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1 EFiled: Mar :35PM EDT Transaction ID Case No VCMR IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE GORDON NIEDERMAYER and BRENT REED, Derivatively on Behalf of CYTRX CORPORATION, v. Plaintiffs, STEVEN A. KRIEGSMAN, et al., and Defendants, CYTRX CORPORATION, a Delaware Corporation, Nominal Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) C.A. No VCMR THE INDIVIDUAL DEFENDANTS OPENING BRIEF IN SUPPORT OF THEIR MOTION TO STAY THE DELAWARE ACTION PENDING COURT APPROVAL OF THE CALIFORNIA DERIVATIVE SETTLEMENT OF COUNSEL: Thomas J. Nolan Allen L. Lanstra SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California Tel.: (213) DATED: March 21, 2016 Edward P. Welch (ID No. 671) Sarah R. Martin (ID No. 5230) SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 920 North King Street, 7 th Floor P.O. Box 636 Wilmington, Delaware Tel.: (302) Attorneys for Defendants Steven A. Kriegsman, Louis J. Ignarro, Joseph Rubinfeld and David J. Haen

2 TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES... ii INTRODUCTION... 1 STATEMENT OF FACTS A. Background B. The DreamTeam C. The Stock Options D. The Federal Securities Action E. The First Delaware Action F. The California Derivative Action G. The Niedermayer Action ARGUMENT I. PRACTICAL CONSIDERATIONS WARRANT A STAY OF THE NIEDERMAYER ACTION PENDING RESOLUTION OF THE CALIFORNIA DERIVATIVE SETTLEMENT II. MCWANE ALSO SUPPORTS A STAY OF THE NIEDERMAYER ACTION A. A Prior Action Is Pending In A Competent Court B. The California Derivative Action Involves Substantially The Same Parties C. The California Derivative Action And The Niedermayer Action Involve Exactly The Same Issues Of Fact And Law CONCLUSION i

3 TABLE OF AUTHORITIES CASES PAGE(S) Allion Healthcare Inc. S holders Litig., C.A. No CC, 2011 WL (Del. Ch. Mar. 29, 2011)... 5, 6 Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013)... 4, 32, 33 Brenner v. Albrecht, C.A. No VCP, 2012 WL (Del. Ch. Jan. 27, 2012)...passim Brudno v. Wise, C.A. No , 2003 WL (Del. Ch. Apr. 1, 2003) Cook v. Whitman, C.A. No VCG, 2014 WL (Del. Ch. July 22, 2014)... 7, 30, 31 DeKalb Cnty. Pension Fund v. Page, C.A. No CS (Del. Ch. Jan. 29, 2013) (TRANSCRIPT) DeKalb Cnty. Pension Fund v. Page, C.A. No CS, 2013 WL (Del. Ch. Feb. 18, 2013) Derdiger v. Tallman, 773 A.2d 1005 (Del. Ch. 2000)...passim McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng g Co., 263 A.2d 281 (Del. 1970)... 7, 11, 35 Niedermayer v. Kriegsman, C.A. No VCMR (Del. Ch. Mar. 8, 2016) (TRANSCRIPT) Schnell v. Porta Sys. Corp., C.A. No. 12,948, 1994 WL (Del. Ch. Apr. 12, 1994)... 35, 37, 40 In re Westell Techs., Inc. Derivative Litig., C.A. No , 2001 WL (Del. Ch. June 28, 2001)... 36, 37, 38, 39 ii

4 INTRODUCTION In this action (the Niedermayer Action ), purported stockholders ( Plaintiffs ) seek to assert derivative claims against certain officers and current and former members of the board of directors of CytRx Corporation ( CytRx or the Company ). By way of this Motion to Stay This Action Pending Court Approval of the California Derivative Settlement (the Motion to Stay, Dkt. 6), Defendants move to stay because the claims and allegations mirror those in two other derivative actions one whose settlement was approved by this Court, and the other whose proposed settlement is in the process of being approved by a federal district court in California. First, Plaintiffs assert that Defendants spring loaded stock option grants issued in December But other CytRx stockholders commenced derivative litigation in the Court of Chancery based on those allegations in July 2014 (the First Delaware Action ), and those claims were released as a part of a June 2015 settlement approved by this Court in November 2015 all before Plaintiffs filed the present action in December Second, Plaintiffs remaining derivative claims concern allegations that CytRx engaged a stock promotion firm, the DreamTeam Group (the DreamTeam ), to facilitate promotional articles regarding CytRx, in which neither DreamTeam nor the authors of the articles disclosed that they had been

5 paid, and that the DreamTeam articles caused CytRx s stock price to be artificially inflated in advance of a secondary offering of CytRx stock completed in February But other stockholders commenced derivative litigation on these allegations in August 2014 in the U.S. District Court for the Central District of California (the California Derivative Action ), which claims will be released under a proposed settlement that is in the process of being approved by the court that has been handling that action for nearly 18 months. Contrary to Plaintiffs speculation, the settlement of the California Derivative Action was not gamesmanship or tactics to accomplish a complete end-around of the Delaware Court and avoidance of Plaintiffs and counsel.... (Plaintiffs Counsel s Letters to the Court of Feb. 25 and 29, 2016 (Dkt. 4, 9).) Rather, the proposed settlement of the California Derivative Action is the final piece of a long-negotiated effort to globally resolve multiple lawsuits filed concerning the DreamTeam and spring loading allegations. In addition to the derivative settlements of the First Delaware Action and the California Derivative Action, a settlement of a securities class action is also pending approval before the U.S. District Court for the Central District of California (the Federal Securities Action ). The pending settlement of the Federal Securities Action also resolved a competing securities action in the Los Angeles County Superior Court (the State Securities Action ), so that action was dismissed in December The long- 2

