pursuant to the subsidiaries’ stock option plans, and

the Sorrento stockholders never approved the stock option plans.3 The Sorrento

directors also adopted or amended the certificates of incorporation of the five

2
         Pl.’s Answering Br. 1 n.1.
3
         The Sorrento stockholders had previously approved an equity compensation plan
         using shares of Sorrento stock.

                                           4
subsidiaries to allow for the issuance of Class B stock with 10 to 1 voting rights.

Those decisions were not approved by the Sorrento stockholders.

                      a.    Scintilla

         In October 2015, Scintilla, a Sorrento subsidiary, granted options to purchase

1,600,000 shares of Scintilla common stock to the six Sorrento directors and a

warrant to purchase 9,500,000 shares of Scintilla Class B stock with 10 to 1 voting

rights to Defendant Ji. The options and the warrant had a $0.01 per share exercise

price.    Ten months later, on August 2, 2016, Sorrento, Scintilla, and Scilex

Pharmaceuticals, Inc., a pharmaceutical development company, (“Scilex”) agreed to

a term sheet under which Scintilla would purchase all of the Scilex stock. The term

sheet contemplated that upon the closing, Sorrento would contribute $10 million to

Scintilla to fund working capital expenses. Ji currently owns 6.5% of Scilex’s

equity, which Scintilla would purchase under the term sheet. On August 15, 2016,

Sorrento, Scintilla, and Semnur Pharmaceuticals, Inc. (“Semnur”) agreed to a similar

term sheet under which Scintilla would acquire all of the Semnur equity for a $60

million initial payment of Sorrento stock and cash. Defendant Shah is a director and

Chief Executive Officer of Semnur and owns 5.5% of Semnur’s outstanding stock.

                      b.    Biologics

         In August 2015, Sorrento entered an exclusive license with Mabtech Limited

(“Mabtech”) to develop and sell four late-stage antibodies in the North American,

                                            5
European, and Japanese markets. In October 2015, Sorrento transferred its rights

under the Mabtech exclusive license to its subsidiary Biologics. In the same month,

Biologics granted options to purchase 2,000,000 shares of Biologics common stock

to the Sorrento directors with a $0.01 per share exercise price. Biologics also granted

Defendant Ji a warrant to purchase 9,500,000 shares of Biologics Class B shares

with 10 to 1 voting rights for $0.01 per share.

                    c.    LA Cell

      In May 2015, LA Cell, a Sorrento subsidiary, granted options to purchase

1,700,000 shares of LA Cell common stock to the Sorrento directors and a warrant

to purchase 9,500,000 shares of LA Cell Class B stock with 10 to 1 voting rights to

Ji. The warrant and the options have an exercise price of $0.01 per share. The

options and warrant give Ji the right to purchase over 18% of the economic interest

and 25% of the voting interest in LA Cell. Subsequently on September 25, 2015,

LA Cell entered an exclusive licensing agreement with City of Hope, a medical

research center, under which LA Cell licensed to City of Hope certain technology

that allows antibodies to target so-called “undruggable” disease-causing molecules.

Sorrento announced that the total deal value with City of Hope could be in excess of

$170 million.

                                          6
                    d.    Concortis

      In 2013, Sorrento acquired Concortis in exchange for Sorrento stock worth

$11 million. Concortis drove Sorrento’s revenue growth in 2014, and the subsidiary

filed five patent applications in 2013 and 2014. In October 2015, Concortis granted

options to purchase 1,600,000 shares of Concortis common stock to the Sorrento

directors and a warrant to purchase 9,500,000 shares of Concortis Class B stock with

10 to 1 voting rights to Ji. The options and the warrant had an exercise price of $0.25

per share.

                    e.    TNK Therapeutics

      On May 18, 2015, Sorrento founded TNK Therapeutics (“TNK”) to focus on

developing “CAR.TNK immunotherapies” for the treatment of cancer and infectious

diseases. In the same month, TNK granted the Sorrento directors options to purchase

1,700,000 shares of TNK common stock and granted Ji a warrant to purchase

9,500,000 shares of TNK Class B stock with 10 to 1 voting rights. The options and

the warrant had exercise prices of $0.01 per share. Sorrento and TNK then entered

purchase agreements for TNK to acquire (1) all of the membership interests of

CARgenix for $6 million in TNK common stock and (2) all of the stock of BDL

Products, Inc. (“BDL”) for $6 million in TNK common stock. Both of the purchase

agreements provide that if TNK does not complete a financing of at least $50 million

or an initial public offering before certain deadlines in 2016, the original owners of

                                          7
CARgenix and BDL will become entitled to receive Sorrento common stock. On

November 25, 2015, an analyst report issued by Brean Capital, LLC allegedly valued

TNK at $1.3 billion.

