IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

PARTNER INVESTMENTS, L.P., : a Delaware limited partnership, : PFM HEALTHCARE MASTER FUND, L.P., : a Cayman Islands limited partnership, and : PFM HEALTHCARE PRINCIPALS : FUND, L.P., a Delaware limited partnership, :

: Plaintiffs, :

v. : C.A. No. 2017-0262-___ :

THERANOS, INC., a Delaware corporation, ELIZABETH HOLMES, : FABRIZIO BONANNI, : WILLIAM H. FOEGE, and : DANIEL J. WARMENHOVEN, :

: Defendants. :

PLAINTIFFS’ OPENING BRIEF IN SUPPORT OF THEIR MOTION FOR A TEMPORARY RESTRAINING ORDER

H EYM AN EN ERI O GATTUSO & H I RZEL LLP Kurt M. Heyman (# 3054) Patricia L. Enerio (# 3728)Aaron M. Nelson (# 5941) 300 Delaware Avenue, Suite 200 Wilmington, DE 19801 (302) 472-7300 Attorneys for Plaintiffs

OF COUNSEL:

GIBSON, DUNN & CRUTCHER LLP Reed Brodsky 200 Park Avenue New York, NY 10166 (212) 351-4000

JTL

PUBLIC VERSION --Filed: April 20, 2017

EFiled: Apr 20 2017 10:00PM EDT Transaction ID 60501447 Case No. 2017-0262-JTL

GIBSON, DUNN & CRUTCHER LLP Winston Y. Chan Matthew S. Kahn Aimee M. Halbert Sarah Cunningham 555 Mission Street, Suite 3000 San Francisco, CA 94105 (415) 393-8200

Dated: April 6, 2017

TABLE OF CONTENTS

Page

i

PRELIMINARY STATEMENT ...............................................................................1

STATEMENT OF RELEVANT FACTS ..................................................................5

I. The Parties To This Action. ..................................................................5

II. The Fraud Action Defendants Make Material Misrepresentations, Misleading Statements, And Omissions To Induce Plaintiffs’ $96.1 Million Investment In Theranos.....................7

III. Fact Discovery Has Revealed Rampant Fraud......................................9

IV. Theranos Now Seeks To Use The Exchange Offer To Prevent PFM From Recovering Its Fraudulently Induced Investment. ...........18

ARGUMENT ...........................................................................................................22

I. The Legal Standard For Issuing A TRO. ............................................22

II. Plaintiffs Assert Colorable Claims That Defendants Breached Their Fiduciary Duty Of Loyalty And Committed Waste. .................23

A. Plaintiffs Allege A Colorable Claim For Breach Of The Duty Of Loyalty. ................................................................................23

B. Plaintiffs Allege A Colorable Claim For Waste. ......................29

III. The Exchange Offer Is Subject To The Entire Fairness Test, Which Defendants Cannot Satisfy. .....................................................31

A. Entire Fairness Applies To The Exchange Offer. .....................31

B. The Exchange Offer Does Not Survive Entire Fairness Scrutiny. ....................................................................................36

IV. The Coercive And Misleading Exchange Offer Cannot “Cleanse” Defendants’ Egregious Self-Interested Breach Of Fiduciary Duty. ....................................................................................38

V. The Exchange Offer Will Irreparably Harm Plaintiffs. ......................45

VI. The Balance Of Hardships Favors Plaintiffs. ......................................48

Page

ii

CONCLUSION ........................................................................................................50

TABLE OF AUTHORITIES

Page(s)

iii

CASES

AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103 (Del. Ch. 1986) ............................................................................27

Am. Gen. Corp. v. Unitrin, Inc., 1994 WL 512537 (Del. Ch.) ...............................................................................49

Arnold v. Soc. for Sav. Bancorp., Inc., 650 A.2d 1270 (Del. 1994) ........................................................................... 39-40

In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009) ...................................................................... 29-30

Condec Corp. v. Lunkenheimer Co., 230 A.2d 769 (Del. Ch. 1967) ............................................................................25

Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) ...................................................................................38

Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) .................................................................................25

Eisenberg v. Chi. Milwaukee Corp., 537 A.2d 1051 (Del. Ch. 1987) ...................................................................passim

Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001) ..................................................................................... 36

In re Emerging Commc’ns, Inc. S’holders Litig.,2004 WL 1305745 (Del. Ch.) .............................................................................41

Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049 (Del. Ch. 1996) ..........................................................................24

Gimbel v. Signal Cos., Inc., 316 A.2d 599 (Del. Ch. 1974) ............................................................................47

Page(s)

iv

Glazer v. Zapata Corp., 658 A.2d 176 (Del. Ch. 1993) ............................................................................29

Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584 (Del. Ch. 1986) ...................................................................... 26-27

Jeter v. RevolutionWear, Inc., 2016 WL 3947951 (Del. Ch.) .............................................................................24

Joseph v. Shell Oil Co., 482 A.2d 335 (Del. Ch. 1984) ................................................................32, 38, 41

In re Lear Corp. S’holder Litig., 926 A.2d 94 (Del. Ch. 2007) ..............................................................................41

Lewis v. Anderson, 477 A.2d 1040 (Del. 1984) .................................................................................25

Lewis v. Vogelstein, 699 A.2d 327 (Del. Ch. 1997) ............................................................................31

Lewis v. Ward, 852 A.2d 896 (Del. 2004) ...................................................................................25

Nagy v. Bistricer, 770 A.2d 43 (Del. Ch. 2000) ..............................................................................44

ODS Tech., L.P. v. Marshall, 832 A.2d 1254 (Del. Ch. 2003) ..........................................................................45

In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1 (Del. Ch. 2014) ................................................................ 23, 24, 33, 35

Partner Investments, L.P. et al. v. Theranos, Inc., et al., C.A. No. 12816-VCL (Del. Ch.) .......................................................................... 2

Police & Fire Ret. Sys. of the City of Detroit v. Bernal, 2009 WL 1873144 (Del. Ch.) .............................................................................48

In re Pure Resources, Inc., S’holders Litig., 808 A.2d 421 (Del. Ch. 2002) ................................................................35, 40, 45

Page(s)

v

Ryan v. Gifford, 918 A.2d 341 (Del. Ch. 2007) ...................................................................... 25-26

Sample v. Morgan, 914 A.2d 647 (Del. Ch. 2007) ......................................................................30, 31

Schreiber v. Carney, 447 A.2d 17 (Del. Ch. 1982) ..............................................................................25

Sherwood v. Ngon, 2011 WL 6355209 (Del. Ch.) ....................................................................... 22, 43

In re Siliconix Inc. S’holders Litig., 2001 WL 716787 (Del. Ch.) ................................................................... 31, 32, 39

Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170 (Del. 2000) .................................................................................39

Solar Cells, Inc. v. True N. Partners, LLC, 2002 WL 749163 (Del. Ch.) ........................................................................passim

Solomon v. Armstrong, 747 A.2d 1098 (Del. Ch. 1999) .................................................................... 31-32

Solomon v. Pathe Commc’ns Corp., 672 A.2d 35 (Del. 1996) .....................................................................................31

In re Staples, Inc. S’holders Litig., 792 A.2d 934 (Del. Ch. 2001) ............................................................................48

T. Rowe Price Recovery Fund, L.P. v. Rubin, 770 A.2d 536 (Del. Ch. 2000) ...................................................................... 48-49

Tanimura & Antle, Inc. v. Packed Fresh Produce, Inc., 222 F.3d 132 (3d Cir. 2000) ...............................................................................47

True North Commc’ns Inc. v. Publicis S.A., 1997 WL 33173290 (Del. Ch.) .....................................................................23, 46

In re Volcano Corp. Stockholder Litig., 143 A.3d 727 (Del. Ch. 2016) ...................................................................... 38-39

Page(s)

vi

Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) ....................................................................... 27, 36-37

1

Plaintiffs Partner Investments, L.P., PFM Healthcare Master Fund, L.P., and

PFM Healthcare Principals Fund, L.P. (collectively, “Plaintiffs” or “PFM”)

respectfully submit this brief in support of their motion for a Temporary Restraining

Order (“TRO”) temporarily enjoining Defendants Theranos, Inc. (“Theranos” or the

“Company”), Elizabeth Holmes (“Holmes”), Fabrizio Bonanni (“Bonanni”),

William H. Foege (“Foege”), and Daniel J. Warmenhoven (“Warmenhoven”)

(collectively, “Defendants”) from closing the Offer to Exchange Preferred Stock set

to expire at 5:00 p.m. on April 14, 2017.

PRELIMINARY STATEMENT

Through a string of repeated lies, misrepresentations, misleading statements,

and omissions of material information, Theranos, Holmes, and former Chief

Operating Officer and member of the Board of Directors Ramesh Balwani

(“Balwani”) induced PFM to invest approximately $96.1 million in Theranos in

February 2014. PFM became a holder of Series C-2 Preferred Stock in the

Company, with a liquidation preference ahead of holders of the Company’s common

stock and holders of the Company’s Series A and B Preferred Stock, and pari passu

with the holders of Series C and C-1 Preferred Stock. After it became clear that

Theranos, Holmes, and Balwani had fraudulently induced PFM’s investment and

continued to lie and omit material information throughout the parties’ business

relationship, PFM brought an action in the Delaware Court of Chancery (the “Fraud

2

Action”) against Theranos, Holmes, and Balwani (the “Fraud Action Defendants”)

to rescind PFM’s Stock Purchase Agreement and recover restitutionary,

compensatory, and other relief. See Partner Investments, L.P. et al. v. Theranos,

Inc., et al., C.A. No. 12816-VCL (Del. Ch.). The Fraud Action is set for trial in June

2017 before this Court, and the parties are actively engaged in fact discovery.

