Byong W Yoo vs. Jean Chong

Motion Other

Cal. Super. - 4th Dist.August 14, 2017

— N N N N N D ND ND ND DN N N 2 a a A A a a QQ A «ca a «a co ~N oO o r A W N =~ O © o N o O o h h , Ww N © © 00 N N oO Oo A ww WN FRIEDMAN STROFFE & GERARD, P.C. ROBERT E. ADEL (SBN 166313) radel@fsglawyers.com WILLIAM Q. TRAN (SBN 210771) wtran@fsglawyers.com 19800 MacArthur Boulevard, Suite 1100 Irvine, California 92612-2425 Telephone: (949) 265-1100 Facsimile: (949) 265-1199 Attorneys for Defendant and Cross-Defendant PREMIER FOOD SAFETY CORPORATION SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF ORANGE (CENTRAL JUSTICE CENTER) BYONG W. YOO and HWA YOO, Plaintiffs, JEAN CHONG and KOREY CHONG, and DOES 1-25, inclusive, Defendants. AND RELATED CROSS ACTION. ELECTRONICALLY FILED Superior Court of California, County of Orange 01/03/2018 at 03:04:00 Pi Clerk of the Superior Court By Wary hl Johnson, Deputy Clerk CASE NO. 30-2017-00937524-CU-CO-CJC ASSIGNED FOR ALL PURPOSES TO: JUDGE: Walter Schwarm DEPT.: C-19 NOTICE OF MOTION AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES [Filed Concurrently With Declarations Of Dirk Yoo, Dr. Byong Yoo, Hwa Yoo, Donald Yoo, and Robert Adel, and (Proposed) Order] Complaint Filed: 08/14/17 Trial Date: 03/28/18 JaotaxxXEXRRL January 23, 2014 DATE: TIME: 2:06 1:30 pm DEPT.: C-19 RESERVATION NO.: 72721837 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 MT - — © © oO o N N oo a ~~ o w oN TO THE COURT AND TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD: January 23, 2018 at 1:30 pm *V PLEASE TAKE NOTICE that on japo@mx Rexx 00crxxx, or as soon thereafter as the matter may be heard in Department C-19 of the Orange County Superior Court, located at 700 Civic Center Drive West, Santa Ana, California, Cross-Defendant Premier Food Safety Corporation (“PFS” or the “Company”) will and hereby does apply to the Court for authorization to indemnify Cross-Defendants Byong Yoo, Hwa Yoo, Dirk Yoo and Donald Yoo (collectively “Cross-Defendants”) against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in defending against I — Jean Chong and Korey Chong allegations of breach of fiduciary duty, breach of duty of loyalty, dissolution of PFS and related claims against Cross-Defendants, on an ongoing basis, as those expenditures are incurred. | This Motion is made pursuant to the express indemnity provisions in the Company’s Articles of Incorporation, Corporations Code section 317(b) and 317(e)(4) and Labor Code section 2802, and is made on the grounds that the claims against Cross-Defendants for which they seek indemnification all arise directly out of Cross-Defendants’ good faith discharge of their duties as directors, officers and/or employees of the Company, and their actions were in the best interests of the Company. This motion is based on based on the accompanying Memorandum of Points and Authorities, the concurrently-filed Declarations of Dr. Byong Yoo, Hwa Yoo, Dirk Yoo, Donald Yoo and Robert Adel, the pleadings, records and files in this action and such other oral and documentary evidence as may be presented at or before the hearing on this motion. DATED: January 3, 2018 FRIEDMAN STROFFE & GERARD, P.C. . v Robert’E. Adel * William Q. Tran Attorneys for Cross-Defendant Premier Food Safety Corporation 1 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 Oo © 00 NN OO Oo A W N = N N D N D N DN DD DND N N N a aA A a 4A a QQ @ « A a «a oo N N O O o r A O N =m, O O © 00 N O O O o r b L W w O N Aa VI. Vil. TABLE OF CONTENTS PAGE(S) BF FO CE TCO smmmacmsnnoooonsvomsonmssssiscg mmr i 51 RS A STR 5 STATEMENT OF FACT Suuniumanmsusmrsssnss ssnovusseneminssssn is sss mses 00h sass 05 sy sp pay snamans op sa 151s 6 CROSS-DEFENDANTS ARE ENTITLED TO INDEMNITY UNDER THE COMPANY'S ARTICLES, CORPORATIONS CODE § 317 AND LABOR CODE § 2802.......cccervennvcrivvennnrrennns swans A. Cross-Defendants Are Entitled To Express Indemnity Under the Company's | Articles Of INCOrPOratioN.....cveriiriiriirirrieice serene beter restore sree srnes ane 8 B. Additionally, Cross-Defendants Are Entitled To Statutory Indemnification Under Corporations COU § 317. uveitis estes rere snare erence sree reese nes RC 1. Section 317 authorizes indemnification upon a finding that the director or officer has acted in good faith and in the best interests of the company. ....9 2. Cross-Defendants have met the requirement that they have acted in good faith and have taken actions they believed to be in the Company’s best TINEEIESTS. tivities es besser sree ea 10 C. Additionally, Cross-Defendants/Employees Are Entitled to Statutory Indemnity Under labor Core 5 ZB02 wmwsamammsmissonemsmmumos sums ss ESS Token ys aspen 12 JEAN AND KOREY ARE NOT ENTITLED TO INDEMNITY c..coovvviireenrininicnnnnnieenninninennesnesnens 13 THE NEED