6 negotiated effort at a global resolution started almost a year ago, which was kicked off by a two-day, in-person mediation held in April 2015 in Los Angeles and was mediated by former U.S. District Court Judge Dickran M. Tevrizian (Ret.). That mediation and the continued efforts following the mediation ultimately led to the successful resolution of the Federal Securities Action, the State Securities Action, the First Delaware Action and the California Derivative Action. Yet, on the eve of the final steps of the last settlement of these cases the settlement of the California Derivative Action Plaintiffs filed this action, which does nothing more than repeat the allegations pled in the California Derivative Action and the First Delaware Action. Plaintiffs filed this action more than sixteen months after the set of actions challenging the same conduct were filed, and eighteen months after first making an inspection demand pursuant to 8 Del. C. 220, yet Plaintiffs now seek to disrupt the global resolution of the actions that were being litigated, mediated and settled while Plaintiffs were nowhere to be found. (As demonstrated below, Plaintiffs attempt to excuse their 18-month delay by asserting that CytRx caused the delay by slow rolling their 220 demand is without merit.) The filing and settlement of the First Delaware Action and proposed settlement of the Federal Securities Action and the California Derivative Action were well-publicized. Plaintiffs, however, never took steps to intervene in any of 3

7 those actions. Instead, seeking to undermine the years of litigation and mediation that occurred in those actions, Plaintiffs filed the Niedermayer Action, and now claim that their suit must go forward because CytRx has a forum-selection bylaw favoring the Delaware Court of Chancery. Based solely on the forum-selection bylaw, Plaintiffs maintain that their lawsuit should take precedence and not be stayed despite their claims already being the subject of a proposed settlement in the California Derivative Action. By pressing for the briefing and hearing on this Motion to Stay, Plaintiffs are transparently hopeful that a favorable result may somehow aid their announced plans to object to the settlement in the California Derivative Action. Besides ignoring the years of litigation and mediation directed at resolving all of the cases, Plaintiffs argument about the bylaw is simply wrong. Just like the bylaw endorsed in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), CytRx s forum-selection bylaw provides that the Delaware Court of Chancery is the exclusive jurisdiction for derivative actions [u]nless the corporation consents in writing to the selection of an alternative forum. Id. at 942 (emphasis added). Plaintiffs have not and cannot present any basis not to defer to CytRx s election to consent to jurisdiction in the federal court in order to resolve the California Derivative Action. Indeed, the extensive history of the efforts to settle that action starting from the 4

8 April 2015 mediation and throughout the litigation while it was the only derivative action based on the DreamTeam allegations, is indicia of the good faith and business judgment of the corporation in deciding to consent to the jurisdiction of the Central District of California to finalize the settlement in December Moreover, allowing Plaintiffs suit to proceed in this instance would undermine the very purpose of CytRx s bylaw and those like it to avoid duplicative multi-forum litigation. Plaintiffs real motivation in pressing this action and objecting to the settlement of the California Derivative Action is clear. Despite not having filed any suit when defendants were meeting with the mediator and having extensive discussions to resolve the various pending suits, Plaintiffs counsel is disappointed that Plaintiffs and their counsel were not included in the settlements. (See Letter to Vice Chancellor Montgomery-Reeves from Peter B. Andrews, Esq. requesting an immediate status conference with the Court (Dkt. 4) at 2 ( Defendants now are settling with the California plaintiffs without involving the Delaware Plaintiffs and their counsel. ); id. at 3 ( there was no consultation or involvement of the Delaware Plaintiffs and their attorneys in reaching this resolution ); id. ( This appears to be avoidance of Plaintiffs and counsel. ).) But these kinds of complaints are not new to this Court. See In re Allion Healthcare Inc. S holders Litig., C.A. No CC, 2011 WL , at 5

9 *4 (Del. Ch. Mar. 29, 2011) (remarking that [i]n the event that defense counsel settles leaving one set of plaintiffs counsel out in the cold, the unfavored plaintiffs lawyers then often oppose the settlement ). Notably, this is not a situation where defendants chose to settle with one set of plaintiffs while a suit in Delaware was pending, nor one where the settlements reached in the various actions were illusory. Rather, here, the parties to four sets of actions entered into mediation long before Plaintiffs filed their suit in Delaware, and ultimately settled each of those actions as a result of that mediation. Asking this Court to serve as a stalking horse for Plaintiffs to object to the settlement of the California Derivative Action is the type of request this Court has previously rejected. As Vice Chancellor Glasscock held: Essentially, the Plaintiff requests an expedited decision [on a motion to stay a Delaware derivative action pending settlement of a California derivative action] in the belief that, if my decision on the Motion to Stay is favorable to him, he may find that decision useful to leverage a favorable decision at the California preliminary settlement hearing. The Plaintiff concedes that he will have a full opportunity at the preliminary settlement hearing and thereafter to argue to the California court that the proposed settlement is unfair because it would terminate claims in this action. The Plaintiff believes that a favorable ruling here might have some persuasive value in his argument in California. It is not, however, generally the purpose of this Court to act as a stalking horse for the issues that a sister court will have before it, and which that court is perfectly qualified to resolve. More to the point, expedited litigation here, or indeed any continued briefing of the Motion to Stay, would risk waste of limited judicial and litigants resources in light of the pending settlement of the matter in California, which has a reasonable likelihood of staying, if not terminating, litigation here. 6

