EXHIBIT 10.1
IN THE SUPERIOR COURT OF FULTON COUNTY
STATE OF GEORGIA
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In re CRYOLIFE, INC. DERIVATIVE LITIGATION ) Consolidated Case No.
) 2003-CV-64109
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This Document Relates To: ) STIPULATION OF SETTLEMENT
)
ALL ACTIONS. )
)
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This Stipulation of Settlement (the "Stipulation") is made and entered into
by and among the following Settling Parties (as defined further in Section IV
hereof): (i) the Representative Plaintiffs (on behalf of themselves and
derivatively on behalf of CryoLife, Inc. ("CryoLife" or the "Company"), by and
through their counsel of record in the Litigation; and (ii) the Defendants
identified below, by and through their counsel of record in the Litigation. The
Stipulation is intended by the Settling Parties to fully, finally and forever
resolve, discharge and settle the Released Claims (as defined below in P. 1.9),
upon and subject to the terms and conditions hereof.
I. THE LITIGATION
This consolidated shareholders' derivative action asserts claims on behalf
of nominal defendant CryoLife, Inc. against its Board of Directors ("Board") and
certain top officers arising out of their alleged misconduct relating to
CryoLife's tissue processing practices, compensation payments to CryoLife's top
insiders, and misstatement of CryoLife's publicly reported financial results.
Defendants include Steven G. Anderson, Bruce J. Van Dyne, John M. Cook, Ronald
D. McCall, Virginia C. Lacy, Ronald C. Elkins, James C. Vander Wyk , and D.
Ashley Lee (together, the "Defendants").
CryoLife collects and freezes human tissue for transplant, cardiovascular,
vascular, and orthopedic applications. The Complaint alleges that the Defendants
impaired the corporate franchise by employing inadequate decontamination
processes that publicly led to serious physical injury to at least 26 recipients
of CryoLife tissues and to the death of 23-year-old Brian Lykins from an
infection that was allegedly traced to the CryoLife tissue he received during
elective knee surgery. These tragedies were allegedly precipitated by the
Defendants' inadequate stewardship of the Company, and led to FDA and CDC
investigations of CryoLife and an FDA Recall Order that impaired CryoLife's
business. Despite this, the Defendants allegedly awarded themselves improper
bonuses, excessive compensation, and stock option grants.
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Plaintiffs assert that due to the Defendants' alleged misconduct, CryoLife
suffered significant injuries and damages and was subjected to costly product
liability lawsuits, SEC inquiries and other federal investigations.
On August 29, 2002, and September 12, 2002, plaintiffs Rosemary
Lichtenberger and Robert Frailey made written demands upon CryoLife's Board,
requesting that it commence legal proceedings against those person responsible
for the alleged wrongdoing detailed in the Verified First Amended Consolidated
Derivative Complaint ("Complaint"). Among other things, the demands sought to
require the CryoLife Board to bring legal action against themselves and
CryoLife's top officers, alleging failures to improve the Company's tissue
processing practices, excessive compensation payments to themselves, and false
and misleading statements to shareholders.
In response to plaintiffs' demands, on October 10, 2002, CryoLife's Board
formed a special litigation committee consisting of three of the Defendants to
advise the Board regarding the disposition of the derivative claims. In July
2003, the special litigation committee completed its investigation and
recommended that the derivative action be terminated as not in the best
interests of the corporation. Thereafter, in late November 2003, the Defendants
filed a motion to dismiss the derivative action.
Between December 2003 and October 2004, extensive discovery and extensive
law and motion practice ensued. Among other things, the Plaintiffs, through
their counsel, took the depositions of the three Defendants who served on the
special litigation committee and reviewed more than 10,000 pages of documents,
interview summaries and transcripts. On August 12, 2004, the Plaintiffs filed a
comprehensive 62-page brief in opposition to the Defendants' motion to dismiss,
as well as motions to strike the special litigation committee's report.
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On November 23, 2004, the Fulton County Superior Court, the Honorable Alice
Bonner, presiding, conducted a lengthy hearing on the motion to dismiss. After
considering the extensive record, presentations and arguments of counsel, on
December 1, 2004, the Court issued an order denying the Defendants' motion to
dismiss.
As a result of the denial of the Defendants' motion to dismiss, the
Plaintiffs were able to move forward with the preparation of the derivative
action for trial. Towards this end, beginning in December 2004, the Plaintiffs
served extensive discovery on the Defendants and relevant third parties. The
Plaintiffs also took the deposition of CryoLife on certain key issues and
analyzed more than 18,200 documents produced by the Defendants.
In mid-February 2005, the Fulton County Superior Court issued an order
directing the parties to participate in a settlement conference by the end of
April 2005. Thereafter, on March 21 and April 4, 2005, the Plaintiffs and the
Defendants participated in two hard-fought and arms-length in-person mediations
before the Honorable Daniel Weinstein, a former California Superior Court judge
and widely respected mediator, and between those dates the parties held numerous
telephonic negotiations. As a result of the mediation process, on April 4, 2005,
the parties reached an agreement-in-principle to resolve the derivative action
on the terms and conditions detailed in this Stipulation of Settlement.
II. DEFENDANTS' DENIALS OF WRONGDOING AND LIABILITY
The Defendants have denied and continue to deny each and all of the claims
and contentions alleged by the Representative Plaintiffs in the Litigation. The
Defendants expressly have denied and continue to deny all charges of wrongdoing
or liability against them arising out of any of the conduct, statements, acts or
omissions alleged, or that could have been alleged, in the Litigation.
