Werbowksky v. Hillsberg et al, No. 3:2014cv00382 - Document 44 (D. Or. 2014)
Court Description: Opinion and Order - Galena's motion to stay (Dkt. 38 ) is DENIED. Signed on 10/22/2014 by Judge Michael H. Simon. Associated Cases: 3:14-cv-00382-SI, 3:14-cv-00514-SI, 3:14-cv-00516-SI (mja)
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Werbowksky v. Hillsberg et al Doc. 44 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF OREGON In Re GALENA BIOPHARMA, INC. DERIVATIVE LITIGATION, This Document Relates To: ALL ACTIONS Case No. 3:14-cv-382-SI LEAD 3:14-cv-514-SI 3:14-cv-516-SI OPINION AND ORDER Christopher A. Slater and Michael J. Ross, SLATER ROSS, Sovereign Hotel, 4th Floor, 710 S.W. Madison Street, Portland, OR 97205; Robert B. Weiser, Brett D. Stecker, Jeffrey J. Ciarlanto, THE WEISER LAW FIRM, P.C., 22 Cassatt Avenue, First Floor, Berwyn, PA 19312; Kathleen A. Herkenhoff, THE WEISER LAW FIRM, P.C., 12707 High Bluff Drive, Suite 200, San Diego, CA 92130; Michael J. Hynes and Ligaya Hernandez, HYNES KELLER & HERNADEZ, LLC, 1150 First Avenue, Suite 501, King of Prussia, PA 19406; William B. Federman and Sara E. Collier, FEDERMAN & SHERWOOD, 10205 N. Pennsylvania Avenue, Oklahoma City, OK 73120. Of Attorneys for Plaintiffs. Lois O. Rosenbaum and Stephen H. Galloway, STOEL RIVES LLP, 900 S.W. Fifth Avenue, Suite 2600, Portland, OR 97204; Paul R. Bessette, Michael J. Biles, James P. Sullivan, KING & SPALDING LLP, 401 Congress Avenue, Suite 3200, Austin, TX 78701. Of Attorneys for Defendants. Michael H. Simon, District Judge. Before the Court is the motion of nominal defendant Galena Biopharma, Inc. (“Galena”) to stay the pending consolidated derivative actions for 90 days to allow sufficient time for an investigation by a single-member special litigation committee (“SLC”) formed by Galena’s Board of Directors (“Board”). For the following reasons, Galena’s motion to stay is denied. PAGE 1 – OPINION AND ORDER Dockets.Justia.com STANDARDS “[F]ederal courts should apply state law governing the authority of independent directors to discontinue derivative suits to the extent such law is consistent with [federal law].” Burks v. Lasker, 441 U.S. 471, 486 (1979). Therefore, the propriety of Galena’s requested stay is a question to be resolved under the law of Galena’s state of incorporation, Delaware. Under Delaware law, a properly formed SLC is generally entitled to a stay of derivative litigation for a reasonable period of time necessary to complete its investigation. See In re Oracle Corp. Derivative Litig., 808 A.2d 1206, 1211 (Del. Ch. 2002); Kaplan v. Wyatt, 484 A. 2d 501, 510 (Del. Ch. 1984); Abbey v. Computer Commc’ns Tech. Corp., 457 A.2d 368, 375-76 (Del. Ch. 1983). There is an exception, however, if it is clear from the stay application that any decision by the committee to terminate litigation will not withstand scrutiny. See Biondi v. Scrushy, 820 A.2d 1148, 1165 (Del. Ch. 2003) (denying an SLC’s motion to stay because the SLC would not meet the independence requirement of Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981)). Any such decision by the SLC would need withstand Zapata’s requirement that the SLC be independent and act in good faith and that the investigation be reasonable and conducted objectively. See Zapata, 430 A.2d at 788 (holding that an SLC could move to dismiss a derivative action “[a]fter an objective and thorough investigation” and that the company would “have the burden of proving independence, good faith and a reasonable investigation, rather than [a court] presuming independence, good faith and reasonableness.”); see also Booth Family Trust v. Jeffries, 640 F.3d 134, 138-39 (6th Cir. 2011) (“Under Zapata . . . . If a court finds that a corporation’s special litigation committee was independent, conducted its investigation in good faith, had reasonable bases for its conclusion and the decision to dismiss the lawsuit is not inconsistent with business judgment, the court will dismiss the derivative action.”). PAGE 2 – OPINION AND ORDER BACKGROUND A. The Alleged Wrongdoing As alleged in the Verified Amended Consolidated Shareholder Derivative Complaint (“Amended Complaint”), Galena is a biotechnology company based in Portland, Oregon. The Company is focused on the development and commercialization of targeted oncology treatments that address major unmet medical needs to advance cancer care. Galena is pursuing the development of cancer therapeutics, including its main product candidate, NeuVax™, for the treatment of breast cancer and other tumors. In July 2013, Galena entered into a contract with The DreamTeam Group or one of its subsidiaries, MissionIR (also known as “Mission Investor Relations”) (collectively “DreamTeam”). Galena paid DreamTeam $50,000 for 240 days of advertising, branding, marketing, investor relations, and social media services. Plaintiffs allege that as part of these services DreamTeam was to place, or plant, misleading articles