   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MICKAEL A. FLAA,                        )
                                        )
                 Plaintiff,             )
                                        )
     v.                                 ) Civil Action No. 9146-VCG
                                        )
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.     )

                        MEMORANDUM OPINION

                         Date Submitted: May 2, 2014
                         Date Decided: May 29, 2014

Richard P. Rollo, of Richards, Layton & Finger, P.A., Wilmington, Delaware; OF
COUNSEL: Barry F. Cannaday, of Dentons US LLP, Dallas, Texas, Attorneys for
the Plaintiff.

David L. Finger, of Finger & Slanina, LLC, Wilmington, Delaware, Attorney for
the Defendants.




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,1

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


1
    I refer to Vicki Montano by her first name to avoid confusion. No disrespect is intended.

                                                  2
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



                                           3
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.

                                         I. FACTS

                                         1. Flaa I

       As explained in a prior iteration of this action, Flaa I,2 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.3 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




2
 Flaa v. Montano, 2013 WL 5498045 (Del. Ch. Oct. 4, 2013).
3
 See Defs.’ Op. Pre-Trial Br. at 2 (“Finding investors who wanted to invest in a company with
no saleable products was difficult.”).

                                             4
against Cardio.4 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



4
 That letter was preceded by both a June 2012 request by Wallen that Cardio convert his debt to
equity, which request was rejected by the Cardio board, and a September 2012 Nevada action in
which Wallen sought to enforce Montano’s personal guarantee of loans from Wallen to Cardio.
Those transactions are described in additional detail in Flaa I. See Flaa, 2013 WL 5498045, at
*2.

                                              5
Board”) to sit on the Cardio board of directors pending resolution of the litigation.5

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,6 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].”7 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:


5
  Flaa v. Montano, No. 8632–VCG (Del. Ch. July 12, 2013) (ORDER).
6
  Flaa v. Montano, No. 577,2013 (Del. Jan. 30, 2014) (Letter to Counsel).
7
  JX 82.

                                               6
          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.8

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 III, John (Jack) W. Jacobs and Joong Ki
          Baik, if he or she is in office immediately prior to the effective time of
          this Written Consent.9

          Though stockholders received identical proxy solicitation materials, Wallen

obtained proxies in the Second Consent Action by three methods: (1) Vizier and

8
    Pl.’s Pre-Trial Answering Br. at 5.
9
    Compl. Ex. E at 1799982.2.

                                              7
certain other stockholders not at issue here executed proxies by hand-delivery of

completed paper proxy cards; (2) certain Cardio stockholders of record executed

electronic proxies by telephone and internet, purporting to permit Wallen to deliver

written consents on their behalves; and (3) certain brokerage firms executed

powers of attorney to a proxy tabulating agency, Broadridge, which in turn

executed proxies purporting to permit Wallen to deliver written consents on behalf

of the stocks’ record owners. On November 27, 2013 and January 2, 2014, Wallen

delivered written consents to Cardio’s registered agent supported by proxies

obtained from these other Cardio stockholders, by which a majority of the Cardio

shares purported to consent to the removal of the “Removed Directors”—the

Defendants in this action.

A. The Vizier Proxy

      In Flaa I, I determined that a written consent, executed by Montano’s ex-

wife Vicki on behalf of Vizier, was executed without actual or apparent authority.

At that time, Vizier held 30 million shares of Cardio, jointly owned by Daniel and

Vicki Montano. I found that Montano, as President of Vizier, had authority to vote

the Cardio shares, and that Vicki, in her capacity as either Vice President or

stockholder, did not.

      In July 2013, Montano filed for bankruptcy under Chapter 7 of the U.S.

Bankruptcy Code. As a result of that filing, U.S. Bankruptcy Trustee Dotan



                                         8
Melech (the “Trustee”) obtained control over Montano’s interest in 4 million

directly-held shares of Cardio, as well as his fifty-percent interest in the 30 million

Cardio shares held by Vizier. Soon after this Court issued its Memorandum

Opinion on October 4, 2013 in Flaa I, the Trustee began to discuss with Wallen

and the other members of the Cardio Interim Board the Company’s financial status.

Specifically, in late October, the Trustee “requested a copy of the [Cardio]

business plan and copies of the financial proposals [from Wallen] that will fund the

business plan,”10 which Flaa provided in detail by email dated November 1, 2013.