10 Cook v. Whitman, C.A. No VCG, 2014 WL , at *2 (Del. Ch. July 22, 2014). Just as in Cook, a stay is warranted here. This Court s inherent authority to control its docket and issue stays to prevent duplicative and wasteful litigation compels a stay of the Niedermayer Action. Moreover, a stay is also appropriate under the principles elaborated in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281, 283 (Del. 1970). The California Derivative Action and the Niedermayer Action involve substantially the same parties, and are predicated on the same facts and legal theories. The firstfiled California Derivative Action is pending before a court of competent jurisdiction in which CytRx is headquartered. Moreover, resolution of the California Derivative Action will necessarily have a preclusive effect on the Niedermayer Action and, thus, allowing the Niedermayer Action to proceed at this point would be wasteful and duplicative. Nor will Plaintiffs face any prejudice from a stay. Plaintiffs here waited nearly two years from the conduct at issue in the Complaint to file their litigation. The settlement of the California Derivative Action will soon be presented for approval to the U.S. District Court for the Central District of California. If Plaintiffs believe they have a legitimate basis to object to the settlement of the California Derivative Action, they may do so. 7

11 Recognizing that their effort to proceed with duplicative litigation lacks merit, after the close of business on Friday, March 18, 2016, on the eve of the last business day preceding the stipulated and ordered due date for Defendants opening brief on this Motion to Stay, and without prior notice to the Court or any of the parties, Plaintiffs filed a Verified First Amended Class Action and Derivative Complaint (the Amended Complaint ). By filing the Amended Complaint, Plaintiffs are attempting to disturb the framework presented to the Court by Plaintiffs counsel in its successful effort to obtain an expedited briefing and hearing schedule on this Motion to Stay. By a stipulation of the parties filed on March 10, 2016, as ordered by the Court on March 15, 2016 (Dkt. 15), the briefing on the Motion to Stay and Defendants motion to dismiss was bifurcated and an expedited briefing schedule was established whereby Defendants would file their opening brief on the Motion to Stay on Monday, March 21, Having conceded as they must that the claims and allegations in the Niedermayer Action duplicate those in the California Derivative Action and thus the Niedermayer Action will be extinguished if the settlement of the California Derivative Action gains court approval in California, Plaintiffs represented that their opposition to the Motion to Stay rested on their assertion that the Company s waiver of the forum-selection bylaw was improper and, thus, should preclude this 8

12 Action from being stayed pending approval of the settlement of the California Derivative Action. Plaintiffs now seek to pursue an alternative angle to manufacture some leverage when they object to the settlement in the California Derivative Action. But the Amended Complaint does not alter the fact that a stay should be granted indeed, it reinforces it. In addition, the Amended Complaint is a confusing pleading that, in its attempts to disturb this Motion, only serves to disturb Plaintiffs prior representations. Among other things: The Amended Complaint asserts purported direct class action claims, but without defining the putative class or setting forth class allegations. Plaintiffs purport to plead allegations and claims that not only would be extinguished by the settlement of the California Derivative Action if approved, but also claims that would be extinguished by the Federal Securities Action if approved and claims that were already extinguished by this Court s approval of the settlement in the First Delaware Action. Having obtained their requested bifurcation of the Motion to Stay and Motion to Dismiss, Plaintiffs now attempt to take the forum-selection bylaw issue (i.e., Plaintiffs counsel s sole theory to oppose the Motion to Stay and the basis of their announced plan to object to the settlement of the California Derivative Action in the court proceedings in California) and convert it into a cause of action for breach of fiduciary duty. Plaintiffs have pled as part of a cause of action for breach of fiduciary duty their apparent (albeit ambiguously stated) procedural objections aimed at the proposed settlement in the California Derivative Action. 9

13 Plaintiffs have set forth claims that are not ripe, as they necessarily require the settlements in the California Derivative Action and the Federal Securities Action to be approved by the U.S. District Court before, even under Plaintiffs illogical and erroneous construction, there could be damages to the Company, much less direct damages to Mr. Niedermayer, Mr. Reed or the undefined putative class. The Amended Complaint names as defendant Jane Doe, personal representative of the estate of Martin [sic] R. Selter (presumably meaning Marvin Selter), when the representative of Mr. Selter s estate repeatedly has been named in court and other filings and could have been identified by Plaintiffs with minimal diligence. 1 The Amended Complaint advances patently infirm claims, and continues to assert the same duplicative copycat claims as the original Complaint. Despite purporting to add new allegations based on documents received in response to a Section 220 demand, these allegations were in fact already asserted by Plaintiffs in the First Delaware Action based on documents the first Delaware plaintiffs received in response to their own Section 220 demand. Thus, there is nothing new about the Amended Complaint, nor does it alter the fact that the Niedermayer Action should be stayed pending resolution of the 1 The Amended Complaint names five defendants that Plaintiffs did not name as defendants in the original Complaint: the representative of the Estate of Marvin Selter; CytRx s CFO John Caloz; and three directors who joined the board in 2015, after the commencement in 2014 of the Federal Securities Action, the First Delaware Action, the State Securities Action and the California Derivative Action and the facts and occurrences alleged therein. 10