      Plaintiff alleges that the Grants from Scintilla, Biologics, LA Cell, Concoritis,

and TNK were part of an illegal scheme to siphon assets from Sorrento for the benefit

of self-interested Sorrento directors.

             2.     The voting agreement

      Plaintiff also challenges a voting agreement (the “Yuhan Voting Agreement”)

that Sorrento entered with Yuhan Corporation (“Yuhan”). On April 5, 2016,

Sorrento disclosed that it had agreed to enter into private placements with four

investors to raise $150 million in exchange for approximately 45% of Sorrento’s

common stock (the “Private Placements”). The Private Placements closed on the

record date for the upcoming annual meeting of stockholders, allegedly so that the

Private Placement investors could vote for the incumbent board. One of the Private

Placement investors, Yuhan, signed the Yuhan Voting Agreement as a condition to

the closing of the Private Placements. Under the Yuhan Voting Agreement, Yuhan

was required to vote its common shares as directed by the Sorrento board. Yuhan

invested $10 million in Sorrento, and its shares constitute 2.75% of the outstanding

Sorrento common shares. Plaintiff challenges the Yuhan Voting Agreement as

                                          8
illegal managerial vote buying designed to disenfranchise the Sorrento stockholders

in the 2016 director election and further entrench the board of directors.

      C.     Procedural History

      On September 8, 2016, Plaintiff filed the Complaint challenging the Grants

and the Yuhan Voting Agreement. Defendants moved to dismiss under Court of

Chancery Rule 12(b)(6) for failure to state a claim and because Plaintiff’s claims are

not ripe.4 Defendants also moved to stay in favor of an earlier-filed case in this Court

arising out of the same facts. On January 26, 2017, the Court heard oral argument

on the motions, and on March 21, 2017, Defendants filed a letter informing the Court

that the earlier-filed case had settled. Plaintiff and Defendants filed letters in which

they disagreed about whether the settlement mooted certain issues in this case. On

April 17, 2017, Defendants requested that the Court grant a revised schedule under

which Plaintiff would file an amended complaint and Defendants would respond to

that complaint by August 30, 2017. Plaintiff requested that the Court decide the

motion to dismiss. On May 31, 2017, the Court denied Defendants’ proposed

schedule and determined that the motion to dismiss would be decided on the

arguments and submissions submitted to date.

4
      The Complaint also alleges that demand on the Sorrento board for its derivative
      claims would be futile because five of the six current directors were interested in
      the challenged transactions as direct recipients of the Grants and beneficiaries of the
      entrenching Private Placements. Defendants do not move to dismiss under Rule
      23.1.

                                             9
II.   ANALYSIS

      On a Rule 12(b)(6) motion to dismiss, “all well-pleaded factual allegations

are accepted as true,”5 and the Court must draw all reasonable inferences in favor of

the plaintiff.6 The motion can be granted only if the “plaintiff would not be entitled

to recover under any reasonably conceivable set of circumstances susceptible of

proof.”7 “A party is entitled to dismissal of the complaint only where it is clear from

its allegations that the plaintiff would not be entitled to relief under any set of facts

that could be proven to support the claim.”8

      A.     Plaintiff’s Claims Are Ripe for Review

      Defendants argue that both Plaintiff’s options-grant and vote-buying claims

are not ripe. As to the options-grant claim, Defendants argue that the speculative

future value of the Sorrento subsidiaries renders Plaintiff’s claim unripe because the

future value of the director compensation cannot be determined at this time. Citing

this Court’s opinion in In re Allergan, Inc. Stockholder Litigation,9 Defendants argue

that the vote-buying claim is unripe because the 2.75% of the vote that the board

5
      In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006).
6
      Id.
7
      Id. (quoting Savor, Inc. v. FMR Corp., 812 A.2d 894, 897 (Del. 2002)).
8
      Hewlett v. Hewlett-Packard Co., 2002 WL 549137, at *1 (Del. Ch. Apr. 8, 2002).
9
      2014 WL 5791350 (Del. Ch. Nov. 7, 2014).

                                           10
allegedly illegally bought has not yet been outcome determinative in any vote.

Those arguments fail.

