MICKAEL A. FLAA, Plaintiff,
DANIEL C. MONTANO, VIKTORIYA T. MONTANO, JOHN W. JACOBS, ERNEST C. MONTANO, ERNEST MONTANO III and JOONG KI BAIK, Defendants, and CARDIOVASCULAR BIOTHERAPEUTICS, INC. Nominal Defendant.
Date Submitted: May 2, 2014
Richard P. Rollo, of Richards, Layton & Finger, P.A., Wilmington, Delaware; OF COUNSEL: Barry F. Cannaday, of Dentons U.S. LLP, Dallas, Texas, Attorneys for the Plaintiff.
David L. Finger, of Finger & Slanina, LLC, Wilmington, Delaware, Attorney for the Defendants. GLASSCOCK, Vice Chancellor
GLASSCOCK, Vice Chancellor
This Memorandum Opinion concerns the latest skirmish in the battle for control of CardioVascular BioTherapeutics, Inc. ("Cardio, " or the "Company"), between forces allied with its founder, Daniel Montano, and those supporting a large creditor of Cardio, Calvin Wallen. Although Cardio has not yet been able to monetize any product, both parties view the Company as on the cusp of success. The current dispute is over the second written consent action taken on behalf of the Wallen faction in less than a year, seeking to seat a board of directors amenable to him, and purporting to remove Montano and his supporters from the Cardio board. The stockholders' view, as revealed by the written consent actions, is in near equipoise. The deciding votes in both consent actions were cast by Vizier Investment Capital Limited ("Vizier"), an entity created by Montano to hold Cardio stock he held jointly with his then-wife, Victoria "Vicki" Montano. Vicki, now divorced from Montano, purported to consent with respect to the Vizier shares in favor of the Wallen slate in the first consent action; I found those consents to be invalid, as Vicki lacked the authority to vote the shares. Montano has since entered personal bankruptcy, and the Vizier shares are now under the control of a trustee in bankruptcy. The trustee provided a proxy to Wallen which he used to vote the Vizier shares in favor of his slate of directors in the second consent action; for the reasons below, I find that the agreement between Wallen and the trustee was inadequately disclosed to stockholders of Cardio, and that the second consent action is invalid.
Shortly after the first consent action, the Wallen faction was seated as the "new" Cardio board, and one of the board members, Plaintiff Mickael A. Flaa, brought the first incarnation of this action under Section 225 to confirm the validity of that board. I entered a status quo order leaving the Wallen faction in place as the interim board of directors, with its ability to act limited to actions in the normal course of business, pending resolution of the dispute in this Court. After I found that the first consent action was invalid, the Plaintiff appealed, and the parties agreed that the status quo order should remain in effect. That appeal was delayed, however, as Wallen mounted the second consent action. Because this second action had the potential to moot all issues on appeal, the Supreme Court stayed consideration of the appeal, and the current litigation ensued.
Cardio has been, effectively, in limbo for nearly a year, with a board of directors unable to exercise plenary authority over the corporation. Moreover, the record indicates that it has been years since an annual meeting of the stockholders has taken place. A stockholder meeting presided over by the interim board would inevitably drive more litigation, and seating the old Montano-faction board would put back in place directors last elected years ago, who have not served in nearly a year. In order to ensure a board of directors representing the preference of the stockholders as expressed by exercise of their franchise, I employ my discretion to order a stockholder meeting to be held promptly, presided over by a special master.
1. Flaa I
As explained in a prior iteration of this action, Flaa I,  Cardio is a Delaware corporation that, due to its as-yet unsuccessful efforts to develop a drug candidate for treating coronary artery disease, peripheral artery disease, venous ulcers, and diabetic foot ulcers, has faced a serious liquidity crisis. This litigation involves the second Court of Chancery action within a matter of months brought pursuant to 8 Del. C. § 225, seeking to confirm the removal of certain directors of Cardio, including its founder Daniel Montano, by way of a written consent action led by one of Cardio's largest creditors, Calvin Wallen.