Defendants further deny that the Representative Plaintiffs, CryoLife, or
CryoLife Shareholders suffered any damages as a result of any alleged conduct by
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Defendants. The Defendants further assert that at all relevant times, they acted
in good faith, and in a manner they reasonably believed to be in the best
interests of CryoLife and CryoLife shareholders.
Nonetheless, the Defendants have concluded that further conduct of the
Litigation would be protracted and expensive, and that it is desirable that the
Litigation be fully and finally settled in the manner and upon the terms and
conditions set forth in this Stipulation. The Defendants also have taken into
account the uncertainty and risks inherent in any litigation, especially in
complex cases like the Litigation. Defendants have, therefore, determined that
it is desirable and beneficial to the corporation that the Litigation be settled
in the manner and upon the terms and conditions set forth in this Stipulation.
III. CLAIMS OF THE REPRESENTATIVE PLAINTIFFS AND BENEFITS OF SETTLEMENT
The Representative Plaintiffs believe that the claims asserted in the
Litigation have merit. However, counsel for the Representative Plaintiffs
recognize and acknowledge the expense and length of continued proceedings
necessary to prosecute the Litigation against the Defendants through trial and
through appeals. Counsel for the Representative Plaintiffs also have taken into
account the uncertain outcome and the risk of any litigation, especially in
complex actions such as the instant Litigation, as well as the difficulties and
delays inherent in such litigation. Counsel for the Representative Plaintiffs
also are mindful of the inherent problems of proof of and possible defenses to
the claims asserted in the Litigation. Counsel for the Representative Plaintiffs
believe, and Defendants acknowledge, that the settlement set forth in this
Stipulation confers substantial benefits upon CryoLife. Based on their
evaluation, counsel for the Representative Plaintiffs have determined that the
settlement set forth in the Stipulation is in the best interests of the
Representative Plaintiffs and CryoLife.
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IV. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among the
Representative Plaintiffs (for themselves and derivatively on behalf of
CryoLife) and the Defendants, by and through their respective counsel that,
subject to the approval of the Court, the Litigation and the Released Claims
shall be finally and fully compromised, settled and released, and the Litigation
shall be dismissed with prejudice, as to all Settling Parties, upon and subject
to the terms and conditions of the Stipulation, as follows.
1. DEFINITIONS
The following terms have the meanings specified below:
1.1 "Defendants" means CryoLife and any of its subsidiaries (as a nominal
defendant), and the Individual Defendants.
1.2 "Effective Date" means the first date by which all of the events and
conditions specified in P. 6.1 of the Stipulation have been met and have
occurred.
1.3 "Final" means the later of: (a) the date of final affirmance on an
appeal of the Judgment, the expiration of the time for a petition for or a
denial of such writ of review of the Judgment or, if such writ is granted, the
date of final affirmance of the Judgment following review pursuant to that
grant; or (b) the date of final dismissal of any appeal from the Judgment or the
final dismissal of any proceeding on writ of review to review the Judgment; or
(c) if no appeal is filed, the expiration date for filing of any appeal from the
Court's Judgment approving the Stipulation substantially in the form of Exhibit
A attached hereto; i.e., thirty (30) days after entry of the Judgment.
1.4 "Individual Defendants" means Steven G. Anderson, Ronald D. McCall,
Bruce J. Van Dyne, John M. Cook, Ronald C. Elkins, Virginia C. Lacy, James C.
Vander Wyk, and D. Ashley Lee.
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1.5 "Judgment" means the judgment to be rendered by the Court,
substantially in the form attached as Exhibit A.
1.6 "Person" means an individual, corporation, limited liability
corporation, professional corporation, partnership, limited partnership, limited
liability partnership, association, joint stock company, estate, legal
representative, trust, unincorporated association, government or any political
subdivision or agency thereof, and any business or legal entity and their
spouses, heirs, predecessors, successors, representatives, or assignees.
1.7 "Plaintiffs' Settlement Counsel" means Co-Lead Counsel for derivative
plaintiffs in the Litigation: Lerach Coughlin Stoia Geller Rudman & Robbins LLP,
Travis E. Downs, III, Ellen Gusikoff Stewart, 401 B Street, Suite 1600, San
Diego, CA 92101, and Emerson Poynter LLP, John G. Emerson, Scott E. Poynter,
2228 Cottondale Lane, Suite 100, Little Rock, AR 72202.
1.8 "Related Persons" means CryoLife's past or present directors, officers,
employees, controlling shareholders, attorneys, accountants, insurers,
reinsurers and co-insurers, legal representatives, predecessors, successors,
subsidiaries, spouses, heirs, any entity in which an Individual Defendant has a
controlling interest, any members of an Individual Defendants' immediate family,
or any trust of which any Individual Defendant is the settlor or which is for
the benefit of any Individual Defendant and/or member(s) of his/her family.
1.9 "Released Claims" shall collectively mean all claims (including
"Unknown Claims" as defined in P. 1.15 hereof), demands, rights, actions,
liabilities, damages, losses, obligations, or causes of action, whether known or
unknown, contingent or absolute, suspected or unsuspected, disclosed or
undisclosed, hidden or concealed, matured or unmatured, that have been or could
have been asserted in the Litigation by the Representative Plaintiffs or the
CryoLife Shareholders on behalf of CryoLife, against the Defendants or Released
Persons in the Litigation, or any of them, that are based upon or related to the
acts, events, facts, statements, omissions or failures to act which were alleged
or could have been alleged in the Litigation. It is the intent of the Settling
Parties that no action may hereafter be brought or prosecuted derivatively on
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behalf of CryoLife which arises from or relates to the subject matter of the
Litigation. However, "Released Claims" shall not include any of the claims and
defenses among the parties involved in the In re CryoLife, Inc. Securities
Litigation, No. 1:02-CV-1868-BBM, United States District Court, Northern
District of Northern Georgia, and "Released Claims" shall also not include any
rights or claims by Defendants under or related to any policies of insurance
that are not funding this Settlement.