      Delaware courts do not exercise jurisdiction over claims that are not ripe. 10

Ripe claims are those that have “matured to a point where judicial action is

appropriate.”11 The Delaware Supreme Court has summarized the ripeness inquiry

as follows:

              A ripeness determination requires a common sense
              assessment of whether the interests of the party seeking
              immediate relief outweigh the concerns of the court “in
              postponing review until the question arises in some more
              concrete and final form.” Generally, a dispute will be
              deemed ripe if “litigation sooner or later appears to be
              unavoidable and where the material facts are static.”12

In this case, the options and warrants have been granted, and the voting agreement

has been executed. Whether the Grants and the Yuhan Voting Agreement constitute

a breach of fiduciary duty owed to Sorrento and its stockholders can be determined

on a record developed from currently available evidence.

      The precise value of the Grants may remain speculative, as Defendants assert.

But that argument is properly directed to the merits of Plaintiff’s claim, not to

10
      Stroud v. Milliken Enters., Inc., 552 A.2d 476, 480 (Del. 1989).
11
      XI Specialty Ins. Co. v. WMI Liquidating Tr., 93 A.3d 1208, 1217 (Del. 2014)
      (quoting Stroud, 552 A.2d at 480).
12
      Id. at 1217-18 (quoting Stroud, 552 A.2d at 480; Julian v. Julian, 2009 WL
      2937121, at *3 (Del. Ch. Sept. 9, 2009)).

                                          11
ripeness. This case is not unripe merely because there exist valuation questions with

respect to the Grants.

      As to the Yuhan Voting Agreement, Allergan is distinguishable. In Allergan,

the plaintiffs sought, in part, a declaratory judgment regarding the interpretation of

a corporate bylaw. The Court held that the claim was unripe because it sought an

advisory opinion regarding how the bylaw would apply in a hypothetical situation

that had not yet arisen.13 Here, in contrast, Plaintiff challenges the Yuhan Voting

Agreement itself as a breach of fiduciary duty. Even though the Yuhan Voting

Agreement has not yet dictated the outcome of any specific vote, the Court can

determine now whether the board’s decision to enter the agreement constituted a

breach of fiduciary duty. Plaintiff’s claims, thus, are ripe for adjudication.

      B.     Plaintiff’s Challenge to the Options and Warrant Grants States a
             Claim for Relief
      Defendants argue that Plaintiff’s challenge to the Grants does not state a claim

for breach of fiduciary duty because compensating directors for their service to a

subsidiary is permissible under Delaware law, and the business judgment rule

applies to executive compensation decisions. Defendants alternatively argue that

even if entire fairness review applies, Plaintiff has not adequately pled that the

Grants were unfair.

13
      Allergan, 2014 WL 5791350, at *9.

                                          12
      Directors may be compensated for additional service in managing

subsidiaries. And “where . . . there is no reasonable doubt as to the disinterest of or

absence of fraud by the [b]oard, mere disagreement cannot serve as grounds for

imposing liability based on alleged breaches of fiduciary duty . . . .” 14 But “[s]elf-

interested compensation decisions made without independent protections are subject

to the same entire fairness review as any other interested transaction.”15

      “Entire fairness can be proved only where the directors ‘demonstrate their

utmost good faith and the most scrupulous inherent fairness of the bargain.’”16 To

prove entire fairness, Defendants must prove both fair dealing and fair price.17 The

fair dealing inquiry addresses the “questions of when the transaction was timed, how

it was initiated, structured, negotiated, disclosed to the directors, and how the

approvals of the directors and the stockholders were obtained.”18 The fair price

aspect of the test ensures that the transaction was substantively fair by examining

“the economic and financial considerations.”19 The entire fairness standard of

14
      Brehm v. Eisner, 746 A.2d 244, 266 (Del. 2000).
15
      Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 745 (Del. Ch. 2007).
16
      Id. at 746 (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983)).
17
      Weinberger, 457 A.2d at 711.
18
      Id.
19
      Id.

                                          13
review “normally will preclude dismissal of a complaint on a Rule 12(b)(6) motion

to dismiss.”20 And in a claim for excessive compensation where the plaintiff has

adequately pled that the board lacked independence, “plaintiffs need only allege

some specific facts suggesting unfairness in the transaction in order to shift the

burden of proof to defendants to show that the transaction was entirely fair.”21

        The Sorrento board approved the Grants, and every member of the board at

the time of the Grants was interested in them, as Ji, Marth, Janda, Shah, Deming,

and Ebersole all received options. Thus, entire fairness review applies, and as long

as Plaintiff has pled “some specific facts suggesting unfairness”22 in the options and

warrant grants, Defendants have the burden of proving that the Grants were entirely

fair.

