IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

Transcription

1 EFiled: Aug 0 0:PM EDT Transaction ID 0 Case No. -CB IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE RENA A. KASTIS and JAMES E. CONROY, : Derivatively and on Behalf of : HEMISPHERX BIOPHARMA, INC., : : Plaintiffs, : : v. : Civil Action : No. -CB WILLIAM A. CARTER, THOMAS K. EQUELS, : ROBERT E. PETERSON, IRAJ E. KIANI, : WILLIAM M. MITCHELL and RICHARD C. : PIANI, : : Defendants. : : and : : HEMISPHERX BIOPHARMA, INC., a : Delaware corporation, : : Nominal Defendant. : Chancery Courtroom No. A New Castle County Courthouse 00 North King Street Wilmington, Delaware Friday, August, 0 0:0 a.m BEFORE: HON. ANDRE G. BOUCHARD, Chancellor SCHEDULING CONFERENCE AND DISCUSSION CONCERNING AMENDMENT OF BYLAW North King Street Wilmington, Delaware 0 (0) -0

2 0 APPEARANCES: MICHAEL HANRAHAN, ESQ. PAUL A. FIORAVANTI, JR., ESQ. Prickett, Jones & Elliott, P.A. -and- LEE D. RUDY, ESQ. ERIC L. ZAGAR, ESQ. of the Pennsylvania Bar Kessler Topaz Meltzer & Check, LLP for Plaintiffs M. DUNCAN GRANT, ESQ. JAMES H.S. LEVINE, ESQ. Pepper Hamilton LLP -and- ROBERT L. HICKOK, ESQ. of the Pennsylvania Bar Pepper Hamilton LLP for Defendants and Nominal Defendant MICHAEL P. KELLY, ESQ. DANIEL A. BROWN, ESQ. McCarter & English, LLP for the Special Litigation Committee

3 0 0 THE COURT: Good morning, counsel. MR. HANRAHAN: Good morning, Your Honor. Michael Hanrahan for plaintiffs. With me at counsel table are Lee Rudy and Eric Zagar of the Kessler Topaz Melzer & Check firm. THE COURT: Good morning. MR. HANRAHAN: My colleague Paul Fioravanti. THE COURT: Certainly. Good morning, Mr. Fioravanti. MR. GRANT: Good morning, Chancellor. THE COURT: Good morning. How are you today, Mr. Grant? MR. GRANT: Doing just great. Thank you very much. With me at counsel table are Robert Hickok, my Philadelphia office partner, who has been admitted pro hac vice -- THE COURT: Good morning. MR. GRANT: -- and James Levine from our Wilmington office. THE COURT: Good morning. MR. GRANT: On behalf of nominal defendant, Hemispherx, and the director defendants.

4 0 0 THE COURT: Very good. Thank you. Good morning Mr. Kelly. MR. KELLY: Michael Kelly, McCarter & English, for the Special Litigation Committee. It's my first appearance before Your Honor, so I would be remiss if I didn't say it's great to be before Your Honor. It's my privilege. THE COURT: Thank you. MR. KELLY: I have seated behind me Dan Brown, the brains behind the operation. THE COURT: Thank you. There are a lot of people here for a scheduling conference, Mr. Hanrahan. MR. HANRAHAN: It's an important scheduling conference, Your Honor, because it really affects whether this litigation continues or not. Plaintiffs requested a conference because a new bylaw enacted by the board would make plaintiffs subject to liability if they do anything to continue or maintain this litigation. This was a small derivative case raising a straightforward legal issue as to whether three agreements authorized $. million in bonuses. Defendants have turned it into expensive litigation

5 0 0 focused on different issues relating to a Special Litigation Committee and now this bylaw that purports to impose a bond requirement and liability for defendants' fees on the plaintiffs. The defendants were first going to move to dismiss for failure to make demand. We pointed out that, among other reasons, two of the four directors were recipients of the bonuses. So instead of that, they embarked on a Special Litigation Committee where a crony of one of the recipients of the directors -- of the bonuses was appointed as a fifth director. And the director who headed the compensation committee that awarded the bonus was also made a member of the Special Litigation Committee. And what has happened in this case is I think as Chancellor Brown observed years ago, that a Special Litigation Committee tends to add multiple layers to the litigation. There was the stay motion and, of course, under -- Chancellor Strine concluded that under Supreme Court precedent, a stay was required. There was a four-month delay while there's an investigation. Then there's a motion to dismiss and a brief filed. And then the parties embarked on discovery.