       Around the same time in early November, Wallen communicated with the

Trustee via email and conference call in an attempt to secure Vizier’s proxy in the

Second Consent Action.11 As a preliminary matter, for the Trustee to obtain the

authority to execute the requested proxy on Vizier’s behalf, the Trustee and

Montano’s ex-wife Vicki, acting as stockholders of Vizier,

       (a) . . . executed a Unanimous Written Consent (i) removing the
       current directors of Vizier and appointing the Trustee and [Vicki]
       Montano as the sole Directors of Vizier, and (ii) removing [Montano]
       as President of Vizier and appointing the Trustee as President and
       [Vicki] Montano as the Vice President of Vizier, and (b) [Vicki]
       Montano and the Trustee, as the sole Directors of Vizier, executed a

10
  JX 72 at 2014CVBT00005103.
11
  Although the final written agreement into which Wallen and the Trustee ultimately entered, as
described in more detail below, did not include a requirement that the Trustee vote in favor of the
Second Consent Action, such was clearly the parties’ intent. See, e.g., JX 113 at
2014CVBT00003066 (“I fear that the vote will not get done unless we can get [the Trustee]
additional insurance re the below.”); id. at 2014CVBT00003067 (“Here is [Wallen’s] signature
on the share purchase agreement. Please let me know whether you now have everything you
need in order for the Trustee to be able to vote today.”).

                                                9
          Unanimous Written Consent of Board of Directors (i) appointing the
          Trustee as President and [Vicki] Montano as the Vice President of
          Vizier, (ii) affirming that, in accordance with the Memorandum of
          Association and Articles of Association of Vizier, it is the sole
          responsibility of the Trustee, as the President of Vizier, to manage the
          day to day affairs of Vizier, including, but not limited to voting the
          Vizier shares of [Cardio].12

          In seeking to secure the Trustee’s commitment to execute a proxy on

Vizier’s behalf, Wallen and the Trustee also began negotiating a deal whereby

Wallen would purchase 1 million shares of Cardio from the Montano bankruptcy

Estate, in exchange for a sum of money (described by the Trustee as five times its

actual value) and a director seat on the Cardio board of directors; such an

agreement would provide the Montano Estate some much-needed liquidity in

addition to an ability to protect its only asset, Cardio stock. According to a series

of emails between counsel for the Trustee and Wallen, the Trustee’s bankruptcy

counsel “propos[ed] (subject to Bankruptcy Court approval) that the Trustee would

vote the Vizier shares ‘as requested,’ the Trustee would designate a member of the

[Cardio] board to replace a member of the Interim Board, Mr. Wallen or another

party would purchase 1 million shares of [Cardio] stock from Vizier for $1.00 per

share, and the estate would receive certain undefined minority stockholder

rights.”13 Wallen countered that “the Trustee’s vote would be irrevocable, [the

Trustee’s board designee] Mr. Moran would be appointed as an additional, and not

12
     JX 78 at AR11.
13
     Defs.’ Op. Pre-Trial Br. at 11-12.

                                            10
a replacement, director, and Mr. Wallen would pay 5 cents a share for the 1 million

shares of [Cardio].”14 The parties eventually settled on an exchange under which

Wallen would purchase from the Montano Estate 1 million shares of Cardio at

$0.25 per share, in addition to granting the Trustee certain other rights described in

more detail below. Further, Wallen’s counsel explained to the Trustee that:

       Under Delaware law, the Cardio Board of Directors has a fiduciary
       duty to the shareholders to consider the qualifications of any proposed
       addition to the Board and to make an independent determination that
       it will be in the best interest of the shareholders of Cardio to appoint
       the person who is put up for a vacant position on the Board (which is
       what will happen here). They cannot agree in advance to simply
       appoint anyone the Trustee designates.15

While the Trustee initially responded that the Cardio Interim Board’s inability to

commit to appointing the Trustee’s board designee was a “deal breaker,”16 the

parties eventually agreed to the following language in a November 22, 2013

Agreement for the Purchase and Sale of Stock (the “Stock Purchase Agreement”):

       If Wallen is able to confirm the Wallen Group’s right to manage
       [Cardio] . . . then Wallen will use his best efforts, consistent with his
       fiduciary duties, to cause the Board of Directors to add an additional
       two members, with one to be selected by the Wallen [sic] and the
       other by the Trustee. If Wallen and his aligns are confirmed as
       management of [Cardio] and these two positions are not added
       through no fault of the Trustee, Wallen shall return the Shares to the




14
   Id. at 12.
15
   JX 86 at 6.
16
   Id. at 5.

                                          11
       Trustee for no consideration, but the Trustee shall be entitled to retain
       the Purchase Price and apply it to the Montano Estate asset base.17

In addition, the parties agreed that if the Second Consent Action was unsuccessful

or ineffective, “then the Trustee [would] promptly repurchase from Wallen

500,000 shares of [Cardio] stock for $0.25 per share with such $125,000 payment

to [be] made from the Purchase Price funds. The Trustee [would] then apply the

remaining $125,000 of the Purchase Price to the Montano Estate asset base.”18

       In other words, Wallen and the Trustee agreed that, in exchange for the

Trustee’s proxy, Wallen would purchase 1 million Cardio shares from the Montano

Estate for $250,000. If the Second Consent Action was successful, Wallen would

use his best efforts to secure an additional seat on the Cardio board for the

Trustee’s designee; if, despite his best efforts, he failed to secure that seat, Wallen

would return all 1 million shares but the Trustee would retain the entire $250,000.

If the Second Consent Action was unsuccessful, Wallen would return 500,000

shares and the Trustee would return $125,000.