1.10 "Released Persons" means each and all of the Defendants and the
Related Persons.
1.11 "Representative Plaintiffs" means Wayne County Employees' Retirement
System and Rosemary Lichtenberger.
1.12 "Representative Plaintiffs' Counsel" means counsel that has appeared
for any of the Representative Plaintiffs in the Litigation.
1.13 "CryoLife Shareholders" means all record or beneficial owners of
CryoLife common stock as of August 3, 2005.
1.14 "Settling Parties" means, collectively, each of the Defendants and the
Representative Plaintiffs on behalf of themselves and derivatively on behalf of
CryoLife.
1.15 "Unknown Claims" means any Released Claim which any Settling Party
does not know or suspect to exist in such party's favor at the time of the
release of the Released Persons which, if known by such party, might have
affected such party's settlement with and release of the Released Persons, or
might have affected such party's decision not to object to this settlement. With
respect to any and all Released Claims, upon the Effective Date, the Settling
Parties shall expressly, and by operation of the Judgment the Settling Parties
and the CryoLife Shareholders shall have, expressly waived, the provisions,
rights and benefits of California Civil Code ss.1542, which provides:
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A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR.
The Settling Parties and CryoLife Shareholders by operation of the Judgment
shall have expressly waived, any and all provisions, rights and benefits
conferred by any law of any state or territory of the United States, or
principle of common law, which is similar, comparable or equivalent to
California Civil Code ss.1542. The Settling Parties may hereafter discover facts
in addition to or different from those which such party now knows or believes to
be true with respect to the subject matter of the Released Claims, but the
Settling Parties, the CryoLife Shareholders, and CryoLife, upon the Effective
Date, by operation of the Judgment shall have, fully, finally, and forever
settled and released, any and all Released Claims, known or unknown, suspected
or unsuspected, contingent or non-contingent, whether or not concealed or
hidden, that now exist, or heretofore have existed, upon any theory of law or
equity now existing or coming into existence in the future, including, but not
limited to, conduct that is negligent, reckless, intentional, with or without
malice, or a breach of any duty, law or rule, without regard to the subsequent
discovery or existence of such different or additional facts.
1.16. "Litigation" means the litigation entitled In re CryoLife Derivative
Litigation, Consolidated Case No. 2003-CV-64109, Superior Court of Fulton
County, State of Georgia.
2. SETTLEMENT OF THE DERIVATIVE CLAIMS
2.1 As a result of the Litigation, the Defendants and CryoLife have agreed
to adopt and fully implement the following corporate governance reforms set
forth below. The corporate governance reforms are designed to improve corporate
governance at the Company, and increase shareholders' value.
2.2 Upon approval of the Settlement by the Superior Court of Fulton County,
Georgia (the "Court"), and provided that all of the events and conditions
specified in P. 6.1 of the Stipulation have been met and have occurred,
Defendants and Nominal Defendant CryoLife, Inc., ("CryoLife" or the "Company")
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shall adopt the corporate governance reforms described herein within 60 days,
unless otherwise stated. Defendants and nominal defendant CryoLife acknowledge
that the filing and diligent and skillful prosecution of the derivative action
were significant factors for the corporate governance reforms and personnel
changes set forth below:
1. NEW BOARD SEATS. The size of the CryoLife Board of Directors shall be
increased by one additional seat within 90 days after court approval of the
settlement, effectively adding three new directors to the CryoLife Board since
commencement of the derivative suit. Defendants acknowledge that the derivative
action contributed in part to the appointment of all new directors. The new seat
will be allocated to a director with experience in regulatory affairs, selected
in the manner set forth below:
(A) NOMINEES. The Nominating and Corporate Governance Committee will
commence a search for a qualified director with regulatory experience.
Candidates given first priority consideration will be those candidates submitted
by plaintiffs but the Committee may consider nominations made by others,
including stockholders, provided they are reasonably acceptable to plaintiffs.
The Committee shall review each of the candidates so considered and select from
among them a person determined by the Committee in the exercise of its business
judgment as qualified and appropriate for being added to the Board. If a
candidate is not selected from the first panel of candidates submitted by
plaintiffs and plaintiffs do not agree to the proposed selection of another
candidate, the Nominating Corporate Governance Committee will provide plaintiffs
with the opportunity to submit additional candidates until the Committee
identifies a candidate acceptable to both the Committee and plaintiffs.
Plaintiffs agree not to unreasonably withhold their acceptance of a qualified
candidate identified by the Committee who was not initially submitted by
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plaintiffs. Once a candidate is identified, the Committee will recommend to the
Board, and the Board will, subject to its fiduciary duties, elect that
candidate. Judge Weinstein shall retain jurisdiction over the parties in order
to mediate any disagreements over implementation of this provision.
(B) VACANCIES. Should a director selected by the above procedures cease to
be on CryoLife's Board because of death, resignation or removal in the next 36
months, the Nominating and Corporate Governance Committee shall utilize the
process outlined above in subsection (a) to select a new candidate. At any time,
plaintiffs may nominate a candidate.
