Facts

In 2007, plaintiff Dr. Mathew Zuckerman co-founded defendant Green Earth Technologies Inc. The other plaintiffs are corporations and a trust controlled by him or members of his family. Dr. Zuckerman resigned from Green Earth at the end of Jan. 2009. When he resigned, plaintiffs owned over 10 million shares of Green Earth stock. The shares bore a legend restricting transfer, but could be sold by complying with SEC Rule 144.

When plaintiffs attempted to remove the restrictive legend from the shares and sell their stock, Green Earth instructed its stock transfer agent to refuse to remove the legend or allow transfers of the stock. Green Earth claimed that plaintiffs were affiliates of Green Earth under Rule 144 because they owned more than 10 percent of Green Earth's outstanding shares. Green Earth thereby prevented plaintiffs from selling their shares.

Plaintiffs sued Green Earth and its transfer agent in Los Angeles Superior Court. Defendants removed the case to federal court.

The stock transfer agent eventually agreed over Green Earth's objections to remove the legends from the shares and allow the shares to be sold and was dismissed from the case. However, Green Earth's share price had dropped significantly during this period of delay, and plaintiffs asserted a claim for violation of Delaware Corporation Code section 8-401 seeking damages from Green Earth for this delay.

Green Earth counterclaimed against Dr. Zuckerman for fraud, breach of fiduciary duty, breach of contract and other claims.

PLAINTIFF'S CONTENTIONS:
Plaintiffs contended that Green Earth had no legitimate reason to prevent the sale of the shares and did so only to prop up its share price. Plaintiffs contended that despite their stock ownership, they had no control over Green Earth after Dr. Zuckerman resigned from the company and, therefore, were not affiliates of Green Earth and could sell their shares under Rule 144. Plaintiffs further contended that Green Earth's conduct caused them in excess of $7 million in damages, calculated using the highest intra-day price of Green Earth shares during the period of delay.

Dr. Zuckerman claimed that Green Earth's counterclaims had no merit.

DEFENDANT'S CONTENTIONS:
Green Earth contended that plaintiffs were affiliates of Green Earth because they owned more than 10 percent of Green Earth's stock, thus, their purported transfers of Green Earth stock were not "rightful" and Green Earth had no obligation to effect such transfers. In its counterclaims, Green Earth contended, among other things, that (i) Dr. Zuckerman breached his fiduciary duty by causing Green Earth to issue him 12 million shares of Green Earth stock in exchange for an assignment of virtually worthless patent applications; (ii) Dr. Zuckerman engaged in fraud when he signed his employment agreement with Green Earth, pursuant to which he received 1.9 million shares, days before resigning from Green Earth; and (iii) Dr. Zuckerman breached his fiduciary duties to Green Earth by, among other things, forming a competing entity while he was an officer and director of Green Earth and diverting corporate opportunities from Green Earth to the newly formed entity. Green Earth sought damages of over $9 million on its counterclaims.

Settlement Discussions

The parties participated in a mediation before Hon. Wendell Mortimer, retired, several months before the scheduled trial date. A settlement was not reached. Shortly before trial was to begin, Judge Percy Anderson ordered the parties to appear before USDC Judge John F. Walter for a settlement conference. The parties did so on March 3, 2011, reached a settlement and placed the terms of the settlement on the record before Judge Anderson. The settlement provided that Green Earth would issue plaintiffs 3.5 million shares of Green Earth Stock (with a market value of approximately $1.4 million on March 3, 2011), pay plaintiffs $100,000 in cash, and include plaintiffs' shares in any securities registration statement filed by Green Earth. Plaintiffs agreed to limit the amount of stock they would sell in any given week. Although the parties contemplated that the settlement would be reduced to a written agreement, they could not agree on the exact terms. Thus, pursuant to Judge Percy's order of March 3, 2011, plaintiffs filed a motion to enforce the terms of the settlement as set forth in the record on March 3, 2011.

Result

On March 30, 2011, Judge Percy Anderson entered an order enforcing the settlement. Under the order, Green Earth was required to pay plaintiffs $100,000, issue plaintiffs 3.5 million shares of Green Earth stock, and include those shares in any registration statement filed by Green Earth.

Other Information

FILING DATE: Nov. 17, 2009.