       Prior to executing the November 22 Stock Purchase Agreement, on

November 8, 2013, the Trustee filed a Motion for Order Authorizing Trustee to

Take Certain Actions and Sell Certain Assets Free and Clear of Liens, Claims and
17
   JX 87 at ¶ 5. Wallen’s counsel noted that “Wallen would not be doing this deal if he had any
uncertainty about being able to fulfill his obligations to have new directors appointed. If he
doesn’t meet his commitment, he forfeits $250,000 and the Trustee gets all the stock back. That
is a pretty drastic penalty for not performing, but [Wallen] is willing to agree to this because he
is very comfortable that he can fulfill this obligation.” JX 113 at 3087.
18
   JX 87 at ¶ 3.

                                               12
Encumbrances without Further Court Approval (the “Motion”) in the District of

Nevada U.S. Bankruptcy Court.19 In that Motion, the Trustee submitted to the

court that:

       [Cardio] is . . . currently at a crossroads, where either (a) [Cardio] will
       resolve its litigation and obtain sufficient funding to launch a new
       product that may result in significant returns to its shareholders, or (b)
       [Cardio] will not resolve its litigation, will not obtain funding, and
       may ultimately wind up in its own bankruptcy proceeding, leaving
       this Estate’s creditors with little to no return on account of their
       claims.20

The Trustee sought in his Motion “authority, out of an abundance of caution, to

take actions necessary to allow the estate to vote the [Cardio] shares that it owns

[in Vizier],” as well as permission to sell 1 million Cardio shares held by the

bankruptcy estate to Wallen for $0.25 per share, in order “to provide for an

immediate return to the Estate, limiting the Estate’s downside should [Cardio]

ultimately be unsuccessful in its business endeavors.”21            The Trustee also

represented in his Motion that, based on “multiple meetings with Calvin Wallen,

[Montano], related parties, and their representatives to determine how to proceed

with regard to [Cardio],” “the Trustee ha[d] determined that it may be prudent to




19
   JX 78.
20
   Id. at AR8.
21
   Id. at AR9.

                                           13
take action with regard to the composition of [Cardio’s] board of directors to poise

[Cardio] for future success.”22

        The bankruptcy court granted the Trustee’s Motion on November 18, 2013.

The court’s order indicated that:

        The Trustee is authorized to take the following actions which are
        consistent and fall within the Trustee’s ordinary course duties under
        11 U.S.C. § 704:

                a. to vote the Vizier Investment Capital Limited (“Vizier”)
                shares to serve as President and director of Vizier and take all
                actions attendant to serving as President and director . . . ; [and]

                b. to sell up to 2 million of the 19 million shares at a price of no
                less than $0.25 per share, provided any such sale shall include a
                commitment to add a Trustee appointed representative to the
                board of [Cardio], and the [Montano] Estate retains a right to
                repurchase the shares within 1 year of any public offering of
                such shares for 110% of the purchase price . . . .23

        The Trustee noted in his declaration appended to the Motion that “$.25 per

share . . . appears to be at least five times what the shares are currently worth,” as

well as his belief that the Interim Board on which the Defendants are not directors

“provides the best opportunity for success of [Cardio] (because, in part, it will

result in necessary funding to [Cardio]), and therefore it is in the best interest of the

Estate to keep the [Interim] Board intact.”24



22
   Id. at AR11.
23
   JX 84 at ¶ 2(a)-(b).
24
   JX 79 at ¶¶ 5, 7.

                                             14
       Wallen’s November 11 proxy solicitation materials failed to describe

negotiations—then well-advanced—leading up to the bankruptcy court’s

November 18 order or the resulting November 22 Stock Purchase Agreement

between Wallen and the Trustee. Instead, with respect to that transaction, the

proxy statement provided only that “[b]ased on the opinion of bankruptcy counsel,

it is my belief that the Trustee, with the cooperation of Montano’s ex-wife, has or

will obtain the right to grant a proxy with respect to the shares held by [Vizier],”25

and that “[i]t is anticipated that the Board might appoint one or two additional

directors after these initial designations.”26 On November 15, 2013, Montano

disseminated “proxy revocation” materials to the Cardio stockholders, “writing to

explain the full facts of the matter, to tell [stockholders] what [Montano had] done

for [Cardio], and to explain how [those] efforts are imminently poised to bring in

millions of dollars in partnering agreements that will save the company without

destroying the interests of the existing shareholders,” and urging stockholders not

to grant proxies in the Second Consent Action.27 Montano did not describe the

details of the Stock Purchase Agreement in those materials, although he had notice

of, objected to, and appeared before the bankruptcy court to oppose the Trustee’s

November 8 Motion seeking approval of, that Agreement.