With Theranos hemorrhaging cash, and faced with mounting evidence

revealing the fraudulent scheme of the Fraud Action Defendants, Holmes engineered

an Offer to Exchange Preferred Stock (“Exchange Offer”) that would inoculate the

Fraud Action Defendants, including herself, and all former and current executives,

employees, and directors, from future legal action and deprive PFM of the ability to

recover any judgment it may ultimately obtain in the Fraud Action. With the Board’s

approval, Theranos distributed the Exchange Offer to holders of its Series C-1 and

C-2 Preferred Stock on March 20, 2017.

The Exchange Offer allows Series C-1 and Series C-2 preferred stockholders

who agree to release the Company and its Board from liability for their fraudulent

conduct to obtain a higher liquidation preference to which they would otherwise be

entitled under the Company’s Articles of Incorporation. Participating stockholders

will receive shares in “Series C-1A,” “Series C-1B,” and “Series C-2A” preferred

stock, allowing them to jump PFM—a Series C-2 preferred stockholder—in line for

a higher preference in the event of liquidation, dissolution, or winding up of the

3

Company, unless PFM also agrees to release Defendants from liability. The

Exchange Offer is therefore designed to penalize PFM for exercising its rights to

hold the Company, Holmes, and Balwani accountable for their fraudulent

misrepresentations and omissions—all while insulating Defendants from liability for

their wrongful conduct.

Accordingly, the Board breached its fiduciary duty of loyalty and committed

corporate waste when it approved the Exchange Offer. And because the Exchange

Offer is a product of bad faith and self-dealing involving Holmes—who is the

Company’s controlling stockholder, Chief Executive Officer, and Chairman of the

Board—it is subject to Delaware’s most stringent standard of review: entire fairness.

As alleged in Plaintiffs’ Complaint and as shown below, Defendants fall woefully

short of satisfying the entire fairness standard.

Nor can Defendants rely on the prospect of disinterested stockholder approval

to “cleanse” their egregious self-dealing and waste. On the contrary, any such

approval would be ill-informed, involuntary, and far from disinterested. As

described in Plaintiffs’ Complaint, the Exchange Offer is rife with intentionally false

and misleading disclosures and omissions of material information that any

reasonable stockholder would need to know before deciding whether to release

Defendants from any and all liability for their misconduct. Most glaring is

Theranos’s failure to disclose the overwhelming evidence against the Fraud Action

4

Defendants and the fact that PFM’s participation in the Exchange Offer would

effectively cancel upcoming depositions of Holmes, Balwani, and Foege. But there

are numerous other disclosure issues, including Theranos’s utterly incomplete

financial disclosures, which merely describe the Company’s cash position at a high

level and nothing more. See Compl. Ex. A at 187 (Annex H).

The Exchange Offer is set to close at 5:00 p.m., Eastern Time, on April 14,

2017. Unless this Court enjoins the Exchange Offer from closing until after the June

2017 trial on the Fraud Action, PFM will be irreparably harmed. If the Exchange

Offer is permitted to proceed, PFM will end up with a substantially decreased

liquidation preference, making it virtually impossible to collect on any judgment it

obtains in the Fraud Action if the Company declares bankruptcy—a very likely

scenario given that as of December 31, 2016, the Company had less cash on hand

than the amount of relief PFM seeks in the Fraud Action and no discernable source

of revenue. See Compl. Ex. A (Annex H); see also id. at 140 (Annex G-1).

Moreover, Theranos is expending massive sums on legal expenses every month due

to the Fraud Action, pending investigations by regulatory agencies (including the

Securities and Exchange Commission and U.S. Department of Justice), consumer

class actions in two different states, and its attempts to appeal the crippling monetary

and non-monetary sanctions imposed by the Centers for Medicare and Medicaid

Services.

5

Because Plaintiffs have colorable claims that Defendants breached their

fiduciary duties of loyalty and committed waste in devising, negotiating, approving,

and distributing to stockholders the coercive, self-serving, and unfair Exchange

Offer, and because the Exchange Offer will cause Plaintiffs irreparable harm

outweighing any potential harm to Defendants, Plaintiffs respectfully request that

the Court grant this Motion and enjoin the Exchange Offer until judgment is

rendered in the Fraud Action.

STATEMENT OF RELEVANT FACTS

I. The Parties To This Action.

Plaintiff Partner Investments, L.P. is the beneficial owner of 3,263,529 shares

of Theranos Series C-2 Preferred Stock, which constitutes 5.8% of Theranos’s

outstanding Series C-1 and C-2 Preferred Stock. Compl. ¶ 9. Plaintiff PFM

Healthcare Master Fund, L.P. is the beneficial owner of 2,255,096 shares of

Theranos Series C-2 Preferred Stock, which constitutes 4% of Theranos’s

outstanding Series C-1 and C-2 Preferred Stock. Compl. ¶ 10. Plaintiff Healthcare

Principal Fund, L.P. is the beneficial owner of 136,669 shares of Theranos Series C-

2 Preferred Stock, which constitutes 0.2% of Theranos’s outstanding Series C-1 and

C-2 Preferred Stock. Compl. ¶ 11. Collectively, Plaintiffs own roughly 10.2% of

Theranos’s Series C-1 and C-2 Preferred Stock.

6

Defendant Theranos is a Delaware corporation with its principal place of

business in Palo Alto, California. Compl. ¶ 12. Defendant Holmes is the founder,

Chief Executive Officer, and Chairman of Theranos’s Board of Directors, while

Defendants Bonanni, Foege, and Warmenhoven are members of Theranos’s Board

of Directors. Compl. ¶¶ 13-14.

Holmes is the controlling stockholder of Theranos. According to the

Exchange Offer materials, Holmes “presently holds 100% of [the Company’s]

issued and outstanding shares of Class B Common Stock, controls 98.9% of the

combined voting power of [the Company’s] capital stock and therefore is able to

control all matters submitted to [the Company’s] stockholders which require at least

majority approval of [the Company’s] Class A Common Stock, Class B Common

Stock, and Preferred Stock voting together on an as-converted basis.” Compl. Ex. A

at 161 (Annex G-3). Additionally, “Holmes has the ability to influence management

and the conduct of [the Company’s] affairs as a result of her position as [its] CEO,

as a member of [its] board of directors and with her ability to appoint a majority of

[its] board of directors.” Id. Finally, the Company’s charter provides that “so long

as any holder of Class B Common Stock, like Ms. Holmes, is a member of [its]

Board, that board member must be present at any board meetings in order to establish

a quorum.” Id. “Following the Exchange, Ms. Holmes will control 98.3% of the

combined voting power of the Company.” Id. at 169 (Annex G-3).

7

II. The Fraud Action Defendants Make Material Misrepresentations,Misleading Statements, And Omissions To Induce Plaintiffs’ $96.1 Million Investment In Theranos.

Beginning in 2013, Theranos actively and publicly touted its purported

innovations in drawing and accurately testing small amounts of blood. Compl. ¶ 21.

The Company claimed it had developed and was using in commercial settings its

own tests and analyzers to test “blood sample[s] as small as a few drops,” thereby

“eliminating the need for large needles and numerous vials of blood typically

required for diagnostic lab testing.” Id. It announced that it was rolling out Theranos

“wellness centers” in commercial settings, including in Walgreens pharmacies

nationwide. Id.

Shortly after this announcement, Theranos and PFM began communicating

about a potential investment. Compl. ¶ 22. In meetings and telephone calls from

December 2013 through February 2014, the Fraud Action Defendants made a series

of representations to Plaintiffs regarding the state of the Company’s tests and

devices, its strategic business model and scheduled rollout, and the status of its

regulatory interactions, portraying Theranos as a revolutionary company in the

laboratory testing industry. Id. For example, they represented that Theranos had

developed and validated blood tests on analyzers manufactured in-house that

covered 99.9% of all laboratory requests; that Theranos had submitted many of its

blood tests to the Food and Drug Administration for clearance; that Theranos was

8

using finger sticks for all but 1-2% of its customers’ blood tests, for which it was

using traditional venous blood draws as a short-term solution; that Theranos had

contracts in place to launch testing centers in thousands of pharmacies at leading

retail chains nationwide; and that Theranos’s analyzers were being used by

pharmaceutical companies and the U.S. military. Id. ¶¶ 22-23 . The Fraud Action

Defendants also provided Plaintiffs with financials reporting 2013 revenues of $25

million and projecting a gross profit of more than $1 billion in 2015 and listing, in

addition to Theranos’s purported partnerships with leading retail pharmacy chains,

supposed partnerships in place with the U.S. military, hospitals, and physician

offices. Id. ¶ 23.

It was all lies, made to trick Plaintiffs into investing in Theranos, and it

worked. On February 4, 2014, in reliance on the Fraud Action Defendants’ false and

misleading statements and omissions, Plaintiffs purchased 5,655,294 shares of

Theranos’s Series C-2 Preferred Stock at a purchase price of $17 per share, for a

total investment of $96,139,998. Compl. ¶ 24.

In the months and years following PFM’s investment, Theranos continued to

tout its tests and analyzers publicly, representing that the vast majority of its

commercially available blood tests were performed by finger stick, with the blood

samples stored in nanotainers and tested on analyzers developed and manufactured

by Theranos. These misrepresentations were consistent with those made directly to

9

PFM prior to its investment in Theranos, and were made to reinforce PFM’s belief

in the truth of such representations, and to lull PFM and others into remaining

trusting and non-objecting stockholders. Compl. ¶ 25.