14 California Derivative Action. Indeed, Plaintiffs new derivative claim for breach of fiduciary duty further reinforces that a stay is necessary here, as this claim is dependent on whether the Central District of California approves the settlement of the California Derivative Action. For these reasons and the reasons set forth below, in order to avoid the wasteful duplication of time, effort, and expense that occurs when judges, lawyers, parties, and witnesses are simultaneously engaged in the adjudication of the same cause of action in two courts, this Court should exercise its discretion and stay the Niedermayer Action pending resolution of the settlement in the California Derivative Action. McWane, 263 A.2d at 283. STATEMENT OF FACTS A. Background. CytRx is a developmental stage microcap biotechnology company. (Compl. 5.) 2 CytRx is incorporated in Delaware and headquartered in California. 2 Citations to the Verified Stockholder Derivative Complaint filed on December 14, 2015 (the Complaint ) will be in the form of Compl.. Citations to the Amended Complaint will be in the form of Am. Compl.. The facts contained herein are based on allegations in the Complaint and Amended Complaint, and are not conceded to be true. Exhibits referenced herein, unless otherwise noted, are attached to the accompanying Transmittal Affidavit of Sarah R. Martin in Support of the Individual Defendants Opening Brief in Support of Their Motion to Stay the Delaware Action Pending Court Approval of the California Derivative Settlement, and are cited as Martin Aff. Ex.. 11

15 B. The DreamTeam. In the fall of 2013, CytRx engaged the DreamTeam to promote its stock on various websites. (Compl. 7.) Over the course of the engagement, the DreamTeam caused a number of articles to be published that offered positive views of CytRx. (Id. 7-8.) The DreamTeam did not disclose in these articles that it had been engaged by CytRx. During the period of the DreamTeam s engagement, CytRx s stock price increased. (Id. 8.) On January 31, 2014, CytRx announced a secondary offering of stock. (Id.) On March 13, 2014, Richard Pearson published an article revealing that he had been approved by the DreamTeam to write articles promoting the stock of several companies without revealing that he was being paid. CytRx was one of the companies whose stock the DreamTeam asked Pearson to promote. (Compl. 21.) C. The Stock Options. On December 10, 2013, the Compensation Committee of the CytRx board met at its year-end meeting, and determined to grant stock options pursuant to CytRx s stockholder-approved incentive plan. (Compl. 16.) The strike price for the stock options was the Company s closing stock price on that day of $2.39 per share. (Id. 17.) The next day, CytRx announced the efficacy results of Phase 2b clinical trials relating to aldoxorubicin, one of CytRx s drug candidates. (Id. 12

16 16.) Upon announcement of those results, CytRx s stock prices increased. (Id. 18.) D. The Federal Securities Action. Shortly after Richard Pearson s March 2014 article was published, three separate federal securities class actions were filed in the Central District of California. On June 13, 2014, Chief Judge George H. King of the Central District of California consolidated the three actions as In re CytRx Corporation Securities Litigation, Case No. 2:14-cv GHK (the Federal Securities Action). The Federal Securities Action names as defendants CytRx, CytRx CEO and director Steven Kriegsman, CFO John Caloz, and Vice President David Haen. On October 1, 2014, the plaintiffs filed a consolidated class action complaint. That complaint alleged that CytRx s directors and officers either knew or were deliberately reckless in not knowing that the DreamTeam s authors failed to disclose that they were being paid. (Martin Aff. Ex. 1, Federal Securities Action Compl. 112, 118, 127.) It also alleged that CytRx s public statements were false and misleading because they failed to disclose the DreamTeam s disclosure practices, and that CytRx s stock price leading up to its secondary offering was artificially inflated as a result of the DreamTeam s articles. The complaint further alleged that CytRx s Compensation Committee granted a total 13

17 of 2.9 million spring-loaded stock option awards to themselves, CytRx s other directors and Defendants Kriegsman and Caloz. (Id. 12.) As discussed further below, the parties to the Federal Securities Action, along with the parties to the First Delaware Action and the parties to the California Derivative Action, as well as the parties to the State Securities Action, participated in mediation relating to a potential settlement on April 23-24, The Federal Securities Action did not settle at the mediation, but with the assistance of the mediator, the parties continued settlement negotiations. On November 4, 2015, the parties reached an agreement in principle to settle the Federal Securities Action and, on December 10, 2015, filed a Stipulation of Settlement with the federal court. (Martin Aff. Ex. 2.) The stipulation provides that, in exchange for the release of claims, $8,500,000 will be paid into a settlement fund for the benefit of class members (defined as purchasers of CytRx stock between November 20, 2013 and March 13, 2014), with $4,000,000 to be provided in cash, and the remainder to be paid in CytRx common stock. (Id ) On January 21, 2016, Judge King entered an order preliminarily approving the settlement of the Federal Securities Action. A hearing for final approval of the settlement is scheduled for May 9,