        The Complaint adequately alleges both an unfair process and unfair prices for

the Grants. As to process, Plaintiff alleges that no one other than the interested

directors ever independently approved the Grants.23 Further, on March 15, 2016,

only five days before director nominations were due to the board, Sorrento disclosed

for the first time that it had caused the subsidiaries to issue the Grants. Sorrento did

20
        Orman v. Cullman, 794 A.2d 5, 20 n.36 (Del. Ch. 2002).
21
        In re Tyson Foods, Inc., 919 A.2d 563, 589 (Del. Ch. 2007).
22
        Id.
23
        Compl. ¶ 65.

                                           14
not disclose that all of the directors participated in the Grants until April 29, 2016.

The Grants were also timed soon before or after Sorrento transferred valuable assets

or opportunities to the subsidiaries. And while Defendants argue that the Grants

were “routine compensation pursuant to the subsidiaries’ stock option plans,” 24 the

Grants were not disclosed as non-executive directors’ compensation in the Sorrento

2016 proxy statement.25 Instead, they were disclosed as related-party transactions.26

Those allegations give rise to at least a reasonably conceivable inference of unfair

process.

      As to price, the Complaint alleges that Defendant Ji alone was granted the

right to acquire 25% of the voting power of LA Cell and 18% of its economic value.

The Complaint also alleges that Sorrento disclosed that the LA Cell deal with City

of Hope could be worth in excess of $170 million. Taken as true, the value of that

compensation, especially as a percentage of the value of LA Cell, is large enough to

sufficiently plead that the Grants were excessive. In Steiner v. Meyerson, then-

Chancellor Allen denied a motion to dismiss a challenge to far less compensation

where the entire fairness standard of review applied.27 To accept Defendants’

24
      Defs.’ Opening Br. 28.
25
      Compl. ¶¶ 24, 34, 49, 60.
26
      Defs.’ Reply Br. Ex. 4, at 49-50 (Sorrento Proxy Statement (May 17, 2016)).
27
      Steiner v. Meyerson, 1995 WL 441999, at *7 (Del. Ch. July 19, 1995) (“While
      [$20,000 per year for board service plus payments for committee meetings] seem[s]
                                          15
argument that the Grants were fair compensation for additional services to the

Sorrento subsidiaries would improperly draw an inference in Defendants’ favor.28

Defendants must prove that the Grants were entirely fair to Sorrento, which they

have not done at this stage.29

      C.     Plaintiff’s Challenge to the Yuhan Voting Agreement States a
             Claim for Relief
      Defendants also argue that Plaintiff’s challenge to the Yuhan Voting

Agreement fails to state a claim. They assert that Section 218(c) of the Delaware

      quite within a range that could be paid in good faith by a company seeking to attract
      competent, committed directors, I cannot, under the more demanding fairness
      analysis applicable to fiduciary duty claims, now conclude that there is no state of
      facts consistent with the allegations that would entitle plaintiff to relief on this
      claim.”).
28
      Defendants cite Vice Chancellor Laster’s recent transcript ruling in Oldfather v.
      Ells, C.A. No. 12118-VCL, at 39 (Del. Ch. Dec. 7, 2016) (TRANSCRIPT), to argue
      that even if entire fairness review applies, Plaintiff’s challenge to the Grants should
      be dismissed. Vice Chancellor Laster in Oldfather stated, “I cannot conceive of a
      setting where I would rule that this level of compensation to directors of a public
      corporation, under the circumstances described in the complaint, fails the entire
      fairness test.” Id. But he acknowledged that “[i]n a situation where, frankly, the
      numbers were bigger or different, one might credit” an “inference of unfairness.”
      Id. Here, taking as true the facts in the Complaint, it is reasonably conceivable that
      the Grants were unfair.
29
      See In re Tyson Foods, Inc., 919 A.2d 563, 589 (Del. Ch. 2007) (“[P]laintiffs must
      show either that the board or committee that approved the compensation lacked
      independence (in which case the burden shifts to the defendant director to show that
      the compensation was objectively reasonable), or to plead facts sufficient to show
      that the board or committee lacked good faith in making the award. Assuming that
      this standard is met, plaintiffs need only allege some specific facts suggesting
      unfairness in the transaction in order to shift the burden of proof to defendants to
      show that the transaction was entirely fair.”).

                                            16
General Corporation Law explicitly authorizes the type of voting agreement entered

with Yuhan and that the business judgment rule should apply to the voting

agreement. Defendants contend that I must consider the context in which the Yuhan

Voting Agreement was entered. They assert that the purpose of the agreement was

to prohibit Yuhan, a Sorrento competitor, from obtaining a competitive advantage

by voting against Sorrento’s interests. Further, Defendants argue that the 2.75% of

the Sorrento common stock that is subject to the Yuhan Voting Agreement has not

been outcome determinative in any stockholder vote and is not material to the control

of Sorrento. Defendants contend that the 2016 director election was uncontested,

and no stockholder voted against the slate of directors. They rely on Weinberger v.