FOR AN ALLOCATION BETWEEN INDEMNIFIED AND NON-INDEMNIFIED CLAIMS DOES NOT DEFEAT THE COMPANY'S CONTRACTUAL AND STATUTORY DUTY TO DY ENINAEY menmssmocenmrsmnmns ones smmcnsssorssonsossn moms 00s os 1208 omnes assess dss rs sbi on fone gee wr 1852 14 SECTION 317 DOES NOT REQUIRE THE POSTING OF ANY SECURITY OR MONETARY BONDE cms comsmasimmsmmmnsmsiitogmmaginmssguegumssys seppomeg onsen oss so or (5 SA ES SS A OSS CNOA COSTS AD 15 CONCLUSION Litt nes eben snares ens 17 2 3846533.1 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES — N O N N D N D N N N N D ND A m a am aA am aA a aA a a oo N N oO oO A W N A O O © OO N O O O o r B A W DND N =~ © © oo ~N oO o h O W N TABLE OF AUTHORITIES PAGE(S) CASES Barnes v. State Farm Mut. Auto. Ins. Co. ) (1993) 16 Cal. App. 4th 365 reeves ees eee 10 Branson v. Sun-Diamond Growers (1994) 24 Cal. App. 4th 327 ............ eee erent 9 Cassady v. Morgan, Lewis & Bockius LLP (2006) 145 Cal. APP. 4th 220 o.oo eseeeeessess ses seesenns rests snR arabe 13 Edwards v. Arthur Andersen LLP (2008) 44 Cal, ALN DBT wun siswenns somswamesnins sonemens cvsoionsvenisn o5w 555s 1000 0EVRENERS SEES SESEVETHSTRA BEVBRIFRIFINS EHP» 12 Fed-Mart Corp. v. Price (1980) 111 Cal. APP. 3A 215 .ccur.iuuuermesmeessmmsssessisssssssssessssssssssssssssssssssssssssssssssssssss 10 Grissom v. Vons Companies, Inc. (K99L) 1 Cal. Apps AEN BZ. wes ovusons vanvves conuoses ssossmosson swevssns soso ose ois 555 08550 454050 5500550 #9505 7 12 Plate v. Sun-Diamond Growers of California | (1590) Z25 Cals AP Bl T1515 55855 8g git 1 3085785 hd 56348 oo Es ryan s oms 9,15 Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal. 3d 622 .cvvvvvvreririrrrnnens en eer eens ee ———————————————————— 16 Zapata Corp. v. Maldondo | (1981) B30 A. 28 779 eressoeeevvoesessssssssssssssssses sess ssssss esses seesssssssseeees ses s sssssoss sons ee 11 STATUTES Civil Code SECHION 2772 iii essere 16 Code of Civil Procedure § 995 190 mu serum cosmmms somos exer vues mmm conan i symsssmssicess wis sss 16 Corporations Code § 3 17 wm ws we awww ssn sown sss sons rams Swen mss ——— 8,9, 10, 15 Corporations Cote § 8 17a ms mmm namie aww roms ows oi oe Grits 0 50m 0 (03 ke aims @inegoiss i 9 CONPOILIONS COUR § 317(0)ervervrerrrrersresesesermsesmsssmmmssssssesssessssessesesssssssssssseenermmmmessessmsssssees 5,9, 10, 17 3 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 Oo © oO o NN OO or A o W ON nN No nN No No nN nN No nN _ —- = —- EN —- —_ —- EN EN oo ~N oO or A W N 2 OO OW 00 N O O O on hA EA W O N a TABLE OF AUTHORITIES (contd) PAGE(S) Corporations COUR § BLT7(CHA) uu miirrimrieiiiieriiieisein iterates eressesreseessessessssreensss ensesessessen 17 Corporations Code § 317(e)(4) OO 5,10 Corporations COE § BLT7(f) couriers sess sbeebs eter e reese eres 14, 15, 16 Corporations Code § 317, 1975 Leg. COMM. COMMENL. .verviiriierieiriieirinreresierisessessnsressereseereeens 10 Labor Coils § 2BUI2 cs cummins ion isms ass i505 £056 G05 88 758.0755 poapnams ils na filing gogmp pogunad Nrserrsversevees .8,12,15 LADO COUR § 2B02(C) svvvverrmmeveereeeesssssmnesseeessmmesssssssssssssmsasesssssssssssssssssssssssssesssssssssesssssssessessenns 12 SECONDARY SOURCES 2 Model Business Corporation Act Annotated (4th ed.) § 8.53(b), at p. 8-430 ......occvviriiiinnenen, 16 Block & Epstein, Corporate Counsellor’s Deskbook (5th ed.) at § 2.02[E]......... FPR 16 C. Hugh Friedman, California Practice Guide: Corporations (The Rutter Group 2012) 1 6:465, at p. 6-94.13 oversee sere 16 4 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 Oo © 00 N N O&O Oo A W N N O N N D N D ND ND NM ND a a a m n a e s a m a = a a s [0 0] ~I oD a1 H O W nN — oO © o o ~l » a1 nN w nN — MEMORANDUM OF POINTS AND AUTHORITIES l. INTRODUCTION By this motion, Cross-Defendant Premier Food Safety Corporation (“PFS” or the “Company”) seeks authorization to indemnify four officers/directors for expenses they incur defending themselves against breach of fiduciary duty and related claims. PFS is a family- owned company. The family-members/owners are in a dispute over the ownership of the Company, the way the Company is being managed, and the future existence of the Company. In their First Amended Complaint, the parents sued their three children and son-in-law, challenging the number of shares the children claim to own. The daughter and son-in-law cross-complained against their parents and siblings, alleging breach of fiduciary duties and related claims, and seeking dissolution of the Company. The allegations in the parents’ Complaint concern only the number of shares each individual owns; These claims are made by shareholders in their individual capacity against other shareholders in their individual capacity. They involve claims of personal SvRErchilp and they do not involve anyone’s