(C) RENOMINATION. After their initial election to the Board, the selected
directors shall be nominated by the Board at the next annual meeting at which
directors are elected to serve for an additional one-year term.
2. EXPENSING OF STOCK OPTIONS. The Company agrees to expense stock options
in accordance with FAS 123R beginning in the fourth quarter of 2005, but if the
effective date of applicability of FAS 123R to CryoLife is postponed or
deferred, then the Company shall begin expensing stock options in accordance
with FAS 123R by a date that precedes such effective date of applicability of
FAS 123R to CryoLife by one quarter. If FAS 123R is cancelled, terminated, or
made inapplicable to CryoLife, CryoLife will not be required to expense stock
options. The prosecution of the derivative actions played a significant role in
the Board's decision to adopt expensing of stock options.
3. NO RE-PRICING OF STOCK OPTIONS WITHOUT STOCKHOLDER APPROVAL. The Board
shall adopt a policy prohibiting the re-pricing of stock options to officers and
directors without shareholder approval by a majority vote.
4. NO MARGIN CALL BONUSES. The Board shall adopt a policy prohibiting the
award of bonuses to officers, directors and/or other employees to avoid or
satisfy margin calls.
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5. DIRECTOR EDUCATION. The Presiding Director shall be required to attend
classes at a director education program at a major university, such as Stanford
or Vanderbilt, or one approved or recommended by the National Association of
Corporate Directors or the New York Stock Exchange.
6. NON-STAGGERED DIRECTOR ELECTIONS. The Board shall adopt a resolution or
other appropriate measure requiring all directors to stand for election or
re-election to the CryoLife Board annually, with the first non-staggered
election to be held within one year after the date of final approval of the
Settlement.
7. DIRECTOR INDEPENDENCE. The Board shall adopt a policy requiring that 50%
of the CryoLife Board be independent directors as defined in the rules of the
New York Stock Exchange, as in effect from time to time.
8. DIRECTOR RETIREMENT. The Board shall agree that no person who has
reached the age of 75 will be eligible for election or re-election as a director
of the Company.
9. DIRECTOR STOCK OWNERSHIP. CryoLife shall adopt share ownership
guidelines for its directors that are designed to align the interests of the
Board with those of shareholders, taking into account that share ownership
requirements must ensure that Board members have a sufficient stake in the
Company to share in the financial fortunes of shareholders while also
considering the appropriate financial planning and needs of individual
directors. At least 50% of directors' annual fees shall be paid in CryoLife
stock. Such stock consideration shall include (a) the fair market value of any
stock used to pay fees plus, (b) the amount realized as an expense by the
Company on any stock option granted to non-employee directors, plus (c) cash
paid to offset taxes payable by directors on stock granted to pay fees at time
of grant or option exercise.
10. EXPANSION OF THE DUTIES AND RESPONSIBILITIES OF THE PRESIDING DIRECTOR.
The Presiding Director of the CryoLife Board shall be responsible for
coordinating the activities of the independent directors. In addition to the
duties of all Board members (which shall not be limited or diminished by the
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Presiding Director's role), the specific responsibilities of the Presiding
Director are to advise the Chairman of the Board (if the Presiding Director is
not also the Chairman of the Board) or to undertake the following:
(a) determine an appropriate schedule of Board meetings, seeking to
encourage that the independent directors can perform their duties responsibly
while not interfering with the flow of the Company's operations;
(b) prepare agendas for the Board and Committee meetings;
(c) assess the quality, quantity, and timeliness of the flow of information
from the Company's management that is necessary for the independent directors to
effectively and responsibly perform their duties, and although the Company's
management is responsible for the preparation of materials for the Board, the
Presiding Director may specifically request the inclusion of certain material;
(d) direct the retention of consultants who report directly to the Board;
(e) oversee that the Nominating and Corporate Governance Committee's
activities respecting compliance with and implementation of the Company's
corporate governance policies and monitor the Chairman of the Nominating and
Corporate Governance Committee's oversight of the process to recommend revisions
to CryoLife's corporate governance policies;
(f) oversee the Regulatory Affairs and Quality Assurance Policy Committee's
activities respecting compliance with and implementation of the Company's
policies and procedures for development and implementation of improved safety
processes and procedures for new and existing biopharmaceutical products;
(g) coordinate, develop the agenda for, and moderate executive sessions of
the Board's independent directors, and act as principal liaison between the
independent directors and the Chairman of the Board and/or Chief Executive
Officer on sensitive issues;
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(h) evaluate, along with the members of the Compensation Committee and the
Nominating and Corporate Governance Committee, the Chief Executive Officer's
performance and meet with the Chief Executive Officer to discuss the Board's
evaluation;
(i) oversee the recommendations of the membership of the various Board
Committees, as well as selection of the Committee Chairs by the Nominating and
Corporate Governance Committee; and
(j) the Presiding Director shall have the authority to retain such counsel
or consultants as the Presiding Director deems necessary to perform his or her
responsibilities.
11. MEETINGS IN EXECUTIVE SESSION. The Board shall meet in executive
session, i.e., without employee directors present, at least four times a year,
or at each formal, in-person meeting of the CryoLife Board, whichever is
greater.