25
   JX 80 at 3.
26
   Id. at 8.
27
   JX 81 at 1.

                                         15
B. The Parties’ Contentions

          The Defendants contend (1) that the transaction described above constitutes

improper vote-buying, and (2) that because “Wallen had been negotiating (and was

continuing to negotiate) to place a director designated by the Trustee on the

[Cardio] board in connection with his purchase of [Cardio] stock, [and] he did not

disclose that fact in [his proxy solicitation] materials,”28 the Court should

invalidate       the    transaction       under   Portnoy   v.   Cryo-Cell   International,

Incorporated.29 The Plaintiff responds that (1) the Vizier proxy is not the result of

improper vote-buying; (2) Montano acquiesced to the transaction in the bankruptcy

court proceedings; (3) the proxy statement disclosed all it could have given that the

parties were still in the process of negotiating the Stock Purchase Agreement when

the solicitations were sent to stockholders; and (4) the failure to disclose the terms

of the Stock Purchase Agreement does not result in the same unfairness present

under the facts in Portnoy.

                                  II. STANDARD OF REVIEW

          The Plaintiff brings this action to confirm the validity of the Second Consent

Action pursuant to 8 Del. C. § 225, in accordance with which, “[u]pon application

of any stockholder or director, or any officer whose title to office is contested, the

Court of Chancery may hear and determine the validity of any election,

28
     Defs.’ Op. Pre-Trial Br. at 14-15.
29
     940 A.2d 43 (Del. Ch. 2008).

                                                  16
appointment, removal or resignation of any director or officer of any corporation,

and the right of any person to hold or continue to hold such office . . . .”30 Such a

proceeding is summary in nature. Further, in a Section 225 action, “[t]he burden of

proving that a director’s removal is invalid rests with the party challenging its

validity”31—here, the Defendants.

         The Court conducted a one-day trial in this action on May 2, 2014. The

following is my determination of the merits of the Section 225 dispute.

                                       III. ANALYSIS

         The bedrock principles underlying our conception of corporate governance

are that the directors run the corporation on behalf of the owners, the stockholders,

who delegate power to the directors through the operation of the stockholder

franchise. For this reason, both our statutory and common law are protective of the

right of stockholders to vote, and by exercising that vote, to choose the directors.

This Court can interfere with an effective operation of the franchise, in the consent

arena, in two ways, both equally deleterious: by invalidating actions properly taken

by consent; and by ratifying actions purportedly by consent, where those actions do

not represent the will of the stockholders. I have already invalidated one purported

vote to remove the Montano board, and I am therefore cognizant of the risk to

exercise of the franchise in invalidating a second. Nonetheless, imposing the

30
     8 Del. C. § 225(a).
31
     Unanue v. Unanue, 2004 WL 5383942, at *10 (Del. Ch. Nov. 9, 2004).

                                              17
results of an uninformed vote is inimical to the exercise by the stockholders of

their right to elect the board of directors. For the reasons that follow, the Plaintiff’s

request to ratify the results of the Second Consent Action must be denied.

      The Defendants challenge the validity of the Second Consent Action on four

grounds: they contend that (1) the Vizier proxy is invalid as vote-buying or due to

inadequate disclosure of the Stock Purchase Agreement in the solicitation

materials; (2) the electronic proxies are invalid as procedurally deficient; (3) the

brokerage proxies from the proxy tabulating agency, Broadridge, are invalid as

procedurally deficient; and (4) the Second Consent Action should be invalidated

because the proxy solicitation materials contained materially misleading

disclosures. I address only the Defendants’ first contention, as well as outstanding

requests for attorneys’ fees, below.

                                    1. Vote-Buying

      The Defendants seek to (1) invalidate the Vizier proxy on the basis that

Wallen and the Trustee’s Stock Purchase Agreement constitutes impermissible

vote-buying, or (2) invalidate the Second Consent Action in its entirety on the

basis that, even if not impermissible vote-buying, the Stock Purchase Agreement

was material such that its existence should have been disclosed to stockholders

considering whether to execute a proxy.




                                           18
      In Schreiber v. Carney, this Court defined vote-buying as any “voting

agreement supported by consideration personal to the stockholder, whereby the

stockholder divorces his discretionary voting power and votes as directed by the

offeror.”32 Although the Plaintiff suggests that the Stock Purchase Agreement did

not by its express terms compel the Trustee to deliver a proxy in favor of the

Second Consent Action, it is clear from the record before me that the Trustee’s

proxy was a vital part of that Agreement.33 In other words, because I understand

the transaction at issue involved the sale of both stock and a proxy, the Stock

Purchase Agreement constituted vote-buying under the definition articulated in

Schreiber. The mere existence of an agreement to vote shares in a particular way

does not end the inquiry, however.

      Under Delaware law, “an agreement involving the transfer of stock voting

rights without the transfer of ownership is not necessarily illegal and each

arrangement must be examined in light of its object or purpose.” 34 In fact, under

most circumstances, “[s]hareholders are free to do whatever they want with their

votes, including selling them to the highest bidder.”35 However, “vote-buying is

illegal per se if its object or purpose is to defraud or disenfranchise the other



32
   Schreiber v. Carney, 447 A.2d 17, 23 (Del. Ch. 1982).
33
   See JX 113 at 2014CVBT00003071 (indicating that the Trustee would vote “as requested”);
see also supra note 11.
34
   Schreiber, 447 A.2d at 25.
35
   Hewlett v. Hewlett-Packard Co., 2002 WL 549137, at *4 (Del. Ch. Apr. 8, 2002).

