EXHIBIT 10.1

 

 

KATHLEEN A. HERKENHOFF (168562)

kah@weiserlawfirm.com

THE WEISER LAW FIRM, P.C.

12707 High Bluff Drive, Suite 200

San Diego, CA 92130

Telephone: (858) 794-1441

Facsimile:  (858) 794-1450

Co-Lead Counsel for Plaintiffs

[Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

 

This Stipulation and Agreement of Settlement dated April 1, 2016 (the "Stipulation"), is made and entered into by and among the following Parties (as defined further herein), to the consolidated shareholder derivative action captioned In re CytRx Corp. Stockholder Derivative Litigation, pending before the U.S. District Court, Central District of California, Western Division (the "Federal Court" or the "Court") under Master File No. 2:14-cv-06414-GHK (PJWx), (the "Action"), each by and through their respective counsel: (i) plaintiffs Jared Pankratz ("Pankratz") and Jack Taylor ("Taylor," and together with Pankratz, "Plaintiffs"), derivatively on behalf of CytRx Corporation ("CytRx" or the "Company"); (ii) the Individual Defendants (as defined herein); and (iii) nominal defendant CytRx (together with the Individual Defendants, "Defendants"). This Stipulation is intended by the Parties to fully, finally and forever resolve, discharge and settle the above-captioned litigation and all Released Claims (as defined herein), upon and subject to the terms and conditions hereof.

I.	BACKGROUND AND PROCEDURAL HISTORY

CytRx, a Delaware corporation maintaining its corporate headquarters in Los Angeles, California, is a publicly-traded biopharmaceutical research and development company.

On August 14, 2014, plaintiff Pankratz filed a shareholder derivative complaint in the Federal Court on behalf of nominal defendant CytRx, captioned Pankratz v. Kriegsman, et. al., Case No. 14-cv-06414 (the "Pankratz Action").  On August 15, 2015, plaintiff Taylor filed a substantially similar shareholder derivative complaint on behalf of nominal defendant CytRx in the Federal Court captioned Taylor v. Kriegsman, et. al., Case No. 14-cv-06451 (the "Taylor Action").

 

Plaintiffs asserted claims derivatively on behalf of CytRx against certain current and former CytRx senior officers and members of the Company's Board of Directors (the "Board") for breach of fiduciary duty for disseminating false and misleading information; for breach of fiduciary duty for failing to maintain internal controls; for unjust enrichment; for gross mismanagement; for abuse of control; and for insider selling and misappropriation of information, relating to the Company's retention of a stock promotion firm, the DreamTeam Group ("DreamTeam") and/or the granting of stock options to officers and directors of CytRx in December 2013.

The website SeekingAlpha.com had published an article on March 13, 2014 that claimed that DreamTeam caused a series of paid promotional articles regarding CytRx and its products to be published, without disclosing payment, and further alleged that members of CytRx management had reviewed and edited the DreamTeam articles.  Plaintiffs alleged that the Individual Defendants and DreamTeam failed to disclose a paid relationship between DreamTeam (and their agents) and CytRx; that DreamTeam conducted a misleading promotional campaign designed to boost CytRx's stock price which included, inter alia, the publication of a series of articles and comments on investor websites touting CytRx and its products between September 18, 2013 and February 10, 2014; and that DreamTeam's promotional campaign was coordinated with CytRx's own public statements and filings during that time frame.  Plaintiffs also alleged that the DreamTeam promotional campaign artificially inflated the Company's stock price prior to a secondary offering of Company stock completed in February 2014.  In addition, Plaintiffs asserted claims based on allegations of the "spring loading" of stock options issued to officers and directors of CytRx in connection with the annual stock option grants in December 2013.

 

On October 3, 2014, 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, 2014.

 

On December 20, 2014, Defendants moved to dismiss the Action pursuant to: (a) Fed. R. Civ. P. 23.1 ("Rule 23.1") for failure to make a pre-suit demand on the Board; (b) Fed. R. Civ. P. 12(b)(6) ("Rule 12(b)(6)") for failure to state a claim upon which relief can be granted, and (c) Fed. R. Civ. P. 12(b)(3) ("Rule 12(b)(3)") for improper venue based on the Company's forum-selection bylaw, which provides:

 

Unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of Delaware shall be the sole and exclusive forum for: (i) any derivative action or proceeding 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, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the certificate of incorporation or the by-laws of the corporation or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.  Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this Section. (Emphasis supplied.)