12. REGULATORY AFFAIRS AND QUALITY ASSURANCE POLICY COMMITTEE. The Board
will adopt a resolution designating a committee, with a majority of independent
directors, with the appropriate background and experience to serve on CryoLife's
Regulatory Affairs and Quality Assurance Policy Committee to oversee CryoLife's
regulatory affairs and quality assurance relating to new and existing
biopharmaceutical products. The Regulatory Affairs and Quality Assurance Policy
Committee shall have specific responsibilities as follows:
(a) To meet with the Company's in-house auditors, regulatory affairs and
tissue processing quality assurance administrators on a quarterly basis and
receive updates concerning the Company's development and implementation of
improved safety processes and procedures for new and existing biopharmaceutical
products;
(b) To become familiar with CryoLife's internal policies concerning the
development and implementation of improved safety processes and procedures for
new and existing biopharmaceutical products;
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(c) To become apprised of and to make a finding of appropriateness
concerning the Company's safety processes and procedures for new and existing
biopharmaceutical products;
(d) To keep adequate and proper records and/or minutes of all such
discussions, meetings and findings and to make the same available to all Board
members;
(e) In discharging their duties, as provided by the Florida Business
Corporation Act, the members of the Committee will be entitled to information,
opinions, reports, or statements, including financial statements and other
financial data, if prepared or presented by: (i) one or more officers or
employees of the corporation whom the member reasonably believes to be reliable
and competent in the matters presented; (ii) legal counsel, public accountants,
independent consultants or other persons as to matters the member reasonably
believes are within the persons' professional or expert competence; or (iii) a
committee of the board of directors of which the member is not a member if the
member reasonably believes the committee merits confidence; and
(f) The Committee will have authority to engage its own advisors, as well
as an adequate budget.
13. RE-CONSTITUTION OF THE NOMINATING AND CORPORATE GOVERNANCE COMMITTEE.
The Board of Directors shall adopt a resolution creating a Nominating and
Corporate Governance Committee consisting of independent directors. The
Re-Constituted Nominating and Corporate Governance Committee shall have the
specific responsibilities as follows:
(a) The Nominating and Corporate Governance Committee, in consultation with
the Chairman of the Board, the Presiding Director and the Chief Executive
Officer, shall be responsible for periodic review and interpretation of the
Company's Corporate Governance Policies and the Nominating and Corporate
Governance Committee guidelines, as well as consideration of other corporate
governance issues that may, from time to time, merit consideration by the entire
Board;
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(b) The Nominating and Corporate Governance Committee, in consultation with
the Chairman of the Board, the Presiding Director and the Chief Executive
Officer, shall consider and make recommendations to the Board concerning the
appropriate size and needs of the Board;
(c) The Nominating and Corporate Governance Committee, in consultation with
the Chairman of the Board, the Presiding Director and the Chief Executive
Officer, shall consider candidates to fill vacant Board positions. Candidates
shall be selected for their character, judgment, business experience, time
commitment, and acumen. Final approval of a candidate shall be determined by the
full Board;
(d) The Nominating and Corporate Governance Committee shall recommend the
membership of the various committees of the CryoLife Board, as well as the
selection of committee chairs;
(e) The Board shall establish performance criteria for itself and evaluate
itself and individual members on a regular basis. Board evaluation shall include
an assessment of whether the Board has the necessary diversity of skills,
backgrounds, experiences, etc., to meet the Company's ongoing needs. Individual
director evaluations shall include high standards for in-person attendance at
Board and committee meetings and consideration of absences; and
(f) The Nominating and Corporate Governance Committee shall consider
policies relating to the Board and directors, including committee structure and
size, share ownership, and retirement and resignation.
14. ADOPTION OF COMPENSATION PRINCIPLES. The Board of Directors shall adopt
a resolution setting forth the following compensation principles:
(a) Compensation arrangements shall emphasize pay for performance and
encourage retention of those employees who enhance the Company's performance;
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(b) Compensation arrangements shall promote ownership of the Company stock
to align the interests of management and stockholders;
(c) Compensation arrangements shall maintain an appropriate balance between
base salary and long-term and annual incentive compensation;
(d) In approving compensation, the recent compensation history of the
executive, including special or unusual compensation payments, shall be taken
into consideration;
(e) Cash incentive compensation plans for senior executives shall link pay
to achievement of performance goals set in advance by the Compensation
Committee;
(f) Neither bonus nor other forms of compensation shall be paid by the
Company to officers and/or directors for the purpose of satisfying margin call
obligations owed by such officers and/or directors without shareholder approval;
and
(g) Severance, separation and/or similar payments made to the CEO, as well
as all other employees at the Vice President level or higher, shall be limited
to the equivalent of three year's salary, including bonuses and guaranteed
benefits. CryoLife shall adopt a by-law to this effect within 60 days after the
Effective Date, and maintain the by-law for at least four years. The resolution
will include the prohibition on paying compensation to officers and directors
for satisfying margin calls contained in subparagraph (f).
15. CEO COMPENSATION. The Compensation Committee shall recommend for review
by the Board annual and long-term performance goals for the Chief Executive
Officer and evaluate his/her performance against such goals and other relevant
factors such as the performance of the Company's peer companies. During its
consideration of the compensation of the Chief Executive Officer, the
Compensation Committee shall meet in executive session, without the Chief
Executive Officer.
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16. COMMITTEE AUTHORIZATION FOR RETENTION OF COUNSEL. The Board's
Committees, including the Compensation Committee, the Nominating and Corporate
Governance Committee, and the Regulatory Affairs and Quality Assurance Policy
Committee, shall have standing authorization, on their own decision, to retain
legal and/or other advisors of their choice, which advisors shall report
directly to the Committee.
