1. Plaintiffs Tolk and Alsbury contend in para. 9 that more than 50% of the shareholders, property and sales of the old corporation were in California as of when the underlying transactions occurred and that therefore it was a “pseudo foreign corporation” under CA Corporations (“Corps.”) Code sec. 2115(a) and as such was subject to California law at least as far as Corps. Code sec. 1001.  

2. CA Corps. Code sec. 1001(d) requires 90% shareholder approval of the sale of all or substantially all of a corporation’s assets. Plaintiffs contend the Asset Purchase Agreement (“APA”) at issue falls within that definition. 

3. The Court is required to assume the truth of that contention in the proffer for purposes of this motion; however, if, as defendants assert, they cannot prove the foundation for making this assertion at trial, then Delaware law may still apply should this motion be denied. (If this foundation is controverted, and the parties still believe which law applies is material to how trial would be conducted and or on the merits, they may wish to consider whether the Court should hold an Evid. Code sec. 402 hearing on this point prior to start of trial.)  

4. Defendants argue, however, that the Delaware Supreme Court has found CA Corps Code sec. 2115(a) in violation of the Commerce Clause of the US Constitution as to the internal affairs of a Delaware corporation – which should be subject to only one body of laws, not two. Vantage Point v. Examen, 871 A.2d 1108 (Del. 2007)  

5. The treatise defendants rely upon (Friedman, et al, Cal. Practice Guide: Corporations (TRG 2022) sec. 3:7, however, indicates further that California courts - which this Court must follow (as opposed to Delaware courts), have overruled certain constitutional challenges to Corp. Code sec. 2115. See Wilson v. Louisiana-Pacific (1982) 138 Cal.App.3d 216, 222-224 and Valyz v. Penta Inv. Corp. (1983) 139 Cal.App.3d 803, 806-810. (Note, however, the Calif. Supreme Court discussion of related issues in Greb v. Diamond Int’l. Corp. 56 Cal.4th 243). Defendants have not presented argument on how the Court should address these California authorities.  

6. While the foregoing would suggest the Court should follow California law in deciding whether the causes of action are derivative or direct, the Court does not face this issue on a clean slate. Judge Chavez ruled already that Delaware law applies as to the fiduciary duty of directors. In addition, Plaintiffs made this same argument premised upon Corps. Code sec. 2115 to Judge Chavez and he nonetheless ruled Delaware law applied; seemingly rejecting that argument – though he gave no reasons for his decision to grant defendants’ motion. In addition, as defendants argued to Judge Chavez, Tolk’s third amended cross-complaint does not allege that the directors were required to have obtained 90% of shareholders’ agreement to enter the APA (as might be true if California law applied.) On the other hand, Plaintiffs argued they would prove this issue at trial. It does not appear that evidence was before Judge Chavez and it is unclear under what statutory authority defendants were making the motion. Even if the Court were then able to assess evidence not then before it, it is not clear that even if Delaware law applies as to duties of directors that this necessarily also means causes of action brought in a California court also are governed by Delaware law. For example, the aiding and abetting cause of action (that is the principal claim here) is one under California law even if the directors’ fiduciary duties are governed by Delaware law. Finally, the order was in any event an interim order for a trial he was to conduct but ultimately was not able to do. Hence, this Court does not find that it is necessarily controlling for this trial court and even if it is, as discussed below, that it does not make difference on this motion even if Delaware law does apply.  

7. Assuming California law applies, the Court does not now reach whether Corps Code sec. 1001(d) is applicable to the facts here. It is not critical to this non-suit motion. Even if 1001(d) does not apply, Plaintiffs would still be able to pursue other claims that that the necessary consent was not required. (See para. 47) To the extent this motion seeks to adjudicate that it is not possible Plaintiffs could prevail on this theory assuming their position it is applicable and 90% of shareholders’ consent was not secured, there are remaining issues which require further briefing and or submission of evidence prior to the Court being able to rule on a non-suit solely on this issue:  

8. Initially, as discussed above, the sec. 1001 (d) claim was not alleged in the most recent pleading. If failure to plead is not fatal, Plaintiffs could conceivably succeed on this theory if pursued: Defendants argue 1001(d) is not applicable because the new company (the “acquiring party”) was not in “control” of the old corporation, as the term “control” is defined in Corps. Code sec. 160. However, the language in (d) is hard to understand. Plaintiffs argue the focus of the statute is to address where those in charge of the corporation acquiring the assets controls the party selling the assets – in which case 90% of the shareholders’ vote is mandated. If Plaintiffs are correct, the issue would be whether either Mullins or Tarsadia are in control – either by way of Mullins based on his officer status (under sec. 160 (a)) and or Tarsadia by way of its ownership of membership interests in the new company. ¿Again, the proffer is that Tarsadia parties were in control of the company selling the assets. (See paras. 35 & 82-88) Whether Mullins could not have been himself a controlling shareholder where he had less than 50% of the stock (or was so by acting with others) will again have to be determined at trial. Defendants’ further argument that Mullins was not conflicted because he had the same employment as he had before may also not succeed, at least for these purposes, where it is asserted i) that old job would not still have been in place because, as even Defendants acknowledge, the company was by then insolvent (see para. 34) and ii) he also received loans / other consideration from Casserly and or Tarsadia.  