conduct as an officer, director or employee, These claims are not subject to indemnification. The allegations in the Cross-Complaint, however, are subject to indemnification. There are six family members involved in this dispute — all are directors and shareholders. Two of them, Cross-Complainants Jean and Korey Chong (“Cross-Complainants”), sued the other four Cross-Defendants, Byong, Hwa, Dirk and Donald Yoo (who are also officers and/or employees) for breaches of fiduciary duties and related causes of action. The conduct underlying the suit against Cross-Defendants arises directly out of Cross-Defendants’ good faith discharge of their duties as directors, officers and/or employees, and their actions were in the best interests of PFS. PFS’s Articles of Incorporation expressly authorize the Company to indemnify the Cross- Defendants under these circumstances. Additionally, Corporations Code sections 317(b) and 317(e)(4), entitle PFS to indemnify its directors and officers. And Labor Code section 2802, actually obligates PFS to indemnify them. 5 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES ' 3846533.1 — oO OW oOo ~N OO oOo A O w DN it. STATEMENT OF FACTS PFS is a family-owned company. The shareholders are Dr. Byong Yoo (“Byong”), Hwa Yoo (“Hwa”), Dirk Yoo (“Dirk”), Donald Yoo (“Donald”), Jean Chong (“Jean”) and Korey Chong (“Korey”). They, along with Max Ellzey, comprise the Company's board of directors.t (Declaration of Dirk Yoo [“Dirk Decl.”] at 4 2.) Byong and Hwa, the patriarch and matriarch of the family, founded the Company. Byong is the President and Hwa is an employee. Byong and Hwa have three adult children: Dirk, Donald and Jean. Jean is married to Korey. Dirk is the CEO. Donald is an employee. Jean and Korey are shareholders and directors but not employees. (Dirk | Decl., 9191 1-2.) Jean and Korey are adverse to the Company and hostile to the rest of the family. The case began when Byong and Hwa got in a dispute with Jean and Korey over how many shares Byong had given them. Byong and Hwa filed their First Amended Complaint against all four children, challenging the children’s claimed share ownership. This allegation concerns a dispute among shareholders in their individual capacities fighting over their individual ownership interests, and the Company does not intend to indemnify anyone for expenses incurred in this shareholder dispute. (Dirk Decl., 9 4, 7.) See also Declarations of Byong Yoo (“Byong Decl.”) at 119 4, 7; Declaration of Hwa Yoo (“Hwa Decl.”) at 919 4, 7; and Declaration of Donald Yoo (“Donald Decl.”) at 9111 4, 7. That part of the case is not a part of this Motion, Jean and Korey filed a Cross-Complaint against Byong, Hwa, Dirk, Donald and PFS, alleging causes of action for Dissolution of Corporation, Conversion, Breach of Fiduciary Duty, Breach of Duty of Loyalty, Accounting and Declaratory Relief. The Cross-Complaint contains two basic claims: first, that Jean and Korey do own all the shares they contend they own; and | second, that the Cross-Defendants breached their fiduciary duties and duties of loyalty and otherwise committed wrongdoing in their capacities as officers, directors and employees. Jean's and Korey’s share ownership claim is a mirror of the First Amended Complaint and is a dispute among shareholders in their individual capacities, and is thus not subject to ' First names will be used for clarity. No disrespect is intended. 6 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 -— nN Nd nN nN nN No No No No — —- — —- — — - EY — —_ 0 ~N OO or A W N 2 OO © oo N o o d O N 0 OO Oo 0 NN oo of bA ww No indemnification. (Dirk Decl., 9 5.) The second claim regarding fiduciary duties and managerial conduct, however, is precisely the type of claim that is typically indemnified in these cases. For ease of reference, this Motion will refer to the “Share Ownership Dispute” which is not subject to indemnity, and the “Fiduciary Duty Dispute” which is. Each of the four Cross-Defendants have demanded that the Company indemnify them for expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in the Fiduciary Duty Dispute. See Declaration of Robert Adel (“Adel Decl.”) at 9) 2; Exhs. A-C. They contend, and the Company agrees, that the conduct that underlies the Fiduciary Duty Dispute was done in the course and scope of their duties as directors and officers and was done in the best interests of the Company. The Company has informed them that it will not indemnify them for anything related to the Share Ownership Dispute, but that it will seek Court approval to indemnify them for their expenses related to the Fiduciary Duty Dispute. (Adel Decl., 11 4; Dirk Decl., 9 6; Byong Decl., 1 6; Hwa Decl, 91 6; Donald Decl., 9 6.) In their Cross-Complaint, Jean and Korey allege in