6 0 0 And actually, there's a disagreement. We don't agree that document discovery has been concluded because, among other things, the materials -- the agreement and other materials relating to Sage, which is an entity that demanded a bonus, and that's what triggered the CEO and the general counsel to say, Well, we're entitled to a bonus too, well, we want to see that, and they haven't produced it. But right now, we can't do anything about that, because if we do anything, under this bylaw, it subjects our clients to liability that the defendants say they've incurred hundreds of thousands of dollars of fees so far. And so while we were carrying out the process that Zapata mandates for dismissal of a derivative case in a demand excused context, this bylaw comes in and, basically, we can't continue with the Zapata process. We can't do anything because there would be crippling financial liability that would attach to our clients, including a bond requirement and liability for all defendants' legal fees and expenses if plaintiffs continue or maintain this litigation and do not obtain a judgment on the merits

7 0 0 essentially for all the relief sought. I've litigated many cases on behalf of stockholders in my years at the bar, and very few result in a judgment on the merits. Fewer still a judgment on the merits for plaintiffs. And of those few, my firm has had some success in obtaining actual judgments on the merits in favor of stockholders. But even in that handful of cases, we would not have met the success standard of the Hemispherx bylaw. For example, in Weinberger versus UOP, we lost at trial before the initial Supreme Court panel before we won a partial victory on liability before the Supreme Court en banc. On remand, we contended there should be rescissory damages or that compensatory damages should be at least $ a share; but the Chancellor awarded $ per share. So while we did obtain a judgment on the merits, it did not provide in substance and amount the full remedy sought. It would not have satisfied the Hemispherx-style bylaw. And so the plaintiffs in Weinberger, a landmark victory for the stockholders, would have been obligated to pay the defendants' fees and expenses. And ironically, in Weinberger, we requested that the majority stockholder and its

8 0 0 designees to the UOP board be required to pay the fees. That was denied, even though they breached their duty of loyalty. And instead, it was, Well, any fees had to come out of the recovery for the class. But now, we have a bylaw that, basically, even if you succeeded in a significant way, you could be liable for hundreds of thousands if not millions of dollars of legal fees. And the same principle would apply years later in Southern Peru. We recovered $ billion in a derivative judgment but it didn't provide the full rescissory relief or the full damages relief sought. Moreover, though the Chancellor ultimately found the performance of the Southern Peru special committee was atrocious, the special committee directors were granted summary judgment under Section 0(b)(). THE COURT: Can I interrupt you for a few minutes? MR. HANRAHAN: Yes. THE COURT: The reason I made the comment I did at the outset is we're in sort of a perplexing posture, as I see it. What are you expecting the Court to do today?

9 0 0 MR. HANRAHAN: Your Honor, what we would like the Court to do is to set a brief schedule and schedule a hearing on our motion. And let me -- THE COURT: Because -- let me just make sure I sort of -- MR. HANRAHAN: Mm-hmm. THE COURT: Everything you've said in terms of the background is consistent with what I've read through the papers thus far in general terms. I used those words advisedly at the beginning because, as I understood it, there's only been one complaint in this case. Right? MR. HANRAHAN: That's correct. THE COURT: Okay. They filed a motion to dismiss, formed an SLC. You got stayed. There were reports coming out recommending dismissal. You're now in SLC discovery. The bylaw comes down. And then you send me a motion and a -paragraph, 0-page speaking motion saying, Please schedule something. I schedule a scheduling conference. Next thing I know, I have two briefs that start delving very deeply into the beginning parts of the merits of an underlying challenge, but I don't view that as really the right way to deal with

10 0 0 0 an underlying challenge. So that's the reason I asked you what it is you're asking the Court to do. But let me ask a few other questions. It's correct, isn't it, that you haven't amended your complaint to make a challenge to this bylaw? Is that right? MR. HANRAHAN: Your Honor, the problem is -- THE COURT: I think that's a yes or no. MR. HANRAHAN: We have not amended it, Your Honor. And the reason we have not amended it is that the bylaw is drafted so as to paralyze plaintiffs. Anything we do would be to continue or maintain the litigation, and at that point, liability attaches to our clients. And they -- no rational stockholder could do that. I couldn't ask them to do that. THE COURT: Why could this claim be ripe without you amending? MR. HANRAHAN: Excuse me, Your Honor? THE COURT: How could I rule substantively that the bylaw is invalid without a claim and a pleading challenging the bylaw? How could

11 I do that? 0 0 MR. HANRAHAN: Well, Your Honor, because we're not in a position where we can file an amended complaint. And this is a court of equity. THE COURT: Well, you could. You have to make some decisions. MR. HANRAHAN: They've purported to change the rules of the litigation. And I mean, this is the problem with this type of bylaw. Normally, you have -- the Court sets the rules and there's case law that sets the rules. We now are in new territory where this bylaw, which unlike the ATP bylaw, includes the language "continues or maintains." And so we are attempting to avoid doing anything that subjects these plaintiffs, who are retirees -- THE COURT: But even if you brief the motion that you're then asking me to brief, I think you're already, under your own characterization of the potential impact of this bylaw, in jeopardy in those terms, aren't you? MR. HANRAHAN: Your Honor, that's why we come to this court of equity and say we're in an unfair position here. We didn't put ourselves in that position. But that's why perhaps, you know, our

12 0 0 motion strikes the Court as, Oh, well you could have done it in a different procedural fashion, but we're attempting to get the Court's attention -- THE COURT: Oh, you have my attention. MR. HANRAHAN: -- and to get some procedure. Because as Your Honor points out, we don't know whether they'll take the position that the very fact that -- if we dismiss the litigation, there may be a claim for attorneys' fees. THE COURT: Right. MR. HANRAHAN: That's the problem with this bylaw. THE COURT: Right. So let's assume for the sake of these questions that I were sympathetic to your plight; that I understand all the dynamics that you're pointing out that create a very difficult situation for you. Tell me the legal authority, though, that would allow me to effectively render a declaratory judgment on a bylaw without a claim in a case being brought challenging such a bylaw. MR. HANRAHAN: Well, Your Honor, there's motion practice in cases that deals with particular situations. And depending on how the Court