18 E. The First Delaware Action. In July 2014, three separate derivative actions were filed in this Court relating to CytRx s stock options grant in December Those cases were consolidated as In re CytRx Corp. Stockholder Derivative Litigation, C.A. No VCL (the First Delaware Action). The First Delaware Action named as defendants CEO and director Steven Kriegsman and directors Louis Ignarro, Joseph Rubinfeld and Richard Wennekamp, officers Benjamin Levin, Daniel Levitt and Scott Wieland, and named CytRx as a nominal defendant. The amended consolidated complaint in the First Delaware Action alleged that the CytRx board had improperly spring loaded the options grant on December 10, 2013, and issued the options at a below-market price at a time when CytRx insiders had material inside information that, when released, would cause the Company s stock price to rise. The complaint also contained allegations relating to the DreamTeam and CytRx s secondary offering, but the plaintiffs represented that no claims were based on those allegations. On November 10, 2014, defendants filed a motion to dismiss pursuant to Court of Chancery Rules 12(b)(6) and 23.1, and also filed a motion to stay the First Delaware Action pending resolution of the Federal Securities Action. On January 8, 2015, Vice Chancellor Laster heard the defendants motion to dismiss and motion to stay, and stayed any claims relating to the DreamTeam and secondary offering pending 15

19 resolution of the Federal Securities Action. Vice Chancellor Laster denied the defendants motion to dismiss. Ultimately, as a result of the April mediation, the parties to the First Delaware Action entered into a settlement, pursuant to which the defendants agreed to re-price certain of the options issued on December 10, 2013 to an adjusted market price, and also to make certain corporate governance reforms relating to option grant practices. (Martin Aff. Ex. 3, In re CytRx Corp. Stockholder Derivative Litig., Consol. C.A. No VCL, Stipulation and Agreement of Settlement, dated Aug. 28, 2015.) Among other things, the settlement included a release of all claims, but excluded claims asserted in the California Derivative Action other than those relating to the December 10, 2013 options grant. (Id ) On November 20, 2015, the Court of Chancery held a settlement hearing, at which it approved the settlement of the First Delaware Action, and entered an order dismissing the case with prejudice and releasing claims. (Martin Aff. Ex. 4, In re CytRx Corp. Stockholder Derivative Litig., Consol. C.A. No VCL, Order and Final Judgment, dated Nov. 20, 2015.) F. The California Derivative Action. On August 14, 2014, a CytRx stockholder filed a derivative action in the U.S. District Court for the Central District of California, captioned Pankratz v. Kriegsman, et al., Case No. 14-cv (the Pankratz Action ). On 16

20 August 15, 2015, a second CytRx stockholder filed a substantially similar derivative complaint captioned Taylor v. Kriegsman, et al., Case No. 14-cv (the Taylor Action ). Like the Federal Securities Action, these actions were assigned to Judge King. Both the Pankratz Action and the Taylor Action asserted claims derivatively on behalf of nominal defendant CytRx against certain current and former CytRx senior officers and members of the Company s board of directors for breaches of fiduciary duties and unjust enrichment relating to the Company s retention of DreamTeam. The Pankratz complaint (which was later designated the operative complaint) alleged that: In 2013, the defendants secretly hired stock promotion firm the DreamTeam Group ( Dream Team ) and/or its subsidiary to begin a misleading campaign designed to boost the Company s stock price. The plan (which was not disclosed to CytRx s stockholders) was simple, and would be executed in two main parts. First, DreamTeam would post and publish misleading articles and comments on investor websites (such as SeekingAlpha.com), touting the supposed strength of CytRx and its products. At no time did these articles disclose that CytRx (under the defendants direction and on their watch) had paid for the promotion. The defendants coordinated their own [SEC] disclosures with these DreamTeam articles touting the Company s future prospects. Second, when the share price was high enough, the defendants would cause the Company to conduct a secondary offering of Company stock at an artificially inflated price. (Martin Aff. Ex. 5, Pankratz Compl. 3.) The Pankratz complaint alleged that this was a textbook definition of a pump and dump scheme (id. 34), although such 17

21 characterization did not follow logically from the complaint since there were no allegations of any stock sales (i.e., the dump ). The Pankratz complaint also alleged that in December 2013, the defendants utilized their material, non-public information to market time stock options they awarded to themselves. (Pankratz Compl. 6.) The complaint alleged that the directors and officers breached their fiduciary duties by, among other things, failing to exercise oversight over the Company s internal controls. (Id. 27.) On October 3, 2014, the plaintiffs and defendants filed a joint stipulation to consolidate the Pankratz Action and the Taylor Action and appoint Co-Lead Counsel, which the federal court granted on October 8, The case was consolidated as In re CytRx Corporation Stockholder Derivative Litigation, Master File No.: 2:14-cv GHK (PJWx) (the California Derivative Action). The action names as defendants Steven Kriegsman, John Caloz, Max Link (former CytRx director, now deceased), Marvin Selter (former CytRx director, now deceased), Louis Ignarro, Joseph Rubinfeld, Richard Wennekamp, and names CytRx as a nominal defendant. On December 20, 2014, the defendants moved to dismiss the operative complaint pursuant to Fed. R. Civ. P and 12(b)(6), and alternatively moved to stay the California Derivative Action in deference to the Federal 18