17. CFO QUARTERLY FINANCIAL REVIEW. At each regularly scheduled Board of
Directors meeting, the Company's Chief Financial Officer or his designee shall
provide a report that includes year-to-date financial results and quarterly or
quarter-to-date financial results that include the Company's financial condition
and prospects, including but not limited to, as appropriate under the
circumstances, a discussion of all reasons for material increases in expenses
and liabilities, if any, and material decreases in revenues and earnings, if
any, including any modification or adjustment of reserve accounts or
contingencies and management plans for ameliorating or reversing such negative
trends and the success or failure of any such plans presented in the past.
18. ANNUAL AUDIT OF FINANCIAL STATEMENTS BY INDEPENDENT AUDITOR. So long as
the Company remains a publicly traded company, the Company shall engage an
independent auditing firm to perform an annual audit of its financial
statements. The annual audit will encompass, as determined appropriate by the
Chief Financial Officer and such independent auditing firm, a review of the
financial results reported by each Company office to the Company headquarters. A
written report of the results of each annual audit, including any findings,
opinions or recommendations by the independent auditor shall be provided to the
Chairman of the Board, the Presiding Director, the Chief Executive Officer, the
Chief Financial Officer and the Audit Committee of the Board of Directors for
review and remedial action, if necessary.
19. AUDIT PARTNER ROTATION. The Company shall adopt a policy requiring
audit partner rotation every four years, unless rotation is required sooner by
law.
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20. INSIDER TRADING CONTROLS. The Board will appoint a director or senior
vice-president level or above officer of the Company who will be responsible for
effecting compliance with the Company's stock trading and market communications
policy. That individual will be designated the Trading Compliance Officer and
will be responsible for developing (with Board involvement), presenting to the
Board for approval, and monitoring and updating (with Board involvement and
approval) a comprehensive program (the "Trading Compliance Program") designed to
monitor and promote compliance with the Company's trading policies. The Board
will be responsible for direct oversight of the Trading Compliance Program and
the Trading Compliance Officer and the non-management members of the Board will
have direct access to the Trading Compliance Officer, including the opportunity
to meet with the Trading Compliance Officer outside the presence of the any
other member of management. At least once yearly, the non-management directors
will receive a report from the Trading Compliance Officer outside the presence
of any other member of management. In addition, the Trading Compliance Program
will provide:
(a) Provisions with respect to transaction in the Company's securities by
directors and officers of the Company which are no less restrictive than those
set forth in the New York Stock Exchange Listed Company Manual and shall take
into account applicable federal securities laws and regulations.
(b) During any pending Company-funded open market stock buy-back program,
no insider will be permitted to sell stock. This prohibition will not apply to
trades made pursuant to plans entered into pursuant to Rule 10b5-1 under the
Securities Exchange Act of 1934 at least six months prior to the announcement of
any buy-back.
(c) The Company will require public disclosure of all sales or purchases of
the Company's stock by any corporate executive officers or directors within two
business days of such purchase sale. This disclosure requirement will not apply
to the use of Company stock or options to secure any loan but will apply to the
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use of stock or options to engage in a swap, forward contract or similar
contract. The Company will take reasonable steps to ensure that all directors,
officers and executive employees file all trading forms required of them by the
SEC concerning trading by directors, officers, and executive employees of the
Company.
(d) Failure to comply with the Company's trading policy will result in
appropriate sanctions, potentially including disgorgement by the individual to
the Company of all profits, if any, from the transaction, termination of
employment or other position, or other appropriate disciplinary action.
(e) No executive corporate officer will directly or indirectly short the
Company's stock or engage in put or call transactions involving the Company's
stock. This prohibition will not prohibit standard collar or prepaid forward
transactions pre-approved at least 90 days in advance by the independent
directors of the Board or a committee consisting solely of independent directors
and disclosed to shareholders by a Form 4 or other means acceptable to the SEC.
21. TERM. Unless otherwise stated, the Board shall implement the foregoing
corporate governance reforms for a period of four years after final approval of
the settlement or until such earlier time, if any, as the Company ceases to be a
publicly traded corporation. Should any of the foregoing provisions violate any
law, rule, regulation (including New York Stock Exchange listing requirements),
or subsequently-adopted amendment to the Company's by-laws or articles of
incorporation approved by the shareholders, the provision may, upon approval by
the Court, be removed from this Stipulation and the Final Judgment without
rendering the remainder of the Agreement null and void.
22. NEW FDA COUNSEL. Defendants and nominal defendant CryoLife, Inc.,
acknowledge that the filing and prosecution of the derivative action was a
contributing factor in the decision to engage new FDA counsel to represent the
Company.
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23. RETENTION OF JURISDICTION/DISPUTE RESOLUTION. The Honorable Daniel
Weinstein (Ret.) shall retain jurisdiction during the term of this agreement to
resolve any disputes among the parties concerning the foregoing corporate
governance reforms.
24. DERIVATIVE ACTIONS BENEFITED THE CORPORATION. Defendants and CryoLife
expressly acknowledge and state that the corporate governance reforms described
above resulted from the filing and diligent prosecution of the derivative action
and have and will continue to benefit the corporation by reason of the corporate
governances and personnel changes made or to be made under this settlement.
3. RELEASES
3.1 Upon the Effective Date, as defined in P. 1.2 hereof, the
Representative Plaintiffs on their own behalf and derivatively on behalf of
CryoLife and by operation of the Judgment the CryoLife Shareholders shall have,
fully, finally, and forever released, relinquished and discharged all Released
Claims and any and all claims arising out of, relating to, or in connection with
the settlement or resolution of the Litigation against the Released Persons.