13 0 0 wants to characterize it, I mean, we have a procedural situation where we are in, to use the words of Zapata, procedural gridlock. That is, they've put us in a position where we can't do anything. Now, if the Court wants to tell them, Hey, you can't do that -- that's really what we want, is the Court to say, You can't do that. They're entitled to go forward at least to challenge this bylaw. Because alternatively, if the Court tells us, No, you can't challenge the bylaw without incurring liability for the plaintiffs, then we have to dismiss the case. It is just not reasonable to expect any stockholder -- THE COURT: What's the difference between the following two scenarios: Scenario one, what you're proposing -- which is I gather what you're proposing -- is fully brief a facial challenge to this bylaw based on your current pleading and see how that shakes out, versus scenario two, amend your pleading, put the claim in, and assert a facial challenge. What's the difference? MR. HANRAHAN: Well, Your Honor, at least as we see it, our motion says we'll either dismiss, or if the Court is willing to consider a

14 0 0 challenge to the bylaw and it's not going to result in liability to our -- THE COURT: The second part, you're not going to get either way until the end of that process, the second part being that challenging the bylaw is not going to expose you to liability. You wouldn't get it until you briefed the issue anyway. MR. HANRAHAN: Well, we thought we might get it from the defendants, who might say, Well, wait a minute. Because it is just colossally unfair to put in this bylaw and then say, But if you try to challenge it, then you're going to be liable for all our fees. THE COURT: Right. But suffice to say I take it you didn't get it, at least sufficiently for your purposes, from the defendants so far. Right? MR. HANRAHAN: No, we haven't, Your Honor. And I think that's -- THE COURT: Then what was that issue about, We're not seeking to hold the lawyers liable; we're just seeking something -- MR. HANRAHAN: They're just seeking to hold the plaintiffs liable. Well, that's what they say but that's not what the bylaw saws.

15 0 0 THE COURT: I recognize that. MR. HANRAHAN: And this is a further problem because the rules keep changing. And one of the other problems with going forward is, well, are they going to change the rules again two months from now? Six months from now? After the Court's decision on the merits comes down? How would you ever know? But you can't put people at risk of losing their retirement savings in that situation. So I think what has to happen here is either there's a procedure that we can follow without incurring liability for the plaintiffs or the bylaw will have accomplished exactly what it was intended to do. Intended to cause a dismissal of this litigation not because of the merits but because they placed such a tremendous financial obligation on the plaintiffs that no rational stockholder is going to do that. So that's why we're here. And I know that we did a motion that was ten pages long to give the Court the background and what we -- we got back a response of pages that raised a lot of -- and we felt we needed to show the Court there are issues of validity here that were not touched upon in ATP; that there is a context here as

16 0 0 to whether or not this bylaw operates equitably in this particular set of circumstances. And I think one of the ways it operates inequitably is the very problem Your Honor has put your finger on. It puts plaintiffs in a no-win situation where, under the bylaw, you can't even be sure that dismissing the case doesn't trigger a claim for attorneys' fees against you. On that basis alone, I think a court of equity has the power to say, Okay, we're going to have a proceeding here, and plaintiffs' participation in that proceeding is not going to trigger liability. You know, if that's the way defendants want to play it, then I think the Court should say, No, not going to -- you know, this is still a court of equity. And we've gone down a road where now cases are going to, apparently, increasingly be run according to bylaws that boards put in. And they all are putting in different ones. Some say the corporate benefit doctrine doesn't apply anymore. And so now you're going to have this kind of Whack-A-Mole problem where they're just going to be popping up all over. The Court is going to spend a huge amount of time. One of the things that

17 0 0 hasn't been touched on is this dumps in Your Honor's lap at the end of cases, now we're going to have this huge proceeding over fee awards and over whether the plaintiffs are liable for the fees and what was the degree of success and all. All of this, boards can do by passing bylaws? It seems odd. But in this situation, at least, we think we're entitled to get an assessment of, is this bylaw valid and enforceable? Because alternatively, if a bylaw may apply to these plaintiffs, they cannot -- and virtually no stockholder can, particularly in a derivative case. You have no direct interest in any recovery and your indirect interest is going to be minimal. That's why there are derivative cases, is because the Delaware courts have recognized that, otherwise, people would not bring a case challenging a corporate action because they wouldn't have a sufficient economic interest. It's only if you can bring it on a representative basis. So what they've done is essentially undercut the whole theory of the derivative case that has been around since before this Court existed as a principle of equity. So we would ask that the Court