22 Securities Action and/or the First Delaware Action. In addition, the defendants moved to dismiss the California Derivative Action for improper venue pursuant to Fed. R. Civ. P. 12(b)(3), based on a CytRx forum-selection bylaw that states (in relevant part): Unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim for breach of fiduciary duty owed by any director, officer, employee, or agent of the corporation to the corporation or the corporation s stockholders. On December 4, 2014, Judge King vacated the hearing date for the defendants pending motions and ordered supplemental briefing from the parties related solely to the issue of stay. Following the supplemental briefing, Judge King entered an order staying the California Derivative Action pending the resolution of the First Delaware Action. Based on the Court of Chancery s January 8, 2015 decision in the First Delaware Action to stay derivative claims based on the DreamTeam but to permit claims to go forward relating to the stock options issuance, the plaintiffs in the California Derivative Action filed a motion to vacate the stay that Judge King had entered. The defendants opposed that motion, and briefing by the parties in connection with the motion to vacate the stay was completed by March 16,

23 Around February 2015, the parties to the California Derivative Action, the First Delaware Action, the Federal Securities Action and the State Securities Action began to discuss potentially settling the actions and all agreed to retain a mediator, the Hon. Dickran M. Tevrizian (Ret.) (the Mediator ), an experienced mediator and former U.S. District Court judge in the Central District of California. On April 6, 2015, in furtherance of the parties settlement discussions, counsel for the California Derivative Action plaintiffs sent counsel for the defendants a detailed settlement demand. On April 15, 2015, the plaintiffs and defendants in the California Derivative Action each submitted their respective confidential mediation statements to the Mediator. On April 23, 2015 and April 24, 2015, counsel for the parties to the California Derivative Action, the Federal Securities Action, the First Delaware Action and the State Securities Action participated in all-day, in-person mediation sessions with the Mediator in Los Angeles. Counsel for the plaintiffs and defendants in the California Derivative Action attended both days of the mediation, but their efforts were unsuccessful at that time and the case did not settle at the conclusion of the mediation. Nonetheless, settlement discussions between the parties continued thereafter, with the assistance of the Mediator, while the parties continued to litigate the action. 20

24 Having learned of the settlement of the First Delaware Action via a filing on June 3, 2015 in the Federal Securities Action, Judge King on June 24, 2015 granted the plaintiffs earlier motion to vacate the stay and simultaneously denied the defendants motion to stay the California Derivative Action in favor of the Federal Securities Action. The court s June 24, 2015 order also denied the defendants motion for improper venue under Rule 12(b)(3), but sua sponte granted the defendants and CytRx leave to move to dismiss the California Derivative Action based on the forum-selection bylaw pursuant to the doctrine of forum non conveniens. On July 24, 2015, the defendants filed the motion to dismiss on grounds of forum non conveniens. Judge King granted that motion to dismiss without argument on October 30, 2015 (the October 30 Order ). Following the Mediation in April 2015 and throughout the period leading up to the October 30 Order, the parties to the California Derivative Action had continued to discuss settlement. On October 22, 2015, counsel for the plaintiffs sent a revised settlement demand to counsel for the defendants that served as the platform for continued settlement discussions between the parties. After the October 30 Order, the parties to the California Derivative Action continued to discuss potential settlement. While the October 30 Order dismissed the complaint without prejudice to pursuing the claims in the Delaware 21

25 Court of Chancery, on November 17, 2015, the plaintiffs instead filed a Notice of Appeal (the Appeal ) with the U.S. Court of Appeals for the Ninth Circuit (the Ninth Circuit ). On December 23, 2015, the parties to the California Derivative Action entered into a Memorandum of Understanding (the MOU ) documenting their agreement in principle for the resolution of the action. (Martin Aff. Ex. 6.) The MOU expressly provides that for the limited purpose of obtaining final approval of the proposed settlement of the California Derivative Action, CytRx consented, as expressly permitted by and pursuant to the Company s forum-selection bylaw, to the selection of the U.S. District Court for the Central District of California as an alternative forum to the Court of Chancery. (Id. 4.) In light of the agreement in principle reflected by the MOU, on February 11, 2016, the parties filed a stipulated motion to dismiss the Appeal voluntarily pursuant to Fed. R. App. P. 42(b), without prejudice to reinstatement of the Appeal so that the plaintiffs may appeal the October 30 Order in the event that the federal district court does not enter a final order approving the settlement agreed to by the parties, or such final order is not affirmed on appeal. The Ninth Circuit granted the parties stipulated motion on February 19, On February 25, 2016, the parties to the California Derivative Action filed a Notice of Settlement and Joint Request to Stay Proceedings pending court 22

26 approval of the settlement. On February 26, 2016, Judge King granted the request to stay proceedings until March 25, 2016 to provide the parties time to prepare and submit a stipulation of settlement. G. The Niedermayer Action. On June 24, 2014 (after the Federal Securities Action had been filed), Plaintiff Gordon Niedermayer made a demand to inspect the books and records of CytRx pursuant to 8 Del. C Contrary to Plaintiffs statement that the Company slow rolled the inspection, 3 Niedermayer failed to timely respond to CytRx s request for additional required information regarding Niedermayer s stock ownership including periods of silence from his counsel of 1 month (July 1, 2014 to July 29, 2014), 4 months (August 4, 2014 to December 16, 2014), and 9 months 3 Accusing the Company of slow rolling Plaintiffs Section 220 inspection demand to somehow pass blame for their counsel s inattention to their alleged concerns for a period of over 16 months is incredulous, particularly upon examination of the statutory requirements under 8 Del. C. 220, the correspondence between counsel, the timeline set forth below, and Plaintiffs failure to take any action to correct the alleged slow rolling. Moreover, counsel for other CytRx stockholders also made inspection demands, met the statutory requirements after the Company requested the necessary additional information, and received their documents and without unexplained time gaps of 1 month, 4 months, and 9 months. (See Silverberg v. Kriegsman, C.A. No VCL, Verified Shareholder Derivative Complaint (Dkt. 1), dated July 21, 2014.) Thus, Plaintiffs also cannot assert a plausible explanation for why CytRx would produce the same documents to other stockholder plaintiffs counsel but decide to slow roll their counsel. Plaintiffs blame theory is contradicted by the facts, and makes no sense. 23