In late 2015, however, various media outlets began to publish disturbing news

about Theranos. Compl. ¶ 26. As more information came to light regarding

Theranos’s tests and devices, its regulatory interactions, and its business dealings,

Plaintiffs realized that the Fraud Action Defendants had made a series of knowing

misrepresentations, misleading statements, and material omissions to Plaintiffs both

before and throughout their investment in Theranos. Id.

On October 10, 2016, PFM filed the Fraud Action in this Court against the

Fraud Action Defendants to recoup its approximately $96.1 million investment,

alleging fraudulent misrepresentation, inducement, and concealment (among other

claims), and seeking restitutionary, compensatory, and other relief.

III. Fact Discovery Has Revealed Rampant Fraud.

Trial is set for June 26, 2017 in the Fraud Action, and the parties are actively

engaged in fact discovery. The testimony elicited at 22 depositions of current and

former Theranos employees and Board members proves that the Fraud Action

Defendants made knowing and intentional misrepresentations and omissions to PFM

(and others) throughout the parties’ relationship about the capabilities of Theranos’s

analyzers and finger-stick technology, the accuracy and safety of Theranos’s tests,

10

the status of the Company’s regulatory approvals, and the Company’s strategic and

financial outlook.

As Theranos’s September 2013 Walgreens launch date approached, Theranos,

Holmes, Balwani, and others were forced to confront the fact that the Company was

not going to be able to fulfill its customers’ orders using its own analyzers, so they

concealed their use of more than 20 different types of commercially available

analyzers instead. Compl. ¶ 47. Indeed, with respect to the Walgreens launch in the

fall of 2013, one witness testified that “they were deadly serious about hitting these

goals, and they were willing to do anything that was going to – that was going to be

necessary. And there was definitely a push from them towards everybody else to

sort of, like, try and make this happen.” Decl. of Aaron Nelson, Ex. A (Patel Dep.)

116.1

PFM has learned that what the Fraud Action Defendants deemed “necessary”

was to purchase and use third-party equipment anonymously to cover up that their

own technology could not perform as promised. Theranos formed a wholly-owned

subsidiary through which it secretly purchased commercially available devices.

Ex. B (Shadpour Dep.) 128. Another witness testified that in late 2013 and early

2014, once Theranos had purchased and begun to use this equipment, “most of the

1 Unless otherwise noted, all citations to exhibits herein refer to the exhibits attached to the Declaration of Aaron M. Nelson.

11

tests weren’t even run on the Theranos platform . . . most of the tests were being run

on third party machines.” Ex. C (T. Shultz Dep.) 21.

Indeed, a former member of Theranos’s Board of Directors testified that “it

was not until some of the press reporting that [he] became aware that there was

extensive commercial analyzers in use.” Ex. D (Roughead Dep.) 40. Another

former Board member testified that he understood, based on his communications

with Holmes, that Theranos ran all of its tests on Theranos-manufactured devices,

and if that was not true, he “would have wanted to know, and [he] would have

wanted to know why.” Ex. E (G. Shultz Dep.) 44.

Just as they deceived and lied to these two former Board members, the Fraud

Action Defendants lied to and deceived PFM. Among other things, they provided a

presentation to PFM that purported to show the accuracy and high correlation of

Theranos tests as compared to commercially available methods. Compl. ¶ 47. Yet

the slides in the presentation actually contained data from commercial analyzers,

including one manufactured by Bio-Rad. Id. When asked whether, without

familiarity with the appearance of Bio-Rad machine data, a viewer would know

where the data came from, a former employee answered: “No, there’s nothing that

suggests it’s from Bio-Rad.” Ex. A (Patel Dep.) 96.

In addition to their misrepresentations and omissions regarding Theranos’s

use of its own analyzers, the Fraud Action Defendants misrepresented to PFM that

12

98% of the tests it performed for customers were run using small blood samples

drawn from the finger using a finger stick (also known as “capillary samples”) rather

than traditional venous samples drawn from the arm. Compl. ¶ 47. A Theranos

employee involved in creating and maintaining its electronic laboratory information

system testified that in reality, however, “out of all the tests that were performed in

the fourth quarter of . . . 2013, I’m very, very confident that 98 percent were not

performed from capillary [i.e. finger-stick] collection.” Ex. F (Fosque Dep.) 203.

Similarly, Theranos’s former laboratory director stated that when he first began

working at Theranos in December 2013, he would “estimate 90 percent of the testing

was done by venous draw.” Ex. G (Pandori Dep.) 74. Both he and Theranos’s

former head of Arizona Operations estimated that in the spring of 2014, mere months

after PFM invested in the Company, only 50% of customers’ tests were performed

with finger-stick samples. Id.; Ex. H (Masson Dep.) 47. And these finger-stick

samples were analyzed on commercially available equipment—not Theranos’s

promised technology.

Moreover, the Fraud Action Defendants misrepresented to PFM that Theranos

tests had very low coefficients of variation (“CV”) of 2.5% or less—meaning that

they had a high degree of accuracy—and misrepresented publicly that its tests had

CVs of 10% or less. But in reality, Theranos’s tests had extraordinarily high CVs.

Compl. ¶ 47. Indeed, one former Theranos employee testified that soon after he

13

started working at Theranos he “realized that the CVs were much higher than

what . . . [Holmes’s] comments would lead you to believe or [the] website would

lead you to believe.” Ex. C (T. Shultz Dep.) 95. Another explained that far from

the tests having CVs of 10% or even 2.5%, “[w]e rarely had CVs less than 10

percent. We were lucky if we had CVs less than 20 percent.” Ex. I (Cheung Dep.)

153. Theranos’s former laboratory director also testified “that there were

particularly large coefficients of variance compared to what [he] had seen in [his]

career[.]” Ex. G (Pandori Dep.) 68.

Shockingly, instead of reporting or admitting such high degrees of variance,

the Fraud Action Defendants manipulated data relating to patients’ blood tests by

dropping “outliers,” averaging data points, and using other misleading tricks in order

to bring down CVs. Compl. ¶ 47. A Theranos scientist described the Company’s

failure to establish any procedures or guidelines regarding the elimination of

outliers: “There was no rhyme or reason to what would constitute an outlier versus

what wasn’t . . . it was just . . . does it give you a thumbs up or a thumbs down.”

Ex. I (Cheung Dep.) 46. The Fraud Action Defendants appear to have treated test

validation data similarly. As one former employee described it, “if you . . . flip a

coin enough times, eventually you’re going to get ten heads in a row, and then you

can say, ‘Oh, this coin returns heads every time.’” Ex. C (T. Shultz Dep.) 138. The

14

testimony illustrates that the data presented by the Fraud Action Defendants was

generated only by cherry-picking, deleting, and ignoring particular data points.

The fraud at Theranos extended beyond misrepresenting its tests and devices

to grossly inflating its actual and projected revenues. In January 2014, before PFM

invested in Theranos, the Fraud Action Defendants provided PFM with financial

documents that included a cash flow statement and revenue projections. Compl.

¶¶ 46-47. Theranos’s former Controller created similar materials just a month and

a half later to assist a third-party firm in the preparation of Theranos’s Section 409(a)

reports. Ex. J (Yam Dep.) 141, 147. Yet when she compared the numbers for fiscal

year 2014 in those materials against the numbers for fiscal year 2014 in the materials

provided to PFM, she stated that she was “not sure” why there was “an almost 211-

million-dollar difference between the two revenue projections[.]” Id. at 154-55.

With respect to fiscal year 2015, she likewise was “not sure” why there was a

“massive discrepancy of almost $1.5 billion between the two revenue figures[.]” Id.

at 155. Nor could she explain the “nearly 1-billion-dollar difference between the

gross profit projected” in the two documents for fiscal year 2015. Id. at 158.

Relatedly, and contrary to the Fraud Action Defendants’ representations to

PFM that Theranos had contracts in place to open in more than 8,000 Walgreens

stores nationwide (Compl. ¶ 47), there was never an agreement in place to open in

more than approximately 40 Walgreens locations. The Company’s Supply Chain

15

Manager, who had asked for sufficient lead time to be able to plan the global supply

chain for new stores, testified that it was “correct” that he was “never given

information about any other Walgreens store openings beyond those 41.” Ex. B

(Shadpour Dep.) 164. The Company’s Head of Arizona Operations similarly

testified that she “understood the plan was to roll out a total of 40 Theranos-

Walgreens locations” and, when asked “how many total Walgreens-Theranos

locations were planned” through the end of 2014, she responded, “I don’t know.”

Ex. H (Masson Dep.) 39; see also id. at 33 (testifying “I don’t recall specifics around

the rollout” beyond 40 Walgreens stores).

The Fraud Action Defendants also misrepresented the nature and extent of

other business partnerships in addition to Theranos’s partnership with Walgreens.

For example, contrary to their representations to PFM regarding the use of

Theranos’s proprietary technology by the U.S. military (Compl. ¶¶ 22-23), Admiral

Gary Roughead, USN (Ret.), one of Theranos’s former Board members, testified:

Q. Okay. And did Theranos ever end up with a contract or deal with the military?

A. Not to my knowledge, no. Q. Or with any branch of the military? A. Not that I’m aware of, no. Q. Okay. Was Theranos technology ever used in the field? A. Not that I’m aware of.

Q. Okay. Was it ever used on submarines? A. No.

16

Ex. D (Roughead Dep.) 97-98. Admiral Roughead also was “not aware” of Theranos

devices ever being placed in physicians’ offices (id. at 115), contrary to the Fraud

Action Defendants’ representations to PFM. Compl. ¶¶ 22-23.