18 0 0 schedule a hearing and allow us to go forward to it without a fret of liability. I think we're at least entitled to that. Thank you, Your Honor. THE COURT: Thank you. Mr. Grant. MR. GRANT: Thank you, Your Honor. To address the purpose for which you convened this hearing, we think in terms of scheduling, that the most orderly way to proceed is for any remaining discovery to be completed relative to the Special Litigation Committee's motion to dismiss, briefing on the SLC motion to dismiss, argument and decision. And Mr. Kelly, I think, will support that position. The SLC motion to dismiss has been pending for seven months. We now have a new motion injected into the case, but we think -- THE COURT: Well, injected by virtue of your clients' rather extraordinary actions -- MR. GRANT: That's fair. THE COURT: -- in the middle of the case. MR. GRANT: That's fair. But we think

19 0 0 that's the orderly way to proceed. Now, to touch just briefly on the merits -- and I don't propose to dive deeply into them. I don't think that's why we're here. You've read our papers. We agree with you that if the bylaw is going to be challenged, the proper way to do it is with an amendment to the complaint. THE COURT: That's interesting you say that because that was certainly an observation I had, but that's not in your papers. MR. GRANT: It's not, but I was inspired by your comment. I mean, we do say ripeness. We say it's not ripe because -- THE COURT: For a different reason. MR. GRANT: Yeah, for a different reason, because there's the threat of harm but there is no actual tangible harm. And we've also pointed out that for that harm to become tangible, there are multiple stages at which you would become involved and rule whether we can go forward. Has there been substantial success on the merits by plaintiffs? May we apply the bylaw to these plaintiffs? Is the amount, if we seek to apply it, is the amount that we're seeking in reimbursement fair and reasonable?

20 0 0 0 So it's not as if the company can just roll over the plaintiff. There would be judicial intervention. THE COURT: Is the company prepared or not to make a commitment that it won't seek to enforce this bylaw insofar as it would concern litigation over the validity of the bylaw or whether it was adopted inequitably? Yes or no, at this point? MR. GRANT: So I will answer yes or no. Just to be sure I understand, so in effect, the proposed briefing and argument on the bylaw, is that -- THE COURT: Is the company prepared to commit -- and we can take it in stages -- one, to allow -- whether we put it in a pleading or not, we'll get to that separately -- litigation over the facial validity of a bylaw to occur without seeking to impose, if it goes unfavorably for the plaintiffs, the application of the bylaw against the plaintiff -- anybody -- the plaintiff, plaintiff's counsel, anybody? MR. GRANT: For that phase of litigation, yes. THE COURT: All right. MR. GRANT: We commit that the work

21 0 0 done on that briefing and argument and so forth, we will not seek to impose the bylaw against plaintiff. And as to their counsel, I mean, we have committed -- THE COURT: You've already given -- MR. GRANT: -- that counsel are not on the hook. THE COURT: Okay. But it won't apply to anybody for a facial validity challenge to the bylaw. MR. GRANT: Correct. THE COURT: Okay. Now let me take it to the next step. How about will it apply to anybody for purposes of making a factual record and bringing on a claim -- a Schnell claim, basically -- that it may have been adopted for an improper purpose? Is the company prepared to commit that it won't seek to apply the bylaw in that circumstance if it works out g for the plaintiff? MR. GRANT: When you say "anybody," you mean a different plaintiff? THE COURT: No, no, no. In this case. In this case. Let's assume Mr. Hanrahan amended his complaint, sought declaratory judgment that the bylaw

22 0 0 is invalid, asserted a breach of fiduciary duty claim or whatever claim he wants to bring saying it was adopted for an inequitable purpose. I hear you saying that on Count I, declaratory judgment, facially invalid, the company is not going to enforce this bylaw to litigate that issue. I appreciate that concession, if you will. What I'm asking you now is for purposes of Count II, if he litigates over whether it was adopted for an inequitable purpose, takes discovery surrounding the circumstance of the adoption of the bylaw, litigates that issue, is the company prepared to commit or not that it will seek to enforce that bylaw against anybody? If you don't have a -- look, I'm not going to like tear something out of you you're not prepared to commit, but it would help me sort through things if I knew your position on that. MR. GRANT: Understood, and I appreciate that. The company's position on that question, Your Honor, is if the amount of discovery required is reasonably cabined so we're not talking about 0 depositions, then, yes, we will commit not to

23 0 0 seek to apply the bylaw against plaintiffs for an as-applied or is-it-equitable type of challenge. Now, if -- I don't think they need 0 or 0 depositions, but if it became a huge discovery program, I'd like the opportunity to consult with our client before giving a firm answer. THE COURT: I appreciate that. Thank you. I imagine there will be some document discovery in that process if we ever go there as well, but -- MR. GRANT: Yes, of course. THE COURT: Right. MR. GRANT: But I think, principally, they would be interested in depositions and ask the question, why did you adopt this bylaw? THE COURT: Okay. MR. GRANT: And I think they would find out that this Kastis litigation is not the principal reason. I think they'll find out that there's securities litigation in the Eastern District of Pennsylvania which is really the central reason for adoption of the bylaw. THE COURT: I see. Okay.