9. Therefore, at this juncture, the Court will deny the motion to the extent it is directed at the claim that there is a requirement of having 90% shareholder approval.  

10. The Court addresses now whether applying California law, the evidence is susceptible to being found to be “direct,” as opposed to derivative, as previously briefed, to be able to go forward.  

11. The principal reasons based on the proffer Plaintiffs may or may not be able to establish a direct claim are as follows:  

a. Tolk was not given prompt notice of the ADA so that he could exercise voting rights as shareholder. (See paras. 33, 44 & 46) 

  b. Tolk lost any value in his ownership interest in the old company (23% (see para. 4)) whereas other shareholders received the additional benefit of employment by the new company (see para. 70), as well as other consideration; especially, Mullins, where he received assistance financially. (See paras. 73 & 74) 

c. That said, is this case truly one for wrongful discharge as opposed to shareholder rights? (See paras. 51 & 53) Tolk had direct injury in the form of loss of continued employment; however, he is disclaiming employment damages. In turn, what the company owed him as creditor ($741,500.28) (see para. 5) he has recovered already by way of a judgment against the old corporation. On other hand, the old company may be judgment proof if it has no assets. It is unclear if Tolk is seeking to hold aiders and abettors as additional judgment debtors or otherwise responsible for this amount.  

d. In turn, that the old corporation was injured because it did not receive the level of consideration Plaintiffs argue it should have for conveyance of assets (i.e., more than $3 million) would appear to be “derivative.”  

e. In summary, that Tolk lost whatever contributions he made to the company (see para. 11) and any interest or power to continue to make the most of those interests.  

12. Plaintiffs also argue however that prior to putting them to the burden of establishing the nature of their damages, under the Delaware law Judge Chavez found applied to the duty of directors, the burden is initially shifted to defendants to establish the entire reasonableness or fairness of the transaction - in the event the directors are conflicted (under Weinberger v. UOP, 457 A.2d 701 (De. 1983)) (as alleged) - or at least for the Court to undertake “heightened” or “enhanced” scrutiny where the APA is a “final stage” transaction) (under Revlon v. MacAndrews, et al., 506 A.2d 173 (Del. 1986)). See Corwin v. KKR, 125 A.3d 304 (Del. 2015) Which of these tests would apply, or conversely (as defendants argue) for the default highly deferential / Business Judgment Rule to apply (under Reis v. Hazlett, et al, 28 A.3d 442 (Del. 2011)) and for the burden not to be shifted (see Paramount v. QVC, 637 A.2d 34 (Del. 1994)) requires analysis of whether the directors are “interested.”  

13. The Court is not in a position without hearing the evidence to now decide the complex “interestedness” question. It is required the Court assume they are interested or conflicted for these purposes, as alleged. (See para. 40 & paras. 61 through 75) In doing so, the Court recognizes that if the company was “insolvent,” another highly disputed issue, whether directors are interested may change as their duties then may be to creditors, not other shareholders. Similarly, it may be that merely because shareholders may themselves benefit from a proposed transaction does not necessarily in and of itself make them conflicted. ¿¿ 

14. Therefore, returning to the direct v. derivative question, the ultimate issue is whether the injuries are “incidental to an injury to the corporation:” In summary, the claim is Tolk lost his opportunity to receive dividends as a shareholder or other consideration or revenue from the company - whether as income or from profits - whereas other shareholders received continuing employment and ultimately some stake in future profits and or ability to recover what had been invested in the company. It would be solely any such disparate treatment of shareholders that is separate and apart from allegedly inadequate consideration for assets that might be a cognizable “direct” claim.   

15. Jara v. Suprema Meats (2004) 121 Cal.App.4th 1238 permitted this form of recovery, relying in part on Crain v. Electronic Memories, et al. (1975) 50 Cal.App.3d 509 – in the way like here the claim is that the transactions in question left the company as a shell and untenable for there to be a viable derivative suit on behalf of the company. The Jara Court notes the continuing significance of the California Supreme Court decision in Ahmanson, discussed below, and its clear statement of the test; namely, that there may be a direct claim if the transaction results in majority stockholders retaining a “disproportionate” share of the corporation’s ongoing value to the detriment of minority shareholders. Hence, the trial should concern whether there was disproportionate injury to some shareholders over others. (See paras. 24, 32 and 39) Like here, Jara involved majority receiving allegedly extra compensation as opposed to just additional shares. The Jara Court also noted the public policy behind derivative rules is less pressing where there is not as here an issue of avoiding multiplicity of cases by different shareholders of a public company or determining if the board will take action beforehand where here that would allegedly have been redundant.  