In order to keep their massive fraud hidden from the Company’s partners, its

investors, and the public, the Fraud Action Defendants went to extreme lengths to

protect secrecy so as not to reveal that the entire business was built on lies. As one

former employee testified, “we would have to hide things from people, we were

constantly hiding things from all sorts of people, whether it was regulators or

whether it was outside vendors or even people that would come in for demos or even

from other employees.” Ex. I (Cheung Dep.) 154. Another former employee

explained that the Fraud Action Defendants “made it sound like they just had

something so special that they didn’t want it to get stolen,” but in reality “they didn’t

want anyone to realize that they really didn’t have anything that innovative.” Ex. C

(T. Shultz Dep.) 75-76. Indeed, one employee said he “was told not to talk to

people” about the Company’s use of the commercially available Siemens ADVIA

device to run blood tests. Ex. K (Gong Dep.) 75.

Multiple Theranos employees testified about the culture of fear that the Fraud

Action Defendants instilled in employees in order to prevent them from raising

questions. As one explained: “It was a tough culture to be a part of to constantly

fear losing your job if you said anything that the CEO or the COO didn’t like.” Ex. I

17

(Cheung Dep.) 200; see also Ex. L (Niroomand Dep.) 108 (“there’s a general fear

that Theranos is not afraid to come after you if you speak up”); Ex. C (T. Shultz

Dep.) 72 (“It was just, you know, people – I mean, that was – that was the culture.

People knew. They would say, ‘Don’t speak up or you get fired.’”); Ex. M (Nugent

Dep.) 96, 104, 111 (describing the “adversarial,” “intimidating,” “stressful,” and

“caustic” environment at Theranos).

These fears were not unfounded, given that the Fraud Action Defendants

routinely threatened and harassed Theranos employees in order to ensure that the

truth would not see the light of day. One employee testified at length regarding the

harassment she experienced upon resigning after raising quality control issues:

I realized like when they were furiously calling me and they threaten to sue me, that they were guilty of something; that they knew that they had done things that were wrong and things that were bad. And so it sort of shifted me from being in this place of being really fearful and being really scared and being really kind of like frightened of potential retaliation.

Ex. I (Cheung Dep.) 155. Another employee described the “witch hunt” for the

author of a negative review about Theranos on the company review website

Glassdoor.com. Ex. L (Niroomand Dep.) 108-109.

The evidence described above represents only a fraction of the compelling

testimonial evidence that PFM has obtained in support of its claims in the Fraud

18

Action. Fact discovery is ongoing and continues to reveal the ugly truth about the

massive fraud perpetrated by the Fraud Action Defendants.

IV. Theranos Now Seeks To Use The Exchange Offer To Prevent PFM From Recovering Its Fraudulently Induced Investment.

Faced with the mounting evidence of widespread misconduct in the Fraud

Action, Holmes hatched a plan to deprive PFM of its ability to collect on any

judgment rendered in the Fraud Action and to shield the Company and its officers,

directors, and stockholders from liability to other investors for the Fraud Action

Defendants’ wrongful conduct—all in an effort to undermine the proceedings before

this Court in the Fraud Action.

On March 20, 2017, Theranos distributed the Exchange Offer to the holders

of its First Series C-1 Preferred Stock, Second Series C-1 Preferred Stock, and Series

C-2 Preferred Stock “in order to realign [its] relationship with the holders” of such

securities and “to protect the Company and its officers, directors and stockholders

from any potential legal claims that holders of Series C-1 Preferred and Series C-2

Preferred may have against the Company as stockholders.” Compl. Ex. A at 5. The

Exchange Offer gives holders of First and Second Series C-1 Preferred and Series

C-2 Preferred Stock an opportunity to exchange those shares for three new types of

securities: Series C-1A Preferred Stock, Series C-1B Preferred Stock, and Series

C-2A Preferred Stock. Under the Company’s proposed Amended and Restated

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Certificate of Incorporation—which would be adopted if the Exchange Offer is

consummated—holders of these three new securities would have a liquidation

preference above Series C-2 Preferred Stockholders like PFM:

In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series C-1A Preferred Stock, Series C-1B Preferred Stock, Series C-1B* Preferred Stock, Series C-2A Preferred Stock, and Series C-2A* Preferred Stock (collectively, the “Senior Preferred”) shall be entitled to receive, on a pari passu basis, prior and in preference to any Distribution of any of the assets of the Corporation to the holders of the Series C-2 Preferred Stock, Series C-1 Preferred Stock, Series C Preferred Stock, Series B Preferred Stock, Series A Preferred Stock, Class A Common Stock or Class B Common Stock by reason of their ownership of such stock, an amount per share for each share of Senior Preferred held by them equal to the sum of (i) the Liquidation Preference specified for such share of Senior Preferred, as applicable, and (ii) all declared but unpaid dividends (if any) on such share of Senior Preferred, as applicable. If upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation legally available for distribution to the holders of the Senior Preferred are insufficient to permit the payment to such holders of the full amounts specified in this Section 3(a)(i), then the entire assets of the Corporation legally available for distribution shall be distributed pro rata among the holders of the Senior Preferred in proportion to the full amounts they would otherwise be entitled to receive pursuant to this Section 3(a)(i).

Compl. Ex. A at 20 (Annex A, § 3(a)(i)) (emphases added).

Only “[a]fter payment of the Liquidation Preference specified for the Senior

Preferred” above are the “Series C-2 Preferred Stock, Series C-1 Preferred Stock and

the Series C Preferred Stock . . . entitled to receive, on a pari passu basis, prior and

in preference to any Distribution of any assets of the Corporation to the holders of

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the Series B Preferred Stock, Series A Preferred Stock, Class A Common Stock or

Class B Common Stock,” their liquidation preference. Compl. Ex. A at 20 (Annex

A, § 3(a)(ii)).

In exchange for additional shares of a company built on a house of lies and

liquidity preference in a bankruptcy proceeding, Defendant Holmes stands to reap

great personal gain and extract substantial cost from the stockholders to whom she

owes fiduciary duties of loyalty and disclosure—all while subordinating PFM. And,

to the extent that the other members of the Board of Directors had an actual voice in

this Exchange Offer and voted with Holmes, they went along with this corrupt and

unfair plan. To gain such an enhanced liquidation preference, preferred stockholders

must execute a broad general release that immunizes Defendants and others from

liability for their fraudulent or otherwise unlawful conduct. Section 2.1 of the

Exchange Offer Agreement provides, in relevant part, that each participating

stockholder:

fully, finally, and forever waives, releases, relinquishes, and discharges the Company and (a) its current and former officers andemployees, and each of its and their affiliates, contractors, consultants, auditors, accountants, financial advisors, professional advisors, attorneys, investment bankers, representatives, insurers, trustees, trustors, agents, professionals, spouses, immediate family members, predecessors, successors, assigns, heirs, executors, or administrators, (b) its current and former directors, and each of their affiliates, contractors, consultants, auditors, accountants, financial advisors, professional advisors, attorneys, investment bankers, representatives, insurers, trustees, trustors, agents, professionals, spouses, immediate

21

family members, predecessors, successors, assigns, heirs, executors, or administrators, (c) other stockholders (and any of their affiliates) who execute this Agreement, and (d) their respective successors and assigns, (individually, a “Releasee” and collectively, “Releasees”) from any and all claims, demands, losses, rights, obligations, debts, liabilities, and causes of action of any nature whatsoever, whether known or unknown, suspected or unsuspected, direct or derivative, and that have been or could in the future be asserted in any forum, whether foreign or domestic, whether arising under federal, state, common, or foreign law or in equity, which Releasors now have or have ever had or may hereafter have directly or indirectly against any Releasee arising out of, based on, or relating in any way to any transaction with the Company or to their capacity as a stockholder of the Company that has occurred up until and including the date hereof . . . .

Compl. Ex. A at 45-46 (Annex B, § 2.1) (emphases added); see also id. at 46 (Annex

B, §§ 2.2-2.5). Once a stockholder executes and submits the Exchange Offer

Agreement, it cannot “revoke its participation in the Exchange.” Compl. Ex. A at

52 (Annex B, § 9).

To prevent the Exchange Offer from causing them irreparable harm, Plaintiffs

filed (1) a Verified Complaint for Injunctive and Declaratory Relief to enjoin the

coercive, grossly inadequate, and unfair Exchange Offer as an egregious breach of

Defendants’ fiduciary duty of loyalty and as corporate waste, (2) a motion for a TRO

and this supporting brief, and (3) a motion to expedite.

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ARGUMENT

I. The Legal Standard For Issuing A TRO.

A TRO “is a special remedy of a short duration designed primarily to prevent

imminent irreparable injury pending a preliminary injunction or final resolution of a

matter.” Sherwood v. Ngon, 2011 WL 6355209, at *6 (Del. Ch.). “To obtain such

an order, a party must demonstrate three things: (i) the existence of a colorable claim,

(ii) the [existence of] irreparable harm . . . if relief is not granted, and (iii) a balancing

of hardships favoring the moving party.” Id. (quotations omitted). “When deciding

whether to issue a TRO, the Court’s focus usually is less upon the merits of the

plaintiff’s legal claim than on the relative harm to the various parties if the remedy

is or is not granted.” Id. “Indeed, if imminent irreparable harm exists, the remedy

ought ordinarily to issue unless” “the claim is frivolous,” “granting the remedy

would cause greater harm than denying it,” or “the plaintiff has contributed in some

way to the emergency nature of the need for relief.” Id. (quotations omitted).

Here, a TRO is proper because PFM asserts colorable claims against

Defendants, PFM will be irreparably harmed if the Exchange Offer is permitted to

close, and the irreparable harm PFM will suffer outweighs any harm to Defendants

if the Exchange Offer is temporarily enjoined.