conclusory fashion that that Cross- Defendants Byong, Hwa, Dirk and Donald are guilty of “pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward . . . Cross-Complainants.” (Cross-Cotnpl., q 57.) They further allege that, in their capacities as officers and/or directors, Cross-Defendants have breached their fiduciary duties and duties of loyalty to Cross-Complainants by (1) failing to authorize PFS to pay dividends in the second half of 2017, (2) not intending “to share any of the [Company’s] assets, equipment, opportunities or revenue” with Cross-Complainants, and (3) “attempting to divest” Jean and Korey of their shareholder interest in the Company. (Cross- Compl., 9191 70-71, 79-80.) However, Jean and Korey do not allege anywhere in their Cross- Complaint that Cross-Defendants engaged in any specific acts of bad faith, self-dealing, fraud or intentional or illegal misconduct, or that they placed their personal interests ahead of the Company's, or that that they did anything outside the usual course and scope of their employment. Jean and Korey do not allege anywhere in their Cross-Complaint that any of the Cross-Defendants misappropriated any Company assets, derived any undue gain from the 7 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 OO OW oo NN oO oo Ah Ww NN = N O N ND ND ND ND D N D N N N A aa a a Aa a a a 4a «a ee ) ~ » ot BA w No —_ oO «© oo ~ oD Ci nN w nN —_ Company, or is about to dispose of any Company asset for his or her benefit.(See Cross- Complaint, passim.) Cross-Defendants deny any wrongdoing, but do not deny some of the underlying facts. The board of directors has not authorized dividends in the second half of 2017 because the Company has incurred (and continues to incur) extraordinary expenses for (1) a board- authorized and major business initiative costing hundreds of thousands of dollars; and (2) legal fees incurred as a result of Jean and Korey’s suit (Jean and Korey sued the Company for most of the above-mentioned claims including dissolution), the ultimate amount of which cannot be presently determined. (Dirk Decl., 9 8; Byong Decl., 9 8; Hwa Decl., 4 8; Donald Decl., 9 8.) As a result of these extraordinary expenses, PFS’s board made the decision in good faith and with the Company's best interests in mind not to pay dividends to any shareholder, so that the Company can retain enough funds to pay these extraordinary expenses. Additionally, because the question of how many shares each shareholder has is the subject of this litigation and is hotly in dispute, the Company is not in any position to issue dividends at this time because it cannot know the amount of dividends to pay. (/d.) And the board and the Company's management have refused Jean and Korey’s repeated demands for the Company's “assets, equipment, opportunities [and] revenue” because it would be inappropriate to give any of these things to any of the shareholders. Shareholders of a corporation are compensated by dividends and growth in stock value — not by gifts of — assets or revenue. Ironically, it would be a breach of fiduciary duty for Cross-Defendants to do the very things Cross- Complainants demand. (Dirk Decl., 91 9; Byong Decl., 1 9; Hwa Decl., 1 9; Donald Decl,, 9 9.) in. CROSS-DEFENDANTS ARE ENTITLED TO INDEMNITY UNDER THE COMPANY'S ARTICLES, CORPORATIONS CODE § 317 AND LABOR CODE § 2802 A. Cross-Defendants Are Entitled To Express indemnity Under the Company’s Articles of Incorporation. Article Five of PFS’s Articles of Incorporation dated April 16, 2003 states that “the liability of the Directors ... for monetary damages shall be eliminated to the fullest extent 8 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM ' OF POINTS AND AUTHORITIES 3846533.1 — Oo OW 00 N N OO Oo A w n permissible under California law.” Article Six states that the Company is “authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for a breach of fiduciary duty to the Corporation and its shareholders .... in excess of the indemnification otherwise permitted by Section 317... ." (Adel Decl., 4 3; Exh. D.) An “agent” under Section 317 nu expressly includes any “director,” “officer” or “employee.” Corp. Code § 317(a). PFS’s Articles of Incorporation thus broadly provide for indemnification of its agents “to the fullest extent permissible under California law.” Here, Cross-Defendants are clearly being sued for actions they took as PFS’s directors and officers. As such, they are entitled to the contractual indemnity protections promised to them by the Company. Branson v. Sun-Diamond Growers (1994) 24 Cal. App. 4th 327, 338. B. Additionally, Cross-Defendants Are Entitled To Statutory Indemnification Under Corporations Code § 317, 1. Section 317 authorizes indemnification upon a finding that the director or officer has acted in good faith and in the best interests of the company. Cross-Defendants are not only entitled to indemnity under PFS’s Articles of Incorporation, but by statute as well. Corporations Code § 317(b) provides in relevant part that a corporation “shall have the power to indemnify any person who was or is a party ... to any sToceadifia .... by reason of the fact that the person was or is an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the person if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation...”