                                           19
stockholders.”36 In considering whether a vote-buying scheme has defrauded or

disenfranchised the stockholders, our case law distinguishes between vote-buying

agreements secured by corporate assets and assets owned by third parties.

Accordingly, a third party is prohibited from buying votes only where doing so

would be “disenfranchising” by “creat[ing] a misalignment between the voting

interest and the economic interest of [the] shares.”37 By contrast, even where

economic interests remain aligned, “[m]anagement . . . may not use corporate

assets to buy votes in a hotly contested proxy contest about an extraordinary

transaction that would significantly transform the corporation, unless it can be

demonstrated . . . that management’s vote-buying activity does not have a

deleterious effect on the corporate franchise.”38

      The Plaintiff suggests that, were I to evaluate the Stock Purchase Agreement

as a third-party transaction, the Stock Purchase Agreement could not constitute

impermissible vote-buying under the authorities cited above, as the Agreement did

not misalign the Trustee’s voting and economic interests as a fiduciary of Vizier.

Specifically, the Plaintiff explains that, while the Trustee transferred to Wallen 1

million shares of Cardio from the Montano Estate, Vizier continued to hold an

additional 29 million Cardio shares, and therefore retained a significant economic


36
   Schreiber, 447 A.2d at 24.
37
   Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377, 388 (Del. 2010).
38
   Hewlett, 2002 WL 549137, at *4 (emphasis added).

                                           20
stake in the Company.39 The alignment of interests relevant in a vote-buying

analysis, however, is an alignment of a vote-buyer’s interests upon the exercise of

his vote, not of the vote-seller’s interests upon forfeiture of his vote.40 That is

because “what legitimizes the stockholder vote as a decision-making mechanism is

the premise that stockholders with economic ownership are expressing their

collective view as to whether a particular course of action serves the corporate goal

of stockholder wealth maximization.”41 In other words, where a party has no

equity stake in the corporation, his vote distorts an effective exercise of the

franchise, the ultimate goal of which is the financial success of the company for the

stockholders’ benefit. Accordingly, it is Wallen’s equity interests, rather than the

Trustee’s, that are relevant to a third-party vote-buying analysis. Although Wallen

maintains a significant debt and equity stake in the Company, it is not clear from

the record before me to what extent those interests may be opposed. What is clear

is that, independent of the vote-buying arrangement, Wallen has a significant

economic interest in the success of Cardio, both as an equity-holder and as a

creditor, and that if the Company fails under the management of the Montano slate,

his interests will be extinguished as both shareholder and creditor. It is unlikely,

39
   Pl.’s Pre-Trial Answering Br. at 21.
40
   To the extent the Trustee’s interests are relevant, he acted under a fiduciary duty to advance
Vizier’s interest, and only if he were near-indifferent to the Wallen and Montano slates would an
ability to provide the Estate liquidity influence the Trustee’s decision to favor Wallen’s slate
over Montano’s.
41
   Kurz v. Holbrook, 989 A.2d 140, 178 (Del. Ch. 2010), aff’d in part, rev’d in part sub nom.
Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010).

                                               21
therefore, that the voting rights obtained pursuant to the Stock Purchase Agreement

resulted in the agency problems that misalignment of incentives creates, and about

which third-party vote-buying doctrine is concerned.

       It is not clear to me, however, that the Stock Purchase Agreement at issue

can rightly be characterized as a third-party transaction. While it is true that

Wallen used his personal assets to purchase the 1 million Cardio shares from the

Montano Estate, there remained another crucial term to be satisfied: the delivery of

a board seat on Cardio’s board of directors. Of course, Wallen could not deliver

that seat on his own, and the Interim Board’s legal counsel understood that under

Delaware law, its fiduciary duties to the Cardio stockholders prevented it from

entering into an enforceable agreement to deliver a seat to the Trustee’s designee.42

As a result, while Wallen contractually agreed only to use his “best efforts” to

secure the seat, he assured the Trustee that the Interim Board saw no reason its

fiduciary duties would prevent it from agreeing to the seat despite an inability to

enter into an enforceable agreement to that effect.43                    Most revealingly, he

demonstrated his absolute confidence that the board seat would be approved by

42
   See JX 86 at 6 (email from Barry Cannaday, counsel for the Plaintiff, to Justin Rawlins,
counsel for the Trustee) (“Under Delaware law, the Cardio Board of Directors has a fiduciary
duty to the shareholders to consider the qualifications of any proposed addition to the Board and
to make an independent determination that it will be in the best interest of the shareholders of
Cardio to appoint the person who is put up for a vacant position on the Board (which is what will
happen here). They cannot agree in advance to simply appoint anyone the Trustee designates.”).
43
   See, e.g., id. at 2 (email from Cannaday, counsel for the Plaintiff, to Wallen, Gordon, and Flaa)
(“I have asked that [the Trustee’s counsel] provide [the Trustee’s designee] Al Moran’s resume,
so that it can be determined that there is a legitimate basis for making this statement.”).