 

Alternatively, Defendants moved to stay the Action in favor of a federal securities fraud class action pending in the Federal Court captioned In re CytRx Corp. Securities Litig., No. 14-cv-01956 (C.D. Cal.) (the "Federal Securities Action") and/or a consolidated shareholder derivative action then pending in the Delaware Court of Chancery (the "Delaware Court") captioned In re CytRx Corp. Stockholder Deriv. Litig., C.A. No. 9864-VCL (the "Delaware Action").  Plaintiffs filed briefs in opposition to Defendants' motions on November 6, 2014, and Defendants filed reply briefs on November 20, 2014.  On December 8, 2014, the Federal Court ordered supplemental briefing relating to Defendants' Motion to Stay, which Plaintiffs and Defendants submitted on December 15, 2014 and December 22, 2014, respectively.

 

On January 8, 2015, the Federal Court entered an Order staying the Action pending the resolution of the Delaware Action (the "Stay Order").  In the Stay Order, however, the Federal Court stated that it would nonetheless "remain open" pending any subsequent developments in the Delaware Action that might necessitate vacating the stay of the Federal Action.

On February 27, 2015, Plaintiffs filed a motion to vacate the stay of this Action (the "Motion to Vacate Stay"), based on subsequent developments in the Delaware Action.  Specifically, Plaintiffs' Motion to Vacate Stay was based on the Delaware Court's stay of derivative claims arising from allegations regarding DreamTeam's stock promotion campaign.  Briefing by the Parties in connection with the Plaintiffs' Motion to Vacate Stay was completed on March 16, 2015.

 

In and around February 2015, the Parties commenced discussions regarding a potential resolution of the Federal Action and, in pursuance thereof, agreed to participate in mediation.  The Parties retained the Hon. Dickran M. Tevrizian (Ret.) (the "Mediator" or "Judge Tevrizian"), an experienced mediator and former U.S. District Court Judge for the Central District of California.  On April 6, 2015, in furtherance of the Parties' settlement discussions, counsel for Plaintiffs sent counsel for Defendants a detailed settlement demand.  On April 15, 2015, Plaintiffs and Defendants submitted mediation statements to Judge Tevrizian.  On April 23 and 24, 2015, counsel for the Parties to the Federal Action (along with counsel for the parties to the Federal Securities Action, the Delaware Action, and a securities class action pending in Los Angeles County Superior Court) participated in day-long, in-person mediation sessions with Judge Tevrizian in Los Angeles, California (the "Mediation").  Counsel for Plaintiffs and Defendants attended both days of the Mediation, but their efforts to reach a final resolution were unsuccessful at that time and the Federal Action did not settle at the conclusion of the Mediation.

 

Nonetheless, the submissions made by the Parties and other communications in connection with the Mediation served as the basis for an extended series of subsequent settlement communications and discussions, with the assistance of the Mediator.

 

On June 1, 2015, the parties to the Delaware Action announced that they had reached an agreement on a proposed settlement of that litigation.  The settlement of the Delaware Action was subsequently approved by an Order and Final Judgment entered by the Delaware Court on November 20, 2015.  The release provision set forth in the settlement agreement in the Delaware Action specifically excluded the release of the Plaintiffs' derivative "claims asserted in [the Federal Action], other than any and all allegations and claims relating to the issuance of stock option grants."

