New Delaware forum selection fight: Shareholders sue directors for waiving clause

April 14, 2016

(Reuters) – In Delaware shareholder litigation, to quote the immortal Roseanne Roseannadanna, it’s always something. Just two years ago, plaintiffs lawyers were squirming under the strictures of forum selection bylaws and charter amendments that required shareholders to litigate their claims in Delaware Chancery Court rather than friendlier jurisdictions. But now plaintiffs’ lawyers at Andrews & Springer and Gainey McKenna & Egleston are suing board members at the biopharma company CytRx for waiving the company’s forum selection bylaw.

Their derivative complaint asserts (among many other things) that CytRx directors breached their duty to shareholders by waiving the forum selection bylaw they unilaterally adopted in 2013 in order to settle overlapping derivative claims filed in federal court in Los Angeles. CytRx, represented by Skadden Arps Slate Meagher & Flom, has moved in March to stay the Andrews & Springer case, which was filed – natch – in Delaware Chancery Court. The Delaware plaintiffs’ latest brief argues that Chancery Court has a policy interest in deciding, as a matter of first impression, whether corporations can decide to abandon their own forum selection clauses whenever it suits their purposes.

The CytRx dispute has an incredibly complicated history, and before I get into it, I want to make clear that CytRx’s waiver of its forum selection clause was not (at least as far as I can tell from the briefing) a consequence of Chancery Court’s crackdown last summer on disclosure-only settlements with broad releases. I’ve previously speculated that defendants in shareholder M&A litigation might choose not to enforce provisions directing litigation to Delaware in order to obtain favorable releases in other jurisdictions. That doesn’t appear to be what’s happening in the CytRx case, which involves a supposed scheme to pump up the company’s share price to make insiders’ stock options more valuable.

The alleged scheme, which involved a stock promotion company called the Dream Team Group that generated “news stories” about CytRx’s centerpiece experimental cancer drug, unraveled in 2014, when CytRx’s relationship with the Dream Team was exposed. Litigation, predictably, ensued in both Delaware Chancery Court and federal district court in Los Angeles. Derivative claims over the stock options were consolidated in Delaware. Securities fraud class actions were consolidated in California, as were derivative suits centered on the Dream Team’s work. In a separate action, shareholders also brought a books-and-records suit in Delaware, demanding corporate information about the Dream Team relationship. (I’m simplifying events, but that’s all you need to know for the purposes of this story.)

After mediation in April 2015, CytRx eventually reached a settlement with plaintiffs’ lawyers in the Delaware stock option case and the Los Angeles securities fraud class action, agreeing to pay shareholders about $8.5 million in cash and common shares. The settlement has received preliminary approval from judges in both jurisdictions.

But that settlement didn’t resolve all of shareholder claims because the Dream Team allegations had been carved out of the Delaware stock options derivative case. CytRx directors were fighting Dream Team derivative cases in both Delaware and California. In Delaware, CytRx lawyers insisted plaintiffs’ lawyers weren’t entitled to the records they asked to see. In California, they moved to dismiss the derivative suit, citing the company’s forum selection bylaw.

That’s right – CytRx initially relied on its forum selection clause in the California derivative case. Successfully, too. U.S. District Judge George King of Los Angeles dismissed the case last October. Plaintiffs’ lawyers from the Weiser Law Firm appealed to the 9th U.S. Circuit Court of Appeals, but, in the meantime, talked about a settlement with CytRx. In February, the two sides reached a tentative deal in which the company agreed to corporate governance reforms and $700,000 in legal fees for plaintiffs’ lawyers. The Weiser firm moved for preliminary approval of that settlement earlier this month.

CytRx said the California derivative settlement was the final piece of its global resolution of the Dream Team/stock options mess. But to the Delaware plaintiffs’ lawyers – who had filed their own Dream Team derivative complaint in December 2015, after the California case had been dismissed – the deal smacked of a reverse auction. They filed a revised complaint, adding allegations that directors had breached their duty to shareholders by waiving the company’s successfully asserted forum selection clause to negotiating a settlement in the California derivative suit.

The Delaware derivative plaintiffs have said they plan to intervene in the California case to protest the proposed settlement, but they are also raring to go in Chancery Court on their novel breach-by-waiver claim. The CytRx defendants say the forum selection bylaw permits the company to decide against enforcement. According to board members, settling with the California plaintiffs was in the best interests of the company – which, it points out, is supposed to be the objective of derivative litigation.

The whole sticky wicket is in the hands of new Delaware Vice-Chancellor Tamika Montgomery-Reeves and Judge King in Los Angeles, who will have to figure out how to apportion jurisdiction.

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