and comments on investor websites touting Galena. Plaintiffs further allege that Defendants hired DreamTeam with the plan to wait until the share price of Galena was high enough and then sell their personally-held stock. After Galena hired DreamTeam, DreamTeam published a variety of articles. For example, on or about August 6, 2013, DreamTeam published, on the online investment advice website Seeking Alpha, an article entitled “Galena Biopharma Presents an Attractive Investment Opportunity.” This article recommended investment in Galena stock, but failed to disclose any financial relationship between the author, who was identified only as “Wonderful Wizard,” and either Galena or DreamTeam. Another article placed by DreamTeam touting Galena in Seeking Alpha appeared on November 22, 2013, this time by an author identified as “Kingmaker,” who also failed to disclose any relationship with either Galena or DreamTeam. These two articles about Galena in Seeking Alpha were purportedly written by two different people, each PAGE 3 – OPINION AND ORDER recommending investment in Galena, but were allegedly written by the same author.1 Overall, there were 26 articles about Galena published on Seeking Alpha between July 2013 and February 2014, the time period in which DreamTeam was providing paid promotional services for Galena. In September 2013, shortly after the publication of the August 6th DreamTeam article on Seeking Alpha, Galena conducted a $37.5 million public offering of common stock and warrants. On November 6, 2013, Galena issued a press release, entitled “Galena Biopharma Reports Third quarter 2013 Results.” This press release quoted Galena’s then-president and chief operating officer, Mark Ahn, as stating that Galena’s “commercial success to date with Abstral® has been very encouraging and we are excited to report initial revenues ahead of schedule. . . . [We] expect continuing strength with the launch. We are also making steady progress in advancing our NeuVaxTM and FBP cancer immunotherapy pipeline.” The press release also set forth the “financial highlights” for the third quarter 2013. That same day Galena filed a Form 10-Q with the SEC, signed by Ahn and vice president and chief financial officer Ryan Dunlap, which reiterated the financial results announced in the press release. Neither the press release nor the 10-Q disclosed the stock promotion agreement with DreamTeam. On November 26, 2013, four days after the November 22nd Seeking Alpha article, Galena’s Compensation Committee granted a collective total of 2.75 million shares of stock options to Defendants director Rudolph Nisi; current president and chief executive officer and former chief operating officer and executive vice president, Mark W. Schwartz; Chairman of the Board Sanford Hillsberg; director Richard Chin; director Stephen Galliker; director William 1 Ultimately, the website Seeking Alpha removed from its website the August 6, 2013 article by “Wonderful Wizard” and the November 22, 2013 article by “Kingmaker.” Seeking Alpha’s Vice President of Content and Editor-in-Chief, Eli Hoffman, explained that the removal of the articles was done because they violated Seeking Alpha’s terms of use when the author failed to disclose to Seeking Alpha that “Kingmaker” and “Wonderful Wizard” were, in fact, the same person. PAGE 4 – OPINION AND ORDER Ashton; Ahn; and Dunlap. These options issued in November carried an exercise price of $3.88 per share. These grants were the only ones issued by the Compensation Committee at that time of year. The usual practice by the Compensation Committee was to grant stock options to Galena’s officers and directors in January of a calendar year. The options granted in November 2013 vested on February 26, 2014, shortly before the eight-month DreamTeam promotional campaign was scheduled to end. By early January 2014, Galena’s stock price had risen significantly. In October 2013 it traded at between $2 and $3 per share. By January 2014, it more than doubled and traded at between $5 and $7 per share. As alleged in the Amended Complaint, at the beginning of 2014 Defendants had reason to believe that the stock promotion deal with DreamTeam could be discovered at any time, so most of them engaged in a significant number of high-volume, single-day sales of their personally-held Galena stock. In a period of less than one month, between January 17, 2014 and February 12, 2014 (a period of eighteen trading days), many Defendants sold more than a total of 2.9 million shares, collectively receiving proceeds of more than $16 million. Specifically, Ahn sold approximately 800,000 shares for proceeds of approximately $3.8 million; Schwartz, sold 100,000 shares for proceeds of approximately $557,000; Hillsberg sold 450,000 shares for proceeds of approximately $2.7 million; director Steven Kriegsman sold 600,000 shares for proceeds of approximately $3.8 million; Chin sold 262,500 shares for proceeds of approximately $1.2 million; Galliker sold 300,000 shares for proceeds of approximately $1.2 million; and Nisi sold 450,000 shares for proceeds of approximately $2.7 million.2 The Amended Complaint alleges that these were direct sales and were not pursuant to any pre-arranged Rule 10b5-1 2 The Amended Complaint does not specifically allege any improper sale of shares and related proceeds by Defendants Dunlap or Ashton. PAGE 5 – OPINION AND ORDER trading plan and that none of the selling Defendants had engaged in open market sales of Galena stock during the four years before January 2014. On February 12, 2014, the last day any of the Defendants sold their personally-held stock, Adam Feuerstein published an online article on TheStreet.com, titled “Galena Biopharma Pays for Stock-Touting Campaign While Insiders Cash Out Millions.” In his article, Mr. Feuerstein alleged that Galena was engaging in a misleading brand-awareness campaign aimed at boosting its stock price. The article also reported that Galena had paid DreamTeam to publish articles promoting the Company’s stock without disclosing who paid for those articles. On this news, Galena’s stock dropped $0.85 per share to close at $4.34 per share on February 12, 2014, a one-day decline of 16 percent. Two days later, on February 14, 2014, Seeking Alpha published another article, titled “A Deeper Look at the Galena Biopharma Controversy,” which noted that “the company’s monstrous rise appeared to occur without a catalyst” and that “[l]ogic thus dictates that this meteoric rise was primarily the result of promotional efforts by DreamTeam, and had little to do with a change in the underlying fundamentals of the company.” That same day, Ahn issued a letter to Galena’s shareholders to “set the record straight,” admitting that the Company had paid DreamTeam to promote the Company’s stock and that company insiders had divested shares in mid-January 2014 and denying all other allegations. Galena’s stock dropped $0.63 per share to close at $3.73 per share on February 14, 2014, a one-day decline of 14 percent. Thus, during the one-month period between January 16, 2014 and February 14, 2014, Galena’s share price fell by approximately 50 percent from its all-time high of $7.48 per share. On February 18, 2014, Mr. Feuerstein responded to Ahn’s letter in an article, titled “Galena’s CEO’s Response to Stock Promotions Leaves Questions Unanswered.” The article PAGE 6 – OPINION AND ORDER highlighted what Mr. Feuerstein considered to be inconsistencies and unanswered questions. For example, Mr. Feuerstein questioned why, if there was nothing improper with DreamTeam’s services provided to Galena, did DreamTeam, after its relationship with Galena became public, try to remove all evidence of DreamTeam’s services from the internet by deleting articles, blogs, comments, Twitter feeds, and the compensation disclosure noting the $50,000 payment made by Galena. Mr. Feuerstin also questioned Ahn’s inconsistent statements about why he sold his Galena shares—explained on February 4, 2014 as to “diversify for my family” and explained after the DreamTeam story broke that company insiders were prohibited from selling shares earlier because Galena was in negotiations to acquire Mills Pharmaceuticals. On March 13, 2014, financial analyst and author Richard Pearson published the results of his investigation into the relationship between Galena, CytRx Corp., and DreamTeam on Seeking Alpha in an exposé, entitled “Behind the Scenes with Dream Team, CytRx and Galena.” The article detailed Mr. Pearson’s findings after going “undercover” as a writer for DreamTeam assigned to promote Galena. Mr. Pearson’s article stated that Defendants approved all articles written about Galena before the articles were published. Mr. Pearson opined that Galena’s “[m]anagement will have a very difficult time convincing investors that ‘we didn’t know’” and that “it seems no coincidence that there appears to have been great urgency to get these articles in almost exact proximity to sales/issuances of stock by insiders and the companies at both Galena and CytRx.” Mr. Pearson concluded that “[t]he promotional articles and the paid retention of the Dream Team Group were coordinated with the release of news and data from the companies such that they coincided with the share prices of both stocks rising dramatically.” On March 17, 2014, two trading-days after the publication of the Pearson exposé, Galena announced that it was under investigation by the SEC, stating in its 10-K regulatory filing: “In PAGE 7 – OPINION AND ORDER February 2014, we learned that the SEC is investigating certain matters relating to our company and an outside investor-relations firm that we retained in 2013. We have been in contact with the SEC staff through our counsel and are cooperating with the investigation.” Upon disclosure of the SEC investigation, Galena’s common stock share price dropped to $2.68, representing a 16.5 percent loss