. The policies underlying Section 317 are that (i) a person, who serves the corporation in good faith, should be free from liability for corporate acts if he or she has not engaged in any misconduct, bad faith or intentional wrongdoing, and (ii) indemnification encourages competent people to perform their corporate duties honestly, secure in the knowledge that the corporation will pay their legal expenses in any action brought. Plate v. Sun-Diamond Growers of California (1990) 225 Cal. App. 3d 1115, 1122 (emphasis added); see also Fed-Mart Corp. v. Price (1980) 111 Cal. 9 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 — _ — © © oo ~N OO oo H A N N O N ND ND DD D N D N D N D N 2 A 4a 22 a a a a a a oo ~N oO Oo A W N 2A O O © oOo N o oa b h o D D = App. 3d 215 (trial court’s finding that directors had acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation was sufficient to affirm corporation’s indemnification of directors sued in cross-complaint under Section 317(b) and (e)). As the legislative history of Section 317 makes clear, “[i]ndemnification [under subdivisions (c) and (d)]... may be made upon a determination that indemnification of the agent is proper because the agent has met the specified standard of conduct in the circumstances.” (Corp. Code § 317, 1975 Leg. Comm. Comment.) | 2. Cross-Defendants have met the requirement that they have acted in good faith and have taken actions they believed to be in the Company's best Cross-Defendants easily satisfy the standard of conduct specified in Section 317, and are entitled to statutory indemnification under Section 317(b) and e(4). The claims against Cross- Defendants are based on actions they took as agents of the Company. The Fiduciary Duty Dispute is based in part on the claims 1) that the Company failed to pay dividends to Jean and Korey in the second half of 2017, 2) that the Company “did not intend” to share the Company's assets, opportunities or revenue with them, and 3) that the Company attempted to divest Jean and Korey of their shareholder interest in the Company. However, not one of these claims amounts to a bona fide claim of fraud, bad faith or self-dealing on the part of any Cross-Defendant. The claim that the Company acting through the judgment of its board failed to pay dividends does not remotely demonstrate bad faith on the part of the board or any of its directors. As a matter of law, a decision to issue or withhold dividends is soundly within the board's exercise of its business judgment. Barnes v. State Farm Mut. Auto. Ins. Co. (1993) 16 Cal. App. 4th 365, 378 (board's decision to retain earnings and not declare a dividend comes within the business judgment rule). And the Company’s decision to withhold dividends clearly affects all the shareholders equally, not just Jean and Korey. None of the shareholders have received any dividends in the second half of 2017. (Dirk Decl., 11 8; Byong Decl., § 8; Hwa Decl., 9 8; Donald Decl., § 8.) Although it may or may not be argued that the 10 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 — © © oo NN Oo a bh ow DN directors should have decided otherwise, this allegation even if true falls far short of claims of fraud, bad faith or self-dealing pled with particularity. Likewise, the conclusory allegations that the Company did not intend to share the Company “assets” with Jean and Korey, or allegedly attempted to deny them their shareholder interests in the Company, are without merit. The Company has not “shared” its assets because it does not “share” or “gift” its assets to Jean and Korey or any other shareholder — to do so would violate the directors’ duties to act in the best interests of the Company and treat all shareholders equally. And neither the Company nor any Cross-Defendant has taken any action on behalf of the Company or as directors or officers to approve or “deny” Jean's and Korey's claims of stock ownership. (Dirk Decl., § 7; Byong Decl. 1 7; Hwa Decl., 9 7; Donald Decl., 9 9.) The Company has not taken any position with respect to any merits of the Share Ownership dispute. Here, PFS’s board reasonably determined that it was in the best interests of the Company to not pay dividends so that the Company could pay extraordinary business expenses they were