 

On June 24, 2015, the Federal Court granted Plaintiffs' Motion to Vacate Stay,  lifting the stay it previously entered in favor of the Delaware Action.  The Federal Court relied on statements from the Delaware Action plaintiffs at a January 8, 2015 hearing demonstrating that, contrary to the complaint in the Delaware Action, they were not likely to pursue relief based on the DreamTeam stock promotion allegations—which statements the Federal Court concluded were confirmed by the Delaware Action settlement agreement, which resolved the spring-loaded stock option claims but not the DreamTeam stock promotion claims.  The Federal Court also denied Defendants' prior motion to stay the Action in favor of the Federal Securities Action.  The Federal Court further denied Defendants' motion to dismiss pursuant to Rule 12(b)(3) for improper venue, finding that an argument for dismissal based on the Company's forum-selection by-law should be brought pursuant to the doctrine of forum non conveniens and not Rule 12(b)(3).  The Federal Court permitted Defendants to file a motion to dismiss on the grounds of forum non conveniens based on the Company's forum-selection bylaw within thirty days.  The Federal Court denied without prejudice Defendants' motion to dismiss pursuant to Rule 23.1 and, likewise, stated that Defendants should renew their Rule 12(b)(6) motion "only if we determine that this is the appropriate venue for Plaintiffs' suit."

 

On July 24, 2015, Defendants filed their motion to dismiss on the grounds of forum non conveniens (the "FNC Motion").  The Parties completed briefing on the FNC Motion on September 9, 2015.  On October 30, 2015, the Court granted the FNC Motion and the Action was dismissed without prejudice to Plaintiffs' right to file their derivative claims in the Delaware Court (the "October 30 Order").

 

On November 17, 2015, Plaintiffs instead filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit (the "Ninth Circuit"), with the appeal captioned Pankratz et al. v. Kriegsman et al. and docketed in the Ninth Circuit as Case No. 15-56773 (the "Appeal").

 

Throughout the period following the Mediation, the briefing of the Motion to Vacate Stay and the FNC Motion, and the pendency of the Appeal, counsel for the Parties continued settlement discussions with the assistance of Judge Tevrizian.  By the first week of December 2015, the material terms of the settlement had largely been agreed to by the Parties.

 

On December 23, 2015, the Parties executed a Memorandum of Understanding (the "MOU") documenting their binding agreement to settle the Federal Action.  For the limited purpose of effectuating the Settlement, CytRx consented, and hereby consents, pursuant to and as permitted by its forum-selection bylaw, to the selection of this Court as an alternative forum to the Delaware Court of Chancery for a shareholder derivative action.

 

On February 11, 2016, in light of the MOU and with the assistance of Ann Julius, the Ninth Circuit mediator, the Parties filed a stipulated motion to dismiss the Appeal voluntarily pursuant to Fed. R. App. P. 42(b), without prejudice to reinstatement in the event that this Court does not enter a final order approving the Settlement or such final order is not affirmed on appeal.  The Ninth Circuit granted the Parties' stipulated motion on February 19, 2016.

 

On February 25, 2016, the Parties filed with this Court a Notice of Settlement and Request to Stay the proceedings until March 25, 2016 to allow the Parties to prepare this Stipulation of Settlement, which request the Court granted on February 26, 2016.  On March 29, 2016, the Parties filed a Request to Extend the Stay of Proceedings until April 4, 2016, which request the Court granted on March 30, 2016.

II.	CLAIMS OF THE PLAINTIFFS AND BENEFITS OF SETTLEMENT

 

Plaintiffs believe that the claims they have asserted in the Action on behalf of CytRx have merit.  Plaintiffs, however, recognize and acknowledge the expense and length of continued proceedings necessary to prosecute the Action against the Individual Defendants through trial and appeal(s).  Plaintiffs and their counsel have also taken into account the uncertain outcome and the risk of any litigation, especially in complex actions such as the Action, as well as the difficulties and delays inherent in such litigation and the potential difficulties in collecting upon any judgment.  Plaintiffs and their counsel are also mindful of the inherent problems of proof and possible defenses to the claims asserted in the Action.  Based on their evaluation, Plaintiffs and their counsel have determined that the Settlement set forth in this Stipulation is fair, reasonable and adequate and in the best interests of CytRx and CytRx stockholders.  Plaintiffs' Counsel also believes that the Settlement set forth in this Stipulation confers substantial benefits upon CytRx and its stockholders.  Plaintiffs' Counsel base this conclusion upon, among other things, the nature of the issues and relief, their extensive investigation during the development, initiation, prosecution, and settlement of the Action, which included: (i) inspecting, reviewing and analyzing the Company's public filings with the U.S. Securities and Exchange Commission ("SEC"), press releases, announcements, transcripts of investor conference calls, and news articles; (ii) researching corporate governance issues; (iii) researching the applicable law with respect to the claims asserted in the Action and the potential defenses thereto; (iv) preparation and filing of their respective shareholder derivative complaints; (v) opposing multiple motions to dismiss and/or stay the Action; (vi) preparing and submitting a detailed mediation statement; (vii) preparing and submitting multiple detailed settlement demands; (viii) participating in the two day in-person Mediation in Los Angeles before Judge Tevrizian; (ix) reviewing over 1,250 pages of confidential, non-public documents provided by Defendants; and (x) participating in extensive confidential settlement discussions and other communications with the Mediator and counsel for Defendants.