24 0 0 I didn't mean to cut you off from the other points you want to make. MR. GRANT: No. I just -- I'm reluctant to ignore the merits after the detail you've heard. THE COURT: Sure. MR. GRANT: Just very briefly, we think under ATP that the bylaw is facially valid. There is a three-part test. Is it authorized by statute? Is it authorized by the corporation's charter? And is it otherwise prohibited by law? We've presented in our papers the reasons why we think it satisfies that test. We were, frankly, a little confused until we saw the reply brief whether they were trying to make an as-applied or inequitability type of argument. I don't believe they are, but as to your question about discovery, I think that's the right way to go for any proper as-applied challenge and we're prepared for that. And I think, just the final point, I think this case intersects very well with Chief Justice Strine sitting as Chancellor in the Boilermaker case where there were four counts in the

25 0 0 complaint. He took on Counts I and IV, which were the facial challenges: one, is it authorized by the statute; and secondly, is it a breach of the contract among corporate constituents. And at that time, he did not take on Counts II and III, which were, in effect, as-applied challenges. And he specifically said, Look, plaintiffs, you have a problem with this mandatory venue provision in the bylaws but you haven't gone out to some other forum and pursued a claim and had a motion to dismiss filed on ground of the venue bylaw, so you haven't really been, in effect, harmed. It's not ripe. And we think that's what we have here as well, for reasons you can -- you've seen in our papers. We haven't sought to apply the bylaw to them and we're not sure we ever would. THE COURT: All right. Anything else? MR. GRANT: That's all, unless you have questions. THE COURT: Not at this time. Thank you, Mr. Grant. Mr. Kelly. MR. KELLY: Thank you, Your Honor.

26 0 0 Michael Kelly for the Special Litigation Committee. This is a status conference to address the motions. THE COURT: It has become very free-wheeling, as you can see. MR. KELLY: My application, Your Honor, is that, as you know, the Special Litigation Committee filed a report back in December, on December 0, 0, and we issued -- sorry -- we filed a motion to dismiss back on January 0, 0. So my application is that -- Your Honor already hit upon some of the procedural irregularities that I was going to comment upon in this case. Particularly given the fact that the General Assembly is going to be addressing the ATP issue this coming fall, my application is let's proceed in the normal course and have this Special Litigation Committee motion to dismiss decided, and then we can talk about fees later. It just seems odd to me that we're putting the whole fee issue and whether plaintiffs' firm should proceed at risk first. Our motion was filed almost eight months ago. I took some notes. We produced over 00 pages of documents. We met and conferred with plaintiffs' counsel. There is no

27 0 0 motion to compel outstanding. There was talk about depositions. And July, we sent a letter saying, Now that we've produced documents, we have had a meet and confer, which people do you want to depose? And then we got into this whole bylaw thing. So my application is I think discovery is close to being over. I don't know of any document issues. If they want to depose somebody, let's have it happen soon and let's have this thing decided. And they can file a brief in response to our motion to dismiss, since it's been out there since January, and let's decide that, and then, you know, move to the fee issue later. Maybe the defendant won't move for fees. Who knows? If they do, then we can challenge them. THE COURT: So if you were in Mr. Hanrahan's shoes, you would take that risk and litigate the rest of the SLC case with no concern about the potential effect of the fee-shifting bylaw. Is that right? MR. KELLY: Look, I think the world of Mr. Hanrahan and I don't want to cause him to have any undue stresses, extra stresses in life, but there's two sides of the coin. The other side of the coin is

28 0 0 that, hey, by prolonging and keeping the delay on the Special Litigation Committee, we're sitting out there and my client is incurring costs, not moving forward, while we get sidetracked on this whole bylaw issue. We're going to have to still be involved. And I think just -- I haven't been in the bar years. I know I look a lot older than Mr. Hanrahan. But I've never seen a case in this procedural posture where we're going to put the decision of fees and the risks -- I mean, they filed the complaint. There's always risk. But I don't see how that can't be decided later, if there is an application for fees, and we can talk about all that. We're holding up the merits of the case. So my application is let's get that done; worry about fees later. THE COURT: Thank you, Mr. Kelly. MR. KELLY: Thank you, Your Honor. THE COURT: Mr. Hanrahan, I've done part of your work for you, so, hopefully, you can focus on where we are. MR. HANRAHAN: Your Honor, on the Special Litigation Committee aspect of it, we can't take discovery. We can't move to compel. That would

29 0 0 be continuing the -- and the Special Litigation Committee procedure is what has delayed the merits. And the merits are somewhat considered in the Special Litigation Committee process, but it's not the decision on the merits anyway. So -- and as far as depositions, yeah, they sent us a letter saying, Go ahead and do depositions, like a week after the bylaw was adopted. So I don't know whether they were trying to sucker us into taking depositions and then they'd turn around and go, Aha, you're now liable for all the fees. THE COURT: I looked at the docket. Depositions notices I think went out in February, early February, at the time of the document requests. I'm sure it took a little time to get the documents, but -- MR. HANRAHAN: It took a lot of time to get the documents, Your Honor. There were problems with -- and there are still issues with them. I've mentioned, one key area where we haven't gotten the documents yet. So, you know, they take four months or more for their investigation and then they file a brief a month later, and then, all of a sudden, they say, oh, it's our fault that there's delay. Well, we