facing in 2017 and 2018, including the substantial cost of a new business initiative and the legal fees the Company faces as a result of Jean's and Korey’s cross-claims. (Dirk Decl, 11 8; Byong Decl., 11 8; Hwa Decl., 9 8; Donald Decl., 4 8.) The use of the Company’s funds for a valuable business initiative and to defend the Company in bet-the-company litigation (because Cross-Complainants are seeking here the draconian remedy of dissolving the Company, as well significant damages), as opposed to distributing those funds as dividends, would obviously benefit the Company. Likewise, it is fully in the Company's best interests to retain its current management and these board members, and allow them to carry out their Company duties without the significant burden and distraction of personally paying for the legal fees to defend actions they took on behalf of the Company. The Company's failure to assure the present and future directors that it will protect them from the burden of meritless suits, filed for self- interested motives and for the purposes of overturning the decisions of clear board majorities, will deprive the Company of the services of qualified persons of sober judgment. See e.g., 11 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 oO © oo N N Oo o oo A w ND = N N O N N D DN ND ND ND N N aA a A a A a a a a a 4a Q o ~ oD O1 nN w N o —_ oO «© [o e] ~ [0 )] c r o N w No —_ Zapata Corp. v. Maldondo, 430 A. 2d 779, 787 (Del. 1981) (corporation must be able to rid itself of meritless, harmful litigation and strike suits). These determinations and judgments by the board do not constitute any fraud, bad faith or self-dealing on the part of any Cross-Defendant. There is no evidence (and Jean and Korey do not allege) that these board decisions hurt the Company, or were made to advance any director's personal interests. At best, all that Jean's and Korey's allegations show is that certain choices were made by the directors whose judgment was that these choices best served the Company; and that Jean and Korey vehemently disagree with these judgments. No matter how completely certain Cross-Complainants are that their judgments represented the only correct point of view, the fact remains that Cross-Complainants have failed to allege any conduct by any of the directors or Cross-Defendants that amounts to fraud, bad faith, or self- dealing. C. Additionally, Cross-Defendants/Employees Are Entitled to Statutory Indemnity Under Labor Code § 2802. Each of the Cross-Defendants is employed by PFS. (Dirk Decl., 9 1; Byong Decl., § 1; Hwa Decl., 9 1; Donald Decl., 1 1.) Labor Code § 2802 mandates PFS’s indemnity of its employees in this matter. Section 2802(a) provides that “[aln employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” As the California Supreme Court has recognized, California has “a strong public policy that favors the indemnification (and defense) of employees by their employers for claims and liabilities resulting from the employees’ acts within the course and scope of their employment.” Grissom v. Vons Companies, Inc. (1991) 1 Cal. App. 4th 52, 59 (“purpose of Labor Code § 2802 is to protect employees from suffering expenses in direct consequence of doing their jobs”); Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, 952. Necessary “expenditures or losses” include all reasonable costs, including “attorneys’ fees incurred by the employee.” Labor Code § 2802(c). 12 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 -— © OW 00 N N Oo oo Ah ww DN Here, all of the acts and expenditures undertaken by the Cross-Defendant/Employees that are the subject of the Cross-Complaint were performed within the course and scope of their roles as employees of PFS. These actions were all done in the course of PFS’s business and to advance its business objectives, and these acts were all approved and sanctioned by PFS’s board. (Dirk Decl., 91 6; Byong Decl., 9 6; Hwa Decl., § 6; Donald Decl., 1 6.) Cross-Complaints do not offer any credible allegation to the contrary. That is all that matters for purposes of Section 2802 indemnity — the ultimate merits of Jean’s and Korey’s claims are irrelevant. Cassady v. Morgan, Lewis & Bockius LLP (2006) 145 Cal. App. 4th 220, 230 (“As long as the employee's conduct defended against was within the scope of this employment, the right to attorneys’ fees for defending the action is not dependent upon a finding that the underlying action was unfounded”). Iv. JEAN AND KOREY ARE NOT ENTITLED TO INDEMNITY Ownership of stock is something done in one’s individual capacity. Even if a person is an officer, director or employee of a company, his individual stock is held personally, not as a part of his official duties. Generally, the person can buy or sell stock and keep the