in market capitalization in a single day. On August 21, 2014, Galena issued a press release stating that Ahn “resigned as the President and CEO and as a director of the company to pursue other long held personal and professional goals.” The same day TheStreet.com reported, based on the account of “a source close to the company,” that Ahn had been “fired” by the Board at a “special meeting” held on August 18, 2014. B. Galena’s Appointment of the Special Committee On February 17, 2014, three days after Ahn’s letter to shareholders discussing the allegations of wrongdoing and before any lawsuits had been filed, Galena’s Board formed a Special Committee of the Board of Directors (“Special Committee”), consisting of Defendants Kriegsman, Galliker, Ashton, and Hillsberg to investigate the allegations of wrongdoing being reported in the press. On or about February 27, 2014, the first lawsuit was filed against Galena: a shareholder derivative action filed in the Circuit Court of the State of Oregon for the County of Multnomah. On March 5, 2014, a securities class action was filed in this Court, and on March 7, 2014, the first lawsuit in this consolidated derivative action was filed. Additional securities class action lawsuits were filed in this Court on March 10, 2014 and March 12, 2014. On March 14, 2014, Irving Einhorn joined the Board of Directors of Galena. At approximately the same time that Einhorn joined the Board, the Special Committee was reconstituted to include only two members: Einhorn and Ashton (who had not sold any shares during the relevant period). PAGE 8 – OPINION AND ORDER Additional lawsuits in this consolidated derivative action were filed on March 31, 2014, and one additional securities class action lawsuit was filed in this Court on April 4, 2014. The Special Committee investigated the allegations contained in the press reports and the allegations of the derivative and class action complaints filed in this Court and the Multnomah County Circuit Court.3 The Special Committee consisting of Einhorn and Ashton investigated for approximately four months. The investigation included interviewing numerous employees, officers, and directors of Galena and reviewing more than 140,000 pages of documents. On July 15, 2014, the Special Committee of Einhorn and Ashton issued their report to Galena’s Board.4 The report contained the following findings of fact by the Special Committee, as relevant to this case: (1) they found no evidence that Galena was aware that DreamTeam paid persons to write online articles or send emails favorable to Galena or its products; (2) they found no evidence that Galena was aware that persons affiliated with DreamTeam used multiple aliases when writing about Galena; (3) they found no evidence that Galena hired DreamTeam with the specific intent to increase the price of Galena’s stock; (4) they found no evidence that articles allegedly written at the direction of DreamTeam contained false or misleading statements of material fact; (5) they 3 In May and June of 2014, additional derivative actions were filed in the Delaware Court of Chancery. The Special Committee did not specifically investigate the allegations of the Delaware complaints, although many of the underlying facts are the same as alleged in the Oregon actions. 4 It appears that the report by the Special Committee was not made public until September 25, 2014, when Galena posted a copy of the report on its public website and issued a press release regarding the report. See http://galenabiopharma.com/special-committee-report/ (last visited on October 19, 2014). A complete copy of the report, including appendices but excluding exhibits, is attached as an Appendix to this Opinion and Order. Although Galena had filed its second quarter 2014 Form 10-Q on August 11, 2014, disclosing that the Special Committee had completed its investigation, that filing failed to disclose the Special Committee’s conclusions or the existence of the July 15, 2014 report. The Form 10-Q did, however, disclose that Einhorn had been appointed as a single-member SLC. PAGE 9 – OPINION AND ORDER found no substantial evidence that the articles allegedly written at the direction of DreamTeam had a material effect on the price of Galena’s stock; (6) they found no evidence that, with the exception of Ahn, Galena insiders had knowledge of DreamTeam’s activities before trading Galena’s stock; (7) they found no evidence that Galena’s officers and directors had material nonpublic information before trading in Galena’s stock; and (8) they found no evidence that the trades by officers and directors in the first quarter of 2014 violated any company policy. Based on these findings of facts, the Special Committee of Einhorn and Ashton concluded that there is no credible basis for finding that Galena or its officers and directors violated applicable law or that the officers and directors breached their fiduciary duties as alleged in the Oregon