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II. Plaintiffs Assert Colorable Claims That Defendants Breached Their Fiduciary Duty Of Loyalty And Committed Waste.

A “colorable claim” is one “that is not frivolous” and “has some possibility of

succeeding on the merits.” True North Commc’ns Inc. v. Publicis S.A., 1997 WL

33173290, at *1 (Del. Ch.). A colorable claims exists so long as a court can “simply

acknowledg[e] that it is a close question and . . . that there are strong arguments that

can be advanced on both sides of the issue.” Id. (plaintiff asserted colorable claim

where parties reasonably disputed “the proper interpretation” of language in an

agreement).

Here, Plaintiffs’ claims that Defendants breached their duties of loyalty and

committed corporate waste are colorable because the self-interested Exchange Offer

seeks to penalize PFM for exercising its rights against the Fraud Action Defendants

and insulates Defendants from liability for their wrongful conduct, conferring on

them a substantial personal benefit without adequate consideration.

A. Plaintiffs Allege A Colorable Claim For Breach Of The Duty Of Loyalty.

“Directors of a Delaware corporation owe two fiduciary duties—care and

loyalty.” In re Orchard Enters., Inc. Stockholder Litig., 88 A.3d 1, 32 (Del. Ch.

2014). “The duty of loyalty includes a requirement to act in good faith, which is a

subsidiary element, i.e., a condition, of the fundamental duty of loyalty.” Id. at 32-

33 (quotations omitted). “A plaintiff can call into question a director’s loyalty by

24

showing that the director was interested in the transaction under consideration or not

independent of someone who was,” or “that the director failed to pursue the best

interests of the corporation and its stockholders and therefore failed to act in good

faith.” Id. at 33. “The duty of loyalty mandates that the best interest of the

corporation and its shareholders takes precedence over any interest possessed by a

director, officer or controlling shareholder and not shared by the stockholders

generally.” Id. (alteration and quotations omitted). A “‘bad faith’ transaction [i]s

one ‘that is authorized for some purpose other than a genuine attempt to advance

corporate welfare or is known to constitute a violation of applicable positive law.’”

Id. at 33 n.17 (quoting Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1051 n.2

(Del. Ch. 1996)).

Here, Defendants violated their duty of loyalty by acting in bad faith. The

compelling evidence in the Fraud Action, described in detail above and in the

Complaint (Compl. ¶ 47), demonstrates Holmes’s motive to shield herself, Balwani,

and others from liability for their wrongdoing and to punish PFM. See Jeter v.

RevolutionWear, Inc., 2016 WL 3947951, at *13 (Del. Ch.) (denying motion to

dismiss claims for breach of fiduciary duties where Derek Jeter, “while acting as a

fiduciary to the Company, made statements that were knowingly false and caused

investors to invest in the Company”).

25

Faced with mounting evidence against her, Holmes exercised her nearly 99%

voting control and overwhelming influence such that the Board approved the

Exchange Offer—all in order to deprive PFM of its ability to collect on any judgment

rendered in the Fraud Action and to shield herself, current and former executives

and employees, and current and former board members from liability. See Desert

Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,

1202 (Del. 1993) (reversing order granting motion to dismiss claims for breach of

fiduciary duty and good faith and fair dealing where plaintiff alleged that general

partner of the defendant, an investment fund, excluded plaintiff from certain

investment opportunities in bad faith and in retaliation for plaintiff filing a suit

regarding a related fund).2

Coupled with the rampant fraud discussed above, the substantial personal

benefit conferred on Holmes and the Board under the Exchange Offer also supports

a finding of bad faith. See Ryan v. Gifford, 918 A.2d 341, 358 (Del. Ch. 2007) (“the

2 This Court has a rich tradition of scrutinizing deal structures deliberately designed to prejudice the ability of a stockholder-plaintiff to prosecute its claims. See, e.g., Lewis v. Ward, 852 A.2d 896, 905 (Del. 2004); Lewis v. Anderson, 477 A.2d 1040, 1047 n.10 (Del. 1984); Schreiber v. Carney, 447 A.2d 17, 24 (Del. Ch. 1982); Condec Corp. v. Lunkenheimer Co., 230 A.2d 769, 775 (Del. Ch. 1967) (“corporate machinery may not be manipulated so as to injure minority stockholders.”). The only rational conclusion one can draw from the Exchange Offer’s coercive terms and timing is that Holmes structured this deal to prejudice PFM by forcing it to either give up its claims or risk a pyrrhic victory.

26

intentional violation of a shareholder approved stock option plan, coupled with

fraudulent disclosures regarding the directors’ purported compliance with that plan,

constitute conduct that is disloyal to the corporation and is therefore an act in bad

faith”). Under the Exchange Offer, Defendants stand to reap great personal gain and

extract substantial cost from the stockholders to whom they owe fiduciary duties of

loyalty—all while subordinating PFM. To gain such an enhanced liquidation

preference, preferred stockholders must execute a broad general release that “fully,

finally, and forever waives, releases, relinquishes, and discharges” Holmes,

Balwani, the Board, and others from liability for their fraudulent or otherwise

unlawful conduct. Compl. Ex. A at 45 (Annex B, § 2.1).

Moreover, the Exchange Offer’s timing is particularly problematic in light of

the fact that the Fraud Action is going to trial in June and Theranos is burning

through cash at an alarming rate. Indeed, Defendants have tendered the Exchange

Offer such that it will close just before Plaintiffs are scheduled to depose Holmes,

Balwani, and other key figures in the Fraud Action. The Exchange Offer is thus

especially advantageous to the Fraud Action Defendants and other witnesses, two of

whom are among the group of four that authorized this offer. Considered in context,

this timing alone suggests a breach of Defendants’ fiduciary duties.3 See Jedwab v.

3 PFM and Defendants know that these depositions could have substantial implications not only for the Fraud Action but also for the ongoing investigations by

27

MGM Grand Hotels, Inc., 509 A.2d 584, 599 (Del. Ch. 1986) (“The timing of such

a transaction, we have been authoritatively reminded, may be such as to constitute a

breach of a fiduciary’s duty to deal fairly with minority shareholders.”) (citing

Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983)).

If the Exchange Offer is permitted to close before trial in the Fraud Action,

PFM will end up with a substantially decreased liquidation preference, making it

virtually impossible to collect any judgment it obtains in the Fraud Action. See AC

Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 115 (Del. Ch. 1986)

(“Having concluded that the effect of the particular timing of the Company

Transaction will be to deprive shareholders of an option that may as likely as not be

the more attractive alternative to a majority of them, I conclude, considering all of

the surrounding circumstances, that the action is unlikely to be sustained as fair to

shareholders.”).

In AC Acquisitions Corp., the Court enjoined a defensive self-tender offer

that, due in part to its timing, put stockholders in a coercive double-bind and thus

was “likely to be found to constitute a breach of a duty of loyalty.” 519 A.2d at 114.

the Department of Justice and the Securities and Exchange Commission. Yet this is likely unknown to other stockholders presented with the Exchange Offer. Aside from a brief disclosure that the discovery period in the Fraud Action closes in early May 2017, the Exchange Offer fails to disclose that these depositions are scheduled or that unless PFM agrees to the Exchange Offer, Holmes, Balwani, and others will be deposed.

28

The Court concluded “that no rational shareholder could afford not to tender into the

Company’s self-tender offer” because “a current shareholder who elects not to

tender into the self-tender is very likely, upon consummation of the Company

Transaction, to experience a substantial loss in market value of his holdings” and

“[t]he only way, within the confines of the Company Transaction, that a shareholder

can protect himself from such an immediate financial loss, is to tender into the self-

tender so that he receives his pro rata share of the cash distribution that will, in part,

cause the expected fall in the market price of the Company’s stock.” Id. at 113-14.

Here, as in AC Acquisitions Corp., the Company’s Exchange Offer provides

investors with no reasonable choice between relinquishing their liquidation

preference and releasing their claims against Defendants for their prior wrongdoing.

Indeed, as the Exchange Offer materials explicitly warn:

If you do not participate in the Exchange and we have insufficient cash and other collateral to pay all or any amounts due or owing toany of our creditors and all holders of New Preferred, or the Series C-1B* Preferred Stock or Series C-2A* Preferred Stock, as applicable, in a liquidation event, then your existing shares of Series C-1 Preferred Stock and Series C-2 Preferred Stock may have little or no value.

Compl. Ex. A at 164 (Annex G-3) (emphases added).

For PFM in particular, this purported choice, which would require it to dismiss

its Fraud Action, is particularly coercive. As discussed above, the evidence obtained

in the Fraud Action demonstrates that Theranos, Holmes, and Balwani fraudulently

29

induced PFM to invest in the Company and fraudulently concealed critical

information from PFM about the Company. Yet, if PFM refuses to participate in the

Exchange Offer and maintains its Fraud Action, PFM will lose its liquidation

preference to the Company’s dwindling assets and will be unable to enforce any

judgment it obtains. If, on the other hand, PFM signs the Exchange Offer Agreement

to retain its present liquidation preference, then it must dismiss the Fraud Action and

forgo the possibility of achieving the relief it seeks.

Accordingly, the Exchange Offer is a brazen attempt by Holmes and her

fellow directors to prevent PFM from collecting on any judgment it obtains in the

Fraud Action and to immunize the Company and its officers and directors from past

fraudulent acts without adequate disclosure. Indeed, it is unclear whether Bonanni,

Foege, or Warmenhoven are even aware of the evidence being uncovered in the

Fraud Action. Plaintiffs’ claim that Defendants breached the duty of loyalty is

therefore colorable.