30 0 0 0 asked for documents. We didn't get them right away. There's been a lot of back and forth trying to get them, and we're still trying to get them. THE COURT: Okay. MR. HANRAHAN: So that's where that stands. There are a couple of interesting things that were said. As far as discovery -- first of all, we do, plainly -- this whole facial validity, as-applied distinction that has grown up -- THE COURT: It's a pretty meaningful distinction, don't you think? I mean, even -- MR. HANRAHAN: Well -- THE COURT: -- in the Schnell case, we had -- MR. HANRAHAN: -- the discovery talks about validity -- THE COURT: Excuse me. I'm not sure you let me finish my sentence. MR. HANRAHAN: I'm sorry, Your Honor. THE COURT: So I would appreciate that. I think it's a pretty meaningful distinction because how could you make a Schnell

31 0 0 application without a factual record? MR. HANRAHAN: Your Honor, we think there is a factual record here, starting with the bylaw itself, how it was adopted. Now, what I think the defendants want to do is put in a lot of self-serving things from the directors saying, Oh, we're good people and we did this. But I don't think that can change what the bylaw says, when it was adopted. They talk about the timing of the bylaw. Well, the timing of the bylaw, as Your Honor noted, is in the middle of this litigation, in the middle of the review of the Special Litigation Committee process. They've said that the purpose of the bylaw is to deter litigation. Now, he said today, Mr. Grant said that the securities litigation is the central reason. That's very interesting, Your Honor, because we got the letter threatening that this bylaw was going to apply to our clients, and we were advised to let our clients know that if they continued this litigation, that they would be obligated for defendants' attorneys' fees unless they were basically 00 percent successful. No such letter was sent in

32 0 0 the securities litigation. So to say that, Oh, we were just the tail end doesn't quite add up. In any event, it's clear that one of the purposes of this bylaw was to end this litigation. And they say now, Oh, we haven't decided yet whether the bylaw will be applied. They sent us a letter that said it was going to apply. And this is -- you know, I think Boilermakers, it's interesting, with the forum bylaw -- and they said, well, oh, we didn't file in some other forum and raise the challenge there. And I guess that was our mistake. We thought that maybe it was fair that the Delaware Court of Chancery have the first opportunity to consider how the bylaw would actually work. But in the forum context, okay, if you file an underlying claim in the other forum, then you can get at the outset a determination of whether the bylaw requires that you proceed elsewhere. We have an underlying claim here, an underlying fiduciary duty claim. They've put in this bylaw that they say applies to our case. You look at the terms of the bylaw and it's different from ATP because it's got the words "continues or maintains" in there. So it was

33 0 0 drafted specifically to apply to this litigation. And so the issue is ripe here. And to say, Well, no, go ahead. Your client should put themselves at risk -- they've already said that the fees are in the hundreds of thousands already. It's probably pretty likely it's going to be significantly more than that if the litigation proceeds. You cannot tell stockholders that in order to challenge the bylaw, you have to first put your retirement savings and your house at risk. No one is going to do that. Mr. Kelly wouldn't do it. I wouldn't do it. No one would do it. THE COURT: He was going to use Logan House as collateral. MR. HANRAHAN: Well, maybe -- I don't know what that's worth these days, Your Honor. Maybe it's enough to cover. THE COURT: I'm sorry, Mr. Kelly. I owe you a public apology for even bringing that up. MR. KELLY: Any publicity is welcome, Your Honor. MR. HANRAHAN: And Mr. Kelly's reference to the General Assembly I think is what -- maybe what this, Oh, there ought to be a lot of

34 0 0 discovery -- and by the way, we didn't ask for discovery. The defendants are saying there should be discovery. So we didn't ask for 0 depositions. We didn't ask for any depositions. THE COURT: It does strike me as odd -- look, I understand the timing dynamics of what may or may not happen legislatively with respect to this issue. It hasn't happened yet. It may not happen next year. Who knows. But it does strike me as odd to be so resistant to not wanting to fire all your bullets at this bylaw and take a discovery record, especially when you keep insinuating circumstances surrounding its adoption you think are suspicious without developing that record. Because if you don't, you will be at risk of a facial validity challenge being determined just that way, just as a facial challenge. MR. HANRAHAN: Well, Your Honor, I think the insinuations are supported by the record. We have a letter. I don't think anything could be any clearer than that letter. THE COURT: But there's no substitute for internal s, minutes, depositions -- MR. HANRAHAN: But again, Your Honor,

35 0 0 our view going into this was we can't do that. THE COURT: Okay. MR. HANRAHAN: Because if we try to do it, if we send out a document request and amend the complaint and do all these things -- THE COURT: Well, it sounds like, though, I heard -- and you can get the transcript later, but I heard a concession that I'll put it as reasonable discovery on that issue, the bylaw won't be asserted against you. So it sounds like you could do it if you wanted to. And that would be your decision. MR. HANRAHAN: If that's the position, Your Honor, then I think we can talk to them. THE COURT: Okay. MR. HANRAHAN: I don't think a lot of discovery is really going to be necessary. But certainly, to the extent it makes the defendants and the Court more comfortable with the circumstance, we can do that. We think it is important to get a prompt determination here. And that, really, what's happening is this company and a number of others have put in these bylaws for their in terrorem effect but then they don't want to stand behind them. They don't want a prompt consideration of whether these bylaws