III.	DEFENDANTS' DENIALS OF WRONGDOING AND LIABILITY

Defendants have denied, and continue to deny, that they committed or aided and abetted the commission of any unlawful or wrongful acts alleged in the Action, and expressly maintain that they diligently and scrupulously complied with their fiduciary duties and other legal duties.  Defendants are entering into the Stipulation solely because the proposed Settlement will eliminate the burden and expense of further litigation.  Defendants, without admitting any liability, have concluded that it is desirable that the claims and allegations against them be settled on the terms reflected in this Stipulation and the settlement of the Action on such terms is fair, reasonable, adequate and in the best interests of CytRx and its stockholders.

IV.	TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT

NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among Plaintiffs (derivatively on behalf of CytRx), the Individual Defendants and CytRx, by and through their respective counsel or attorneys of record, as follows:

 

1.	Definitions

As used in this Stipulation, the following terms have the meanings specified below.  In the event of any inconsistency between any definition set forth below and any definition set forth in any other document related to the Settlement set forth in this Stipulation, the definitions set forth below shall control.

¹  Messrs. Link and Selter passed away during the pendency of the Action.  Notices of their deaths were filed and served on October 20, 2014 and November 10, 2014.

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

 

The Parties acknowledge that they may discover facts in addition to or different from those now known or believed to be true by them, with respect to the Released Claims, as the case may be, but it is the intention of the Parties to completely, fully, finally, and forever compromise, settle, release, discharge, and extinguish any and all of the Released Claims known or unknown, suspect or unsuspected, contingent or absolute, accrued or unaccrued, apparent or unapparent, which now exist, or heretofore existed, or may hereafter exist, and without regard to the subsequent discovery of additional or different facts.

 

2.	Settlement Consideration

 

CytRx, through its Board, shall adopt and implement the comprehensive set of corporate governance measures (the "Reforms") attached as Exhibit A to this Stipulation, including adopting resolutions and amending committee charters to the extent necessary for the implementation of the Reforms.  The Action was a factor in the decision to agree to adopt and implement the Reforms. CytRx acknowledges that the Reforms confer a substantial and material benefit on CytRx and current CytRx stockholders.

 

3.	Procedure for Implementing the Settlement

 

 

 

4.

Releases

 

 

5.	Plaintiffs' Counsel's Attorneys' Fees and Expenses

 

 

 

 

 

 

 

 

 

 

6.	Conditions of Settlement, Effect of Disapproval, Cancellation or Termination

A.	The dismissal with prejudice of the Action without the award of any damages, costs, fees or the grant of any further relief except for an award of fees and expenses the Court may make pursuant to ¶ 5 of this Stipulation;

B.	The entry of the Order and Final Judgment approving the proposed Settlement and providing for the dismissal with prejudice of the Action and approving the grant of the releases described herein;

C.	The inclusion in the Order and Final Judgment of a provision enjoining Plaintiffs, CytRx stockholders, and CytRx from asserting any of the Released Claims;

D.	The entry by the Court of the Order and Final Judgment substantially in the form of Exhibit D hereto; and

E.	The Order and Final Judgment has become Final.

 

 

7.	Bankruptcy

 

 

8.	Miscellaneous Provisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IN WITNESS WHEREOF, the Parties have caused the Stipulation to be executed by their duly authorized attorneys and dated April 1, 2016.