proceeds from a sale. A “shareholder agreement” is an agreement among shareholders, regardless of their status as officers or directors. Jean and Korey are defendants only in the Share Ownership Dispute. Byong and Hwa sued, contending that their children only own 15% of the Company, not the 72% claimed by Jean and Korey. The Share Ownership Dispute concerns only the personal property of various individuals. It has nothing to do with anyone's status as a director, officer or employee. It has nothing to do with any acts taken by an agent of the Company for the Company. Thus, no one, including Jean and Korey, are entitled to be indemnified for the Share Ownership Dispute. When Jean and Korey received that lawsuit, they responded with a sweeping “kitchen- sink” Cross-Complaint against not just their parents, who sued them, but against their co- defendant siblings and the Company as well. Their lawsuit seeks to wind-up and dissolve the Company that provides 100% of the livelihoods for the Cross-Defendants, and seeks judgments 13 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 OO © 00 0 ~N Oo O o h wwD N N O N O N D N D ND ND ND D D A A A Qa a A a a a a a wo ~ N O O G O AN W N 2 O O © 00 N O t h w DN - E N against the Cross-Defendants individually, and against the Company, for various kinds of damages plus punitive damages and attorney’s fees. Jean and Korey may now seek to marginalize their own cross-complaint, but the Cross-Defendants have no choice but to take it seriously and defend against it. “Fairness” does not have a role in the decision at hand. Jean and Korey chose to file their lawsuit. They chose to sue their family members for their conduct done in their capacities as officers, directors and employees. They chose to include various claims that they presumably felt were meritorious, but which invoke contractual and statutory indemnity duties. Jean and Korey are not being sued for breach of fiduciary duty. They are suing for it. The law provides for indemnity when defending against such claims. It is axiomatic that a company is not obligated or entitled to indemnify a person who is suing the company and its officers and directors. And it is also axiomatic that a person who is suing to dissolve a company is not acting in the company’s best interests. | V. THE NEED FOR AN ALLOCATION BETWEEN INDEMNIFIED AND NON-INDEMNIFIED CLAIMS DOES NOT DEFEAT THE COMPANY'S CONTRACTUAL AND STATUTORY DUTY TO INDEMNIFY Counsel for the indemnified parties will have to allocate their fees and costs between {the Share Ownership Dispute and the Fiduciary Duty Dispute. The need to perform an allocation such as this is common. It comes up, for example, when only part of a lawsuit is covered by insurance. Or when only some claims are subject to indemnification. Prior to filing this motion (or the related ex parte application), counsel for PFS and counsel for the parties seeking indemnity discussed the need for such an allocation. All counsel agreed to the parameters of what is and is not indemnified (the same parameters as set forth throughout this Motion). And all agreed that each lawyer for a party seeking indemnity would be responsible for his own allocation, and would need to be prepared to respond to any inquiries regarding his allocation. The accuracy of the allocations is the responsibility of the attorney seeking reimbursement, not of Company counsel. Company counsel would only need 14 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 oO OW 00 NN Oo Oo H o w ND N O N ND ND ND D N D N D N D N 2&2 A QQ 2 QQ a a a a oo ~N OO Oo A Ww W ON a2 OO © 00 N o o A Ww No — to review the reimbursement claims for reasonableness, but would not undertake a duty to audit the submissions unless there were an independent and compelling reason to do so. (Adel Decl., 115.) VI. SECTION 317 DOES NOT REQUIRE THE POSTING OF ANY SECURITY OR MONETARY BOND | Cross-Complainants have asserted, without any legal authority, that the Company cannot advance any expenses under Corporations Code § 317 unless the indemnified parties are required to post monetary bonds to cover all claims of indemnification.” However, Section 317 does not require this on its face. Section 317 provides that defense costs “may be advanced by the corporation “upon receipt of any undertaking by or on behalf of the agent to repay the — .."" Corp. Code § 317(f) (emphasis added). The language in Section 317(f) is optional, not mandatory. Cross-Camplalants have proffered no legal authority to suggest that the Company could be forced to require its directors and officers to post a monetary bond under these circumstances. And a bond would not be warranted under these circumstances. Cross-Complainants seek to force the Company to require Cross-Defendants to use their personal