As presented in more detail in Flaa I, in January 2013, Wallen, hoping to salvage some of his investment in Cardio, sent a letter to the Company's board of directors, in which he set forth a financing proposal intended to infuse $8, 500, 000 of capital into the Company, contingent on the immediate resignation of the director Defendants, including Montano, and on Montano waiving all claims against Cardio. When the Cardio board rejected his financing proposal, Wallen initiated a written consent action (the "First Consent Action"), requesting that stockholders consent to (1) amending the Company's bylaws with respect to director removal and appointments, (2) removing the Defendant directors from the Cardio board, and (3) directing the remaining directors to consider his financing proposal. As a result of Wallen's written consent solicitation, the Company received consents from 51.22% of shares outstanding, and the Plaintiff filed suit in this Court in June 2013, seeking to confirm the effectiveness of the First Consent Action. However, I determined in Flaa I that a dispositive consent delivered on behalf of Vizier, a Bahamian company jointly owned by Montano and his ex-wife, Vicki, was executed without actual or apparent authority; accordingly, I found that the First Consent Action was ineffective to remove the Defendant directors from the Cardio board.
At the start of litigation in Flaa I, a status quo order was put in place (the "Status Quo Order"), permitting incumbent directors Grant Gordon and Mickael Flaa, as well as the incoming directors seated pursuant to the First Consent Action—Wallen, Jon Ross, and Robert Schleizer—(collectively, the "Interim Board") to sit on the Cardio board of directors pending resolution of the litigation.After I issued my October 4, 2013 Memorandum Opinion, the Plaintiff filed an appeal of that decision in our Supreme Court. Pending that appeal, the parties stipulated to abide by the Status Quo Order. As explained in more detail below, the appeal of my October 4 Memorandum Opinion has been stayed pending resolution of this 225 action,  and the Interim Board continues to manage the Company pursuant to the Status Quo Order.
2. The Second Consent Action
On November 6, 2013, as the parties were briefing the Defendants' appeal in Flaa I, Wallen caused Cardio stockholder CCM Partners Fund LP ("CCM") to deliver a written consent to Cardio's registered agent, initiating a new written consent action (the "Second Consent Action"). In a November 16, 2013 press release, the Company said of the Second Consent Action, "[t]o avoid any potential confusion, the solicitation is being made by Calvin Wallen III, a [Cardio] stockholder, and not by [Cardio]." Upon delivery of CCM's written consent, Wallen circulated proxy solicitation materials, consisting of a proxy statement and proxy card dated November 11, 2013, to Cardio's stockholders.
The proxy card included in Wallen's solicitation materials stated, in part:
The undersigned hereby acknowledges receipt of the proxy statement in connection with the proposals to amend the Amended and Restated Bylaws of [Cardio] and to remove all members of the Board of Directors of the Corporation other than Mickael Flaa and Grant Gordon . . . .
The undersigned hereby constitutes and appoints Calvin A. Wallen, III, as his, her or its true and lawful agent and proxy with full power of substitution and re-substitution, to execute a written consent, withhold consent, or abstain on behalf of all of the shares held by the undersigned as of the Record Date, in accordance with the instructions given herein.
The proxy statement included in the solicitation materials described Wallen's "proposals" in more detail: Proposition 1 purported to amend the Cardio bylaws with respect to removal and appointments, and Proposition 2 to remove certain directors. Specifically, Proposition 2 stated:
BE IT RESOLVED, that the undersigned hereby consents to, adopts and approves the removal of all of the members of the Board of Directors of the Corporation in office immediately prior to the effective time of [the] Written Consent other than Mickael A. Flaa and Grant Gordon (each director so removed, a "Removed Director, " and all directors so removed, collectively, the "Removed Directors"), and without limiting the intent of the stockholders to remove all such Removed Directors, the Removed Directors shall specifically include each of Daniel C. Montano, Viktoriya Tamlenova Montano, Ernest C. Montano, Ernest Montano ...