16. Jones v. H.F. Ahmanson (1969) 1 Cal.3d 93 indicates a claim will be derivative if the claim is for damage to the whole corporation without severance or distribution among shareholders or to prevent dissipation of assets. While those claims are asserted here, in terms of the adequacy of the consideration under the APA, there are also other separate allegations here that fit a direct claim: i.e., the directors allegedly using their control to their own advantage to the detriment of minority shareholders so as to render their stock unmarketable and in allegedly creating a conflict that could have been avoided had they offered all stockholders the same opportunity to participate in some manner in the new company. ¿(See paras 21 and 22.) 

17. Schrage v. Schrage (2021) 69 Cal.App.5th 126 does not change that analysis: The damages in Schrage were found to be derivative on appeal because they related to the company as a whole and the plaintiffs’ damages were merely one third of the difference in losses to the company between the events in question. The Schrage court noted however that the facts in Jara by contrast were “tantamount to discriminatory payment of dividends” as distinguished from the more general mismanagement claims at issue there. Tolk is correct that whether Jara was correctly decided, as Schrage comments but does not specify how, is likely not for another equal level Court of Appeal to say but for ultimately for the California Supreme Court. Hence, the Schrage Court finds its facts are more like in Avikian v. WTC Fin. Corp. (2002) 98 Cal.App.4th 1108 - where again there were mismanagement claims that were deemed derivative - than those in Jara. Schrage also recognizes that the policies underlying the derivative rule do not apply w/ equal force in cases involving closely held companies though that does not also mean rules still do not apply. Here, it would appear insisting on Plaintiffs pursuing recovery on behalf of the company in Delaware where that company is now a shell may be to require a lawsuit that is not addressing what is at the heart of Plaintiffs’ allegations. ¿ 

18. Under California law, therefore, this motion is denied to the extent it is asserting Plaintiffs could not state a “direct” claim even if they proved the claims stated in the proffer.  

19. In the alternative, even assuming Delaware law should decide this issue, due to the ruling of Judge Chavez, the Court does not find it would make a difference: The Delaware Supreme Court’s decision in Brookfield Asset Mgmt. v. Rosson, 261 A.3d 1251 (Del. 2021) sets forth the history of how its courts have wrestled with the direct v. derivative issue and seemingly is the controlling authority; addressing how prior decisions should be read: Brookfield reaffirms the importance of the two-part test in an earlier of its decisions, Tooley v. DLJ, 845 A.2d 1031 (Del. 2004). In doing so, Brookfield reversed an earlier of its decisions, Gentile v. Rossette, 906 A.2d 91 (Del. 2006) which allowed a direct claim to go forward. The Court emphasized that the issue was not just whether the injury is dependent on an injury to corporation or looking at the value of the total company. Here, Tolk meets the two-part Tooley test: (1) the harm in question is one he allegedly suffered by loss of investment, financial and otherwise, as founder, employee and shareholder (freeze out / disenfranchisement of shareholder vote) (under sec. 228(e) of Delaware Corporation Code) and (2) he would receive if successful the benefit because any damages would look to what that loss was worth for him to have put in that contribution; not the proportionate share of the value of the company. As Brookfield notes, a direct claim is for a “special” or “indirect” injury to one the corporation may have suffered.  

20. The foregoing is without consideration of defendants’ allegations of what occurred and whatever defenses they have to these allegations, including that they acted appropriately in terminating Tolk and in view of the existing financial pressures.  

21. The foregoing is also significant as it appears the claim cannot be to seek recovery for what all other shareholders also may have suffered, i.e., defendants not obtaining enough for assets., as to which Plaintiffs also assert their entitlement to their share. 

22. Similarly, the claim arising from underpayment for assets would be derivative and hence not one that Plaintiffs can now assert. Further, where Tolk has a direct claim but has also disavowed damages for loss of employment, and his other damage claim derives from what would be his proportionate interest in the value of the company, it is unclear if he has any claim where a claim is only permissible if damage was suffered. On the other hand, see American Master Lease v. Idanta (2014) 225 Cal.App.4th 1451, where the Court approved other remedies for aiding & abetting breach of fiduciary duty: restitution by way of avoiding unjust enrichment & disgorgement. Whether that relief is claimed or permitted is an issue beyond this motion but what damages are still available can be addressed in the context of the pending motion in limine to exclude Tolk’s damages expert.