36 0 0 are any good or not. They say, Oh, well, no, maybe you could raise a facial validity challenge. Now, the statute, Section, doesn't say "facial validity." It says "validity." And we think facial validity is a very narrow concept because the Supreme Court in ATP said, Oh, well, a bylaw can be facially valid even though in certain circumstances it would conflict with the statute, with the common law, with the certificate. And the standard that's been applied has been, well, if there's any circumstance in which the bylaw could apply without conflicting with the statute or case law or the certificate, then the bylaw is facially valid even though, under some circumstances, it might conflict with a statute, with common law. So we think validity is not so narrow a concept. Validity ought to be decided in the context of this case. It's a derivative case. The derivative vehicle was created judicially. It's been regulated judicially. And one exception was Section by legislation. It's never been the case that derivative litigation was controlled by bylaws passed by the board so that you have one side of the

37 0 0 litigation basically making up the rules. Which, of course, you know, if I play a game with my nine-year-old and he gets to make up the rules, I'm going to lose virtually every time. And that's what's going on here. And that's the dilemma we're in. And we're trying to find a way, on a prompt and not too cumbersome basis and without subjecting our clients to liability, to find out whether these bylaws are valid, not just facially valid but valid under the circumstances here, where you're applying it to a derivative action, where you're imposing liability on a stockholder. Are they applicable here in an existing case when the board -- and are they enforceable? In a situation where I think we've shown that the ATP bylaw was reciprocal. ATP represented it was. This plainly isn't. So there are circumstances here where we think validity, applicability, and enforceability, are all issues that the Court ought to address, and the Court has to address them now. Otherwise, to say, Oh, well, someday you might be able, if you were willing to risk a six- or seven-figure liability for your client, you could challenge them at the end of

38 0 0 the case, is the same thing as just saying stockholders really have no ability to enforce their rights anymore. Thank you, Your Honor. THE COURT: Thank you, Mr. Hanrahan. Mr. Grant, something prompted you to want to add something else at this point? MR. GRANT: Something did. "Cool Hand Luke" comes to mind because I think plaintiffs and we, following your questions about circumstances in which we would not enforce the bylaw against them, are having a failure to communicate. We are willing, if you think it's the right direction for this to go, to have reasonable and limited discovery on the essentially Schnell issue, on the equitable aspects of the bylaw. But what prompted me to stand up is I have a suggestion for us all to consider for a different direction in which to go. Going back to my initial comment that we think the next step should be resolving the SLC motion to dismiss, we can make the same representation again with let's call it reasonable discovery, that we will not enforce the bylaw against plaintiff for time spent on the defense

39 0 0 side for reasonable discovery, briefing and argument on the SLC motion to dismiss. And I think that then protects them. And we think, procedurally, that going first to the SLC motion to dismiss is the right way to go. I think, you know, we are hopeful and we believe it should resolve the entire litigation. And they won't be at risk for that, for that work that we perform. And we think that's the right way to do it. Just one comment on the timing of the bylaw. While the assertion is that we adopted it in the -- the client adopted it in July to apply to them, the timing was that after ATP came out and the Legislature then did not act, only then did our client adopt the bylaw. And as for the letter that Mr. Hanrahan mentioned that we sent them, there was no letter in the securities litigation but there was a supplemental initial disclosure under Federal Rule in the securities litigation. So in effect, notice was given to the plaintiffs in the securities litigation through different means. THE COURT: I see. Thank you. Mr. Kelly, did you have anything else?

40 0 MR. KELLY: Just 0 seconds, Your Honor. 0 0 THE COURT: Absolutely. MR. KELLY: I was disappointed when Mr. Hanrahan said, quote, we were suckering them into depositions. As Your Honor knows, depositions were noticed back in February. And Mr. Fioravanti knows we had an agreement not to proceed with depositions until the documents were produced. And we've been talking about depositions since February, March, April. So there was no suckering of anybody into depositions. And secondly, the comment about the General Assembly, there was nothing sinister about that. I was just reminding Your Honor that, hey, particularly in this procedure, I always put my -- THE COURT: I didn't draw anything sinister from it. MR. KELLY: Thank you. I'm just mindful of Your Honor's caseload. That there is something in this posture that the Legislature is going to decide next fall. Thank you, Your Honor. THE COURT: Thank you. Mr. Hanrahan, if you have something

41 0 0 brief to add, I'll let you -- MR. HANRAHAN: Your Honor, on the Special Litigation Committee, see, this, I think, illustrates the problem. Now the rules change. Well, we won't apply it here. We won't apply it there. And I think this is going to be a disaster, not just for stockholders. It's going to be a disaster for this Court. Because the rules change. They get invoked. They don't get invoked. And it's one side of the litigation basically trying to dictate to this Court how litigation is going to be conducted. THE COURT: Thank you. There are a lot of moving parts here, but I'm going to give you my reactions from what I've heard of all of this. And frankly, it sounds like, from what I heard today, it would be profitable for there to be more discussions between the parties to see how this can be sorted out. In the first instance, picking up with Mr. Grant's last proposal -- and the devil is often in the details of these things -- but if there is a way to get the plaintiffs and you in agreement that the challenge of the SLC process can be concluded without jeopardy of the bylaw being applied, that seems to me