27 (December 19, 2014 to September 18, 2015) 4 during which time the California Derivative Action and First Delaware Action were filed. Ultimately, Plaintiffs inspected books and records in October The following timeline of events concerning Plaintiffs inspection efforts demonstrates that the lengthy delays were caused by Plaintiffs, not CytRx: Date Plaintiffs Action CytRx Action 6/24/14 Niedermayer makes inspection demand. 7/1/14 CytRx requests proof of Niedermayer beneficial ownership of Company stock. 7/29/14 (28 days) Niedermayer sends printout that makes no reference to Niedermayer. 8/5/14 CytRx communicates deficiency of the printout providing no proof of Niedermayer beneficial ownership by failing to even reference Niedermayer. 12/16/14 Niedermayer sends (4½ months) brokerage account printout. 12/19/14 CytRx acknowledges receipt of 12/16/14 statement, sends draft confidentiality agreement, and requests required representation by Niedermayer under oath. 9/14/15 Reed makes demand. 9/18/15 (9 months) Niedermayer sends signed confidentiality agreement and representation under oath. 24 (cont d)

28 The Niedermayer Action was then filed on December 14, 2015, a full 16 months after the California Derivative Action was filed; after a global mediation of the California Derivative Action, the First Delaware Action, and the Federal Securities Action had taken place; and after months of extended settlement discussions directed at a resolution of all of the actions. Plaintiffs also filed the Niedermayer Action after the Court of Chancery had approved the settlement of the First Delaware Action, which released claims relating to the December 10, 2013 options grant. The Complaint in the Niedermayer Action repeats the claims and allegations in the complaint in the California Derivative Action, with some paragraphs seemingly also copied from the Federal Securities Action. For example, the Complaint alleges: In the fall of 2013, Defendants retained The Dream Team Group ( Dream Team ) to initiate a campaign to tout aldoxorubicin s prospects to boost the price of the Company s stock. First, the Dream Team would have a news article or research report drafted that was then edited and approved by the Company s executive officers. Second, Dream Team writers would then publish the misleading (cont d from previous page) 9/23/15 CytRx acknowledges receipt of Reed and Niedermayer correspondence and indicates that documents are being prepared. 10/16-23/15 CytRx delivers documents. 25

29 articles on investor websites, Seeking Alpha and Forbes, touting the purported strength of CytRx and aldoxorubicin without disclosing payment. Third, when the Company s share price reached sufficient heights, CytRx and Kriegsman, along with [defendants Hein and Caloz] would: (i) consummate the Secondary Offering with artificially inflated shares of CytRx s common stock; and (ii) award themselves and members of the Company s Board with massive amounts of perfectly-timed stock option grants. (Compl. 7.) Further, the Complaint curiously commits the same mistake first set forth in the Pankratz and Taylor complaints by incorrectly describing this as a classic pump-and-dump scheme. (Id. 16.) Moreover, ignoring the First Delaware Action and its settlement approved on November 20, 2015 (notice of which was mailed to all CytRx stockholders and found adequate by this Court), the Complaint also alleges that on December 10, 2013, the Compensation Committee granted stock options to CytRx directors and officers, and that the next day, upon release of news regarding clinical trials, CytRx s stock price rose. (Id ) But these spring loaded stock options claims were settled and released in the First Delaware Action. The Complaint alleges that the defendants are liable for breach of fiduciary duty for failure of oversight and unjust enrichment. (Compl. 190, 199.) Plaintiffs seek as relief, among other things, disgorgement of the stock options, and damages for the costs of the litigation and settlement of the Federal Securities Action. 26

30 On March 18, 2016, after the close of business and without prior notice to the Court or the parties, Plaintiffs filed an Amended Complaint. 5 The Amended Complaint contains substantially the same allegations relating to the spring-loaded stock options and DreamTeam as the original Complaint that are duplicative of the complaints in the California Derivative Action and the Federal Securities Action. The Amended Complaint contains details about the settlement of the First Delaware Action relating to the Court s approval of that settlement and release of claims surrounding the spring-loaded options (Am. Compl. 124), but then inexplicably continues to assert claims relating to the spring-loaded options that have already been released (id ). While the Amended Complaint purports to add allegations based on documents received in response to Niedermayer s Section 220 demand, those claims are not new either. Rather, the Amended Complaint contains the same citations to documents that were produced to stockholder Herbert Silverberg in 5 In filing their Amended Complaint, Plaintiffs made no attempt to comply with Court of Chancery Rule 5.1(e)(2), which provides that [o]n the same day that the plaintiff files the complaint and any Documents as a Confidential Filing, and contemporaneously whenever reasonably practicable, the plaintiff shall use its best efforts to give actual notice to each person who could have a legitimate interest in designating information in the foregoing materials as Confidential information, including a copy of a proposed public version of the complaint. Plaintiffs, despite having full knowledge of counsel for the various defendants, made no attempts to provide defendants counsel with a copy of the Amended Complaint or proposed redactions thereto. 27