B. Plaintiffs Allege A Colorable Claim For Waste.

Directors are liable for corporate waste “when they authorize an exchange that

is so one sided that no business person of ordinary, sound judgment could conclude

that the corporation has received adequate consideration.” Glazer v. Zapata Corp.,

658 A.2d 176, 183 (Del. Ch. 1993). For example, in In re Citigroup Inc. Shareholder

Derivative Litigation, 964 A.2d 106, 111-12, 138 (Del. Ch. 2009), the Court denied

30

a motion to dismiss a corporate waste claim involving a letter agreement “approving

a multi-million dollar payment and benefit package” for Citigroup’s retiring CEO in

exchange for the CEO signing “a non-compete agreement, a non-disparagement

agreement, a non-solicitation agreement, and a release of claims against the

Company.” Id. The Court allowed this claim to proceed in light of the plaintiffs’

allegations that approving such a “compensation package to a departing CEO whose

failures as CEO were allegedly responsible, in part, for billions of dollars of losses

at Citigroup” constituted waste.

Here, too, Defendants committed corporate waste by approving a transaction

that benefits themselves, and not the Company. As this Court has explained, “most

transactions that actually involve waste are almost [always] found to have been

inspired by some form of conflicting self-interest. The doctrine of waste, however,

allows a plaintiff to pass go at the complaint stage even when the motivations for a

transaction are unclear by pointing to economic terms so one-sided as to create an

inference that no person acting in good faith pursuit of the corporation’s interests

could have approved the terms.” Sample v. Morgan, 914 A.2d 647, 670 (Del. Ch.

2007). Holmes in particular stands to receive a significant benefit for obtaining the

broad release contained in the Exchange Offer Agreement, given that she faces

substantial liability in the Fraud Action for repeatedly lying to Plaintiffs about the

Company. Because the Company has not been adequately compensated for this

31

handout to Holmes—not to mention the other directors, officers, and employees who

stand to reap the benefits of the self-interested Exchange Offer release—Plaintiffs

have alleged a colorable claim of corporate waste. See Citigroup Inc., 964 A.2d at

138; Lewis v. Vogelstein, 699 A.2d 327, 336-39 (Del. Ch. 1997) (allowing waste

claim to proceed where company provided annual grants to directors of up to 10,000

options and a one-time grant of 15,000 options exercisable immediately with a

present value of as much as $180,000 per director); Sample, 914 A.2d at 652-53 (“If

giving away nearly a third of the voting and cash flow rights of a public company

for $200 in order to retain managers who ardently desired to become firmly

entrenched just where they were does not raise a pleading-stage inference of waste,

it is difficult to imagine what would.”).

III. The Exchange Offer Is Subject To The Entire Fairness Test, Which Defendants Cannot Satisfy.

A. Entire Fairness Applies To The Exchange Offer.

Delaware law subjects a transaction to an “entire fairness” review “to protect

the rights of the shareholders to make a voluntary choice.” In re Siliconix Inc.

S’holders Litig., 2001 WL 716787, at *6 (Del. Ch.). A tender offer may be

considered involuntary, and thus subject to the entire fairness test, if “coercion is

present, or [if] there is ‘materially false or misleading disclosures made to

shareholders in connection with the offer.’” Solomon v. Pathe Commc’ns Corp.,

32

672 A.2d 35, 39 (Del. 1996) (quoting Eisenberg v. Chi. Milwaukee Corp., 537 A.2d

1051, 1056 (Del. Ch. 1987)); see also Joseph v. Shell Oil Co., 482 A.2d 335, 341

(Del. Ch. 1984) (finding majority shareholder’s failure to disclose material

information to minority shareholders in tender offer “structures the offer in such a

way as to result in an unfair price being offered and the disclosures are unlikely to

call the unwary stockholder’s attention to the unfairness”).

A tender offer is “coercive if the tendering shareholders are wrongfully

induced by some act of the defendant to sell their shares for reasons unrelated to the

economic merits of the sale.” Siliconix, 2001 WL 716787, at *15 (quotations

omitted). A tender offer will also be considered “coercive” and subject to entire

fairness review if the offer resulted from breaches of fiduciary duty or other bad acts.

See Solar Cells, Inc. v. True N. Partners, LLC, 2002 WL 749163, at *4 (Del. Ch.)

(preliminarily enjoining proposed merger and holding that defendants’ bad faith and

breaches of fiduciary duty triggered an entire fairness test); Solomon v. Armstrong,

747 A.2d 1098, 1112-13 (Del. Ch. 1999) (holding that when a party has sufficiently

alleged lack of care or loyalty, the court should review the proposed transaction

under “entire fairness’s strict scrutiny”).

“The entire fairness test helps uncover situations where facially independent

and disinterested directors have failed to act loyally and in good faith to protect the

interests of the corporation and the stockholders as a whole and instead have given

33

in to or favored the interests of the controller.” In re Orchard, 88 A.3d at 37. The

test applies, for example, “when a plaintiff challenges a transaction between the

corporation and its majority stockholder where the majority stockholder has not

sufficiently disabled itself from exercising influence during the negotiation and

approval of the transaction at both the board and the stockholder levels.” Id. at 34.

Thus, “[a] plaintiff can call into question a director’s loyalty by showing that the

director was interested in the transaction under consideration or not independent of

someone who was.” Id. at 33.

Here, entire fairness applies because Holmes—the controlling stockholder

with 99% voting power, CEO, and Chairman of the Board—played an active role in

devising, negotiating, and obtaining approval of the Exchange Offer while also

standing to benefit from its consummation as one of the Fraud Action Defendants.

As the Exchange Offer materials themselves admit, “Holmes has the ability to

influence management and the conduct of [the Company’s] affairs as a result of her

position as [its] CEO, as a member of [its] board of directors and with her ability to

appoint a majority of [its] board of directors.” Compl. Ex. A at 161 (Annex G-1).

The Exchange Offer also directly benefits Holmes’s fellow directors.

Moreover, as demonstrated above, entire fairness review applies because

Holmes and her fellow board members acted in bad faith. See, e.g., Solar Cells,

2002 WL 749163, at *1-4 (when a fiduciary acts in bad faith and violates its

34

fiduciary duties in connection with a transaction, the challenged transaction is

subject to the entire fairness test). In Solar Cells, the Court found it necessary to

apply entire fairness scrutiny to a proposed merger in which one company, First

Solar, would merge into a wholly owned subsidiary of another, True North, resulting

in a dilution of the plaintiff-stockholder’s (Solar Cells) ownership from 50% to 5%.

Solar Cells, 2002 WL 749163, at *1-4. Although Solar Cells owned 50% of the

company, it only controlled two members of the Board of Managers, whereas True

North controlled three members. When the full Board met on March 6, 2002, “the

True North Managers made no mention of the planned merger,” yet they met the

very next day and approved the merger. Id. at *4. Notably, “[n]o effort was made

to inform the Solar Cells Managers that this action was contemplated, or imminent,

when those facts were surely known at the time of the March 6 meeting.” Id.

Instead, they were given notice of the merger, which was “presented as a fait

accompli” just “a week before [its] consummation. Id. Because these “actions [did]

not appear to be those of fiduciaries acting in good faith,” the Court concluded that

it was “likely . . . that the defendants would be required to show the entire fairness

of the proposed merger.” Id.

Similarly, in Eisenberg, the Court issued a preliminary injunction against a

tender offer that the plaintiffs argued violated the duty of loyalty because it

impermissibly coerced preferred stockholders to tender their shares by threatening

35

to delist the shares from the New York Stock Exchange—a step that would

“adversely affect the interests of the nontendering Preferred shareholders.”

Eisenberg, 537 A.2d at 1061-62. Because “[t]he only apparent purpose of such a

disclosure would be to induce shareholders to tender,” the Court concluded “that the

Offer is inequitably coercive.” Id.; see also In re Pure Res. Inc. S’holders Litig., 808

A.2d 421, 438 n.26 (Del. Ch. 2002) (holding an offer is coercive where its “back-

end is so unattractive as to induce tendering at an inadequate price to avoid a worse

fate”).

Here, too, Defendants have acted in bad faith and violated their fiduciary duty

of loyalty. Like the True North managers in Solar Cells, Defendants negotiated the

Exchange Offer in secret and did not disclose the offer to PFM until the last minute.

And, as in Eisenberg, Defendants have sent a clear signal to minority stockholders

like Plaintiffs that refusing to participate in the exchange—that is, refusing to waive

any and all claims against the Defendants for their misconduct—will substantially

reduce their liquidation preference. This is a particularly valuable attribute of

Plaintiffs’ preferred stock given the Company’s precarious financial status and

potentially looming bankruptcy.

Thus, because Defendants breached their duty of loyalty in devising and

approving the Exchange Offer, it must survive “Delaware’s most onerous standard

of review”—“entire fairness.” In re Orchard, 88 A.3d at 34. It cannot.

36

B. The Exchange Offer Does Not Survive Entire Fairness Scrutiny.

There are two aspects to the entire fairness test: fair dealing and fair price.

“However, the test for fairness is not a bifurcated one as between fair dealing and

price. All aspects of the issue must be examined as a whole since the question is one

of entire fairness.” Weinberger, 457 A.2d at 711. The concept of fair dealing

“embraces questions of when the transaction was timed, how it was initiated,

structured, negotiated, disclosed to the directors, and how the approvals of the

directors and the stockholders were obtained.” Emerald Partners v. Berlin, 787 A.2d

85, 97 (Del. 2001) (citations omitted); see also Solar Cells, 2002 WL 749163, at *5

(“Fair dealing pertains to the process by which the transaction was approved and

looks at the terms, structure, and timing of the transaction.”). “Part of fair dealing is

the obvious duty of candor,” and “one possessing superior knowledge may not

mislead any stockholder by use of corporate information to which the latter is not

privy.” Weinberger, 457 A.2d at 711 (citations omitted). This duty applies to

officers and directors, as well as to those who “are privy to matters of interest or

significance to their company.” Id. (citations omitted).