                                                22
agreeing to forfeit his 1 million purchased shares—while permitting the Trustee to

retain the $250,000 consideration—if despite his best efforts, he proved unable to

deliver the board seat. Wallen’s own bankruptcy counsel, in communications with

the Trustee’s counsel, explained that Wallen’s willingness to put $250,000 worth

of shares on the line if the Interim Board did not approve the Trustee’s designee

demonstrated that Wallen was “willing to agree [only] because he [was] very

comfortable that he [could] fulfill this obligation.”44               That confidence is

unsurprising given that the Interim Board and Wallen’s slate were identical.45

And, of course, the Plaintiff’s suggestion that the Trustee’s board seat was not an

essential term of the Stock Purchase Agreement is belied by the fact that the

Trustee, despite selling the Estate’s Cardio stock at five times its market value,

initially considered the Interim Board’s failure to agree to appoint his designee a

“deal breaker.”46 Based on those considerations, it is conceivable that the Interim

Board agreed to deliver a valuable corporate asset—a seat on the Cardio board—in

exchange for the Trustee’s proxy.

       Ultimately, however, I need not determine whether the Stock Purchase

Agreement constituted impermissible vote-buying. The Defendants contend that

the Agreement, even if not impermissible vote-buying, was a material transaction,

44
   JX 113 at 3087.
45
   Both the Interim Board and Wallen’s slate include Wallen, Flaa, Grant Gordon, Jon Ross, and
Robert Schleizer. JX 80 at 7-8.
46
   JX 86 at 5.

                                             23
and Wallen’s failure to disclose it in his proxy solicitation materials provides a

compelling basis to invalidate the Second Consent Action. For the reasons detailed

below, I agree. Despite the Plaintiff’s suggestion that no duty to disclose could be

imputed to Wallen acting in his capacity as a stockholder, even acting in their

individual capacities, directors owe a duty of candor to the stockholders of the

corporation for which they serve,47 and in any event, assuming the Interim Board’s

collusion with respect to the Stock Purchase Agreement, the Interim Board itself

had a duty to update the stockholders regarding its participation in the transaction.

       It is axiomatic that “directors of Delaware corporations are under a fiduciary

duty to disclose fully and fairly all material information within the board’s control

when it seeks shareholder action.”48               Information is material “if there is a

substantial likelihood that a reasonable stockholder would consider it important in

deciding how to vote.”49 For the reasons that follow, I find that the promise to

grant the Trustee’s designee a seat on the Company’s board in connection with the


47
   See Zaucha v. Brody, 1997 WL 305841, at *4-5 (Del. Ch. June 3, 1997) (“[The plaintiff]
argues that he sought consents not as a director but as a stockholder. The statute does not limit
the right to seek consents to stockholders. More fundamentally, fiduciary duties are not limited
to the board as a body or to the controlling majority, but bind directors individually. . . . I see no
sound reason to relieve a director of his fiduciary duty simply on the basis that he is acting in
another capacity. One reason for the fiduciary duty of disclosure is directors’ greater access to
knowledge. A dissident director like [the plaintiff] has that knowledge no less when challenging
controlling board members. Stockholders have a right to assume that directors always act in
what they believe to be the stockholder’s best interest, and I see no reason why that assumption
should not apply to a dissident director who solicits stockholders’ consents.”).
48
   Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997) (internal quotation
omitted) (citing Arnold v. Society for Savs. Bancorp, Inc., 650 A.2d 1270, 1277 (Del. 1994)).
49
   Id.

                                                 24
Stock Purchase Agreement was material such that Wallen and the Interim Board

had a duty to disclose its existence to the Cardio stockholders, either in Wallen’s

initial solicitation materials, or in a supplement to those materials.

       Several factors, taken together, lead to my conclusion that the board seat

secured by the Trustee pursuant to the Stock Purchase Agreement was information

a stockholder would likely find material. In executing a proxy in favor of Wallen’s

Second Consent Action, the Cardio stockholders believed they were delivering

proxies to remove six directors to be replaced by Wallen and his two designees,

Jon Ross and Robert Schleizer. In reality, a proxy in support of the Second

Consent Action effectuated the appointment not only of Wallen, Ross, and

Schleizer, but of both the Trustee’s designee, Moran, and an additional director to

be designated by Wallen.50 I find it likely that the Cardio stockholders would have

found it material to know that, by delivering proxies in favor of the Second

Consent Action, they were also supporting Moran’s appointment to the Cardio

board. Importantly, while the stockholders received written biographies on Flaa,

Gordon, Wallen, Ross, and Schleizer in their proxy solicitation materials, they

received no such information about Moran, and accordingly were denied any




50
  See Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 73 (Del. Ch. 2008) (invalidating an election
on the basis that “the disinterested Cryo-Cell electorate voted in ignorance of the actual board
that would govern them in the event the Management Slate won”).