31 response to a Section 220 demand, and which Silverberg incorporated into a Verified Shareholder Derivative Complaint filed on July 21, 2014, which ultimately became part of the consolidated First Delaware Action. (See, e.g., Silverberg v. Kriegsman, C.A. No VCL, Verified Shareholder Derivative Complaint filed July 21, 2014 (Dkt. 1), 32, 37, 38.) The only new claim in the Amended Complaint is a purported derivative claim against the current CytRx board of directors for breach of fiduciary duty for allegedly impermissibly waiving CytRx s forum-selection bylaw as part of the proposed settlement of the California Derivative Action. (See Am. Compl ) Not only is this claim specious, but also, as discussed below, it is not ripe and further demonstrates why the Niedermayer Action should be stayed. ARGUMENT I. PRACTICAL CONSIDERATIONS WARRANT A STAY OF THE NIEDERMAYER ACTION PENDING RESOLUTION OF THE CALIFORNIA DERIVATIVE SETTLEMENT. The authority to grant a stay is incident to the inherent power of a court to exercise its discretion to control the disposition of actions on its docket in order to promote economies of time and effort for the court, litigants, and counsel. Brenner v. Albrecht, C.A. No VCP, 2012 WL , at *4 (Del. Ch. Jan. 27, 2012) (citation omitted). Among the relevant factors for a court 28

32 to consider when deciding whether to grant a stay are practical considerations [that] make it unduly complicated, inefficient, and unnecessary for [the action before it] to proceed ahead or apace of a related litigation pending elsewhere. Id. (alterations in original) (internal quotation marks and citation omitted). The California Derivative Action and the Niedermayer Action are unquestionably duplicative. Both actions allege that CytRx hired the DreamTeam to promote its articles (Compl. 7, 48; Pankratz Compl. 3, 30); that CytRx s directors and officers acted improperly by not disclosing that it had paid the DreamTeam (Compl. 7; Pankratz Compl. 3, 30, 36); that the DreamTeam articles artificially inflated CytRx s stock price (Compl. 7, 52; Pankratz Compl. 3, 5); that CytRx took advantage of that artificially inflated stock price to conduct a secondary offering (Compl. 7, 16, 66; Pankratz Compl. 3, 34, 35, 36); that CytRx directors and officers benefitted from the receipt of spring loaded options (Compl , 70; Pankratz Compl. 6, 39-44); and that the CytRx directors and officers breached their fiduciary duties and were unjustly enriched (Compl. 44, , 199; Pankratz Compl. 27, 39). Indeed, Plaintiffs counsel has conceded that the two actions will likely involve overlapping judgments. Niedermayer v. Kriegsman, C.A. No VCMR, Tr. at 9 (Del. Ch. Mar. 8, 2016) (TRANSCRIPT). 29

33 As this Court is aware, derivative suits are brought on behalf of the corporation and thus, by definition, must further the corporation s best interests. Brenner, 2012 WL , at *4 (emphasis in original) (citation omitted). Litigating the Niedermayer Action while a settlement is pending in the California Derivative Action that will resolve the claims in the Niedermayer Action is not in CytRx s best interests, and would be a waste of the Company s and the other litigants time and resources, as well as a waste of this Court s resources. Thus, principles of judicial economy, comity and preservation of resources dictate that the Niedermayer Action should be stayed pending the settlement of the California Derivative Action. See Derdiger v. Tallman, 773 A.2d 1005, 1018 (Del. Ch. 2000) ( To preserve the resources of the courts and the parties, avoid duplication of efforts, and also to avoid what I consider a palpable risk of inconsistent findings and results, this action will be stayed in favor of the earlier-filed California Class Action. ). This Court confronted almost the exact same situation in Cook v. Whitman, and found that a stay was appropriate. In Cook, stockholders of Hewlett Packard, a Delaware corporation, brought derivative claims in Delaware after receiving documents pursuant to a Section 220 demand. A prior derivative case involving the same parties and facts had been filed in a California federal court, and the parties to the California action had reached an agreement to settle the 30

34 action, which settlement was being presented to the California federal court for approval. The settlement in the California derivative action would likely have precluded the Delaware derivative action. The Delaware plaintiff indicated that he intended to oppose the California derivative settlement. The defendants moved to stay the Delaware litigation until the California derivative settlement was approved. The plaintiff opposed such a motion, and also argued that the Court of Chancery should expedite and decide the motion to stay before the California settlement hearing occurred. The Court found that: Essentially, the Plaintiff requests an expedited decision in the belief that, if my decision on the Motion to Stay is favorable to him, he may find that decision useful to leverage a favorable decision at the California preliminary settlement hearing. It is not, however, generally the purpose of this Court to act as a stalking horse for issues that a sister court will have before it, and which that court is perfectly qualified to resolve. More to the point, expedited litigation here, or indeed any continued briefing of the Motion to Stay, would risk waste of limited judicial and litigants resources in light of the pending settlement of the matter in California, which has a reasonable likelihood of staying, if not terminating, litigation here. Cook, 2014 WL , at *2. Thus, the Court granted defendants motion to stay. The same is true here, and this Court should grant the Motion to Stay. The fact that CytRx has a forum-selection bylaw does not change this analysis. While CytRx asserted the bylaw in the California Derivative Action and the U.S. District Court dismissed the California Derivative Action based on the bylaw, the 31