In a transaction where a majority stockholder conceals critical information

from minority stockholders, the transaction will not satisfy entire fairness. See

Weinberger, 457 A.2d at 712 (holding that merger did not meet “any reasonable test

of fairness” where majority shareholder concealed feasibility study from

37

independent directors and firm rendering fairness opinion and denied minority

shareholders information concerning the true value of their shares); see also Solar

Cells, 2002 WL 749163, at *4-5.

In Solar Cells, the Court found “a reasonable likelihood that defendants

w[ould] not be able to establish that the proposed merger was the result of fair

dealing” where the controlling managers had secretly negotiated the merger to dilute

Solar Cells’ voting power in the company. 2002 WL 749163, at *5. The defendants

argued that the merger was fair to Solar Cells because it “retain[ed] voting rights in

the surviving company.” Id. But on matters where the unit-holders could vote, Solar

Cells was diluted from an equal voice to only 5%, and True North retained “complete

control over the managing board and any other decision requiring the vote of unit-

holders.” Id.

Here, as detailed above, Defendants’ dealing with Plaintiffs has been anything

but “fair.” Moreover, Defendants have withheld critical information from PFM and

have made false and misleading statements concerning the purpose of the Exchange

Offer, the negotiation process that led to it, the Company’s financial outlook, and

the evidence in the Fraud Action—all of which bear on the irrevocable decision of

whether to release Defendants from any and all liability for their prior misdeeds in

exchange for a higher liquidation preference. See Eisenberg, 537 A.2d at 1059

(“Shareholders are entitled to be informed of information in the fiduciaries’

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possession that is material to the fairness of the price.”); Shell, 482 A.2d at 341

(where “the disclosures made to the stockholders fail[ ] to clearly and unequivocally

disclose that essential and necessary information [has] been withheld by the

appraiser,” the offering price will not meet the “fair price” standard).

Accordingly, the Exchange Offer falls woefully short of satisfying Delaware’s

entire fairness test.

IV. The Coercive And Misleading Exchange Offer Cannot “Cleanse”Defendants’ Egregious Self-Interested Breach Of Fiduciary Duty.

Defendants cannot “cleanse” their conflicted breach of fiduciary duty by

pointing to other stockholders’ expected participation in the Exchange Offer because

the offer is coercive and contains numerous misrepresentations, partial disclosures,

and omissions of material fact. The business judgment rule applies only where a

“transaction not subject to the entire fairness standard is approved by an informed,

voluntary vote of disinterested stockholders.” See Corwin v. KKR Fin. Holdings

LLC, 125 A.3d 304, 311 (Del. 2015); In re Volcano Corp. Stockholder Litig., 143

A.3d 727, 743-45 (Del. Ch. 2016) (applying Corwin to a tender offer). But where

“troubling facts regarding director behavior were not disclosed that would have been

material to a voting stockholder, then the business judgment rule is not invoked.”

Corwin, 125 A.3d at 312. Similarly, the rule is not invoked if stockholders are not

disinterested. See In re Volcano Corp., 143 A.3d at 747 (examining “whether the

39

Volcano stockholders that accepted the Tender Offer were fully informed,

disinterested, and uncoerced”).

The “defendant bears the burden of demonstrating that the stockholders were

fully informed when relying on stockholder approval to cleanse a challenged

transaction.” In re Volcano Corp., 143 A.3d at 748. “Evaluating whether

shareholders are fully-informed as to a particular transaction depends on whether

those stockholders were apprised of all material information related to that

transaction.” Id. (quotations and alterations omitted). “Where a corporation tenders

for its own shares, the exacting duty of disclosure imposed upon corporate

fiduciaries is even ‘more onerous’ . . . because in a self-tender, the disclosures are

unilateral and not counterbalanced by opposing points of view.” Eisenberg, 537

A.2d at 1057; see also id. (“A related reason for requiring the strictest possible

standard of disclosure is that corporate self-tenders, by their very nature, involve

built-in conflicts of interest between the fiduciaries responsible for conducting the

offer and the stockholders to whom the offer is directed.”).

“A fact is material if there is a ‘substantial likelihood’ that its disclosure

‘would have been viewed by the reasonable investor as having significantly altered

the ‘total mix’ of information made available.’” Siliconix, 2001 WL 716787, at *9

(quoting Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1172 (Del. 2000)); see also

Arnold v. Soc. for Sav. Bancorp., Inc., 650 A.2d 1270, 1277-81 (Del. 1994) (holding

40

that “partial and incomplete disclosure of historical information” regarding vague

discussions of “investigation[s]” of certain transactions in advance of exchange-of-

stock merger was material); Eisenberg, 537 A.2d at 1059 (where “disclosures

relating to [tender offer] price were calculated to, and did, obscure and divert

attention from” the fact that the price was unfair, “the disclosures would clearly be

defective”).

In Pure Resources, the Court enjoined an exchange offer that would have

allowed the controlling shareholder of Pure to acquire the rest of Pure’s shares in

exchange for its own stock, because the Court found that “material information

relevant to the Pure stockholders’ decision-making process ha[d] not been fairly

disclosed.” 808 A.2d at 425. Specifically, Pure had failed to give “a fair summary

of the substantive work performed by the investment bankers upon whose advice the

recommendations of their board as to how to vote on a merger or tender rely.” Id.

at 449. This information was material because “[w]hen controlling stockholders

make tender offers, they have large informational advantages that can only be

imperfectly overcome by the special committee process, which almost invariably

involves directors who are not involved in the day-to-day management of the

subsidiary.” Id. at 450.

Other cases have similarly recognized the importance of disclosing

information regarding the negotiation or approval of corporate transactions. See,

41

e.g., In re Lear Corp. S’holder Litig., 926 A.2d 94, 112 (Del. Ch. 2007) (granting

motion to preliminarily enjoin merger where plaintiffs argued that board breached

fiduciary duty by failing to “disclose the fact that, in late 2006, Lear’s CEO. . .

approached the board expressing a serious concern about whether it was in his best

interest to continue as CEO in light of the financial risks that [it] presented” to him);

In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *39 (Del.

Ch.) (finding director violated the fiduciary duty of disclosure by not telling

company’s board that he was purchasing the company for less than he knew it was

worth); Shell, 482 A.2d at 342-43 (enjoining tender offer where offer materials failed

to disclose numerous facts, including recent negative discoveries in oil field,

management’s opinions as to going concern value, and failure to provide investment

bank with the “data necessary to fully and completely evaluate the value of the

probable oil reserves”).

Here, the Exchange Offer is rife with misrepresentations, misleading partial

disclosures, and material omissions regarding its purpose, the negotiation process

that led to it, the Company’s financial outlook, and the extensive evidence of

wrongdoing uncovered in the Fraud Action—all of which bear on the irrevocable

decision of whether to release Defendants and others from any and all liability for

their prior misdeeds in exchange for a higher liquidation preference.

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Most troubling, the Exchange Offer Agreement seeks to obtain a broad,

general release of any and all liability from preferred stockholders, but the offering

materials utterly fail to disclose the overwhelming evidence of the extensive

fraudulent activity by the Fraud Action Defendants that has come to light. As

detailed above, the testimony elicited from current and former Theranos employees

and directors in the Fraud Action demonstrates that the Fraud Action Defendants

made knowing and intentional misrepresentations and omissions to PFM regarding

(among other things) the capabilities of Theranos’s tests and devices, the status of

the Company’s regulatory approvals, and the Company’s strategic and financial

outlook.

Indeed, PFM has learned in discovery that a presentation it was provided by

the Fraud Action Defendants prior to its investment, which contains slides filled with

material misrepresentations and omissions, was also provided to Theranos Board

members and other holders of Theranos shares. By now, many of these holders have

likely been presented with the Exchange Offer but have no way of knowing that in

pursuit of its own claims, PFM has uncovered evidence of potential fraud against

others as well.

In addition, the offer materials provide scant information about how the

Exchange Offer negotiations came about, their content, or their purpose, apart from

a general assertion that “[c]ertain of the Company’s preferred investors . . . have

43

indicated an interest to participate and exchange their shares of First Series C-1

Preferred, Second Series C-1 Preferred or Series C-2 Preferred in the Exchange.”

Id. at 2 (Information Statement); see Eisenberg, 537 A.2d at 1059 (“The shareholder-

offerees are entitled to an accurate, candid presentation of why the self-tender offer

is being made.”).

The Exchange Offer materials are also silent as to why the Board approved

the offer but takes no position on it. See Eisenberg, 537 A.2d at 1060 (holding that

had certain facts been disclosed about the board of directors’ fairness conclusion,

“shareholders would have been given a more even-handed presentation of the

economic merits of the Offer” and that “[t]he need for such a presentation would

appear even more essential, because the directors had concluded that the Offer was

fair, yet decided not to recommend that their shareholders tender into it”); Sherwood,

2011 WL 6355209, at *7 (proxy supplement inadequately “fail[ed] to disclose the

true reason the board removed [a board member] from the Company’s slate”).

Further, the Exchange Offer’s financial disclosures are inadequate. The offer

materials devote a single page to “Financial Information,” which purports to convey

the Company’s “Financial Position as of December 31, 2016.” Compl. Ex. A at 188

(Annex H). But this chart merely discloses the Company’s “cash position as of

December 31, 2016.” Compl. Ex. A at 12 (Information Statement). The offer

materials also include an Investor Presentation with a “Finance Update” (Compl.