derivative and class action complaints. The Special Committee also recommended that Galena should not pursue claims against any person or entity as a result of the findings of the investigation. C. Galena’s Appointment of the Special Litigation Committee On July 21, 2014, six days after the Special Committee of Einhorn and Ashton issued the report concluding that Galena and its officers and directors did not violate any law or breach any applicable fiduciary duties and that the company should not pursue any litigation, Galena’s Board disbanded the Special Committee. The Board then appointed a new, “fully empowered” single-member SLC consisting only of Einhorn. This single-member SLC was authorized by the Board to: (1) investigate and evaluate the allegations and issues raised in the lawsuits filed in both Oregon and Delaware; (2) prepare reports, arrive at decisions, and take other actions in connection with these lawsuits as the SLC deems appropriate and in the best interests of Galena and its stockholders, in accordance with Delaware law; and (3) engage accountants and advisors, including independent legal counsel, that the SLC deems necessary or desirable in order to assist it in the discharge of its responsibilities. PAGE 10 – OPINION AND ORDER In August 2014, the SLC retained the law firm of Young, Conaway, Stargatt & Taylor, LLP to act as its counsel. The SLC, with the assistance of its counsel, has begun to investigate the allegations contained in the various lawsuits. D. Additional Procedural History On August 6, 2013, Galena’s Board amended Galena’s bylaws through unanimous written consent of the Board, adding a forum selection clause. On April 18, 2014, Galena filed a motion to dismiss this consolidated derivative action, asserting that the forum selection clause adopted by the Board was valid and enforceable and required dismissal of the action before this Court. After this motion was fully briefed, but six days before oral argument, the Court asked the parties to “address the process and timing by which Galena shareholders can amend or repeal a bylaw amendment and the date of the Galena annual meeting.” Galena then withdrew its motion to dismiss. Under Delaware law a board is prohibited from unilaterally amending a corporation’s bylaws unless the company’s Certificate of Incorporation specifically allows such an amendment. As Plaintiffs have now explained, in Galena’s Certificate of Incorporation there is no such authority for the Board unilaterally to amend Galena’s bylaws; instead, the Certificate requires a shareholder vote with not less than 75 percent voting to approve any proposed amendment to the bylaws. DISCUSSION Galena moves to stay this action so that the single-member SLC consisting of Mr. Einhorn can conduct and conclude its investigation. Delaware law has a strong presumption that derivative litigation should be stayed pending an SLC investigation. See, e.g., Biondi, 820 A.2d at 1163 (noting that “the general rule under Delaware law is that a stay must be granted when a special litigation committee is formed to consider whether derivative actions should be prosecuted”); In re Oracle, 808 A.2d at 1211 (“[T]his court has acknowledged its duty to stay PAGE 11 – OPINION AND ORDER derivative actions at the instance of a special litigation committee, ‘pending the investigation and report of the Committee. . . .’”) (citations omitted); Kaplan, 484 A.2d at 510 (“It is a foregone conclusion that such a stay must be granted. Otherwise, the entire rationale of Zapata, i.e., the inherent right of the board of directors to control and look to the well-being of the corporation in the first instance, collapses.”). As explained by the Delaware Chancery Court: If Zapata is to be meaningful, then it would seem that such an independent committee, once appointed, should be afforded a reasonable time to carry out its function. It would likewise seem reasonable to hold normal discovery and other matters in abeyance during this interval. If a derivative plaintiff were to be permitted to depose corporate officers and directors and to demand the production of corporate documents, etc. at the same time that a duly authorized litigation committee was investigating whether or not it would be in the best interests of the corporation to permit the suit to go forward, the very justification for the creating of the litigation committee in the first place might well be subverted. Likewise, in effect, it would likely amount to simultaneous discovery of the same persons and materials by two separate sources, both allegedly acting on behalf of the corporation. Abbey, 457 A.2d at 375. Although granting a motion to stay a derivative action pending an SLC investigation is the general rule, there are limited exceptions to that rule. The Delaware Chancery Court has discussed at length the essentially discretionary nature of a trial court’s decision to stay an action, and noted that Delaware courts