42 0 0 like something you ought to tell me you can work out. Come back to me and tell me if you have worked it out, and we can proceed on that basis. Absent working such an arrangement out, my views on the situation right now lay out sort of in the following way. We're in a very odd procedural context. I don't think it's appropriate for me to be adjudicating a bylaw, the validity of a bylaw or an as-applied challenge to a bylaw, if that were ever asserted, without it actually being asserted in the pleading in the first instance. So the key thing that has to happen in my mind is the plaintiffs have to make some decisions. Now, they're going to be able to make those decisions in a much better context than when they walked into the courtroom I think today. But the first decision the plaintiffs have to make is do they want to litigate the validity of this bylaw. And if so, they should amend their complaint and say they want to do so and assert such a claim. And leave would be granted that there would not be an issue in this circumstance if that were opposed, but I would expect it would be unopposed. And there would be an amended pleading.

43 0 0 Then the plaintiffs have to make their second decision, which is what type of claim do they want to bring. Do they want to just assert a facial challenge? And you've been told, and I will hold the defendants to their representation, that you can assert such a challenge without jeopardy of the bylaw applying. Or do you want to make a facial challenge as well as an as-applied challenge? And admittedly, the commitment of the defendants is a little squishier there in terms of the reasonable and limited scope of discovery to permit such a challenge. But, ultimately, the plaintiffs have to have the strength of their convictions and decide what kind of claim do they want me to adjudicate on this bylaw. With respect to whether they are willing to bring in a facial challenge alone or a facial challenge, as-applied challenge, and want to move forward on it. And as I indicated, there will be no jeopardy to the bylaw on the facial challenge based on the representation today. The as-applied would appear to be also an avenue to have a challenge without jeopardy, but you'd have to work out the details and make your own judgment -- Mr. Hanrahan, I can't make

44 0 0 them for you -- on what the plaintiffs want to do in that regard. But until such a claim is actually pled, I think it's premature for me to be adjudicating the validity of this. Now, if you assert such a claim in a pleading and amend your pleading to do so, I think we can brief the validity issue, if it's only the validity issue, on a reasonable basis. I think a normal ordinary course briefing type of schedule can bring the issue to the Court's attention. There are, underlying this -- and I'm not prejudging anything -- many very interesting issues, undoubtedly. This is a for-profit corporation. This is not a non-profit corporation. There are issues of retroactive application in a way that was not considered by ATP that are at issue here because it's purporting to have potential retroactive application to underlying conduct, not just to the universe of shareholders to whom it would apply. I see that as a different issue. There is a bond issue that's different here. There are policy implications about liability to stockholders and for-profit corporations that are at issue here. But all those things would need to be

45 0 0 briefed thoroughly; and that has not occurred to date in a way that the Court could intelligently consider those issues. And it hasn't occurred in a way with the defendants even really having an opportunity to respond to most of those arguments because they appeared in this reply brief. So I would -- and to be clear, I am sympathetic to plaintiffs' situation, again, absent this last issue that Mr. Grant raised as to whether or not there is a clear path to get this case done in terms of the SLC litigation. If you can work that out and want to proceed on that basis and go down that track, not worry about the bylaw, we'll do that. If you can work it out and you have confidence that you're not in jeopardy in a way you think you can get that work done, that's one track. The other track is you can assert this claim, but if you're going to assert it, you put it in a pleading. And if you're going down the second track and you're not comfortable, you have comfort on the first track; that is, to litigate without jeopardy the SLC issues, I will hold the SLC issues in abeyance while we do the litigation over the facial validity of

46 0 0 the as-applied issue on the bylaw. And if you want to go the as-applied route, you can make a motion for expedition, and I think it would be something that should be considered promptly. I'm not sympathetic to the notion -- and I think, largely, Mr. Grant, you diffused this, and I appreciate that -- of barreling ahead either simultaneously or solely with the SLC-related litigation without sorting out this bylaw issue because I view the bylaw issue to have been a creation of the defendants in the middle of this case to change the rules. And in that context, you know, the rules of the game going forward, as I see, are what I've laid out for you. Does anybody have any questions about what I am stating here? Mr. Hanrahan, you in particular, do you understand what I'm saying. MR. HANRAHAN: Yes, sir. THE COURT: Okay. Any questions from the defendants? MR. GRANT: No questions from us, Your Honor. MR. KELLY: No, Your Honor. THE COURT: Thank you. Counsel, I

47 appreciate the arguments. It's a very interesting issue, and we'll see where we go. (Court adjourned at 0: a.m.)

48 CERTIFICATE 0 I, JEANNE CAHILL, RDR, CRR, Official Court Reporter for the Court of Chancery of the State of Delaware, do hereby certify that the foregoing pages numbered through contain a true and correct transcription of the proceedings as stenographically reported by me at the hearing in the above cause before the Chancellor of the State of Delaware, on the date therein indicated. IN WITNESS WHEREOF I have hereunto set my hand at Wilmington, Delaware, this th day of August, 0. /s/ Jeanne Cahill Official Court Reporter of the Chancery Court State of Delaware 0