3.2 Upon the Effective Date, as defined in P. 1.2 hereof, each of the
Released Persons shall be deemed to have, and by operation of the Judgment shall
have, fully, finally, and forever released, relinquished and discharged each and
all of the Representative Plaintiffs, and counsel to the Representative
Plaintiffs from all claims (including Unknown Claims), arising out of, relating
to, or in connection with the institution, prosecution, assertion, settlement or
resolution of the Litigation or the Released Claims.
4. NOTICE ORDER AND SETTLEMENT HEARING
4.1 Promptly after execution of this Stipulation, the Settling Parties
shall submit the Stipulation together with its Exhibits to the Court and shall
jointly request that the Court enter an order (the "Notice Order"),
substantially in the form of Exhibit B hereto, granting approval for publication
of the Notice of Settlement of Derivative Action (the "Notice") substantially in
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the form of Exhibit B-1 hereto, to be published once in Investor's Business
Daily. The Settling Parties shall also request the Court to hold a hearing (the
"Settlement Hearing") and approve the settlement of the Litigation as set forth
herein.
4.2 The Parties shall share equally the costs incurred in connection with
providing the Notice to CryoLife Shareholders; however, if the Settlement
provided for herein does not become Effective, then Defendants shall bear the
full expense of publishing the Notice in Investor's Business Daily. Prior to the
Settlement Hearing, plaintiffs or their counsel shall file with the Court an
appropriate Declaration with respect to the preparation and publishing of the
Notice.
5. REPRESENTATIVE PLAINTIFFS' COUNSEL'S ATTORNEYS' FEES AND REIMBURSEMENT
OF EXPENSES
5.1 Defendants agree to pay Representative Plaintiffs' Counsel fees and
costs in the amount of $3,500,000.00 (the "Fees and Expenses") as a unitary part
of the settlement. This amount shall be deposited by certain of the Defendants'
insurers to an interest bearing escrow account controlled by Lerach Coughlin
Stoia Geller Rudman & Robbins LLP by the later of (i) five (5) business days
after preliminary approval of the Settlement by the Court; or (ii) July 15, 2005
(the "Transfer Date"). If the $3.5 million is not timely deposited in the escrow
account, the unpaid amount shall bear interest at the rate of 5% per annum from
the Transfer Date until paid. The Fees and Expenses shall be paid to Plaintiffs'
Settlement Counsel from the escrow account immediately after the Court executes
the Judgment, to be thereafter distributed to Representative Plaintiffs' Counsel
in such proportions as Plaintiffs' Settlement Counsel shall in good faith
determine represents each such counsel's contribution to the prosecution and
resolution of the Litigation, subject to the obligation of Representative
Plaintiffs' Counsel to repay the Fees and Expenses plus interest should the
Stipulation not become final for any reason. Neither Defendants nor their
insurers shall have any responsibility or liability concerning such allocation
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or compensation. In the event that the Settlement does not become final, then
Representative Plaintiffs' Counsel shall within five (5) business days from
receiving notice from Defendants, refund to the Defendants' insurers the $3.5
million that they have deposited into the escrow account, plus accrued interest
at the same rate as paid in the escrow account, according to the amount each
insurer had deposited.
5.2 If the Stipulation terminates, or is canceled, or does not become
effective for any reason, or if the Judgment shall be reversed or modified upon
appeal, within five (5) business days after written notice of such event is sent
by counsel for Defendants to Plaintiffs' Settlement Counsel, the Fees and
Expenses (including interest) shall be refunded by Representative Plaintiffs'
Counsel to the Defendants insurance carriers, as referenced in P. 5.1 above.
Such obligation to refund shall be joint and several. Each such Representative
Plaintiffs' Counsel's law firm, as a condition of receiving such Fees and
Expenses, on behalf of itself and each partner and/or shareholder, agrees that
the law firm and its partners and/or shareholders are subject to the
jurisdiction of the Court for the purpose of enforcing the Stipulation.
6. CONDITIONS OF SETTLEMENT, EFFECT OF DISAPPROVAL, CANCELLATION OR
TERMINATION
6.1 The Effective Date of the Stipulation shall be conditioned on the
occurrence of all of the following events:
(a) the Court has preliminarily approved the settlement and entered an
order substantially in the form of Exhibit B attached hereto; and
(b) the Court has entered the Judgment, or a judgment substantially in the
form of Exhibit A attached hereto, and the Judgment has become Final, as defined
in P. 1.3 above.
6.2 If all of the conditions specified in P. 6.1 are not met, then the
Stipulation shall be terminated subject to P. 6.3 unless Plaintiffs' Settlement
Counsel and counsel for Defendants mutually agree in writing to proceed with the
Stipulation.
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6.3 If the Stipulation is not approved by the Court or the settlement set
forth in the Stipulation is terminated or fails to become effective in
accordance with its terms, the Settling Parties shall be restored to their
respective positions in the Litigation immediately prior to the settlement. In
such event, the terms and provisions of the Stipulation, with the exception of
P. P. 1.1-1.14, 5.2, 6.2-6.3, 7.3-7.12 herein, shall have no further force and
effect with respect to the Settling Parties and shall not be used in the
Litigation or in any other proceeding for any purpose, and any judgment or order
entered by the Court in accordance with the terms of the Stipulation shall be
treated as vacated, nunc pro tunc.