                                               25
opportunity to assess his credibility before delivering the proxies that would

effectuate his appointment.51

       Further, in addition to assessing Moran’s credibility, the stockholders likely

would have found the existence of the Stock Purchase Agreement relevant in

assessing Wallen’s credibility.         Wallen has initiated two “successful” written

consent actions that squeaked by with majority approval only by obtaining the

support of a dispositive block of shares—the 30 million shares held by Vizier—in

both cases by conduct that has fallen under scrutiny in this Court. Tellingly, the

First Consent Action was invalidated because Vicki Montano, in response to a

request by Wallen, executed a written consent on behalf of Vizier without authority

to do so. While the proxy solicitation materials addressed that problem as if it

were a technical error that had been corrected, in fact the success of the Second

Consent Action still required that a proxy be delivered to Wallen on Vizier’s

behalf, and Wallen sought to secure the support of that dispositive block by

promising its fiduciary’s designee a seat on Cardio’s board. Thus, to the extent

stockholders read in the proxy solicitation materials that “it [was Wallen’s] belief

that the Trustee, with the cooperation of Montano’s ex-wife, has or will obtain the



51
  See id. at 72 (“Problematically, the Cryo-Cell stockholders did not know that [the party to the
vote-buying arrangement] clearly intended to designate [a particular designee], a person whose
recent past would have weighed heavily on the mind of a rational stockholder considering
whether to seat him as a fiduciary.”).

                                               26
right to grant a proxy with respect to the shares held by [Vizier],”52 and rightly

understood that statement to indicate that the primary concern in the first

litigation—Vicki’s authority to vote the Vizier shares—had been effectively

resolved, stockholders would have found it an important clarification that the

Trustee, though he had the right to grant the Vizier proxy, had at least in part

determined to do so as a result of his bargained-for ability to fill a newly-created

director seat. The relevant points here are that (1) in both the First and Second

Consent Actions, even after securing the Vizier block, Wallen’s slate was favored

only by a narrow majority of shares,53 and (2) stockholders would likely have

found it material to know that the slate they were supporting felt it necessary to

rely on the voting agreement described above in order to obtain the requisite

number of proxies.

       The Plaintiff contends that, even if the existence of the Stock Purchase

Agreement was information material to the Cardio stockholders, Wallen could not

possibly have disclosed its contents on November 11 when his proxy solicitation

materials went sent, as the Agreement was not finalized until it was approved by

the bankruptcy court on November 18 and executed on November 22.54 I find it


52
   JX 80 at 3.
53
   See Portnoy, 940 A.2d at 72 (“What [the party to the vote-buying agreement] did with his own
bought shares is less the point than that the disinterested electorate voted in a razor-thin election
without knowledge of very material facts.”).
54
   The Plaintiff suggests that the existence of the Stock Purchase Agreement was publically
available as it was approved in a public bankruptcy court proceeding and disclosed in Delaware

                                                27
telling, however, that, despite his failure to describe the Stock Purchase Agreement

even in the conditional, Wallen did find the transaction sufficiently likely such that

it warranted the partial disclosure that “[i]t is anticipated that the Board might

appoint one or two additional directors after these initial designations.”55

Moreover, the Plaintiff contends that an effective number of proxies were

delivered five days after the Agreement was executed, on November 27; as the

parties were on the cusp of an agreement since mid-November, Wallen should

have provided a supplemental disclosure immediately upon execution of the

Agreement. Even so, Wallen continued to accept proxies through January 2, and

even then did not update his solicitation materials.56

       Because I find that the Trustee’s agreement to deliver its dispositive proxy in

exchange for a seat on the Company’s board was material information that should

have been disclosed to the Cardio stockholders, I find it appropriate to invalidate

the Second Consent Action. I do so despite Montano’s failure to disclose the Stock

Supreme Court filings. Pl.’s Pre-Trial Op. Br. at 29. Though a diligent stockholder might have
discovered the existence of the Stock Purchase Agreement by seeking out and reviewing those
filings, as explained above, the Interim Board had a fiduciary duty to disclose all material
information—including the existence and terms of the Agreement—in the proxy solicitation
materials provided to stockholders; further, even the filings to which the Plaintiff refers did not
disclose that the Agreement was supported by the Trustee’s commitment to deliver a proxy on
behalf of the Vizier stock supporting the Second Consent Action.
55
   JX 80 at 8.
56
   The Plaintiff also suggests that “[n]o improper vote buying could have occurred here, where a
federal court explicitly sanctioned the transaction and, further, directed the Trustee be given the
ability to appoint a board representative.” Pl.’s Pre-Trial Op. Br. at 23. That the bankruptcy
court determined that approval of the Stock Purchase Agreement was appropriate under the U.S.
Bankruptcy Code has no bearing on whether disclosure of that Agreement was material as a
matter of Delaware corporate law.