44

Ex. A at 138 (Annex G-1)), but this, too, is woefully deficient and provides scant

information about the Company’s finances apart from a simplistic chart reflecting

the Company’s “2017 Cash Outlook.” Compl. Ex. A at 142 (Annex G-1). Notably,

the materials provide no disclosure as to how that outlook was generated or whether

it was audited or reviewed by an accountant, which is particularly concerning given

that Theranos has never had a permanent Chief Financial Officer and its Controller

was laid off in early 2017. Nor do the offer materials include any balance sheets,

income statements, or similarly robust financial statements that would help

stockholders assess whether to participate in the exchange. See Nagy v. Bistricer,

770 A.2d 43, 51 (Del. Ch. 2000) (faulting directors for “fail[ing] to provide

[plaintiff] with any material financial information regarding [the target companies]

that would enable [plaintiff] to judge whether the Tentative Merger Consideration

was fair”).

These inadequate disclosures are particularly disturbing given that the Fraud

Action Defendants’ misstatements and omissions concerning the Company’s

financial condition played a critical role in their fraudulent inducement of PFM’s

investment. Specifically, in January 2014, when PFM was evaluating a potential

investment in Theranos, Balwani sent PFM financial results from 2013 and

projections for 2014 and 2015 that dramatically overrepresented the Company’s

actual and projected gross profit (to the tune of $25 million, $130 million, and

45

$980 million in 2013, 2014, and 2015, respectively). The Exchange Offer suggests

no change in this pattern of fraudulent conduct.

Thus, the Theranos Board, led by Holmes, has withheld critical information

concerning the purpose of the Exchange Offer, the extensive evidence against the

Fraud Action Defendants, and the fact that individuals scheduled to be deposed in

that action are among the small group that authorized this Exchange Offer. All of

this information is necessary to evaluate the Exchange Offer. Accordingly, because

the Exchange Offer is coercive and materially misleading, and many of the

approving stockholders are not disinterested, Defendants cannot find solace in the

“cleanse” doctrine described in Corwin and Volcano.

V. The Exchange Offer Will Irreparably Harm Plaintiffs.

Plaintiffs will suffer irreparable harm unless this Court temporarily enjoins

Defendants from closing the Exchange Offer. As an initial matter, it is well settled

in Delaware that “the possibility that structural coercion will taint the tendering

process also gives rise . . . to injury sufficient to support an injunction” or TRO.

Pure Resources, 808 A.2d at 452; see also ODS Tech., L.P. v. Marshall, 832 A.2d

1254, 1263 (Del. Ch. 2003); see also Eisenberg, 537 A.2d at 1063 (enjoining

coercive tender offer).

Here, Defendants’ breaches of fiduciary duty are depriving Plaintiffs of the

opportunity to make a voluntary, uncoerced decision as to whether to tender their

46

shares. As the Court held in Eisenberg, permitting such a coercive offer “to go

forward might forever deprive the tendering shareholders of their right to be treated

fairly. In that event the harm could not easily be undone, and given the nature of the

shareholder interests at stake, damages would not be a meaningful or adequate

remedy. Therefore, the threatened harm is irreparable.” Eisenberg, 537 A.2d at

1062 (enjoining tender offer that threatened to delist—and thus drastically reduce

the value of—untendered shares); see also True North, 1997 WL 33173290, at *2-3

(enjoining allegedly “illegal tender offer” until after preliminary injunction hearing

because the “the Court would have no way . . . of changing back and realigning” the

stockholders’ rights, interests, and incentives “the way they were as of today”).

Moreover, there is a substantial likelihood that PFM will not be able to collect

on a judgment if it prevails in the Fraud Action unless the Exchange Offer is

enjoined—thus making illusory any remedy at law. As a result of the Fraud Action

Defendants’ web of lies, Theranos has no revenue, no products, and no customers.

And Defendants have admitted that Theranos is continuing to spend the money it

received from defrauded stockholders, such as PFM, at a monthly rate of

approximately $20 million. If the Exchange Offer is permitted to proceed, PFM’s

ability to collect on any judgment from Theranos will be further constrained because

it will be behind other preferred stockholders in the queue. PFM will lose its

liquidation preference to the Company’s dwindling assets and be unable to enforce

47

any judgment it obtains—particularly if the Company dissolves or declares

bankruptcy before this Court enters judgment in the Fraud Action. In these

circumstances, once the Exchange Offer is consummated, PFM will in all likelihood

be unable to obtain the relief it seeks in the Fraud Action. If, on the other hand, PFM

signs the Exchange Offer Agreement to retain its present liquidation preference, then

it must dismiss the Fraud Action and forgo the possibility of achieving the relief it

seeks.

Moreover, a long line of cases recognizes that a plaintiff suffers irreparable

harm if it shows that the defendant’s looming insolvency is likely to prevent the

plaintiff from collecting on a judgment. See, e.g., Tanimura & Antle, Inc. v. Packed

Fresh Produce, Inc., 222 F.3d 132, 139 (3d Cir. 2000) (“We conclude that an

adequate remedy at law does not exist, and that injunctive relief to prevent

dissipation of [the] trust assets may issue, when it is shown that the trust is being

depleted and the likelihood is great that there will be no funds available to satisfy a

legal judgment against the delinquent buyer.”); Gimbel v. Signal Cos., Inc., 316 A.2d

599, 603 (Del. Ch. 1974) (enjoining consummation of sale because “when the

plaintiff claims . . . a potential damage in the neighborhood of $300,000,000, it is

doubtful that any damage claim against the directors can reasonably be a meaningful

alternative”).

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The fact that the Exchange Offer Agreement immunizes Defendants from any

liability for their wrongdoing also weighs in favor of finding irreparable harm to

PFM. See Police & Fire Ret. Sys. of the City of Detroit v. Bernal, 2009 WL 1873144,

at * 3 (Del. Ch.) (“[I]njunctive relief may be the only relief reasonably available to

shareholders for certain breaches of fiduciary duty . . . , particularly where the

company has adopted a provision exculpating its directors from personal liability for

monetary damages for breaches of the duty of care.”).

Finally, the fact that this Court would have to unwind the liquidation

preference of participating preferred stockholders—perhaps even after the Company

declares bankruptcy—militates in favor of a finding of irreparable harm. See Police

& Fire Ret. Sys., 2009 WL 1873144, at *2 (“[I]t would be impossible to ‘unscramble

the eggs’ by attempting to unwind the merger once it has been completed.”).

VI. The Balance Of Hardships Favors Plaintiffs.

A balancing of the equities also favors granting Plaintiffs’ motion for a TRO,

as the harm Plaintiffs would suffer from a denial of relief would vastly outweigh any

potential harm to Defendants should such relief be granted. See, e.g., In re Staples,

Inc. S’holders Litig., 792 A.2d 934, 960-61 (Del. Ch. 2001); T. Rowe Price Recovery

Fund, L.P. v. Rubin, 770 A.2d 536, 558-59 (Del. Ch. 2000) (enjoining

implementation of agreements that were an integral part of another company’s plan

to emerge from bankruptcy because, while defendants “are not threatened with any

49

harm by the issuance of the injunction,” plaintiffs, in the absence of a preliminary

injunction, would suffer “substantial, imminent and irreparable harm”).

Here, balancing the hardships favors granting a TRO to prevent Defendants

from consummating the Exchange Offer. If the Exchange Offer is temporarily

enjoined, the potential harm to Defendants is insignificant compared to the harm that

will result to PFM if it loses its liquidation preference and its ability to collect any

judgment obtained in the Fraud Action. See, e.g., Am. Gen. Corp. v. Unitrin, Inc.,

1994 WL 512537, at *6 (Del. Ch.) (granting temporary restraining order because

“the potential injury [defendant] will allegedly suffer lasts only until the preliminary

injunction applications are resolved in a few weeks, while the injury to the Moving

Parties, if no injunction issued, might never be redressed”); Solar Cells, 2002 WL

749163, at *8 (enjoining proposed merger despite defendants’ claims of a forced

sale because “[s]uch a forced sale would adversely affect Solar Cells as well” given

its liquidation position behind defendants). The offer materials do not suggest why,

even if the Exchange Offer does ultimately go forward, it must be now rather than

several months from now. PFM, by contrast, immediately stands to suffer numerous

irreparable injuries from Defendants’ breach of the duty of loyalty and corporate

waste. See Eisenberg, 537 A.2d at 1063 (enjoining tender offer that threatened to

devalue non-tendering stockholders’ shares after balancing the equities).

* * *

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In sum, all relevant factors counsel strongly in favor of temporarily enjoining

consummation of the Exchange Offer.

CONCLUSION

For all of the foregoing reasons, the Court should grant the Motion for a TRO

enjoining Defendants from closing the Exchange Offer set to expire at 5:00 p.m. on

April 14, 2017.

H EYM AN EN ERI O GATTUSO & H I RZEL LLP

/s/ Patricia L. Enerio Kurt M. Heyman (# 3054) Patricia L. Enerio (# 3728)Aaron M. Nelson (# 5941) 300 Delaware Avenue, Suite 200 Wilmington, DE 19801 (302) 472-7300 Attorneys for Plaintiffs

OF COUNSEL:

GIBSON, DUNN & CRUTCHER LLP Reed Brodsky 200 Park Avenue New York, NY 10166 (212) 351-4000

Winston Y. Chan Matthew S. Kahn Aimee M. Halbert Sarah Cunningham 555 Mission Street, Suite 3000 San Francisco, CA 94105 (415) 393-8200

Dated: April 6, 2017