7. MISCELLANEOUS PROVISIONS
7.1 The Settling Parties (a) intend to consummate this Stipulation; and (b)
will cooperate to the extent reasonably necessary to effectuate and implement
all terms and conditions of the Stipulation and will use their best efforts to
accomplish the foregoing terms and conditions of the Stipulation.
7.2 The Settling Parties intend this Stipulation to be a final and complete
resolution of all disputes between them with respect to the Litigation. The
Stipulation compromises claims that are contested and shall not be deemed an
admission by any Settling Party as to the merits of any claim, allegation or
defense. While retaining their right to deny that the claims advanced in the
Litigation were meritorious, Defendants in any statement made to any media
representative (whether or not for attribution) will not deny that the
Litigation was filed in good faith. Neither Plaintiffs nor their counsel will
issue any press release regarding the Litigation. The Judgment will contain a
statement that during the course of the Litigation, the parties and their
respective counsel at all times complied with the requirements of Florida and
Georgia law, including without limitation, the Georgia Civil Practice Act,
O.C.G.A. ss. 9-11-14 and O.C.G.A. ss. 9-11-68.
23
7.3 Neither this Stipulation nor any act performed or document executed
pursuant to or in furtherance of the Stipulation: (a) is or may be deemed to be
or may be used as an admission of, or evidence of, the validity of any Released
Claim, or of any wrongdoing or liability of the Defendants and/or the Released
Persons; or (b) is or may be deemed to be or may be used as an admission of, or
evidence of, any fault or omission of any of the Defendants and/or the Released
Persons in any civil, criminal or administrative proceeding in any court,
administrative agency or other tribunal. Defendants and the Released Persons may
file the Stipulation and/or the Judgment in any action that may be brought
against them to support a defense or counterclaim based on principles of res
judicata, collateral estoppel, release, good faith settlement, judgment bar or
reduction or any other theory of claim preclusion or issue preclusion or similar
defense or counterclaim.
7.4 The Exhibits to this Stipulation are material and integral parts and
are fully incorporated by this reference.
7.5 The Stipulation may be amended or modified only by a writing signed by
or on behalf of all Settling Parties or their respective successors-in-interest.
7.6 This Stipulation and the attached Exhibits constitute the entire
agreement among the parties and no representations, warranties or inducements
have been made to any party concerning the Stipulation or its Exhibit other than
the representations, warranties and covenants in such documents. Except as
otherwise provided, each party shall bear its own costs.
7.7 Plaintiffs' Settlement Counsel are expressly authorized by the
Representative Plaintiffs to take all appropriate action required or permitted
to be taken pursuant to the Stipulation to effectuate its terms and also are
expressly authorized to enter into any modifications or amendments to the
Stipulation that they deem appropriate.
7.8 Each counsel or other Person executing the Stipulation or its Exhibit
on behalf of any party warrants that such Person has the full authority to do
so.
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7.9 The Stipulation may be executed in one or more counterparts. Each
executed counterpart shall be deemed to be one and the same instrument. A
complete set of original executed counterparts shall be filed with the Court.
7.10 The Stipulation shall be binding upon, and inure to the benefit of,
the successors and assigns of the parties hereto.
7.11 The Court shall retain jurisdiction to implement and enforce the terms
of the Stipulation, and all parties submit to the jurisdiction of the Court for
such purposes.
7.12 This Stipulation and the Exhibits shall be considered to have been
negotiated, executed and delivered, and to be wholly performed, in the State of
Georgia, and the rights and obligations of the parties to the Stipulation shall
be construed and enforced in accordance with, and governed by, the internal,
substantive laws of the State of Georgia without giving effect to that State's
choice of law principles.
IN WITNESS WHEREOF, the parties hereto have caused the Stipulation to be
executed, by their duly authorized attorneys, dated as of August 1, 2005.
HOLZER & HOLZER, LLC
COREY D. HOLZER
Georgia Bar No. 364698
MICHAEL I. FISTEL, JR.
Georgia Bar No. 262062
---------------------------------------------
COREY D. HOLZER
1117 Perimeter Center West, Suite E-107
Atlanta, GA 30338
Telephone: 770/392-0090
770/392-0029 (fax)
Liaison Counsel for Plaintiffs
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LERACH COUGHLIN STOIA GELLER
RUDMAN & ROBBINS LLP
WILLIAM S. LERACH
BYRON S. GEORGIOU
TRAVIS E. DOWNS, III
ELLEN GUSIKOFF STEWART
ANDREW J. BROWN
AMBER L. ECK
LIANA A. LARSON
---------------------------------------------
TRAVIS E. DOWNS III
401 B Street, Suite 1600
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)
EMERSON POYNTER LLP
JOHN G. EMERSON
SCOTT E. POYNTER
---------------------------------------------
SCOTT E. POYNTER
2228 Cottondale Avenue, Suite 100
Little Rock, AR 72202
Telephone: 501/907-2555
501/907-2556 (fax)
Attorneys for Plaintiffs
KING & SPALDING LLP
MICHAEL R. SMITH
WARREN POPE
---------------------------------------------
MICHAEL R. SMITH
26
191 Peachtree Street
Atlanta, GA 30303
Telephone: 404/572-4600
404/572-5100 (fax)
Attorneys for the Individual Defendants
ARNALL GOLDEN GREGORY LLP
CLINTON D. RICHARDSON
---------------------------------------------
CLINTON D. RICHARDSON
171 17th Street NW, Suite 2100
Atlanta, GA 30363
Telephone: 404/873-8500
404/873-8501 (fax)
Attorneys for Nominal Defendant
CryoLife, Inc.
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