have strayed from that principle in articulating a seemingly firm rule favoring stays. Carlton, Invs. v. TLC Beatrice Int’l Holdings, Inc., 1996 WL 33167168, at *8 (Del. Ch. June 6, 1996); see also Biondi, 820 A.2d at 1165 n.42 (noting that Carlton demonstrated that there are exceptions to the general rule favoring stays). The court in Carlton noted that the decision whether to grant a stay involves balancing the equities and denied the motion to stay because the equities favored continuing the litigation in light of the length of time PAGE 12 – OPINION AND ORDER the litigation had been pending, the discovery and motions practice that had occurred, and the resources expended litigating the case. Carlton, 1996 WL 33167168, at *9-10. The Delaware Chancery Court also denied a motion to stay pending an SLC investigation where it appeared at the time of the application for stay that any later conclusion by the SLC that a lawsuit would not be in the company’s best interest would not withstand judicial review. Biondi, 820 A.2d at 1165. In Biondi, the court found that because the chairman of the SLC previously had publicly commented that the findings of an investigation by a law firm that had been retained by the company (and was not affiliated with the SLC) “puts to rest any question” of wrongdoing by one of the company insiders that the SLC was charged with investigating, any future decision by the SLC would not withstand scrutiny because “there will always be a reasonable doubt that its investigation was designed to paper a decision that had already been made.” Id. at 1166 (“How can the court and the company’s stockholders reasonably repose confidence in an SLC whose Chairman has publicly and prematurely issued statements exculpating one of the key company insiders whose conduct is supposed to be impartially investigated by the SLC? The answer is that they cannot.”); see also London v. Tyrrell, 2010 WL 877528, at *16 (Del. Ch. Mar. 11, 2010) (“In sum, the independence inquiry under Zapata is critically important if the SLC process is to remain a legitimate mechanism in our corporate law. SLC members should be selected with the utmost care to ensure that they can, in both fact and appearance, carry out the extraordinary responsibility placed on them to determine the merits of the suit and the best interests of the corporation, acting as proxy for a disabled board.” (footnote and citation omitted)). The court in Biondi denied the motion to stay, finding that it would be “wasteful to stay litigation” for an investigation that could announce support for litigating the derivative suits but could not issue “a contrary decision to terminate the litigation” because such PAGE 13 – OPINION AND ORDER a decision “must necessarily be rejected because the SLC cannot demonstrate its independence.” Biondi, 820 A.2d at 1166. Galena argues in its reply brief that the “unique circumstances” of Biondi are not present in this case. Galena fails to mention, however, the fact that the earlier two-member Special Committee, of which Einhorn was one of only two members, issued a report exonerating the company insiders from any wrongdoing.5 The Court disagrees with Galena’s argument that the “unique circumstances” of Biondi are not present in this case. In Biondi the SLC consisted of more than one person, while here there is only a single member, Einhorn. In Biondi, the court was concerned about one of the SLC members who, before the SLC completed its investigation, made a public statement that an investigation by a separate law firm “puts to rest” the allegations of wrongdoing by the company insider. Here, the sole member of the SLC, Einhorn, did not merely comment on an outside investigation, but conducted an investigation as part of the two-person Special Committee and issued a report finding that the company insiders did not engage in the wrongdoing as alleged in this case. This report recommended that the company not pursue any litigation. Six days after issuing this 5 Additionally, in support of its motion to stay, Galena filed the affidavit of Irving M. Einhorn. In his affidavit, Einhorn explains that in February 2014 Galena’s Board created a Special Committee of four directors to investigate the allegations of wrongdoing and report back to the Board its findings and recommendations. After Einhorn joined the Board on March 14, 2014, the Special Committee was “reconstituted” by the board to include only Einhorn and Board member William Ashton. Einhorn further explains in his affidavit that on July 21, 2014, “the Board determined to disband the special committee and to appoint in its place a fully empowered Special Litigation Committee (the ‘SLC’) of the Board, with me as its sole member.” Mr. Einhorn in his affidavit, and Galena in its motion to stay, however, did not disclose to the Court that just six days before the Board disbanded the Special Committee consisting of Einhorn and Ashton, that same two-person