funds in order to be represented by counsel to defend decisions they made as directors, officers and/or employees of the Company. Cross-Complainants’ attempt flies in the face of public policy to encourage service by and to protect directors and officers. Sun-Diamond Growers of California, supra, 225 Cal. App. 3d at 1122, Here, there is not the slightest remotely credible allegation or indicia in the Cross-Complaint that any of the Cross-Defendants have engaged in self-dealing, misappropriated assets, derived any gain, etc. The nature of the claims in the Cross-Complaint allege, at most, breach of the duty of care, not a breach of the duty of loyalty or self-dealing. Consequently, there can be no finding of personal liability against the directors, and thus, there is no credible risk of a judgment requiring personal payments by the 2 In any event, the Company is separately authorized and required to provide indemnity to Cross- Defendants under its Articles of Incorporation and under Labor Code § 2802. Those grounds for indemnity are not dependent on Corporations Code § 317, and they do not require the posting of any bond as a precondition to indemnity. 15 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 oO © 00 ~N oO oA Ww W NN = N o N N N nN nN nN nN N o — —_ E N a _ E N x a — — _ o o ~ I oo O 1 HN w N o — oo © o o ~ D 1 Nn w N o -_ directors. Cross-Complainants’ request for a monetary bond, therefore, is an invidious attempt || to involve the Court in an act of coercion. The purpose of the request purely and simply is to place the individual Cross-Defendants in a position in which their choices are either to take on an unmanageable economic burden, or potentially resign. The law does not Bett such an inequitable result. However, even assuming Cross-Complainants are correct that Section 317 imposes a mandatory undertaking, Section 317’s phrase “any undertaking by or on behalf of the agent to repay the amount” makes clear that the described undertaking can be proffered by the corporate officer himself (i.e., the agent), and does not require any third-party surety or any monetary bond. Notably, the language of Section 317 is in line with Code of Civil Procedure § 995.190, which defines an “undertaking” as “a surety, indemnity, fiduciary, or like undertaking.” Thus, under both statutory provisions, an undertaking may be either a secured (surety) or unsecured (undertaking) promise. See Civil Code section 2772 (defining an “indemnity” as “a contract by which one engages to save another”]; accord Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal. 3d 622, 628. These statutory provisions are also consistent with the generally accepted meaning of an “undertaking.” See e.g., C. Hugh Friedman, California Practice Guide: Corporations (The Rutter Group 2012) 4 6:465, at p. 6- 94.13 (under Section 317(f) “the corporation may properly advance defense costs to officers or directors if they agree to repay such advances in the event it is ultimately determined they are not entitled to indemnification”); Block & Epstein, Corporate Counsellor’s Deskbook (5th ed.) at § 2.02[E] (all state advancement statutes require an “undertaking” and though most do not define the term, “there is general agreement that it means nothing more than an unsecured promise to repay) (emphasis added). The current version of the Model Business Corporations | Act, a prior version of which formed the basis for Delaware's and California’s advancement statutes, explicitly provides that the required “undertaking must be an unlimited general’ obligation of the director but need not be secured.” 2 Model Business Corporation Act Annotated (4th ed.) § 8.53(b), at p. 8-430 (emphasis added). Accordingly, the Court should not 16 NOTICE AND MOTION FOR AUTHORIZATION TO {INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1 — Oo © oo N N O&O Oo A o w DN require Cross-Defendants to post any monetary undertaking as a precondition to receiving indemnification under Section 317. VII. CONCLUSION Pursuant to PFS’s Articles of Incorporation, Corporations Code § 317(b) and (c)(4), and Labor Code § 2802, Cross-Defendants therefore respectfully request that the Court approve the Company’s decision to indemnify the Cross-Defendants for all losses and expenses, including attorneys’ fees and other legal costs, as those losses and expenses are incurred, in connection with Cross-Defendants’ defense of Jean and Korey’s claims in their Cross-Complaint relating only to the Fiduciary Duty Dispute. DATED: January 3, 2018 FRIEDMAN STROFFE & GER D,P.C. By: / Robért E. Adel William Q. Tran Attorneys for Cross-Defendant Premier Food Safety Corporation 17 NOTICE AND MOTION FOR AUTHORIZATION TO INDEMNIFY DIRECTORS AND OFFICERS; MEMORANDUM OF POINTS AND AUTHORITIES 3846533.1