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In re Cytrx Corp. Stockholder Derivative Litigation

Court of Chancery of Delaware

February 22, 2017

In re CytRx Corporation Stockholder Derivative Litigation II,

          Seth D. Rigrodsky, Esquire Brian D. Long, Esquire Gina M. Serra, Esquire Jeremy J. Riley, Esquire Rigrodsky & Long, P.A.

          Peter B. Andrews, Esquire Craig J. Springer, Esquire David M. Sborz, Esquire Andrews & Springer LLC.

         Dear Counsel:

         This letter resolves plaintiffs' motions for appointment of a lead plaintiff and lead counsel. For the reasons described herein, plaintiffs Gordon Niedermayer and Brent Reed (collectively, the "Niedermayer Plaintiffs") are appointed as lead plaintiffs and Andrews & Springer LLC and Gainey McKenna & Egleston are appointed as lead co-counsel. The motion filed by plaintiff Jack Taylor is denied.

         I. BACKGROUND

         A. Facts

         The facts underlying this case are well known. On March 13, 2014, Richard Pearson, a contributor on the website Seeking Alpha, published an article titled, "Behind the Scenes with Dream Team, CytRx and Galena, " in which he detailed how he went undercover after The Dream Team ("Dream Team") solicited him to write favorable articles on behalf of CytRx Corporation ("CytRx" or the "Company") without disclosing payment, how Dream Team's articles coincided with the company's disclosures and stock offerings, and how CytRx's stock price responded. Pearson stated that his goal was "to determine how involved management from these two companies were [sic] in this undisclosed paid promotion scheme."[1] With respect to CytRx, Pearson concluded that members of management at CytRx, including President and Chief Executive Officer Steven A. Kriegsman and Vice President for Business Development David J. Haen, were "intimately involved in reviewing and editing the paid articles"[2] on CytRx stock.

         Before any litigation stemming from the Pearson report began, CytRx adopted a forum selection bylaw. The bylaw states as follows:

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 . . . .[3]

         B. Procedural History

         Following publication of Pearson's article, multiple lawsuits were filed in Delaware and California alleging Caremark[4] claims, federal securities law claims, and challenges to certain spring-loaded options. Vice Chancellor Laster approved a final settlement of the spring-loaded options claims in this Court on November 10, 2015 (the "First Delaware Action"). That settlement excluded claims related to the Dream Team allegations. The United States District Court for the Central District of California approved a final settlement of the federal securities law claims on May 18, 2016 (the "Federal Securities Action"). The Caremark claims related to the Dream Team allegations remain unresolved and are the focus of this case.

         On June 24, 2014, Niedermayer submitted a Section 220 demand to CytRx. On July 1, 2014, the Company responded, requesting proof of Niedermayer's stock holdings in CytRx during the time period in question. On July 29, 2014, Niedermayer sent CytRx unsworn internet printouts purporting to show his stock holdings. The Company replied that such printouts were deficient on August 5, 2014.

         On August 14, 2014, the first Caremark claim arising from the Dream Team allegations was filed in the Central District of California. Taylor filed his complaint in the Central District of California the next day on August 15, 2014. Those actions were consolidated on October 8, 2014 (the "California Derivative Action").

         On December 16, 2014, Niedermayer, in another attempt to prove his stock holdings, sent CytRx an unsworn printout of a brokerage statement. Three days later, on December 19, 2014, CytRx acknowledged receipt of the brokerage statement, sent Niedermayer a proposed confidentiality agreement, and requested that Niedermayer make the required Section 220 representations under oath.

         On December 20, 2014, the defendants moved to dismiss the California Derivative Action. In February 2015, the parties to the Federal Securities Action, the First Delaware Action, and the California Derivative Action began settlement discussions and agreed to a mediator. On April 6, 2015, Taylor sent the California Derivative Action defendants a settlement statement, and on April 15, 2015, the California Derivative Action parties submitted mediation statements to the mediator. Mediation occurred in the First Delaware Action, the Federal Securities Action, and the California Derivative Action on April 23 and 24, 2015.

         On June 24, 2015, the judge in the California Derivative Action, among other things, denied defendants' rule 12(b)(3) motion to dismiss for improper venue, but granted leave to file a motion to dismiss for forum non conveniens based on the CytRx forum selection bylaw. Defendants filed such a motion on July 24, 2015.

         On September 14, 2015, Reed sent a Section 220 demand to CytRx. Four days later, on September 18, 2015, Niedermayer returned the signed confidentiality agreement and sworn representation that CytRx had requested nine months earlier. On September 23, 2015, the Company acknowledged receipt of Niedermayer and Reed's letters and indicated that it was preparing the Section 220 documents. CytRx delivered the documents to the Niedermayer Plaintiffs between October 16 and 23, 2015.

         On October 30, 2015, the judge in the California Derivative Action granted the defendants' motion to dismiss for forum non conveniens based on the CytRx forum selection bylaw. Taylor filed a notice of appeal of that decision in the United States Circuit Court of Appeals for the Ninth Circuit on November 17, 2015.

         On December 14, 2015, the Niedermayer Plaintiffs commenced this case by filing a verified stockholder derivative complaint in this Court.

         On December 23, 2015, the parties to the California Derivative Action entered a memorandum of understanding ("MOU") documenting an agreement in principal that had been reached in late November. CytRx consented in writing in the MOU to the Central District of California as an alternative forum to the Court of Chancery for purposes of settlement. The parties stipulated to dismissal of the Ninth Circuit appeal without prejudice to reinstate the appeal, which the Ninth Circuit granted on February 19, 2016.

         On February 25, 2016, the individual defendants in this case filed a motion to dismiss the Niedermayer Plaintiffs' complaint in this Court. In the alternative, they moved to stay pending approval of the settlement of the California Derivative Action.

         On March 22, 2016, the Niedermayer Plaintiffs filed an amended complaint in this Court, but on May 2, 2016, this Court granted defendants' motion to stay this case in favor of the California Derivative Action. The Niedermayer Plaintiffs then moved to intervene in the California Derivative Action on May 6, 2016. On May 31, 2016, the judge in the California Derivative Action declined to preliminarily approve the proposed settlement and denied the Niedermayer Plaintiffs' motion to intervene, reminding the parties that the California Derivative Action had been dismissed for forum non conveniens. The parties to the California Derivative Action, including Taylor, filed motions to set aside the judgment dismissing that case, which the California court denied on August 17, 2016. Thereafter, Taylor filed a verified stockholder derivative complaint in this Court.

         On September 2, 2016, this Court granted the Niedermayer Plaintiffs' fully briefed motion to lift the stay in this case, and the Niedermayer Plaintiffs filed a second amended complaint on October 12, 2016. The second amended complaint adds new allegations based on the Section 220 documents and an additional claim for waste arising from the ...


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