Special Committee delivered to Galena’s Board the Special Committee’s report dated July 15, 2014, containing the findings and recommendations of Einhorn and Ashton described above. See Appendix. For the reasons explained in this Opinion and Order, the Court considers the existence of the July 15, 2014 report from Einhorn and Ashton, including its findings and recommendations, to be material to the Court’s decision on the pending motion to stay. PAGE 14 – OPINION AND ORDER report, Einhorn was appointed as the sole member of the SLC. Galena now asks the Court to delay three months so that Einhorn can conduct another investigation into the conduct alleged in this case. Einhorn has, however, already investigated the conduct alleged in this case and reached a conclusion regarding the very issue that he, as the sole member of the SLC, is now tasked to investigate. The Court finds that it is unlikely that any future decision by the SLC to terminate this litigation will withstand scrutiny under Zapata. As in Biondi, here the Court and Galena’s stockholders cannot “reasonably repose confidence in an SLC” whose sole member has “publicly and prematurely issued statements exculpating” the alleged wrongdoers “whose conduct is supposed to be impartially investigated by the SLC[.]” Biondi, 820 A.2d at 1266. It would be difficult for Galena to meet its burden to prove that Einhorn, as the SLC, conducted an objective, reasonable, and independent investigation done in good faith, after having already formed judgment as part of the two-member Special Committee. See id.; see also Booth, 640 F.3d at 145 (noting that “the mere appearance of the special litigation committee’s lack of independence is enough to deny [the defendant’s] motion based on the special litigation committee's recommendation and allow the derivative suit to proceed”); London, 2010 WL 877528, at *15 (“When SLC members are simply exposed to or become familiar with a derivative suit before the SLC is formed this may not be enough to create a material question of fact as to the SLC’s independence. But if evidence suggests that the SLC members prejudged the merits of the suit based on that prior exposure or familiarity, and then conducted the investigation with the object PAGE 15 – OPINION AND ORDER of putting together a report that demonstrates the suit has no merit, this will create a material question of fact as to the SLC’s independence.”).6 Further, under Delaware law, “the sole member of a one-person special committee [must] meet unyielding standards of diligence and independence.” Sutherland v. Sutherland, 2007 WL 1954444, at *3 n.10 (Del. Ch. July 2, 2007). As the Delaware Chancery Court has warned, “[i]f a single member committee is to be used, the members should, like Caesar’s wife, be above reproach.” Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 1985). Here, because Einhorn has already conducted an investigation, issued a report to the Board as part of the two-person Special Committee, and publicly announced his conclusion that the Galena insiders did not engage in any wrongdoing, Einhorn fails an “unyielding” evaluation of his independence and objectivity to proceed with the SLC investigation. Sutherland, 2007 WL 1954444, at *3 n.10. /// 6 Galena also cites to an opinion in the consolidated derivative actions against it pending in the Delaware Court of Chancery. That case involves many of the same facts alleged in the case before this Court. Galena notes that the Delaware Court of Chancery stayed that consolidated derivative action in support of Galena’s argument before this Court that a stay is appropriate. Galena did not provide the Court with a copy of the Delaware Court of Chancery’s order. The Court takes judicial notice of the Order and the related briefing filed before the Delaware Court of Chancery, Consolidated Case No. 9715-VCN. In the Delaware case, unlike in this Case, the stay was agreed upon and jointly submitted by the parties. The Delaware order states that “Plaintiffs, Galena, and the SLC . . . agreed to resolve the motion to stay. . . .” Although the Court does not rely on the Delaware Chancery Court order or the stipulation of the parties in that case in resolving this pending motion, the Court notes that nothing filed with the Delaware Court of Chancery in connection with the motion to stay discloses the July 15, 2014 report of the two-member Special Committee. If any party believes that the Court has not properly taken judicial notice of the documents filed before the Delaware Court of Chancery, that party has leave to seek reconsideration of this portion of the Court’s Opinion and Order. See Fed. R. Evid. 201(e). PAGE 16 – OPINION AND ORDER CONCLUSION Galena’s motion to stay (Dkt. 38) is DENIED. IT IS SO ORDERED. DATED this 22nd day of October, 2014. /s/ Michael H. Simon Michael H. Simon United States District Judge PAGE 17 – OPINION AND ORDER
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