                                                28
Purchase Agreement in his own solicitation, which failure in no way justifies

depriving the Cardio stockholders of material information to which they should

have access when comparing the competing Montano and Wallen slates.

       For almost twelve months, since June 2013, the Cardio stockholders have

had no certainty regarding who constitutes the Company’s proper board of

directors. Even prior to the First Consent Action, Cardio had not held an annual

election since 2008,57 despite the requirements of the DGCL and in the Company’s

bylaws that a director election be held annually.58                 Significantly, were I to

invalidate the Second Consent Action and do no more, the Defendants would

return to positions on the Cardio board to which they were last elected more than

five years ago. Clearly, both Montano and Wallen believe that, in the right hands,

this struggling pharmaceutical company will eventually return value to its

stockholders, but without a board able to negotiate agreements to sell its drug

candidates, this company will at best continue on the brink of insolvency.

Therefore, rather than simply invalidating the Second Consent Action, I find that

an appropriate resolution of this action requires ordering an annual election




57
  Montano Dep. (July 12, 2013) 303:2-3.
58
  See Bylaws § 3.3 (“Except as provided in Section 3.4 of these Bylaws [governing resignations
and vacancies], directors shall be elected at each annual meeting of stockholders to hold office
until the next annual meeting. Each director, including a director elected or appointed to fill a
vacancy, shall hold office until the expiration of the term for which elected and until a successor
has been elected and qualified.”).

                                                29
pursuant to Section 225(a).59 A special master shall be appointed by this Court to

oversee the election. The Cardio stockholders are entitled to certainty and to a

process free of the irregularities that have tainted the First and Second Consent

Actions over the last twelve months, as well as a board that can manage with

certainty the few assets of the Company that remain.

                              2. Requests for Attorneys’ Fees

       Three issues remain to be decided in this action and in the earlier-filed

action, Civil Action No. 8632-VCG. Those issues include (1) a request by the

Defendants for attorneys’ fees in connection with their Motion to Compel; (2) the

Defendants’ Motion for Sanctions seeking attorneys’ fees for responding to the

Plaintiff’s Motion for Relief from the Status Quo Order; and (3) the Defendants’

Motion to Hold the Interim Board in Contempt for Violating the Status Quo Order.



59
    See 8 Del. C. § 225(a) (“Upon application of any stockholder or director, or any officer whose
title to office is contested, the Court of Chancery may hear and determine the validity of any
election, appointment, removal or resignation of any director or officer of any corporation, and
the right of any person to hold or continue to hold such office, and, in case any such office is
claimed by more than 1 person, may determine the person entitled thereto; and to that end make
such order or decree in any such case as may be just and proper . . . . In case it should be
determined that no valid election has been held, the Court of Chancery may order an election to
be held in accordance with § 211 or § 215 of this title.”) (emphasis added); Portnoy v. Cryo-Cell
Int’l, Inc., 940 A.2d 43, 83 n.208 (Del. Ch. 2008) (ordering an election to be overseen by a
special master, noting that “[t]he DGCL gives this court wide discretion to craft a remedy in the
case of a tainted election,” and citing both Section 225(a) and Section 227(b)); Magill v. N. Am.
Refractories Co., 129 A.2d 411, 413 (Del. Ch. 1957) (“We think that under our statute the
reviewing court, which must make ‘such order or decree in any such case as may be just and
proper,’ is given a discretion to determine whether a new election should be ordered.”) (citation
omitted).


                                               30
      With respect to the Defendants’ requests for attorneys’ fees in connection

with defending against the Plaintiff’s earlier-filed Motions, that request is denied.

I find that while the parties aggressively litigated this action, neither party’s

conduct rose to a level of bad faith sufficient to trigger an exception to the

American Rule on fees. Specifically, in connection with the Defendants’ Motion

to Compel, I find that the Plaintiff’s opposition was substantially justified,

particularly in light of the over-breadth of the Defendants’ request. Further, with

respect to the Defendants’ request for attorneys’ fees for responding to the

Plaintiff’s Motion for Relief from the Status Quo Order, I find that such fees are

not warranted as it does not appear that the Plaintiff acted in bad faith in pursuing

that Motion. Accordingly, the parties shall bear their own fees in connection with

those Motions.

      As to the Defendants’ Motion to Hold the Interim Board in Contempt for

Violating the Status Quo Order, that Motion is also denied, to the extent that it is

not moot in light of this Memorandum Opinion. Without addressing whether the

Plaintiff violated the spirit of the Status Quo Order by initiating the Second

Consent Action, I find that the relief the Defendants request—declaring written

consents delivered in the Second Consent Action ineffective, dissolving the Status

Quo Order, and awarding the Defendants attorneys’ fees—are either inappropriate

or moot at this juncture.



                                         31
                               IV. CONCLUSION

      For the reasons stated above, I find the Second Consent Action ineffective to

remove the Defendants from the Cardio board of directors, but order the Company

to hold, as soon as is convenient, an annual election, to be overseen by a special

master appointed by the Court. The parties should submit an appropriate Order.




                                        32