Bankston30 for the proposition that when one aspect of a transaction is a voting

agreement covering a relatively small percentage of a corporation’s shares, the

immateriality of the voting agreement is evidence that the purpose of the agreement

was not to disenfranchise the stockholders.

      This Court held in Schreiber v. Carney that “an agreement involving the

transfer of stock voting rights without the transfer of ownership is not necessarily

illegal and each arrangement must be examined in light of its object or purpose.” 31

A vote-buying agreement is not “considered to be illegal per se unless the object or

30
      1987 WL 20182 (Del. Ch. Nov. 19, 1987).
31
      Schreiber v. Carney, 447 A.2d 17, 25 (Del. Ch. 1982).

                                         17
purpose is to defraud or in some way disenfranchise the other stockholders.” 32 In

addition, “[b]ecause vote-buying is so easily susceptible of abuse it must be viewed

as a voidable transaction subject to a test for intrinsic fairness.”33 In Hewlett v.

Hewlett-Packard Co., this Court further clarified that Section 218(c) applies to

voting agreements “between 2 or more stockholders”34 and allows stockholders to

“do whatever they want with their votes, including selling them to the highest

bidder.”35 But management may not use corporate assets to buy votes “unless it can

be demonstrated, as it was in Schreiber, that management’s vote-buying activity

does not have a deleterious effect on the corporate franchise.”36 Here, Sorrento’s

directors allegedly made the voting agreement a condition of a Sorrento capital raise

and, thus, used corporate assets to buy the Yuhan votes. As such, Defendants must

prove that the agreement is intrinsically fair and not designed to disenfranchise

Sorrento stockholders.37

32
      Id. at 25-26.
33
      Id. at 26.
34
      8 Del. C. § 218(c).
35
      Hewlett v. Hewlett-Packard Co., 2002 WL 549137, at *4 (Del. Ch. Apr. 8, 2002).
36
      Id.
37
      Schreiber, 447 A.2d at 25-26.

                                         18
      Plaintiff asserts that the Sorrento board approved the Yuhan Voting

Agreement for the purpose of disenfranchising the stockholders. As evidence,

Plaintiff alleges that the board “handpicked” Yuhan as an investor in the Private

Placements and entered the Yuhan Voting Agreement on the record date for a

director election, allowing management to vote the shares subject to the agreement.

Defendants are correct that, like in Weinberger, only a small percentage of the vote

is at issue, and the voting agreement was negotiated as part of a larger agreement.

But unlike Weinberger, this is a motion to dismiss rather than a motion for summary

judgment. And I do not have the benefit of a more complete record on which to hold

that there are “no facts indicating that the purpose of the settlement was to defraud

or disenfranchise stockholders.”38 Defendants’ arguments regarding the purpose of

the Yuhan Voting Agreement and the ultimate outcome of the 2016 director election

would require that I take inferences in their favor, which I cannot do at this stage.

Instead, taking all reasonable inferences in Plaintiff’s favor, the Complaint

adequately alleges a disenfranchisement purpose, shifting the burden of proving that

the agreement was intrinsically fair to Defendants, which the Defendants have not

38
      Weinberger v. Bankston, 1987 WL 20182, at *4 (Del. Ch. Nov. 19, 1987); see also
      Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 76 (Del. Ch. 2008) (“Although a
      change in the voting of the Saneron bloc alone would not have turned the election,
      Walton’s improper conduct and its non-disclosure contributes to my overall sense
      that the election was tainted by misbehavior by insiders who could not win an
      election simply using the traditionally powerful advantages afforded incumbents.”).

                                          19
done through their motion to dismiss. Plaintiff has alleged a reasonably conceivable

case, which survives this Rule 12(b)(6) motion to dismiss.

       D.    Defendants’ Motion to Stay Is Denied
       Defendants also move to stay this case pending the resolution of an earlier-

filed action in this Court.39 On March 21, 2017, counsel for Defendants informed

the Court of a proposed settlement of the Wildcat Action. In light of that settlement,

the motion to stay is denied.

III.   CONCLUSION

       For the reasons stated herein, Defendants’ motions to dismiss and to stay are

denied.

       IT IS SO ORDERED.

39
       See Wildcat Liquid Alpha, LLC v. Ji, C.A. No. 12338-VCMR.

                                         20