Sylla v. Long CA1/2

Filed 11/18/13 Sylla v. Long CA1/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

JOHN R. SYLLA,
Plaintiff and Appellant,
A135285
v.
P. JAN LONG et al. (San Mateo County
Super. Ct. No. CIV449726)
Defendants and Appellants.

INTRODUCTION
Defendants P. Jan Long and Victor K.L. Huang appeal from a judgment of the San
Mateo County Superior Court in favor of KatanaMe Inc., a Delaware corporation
(KatanaMe), as represented derivatively by plaintiff John Sylla, after a court trial on
Sylla’s shareholder’s derivative claims in connection with the sale of the assets and
intellectual property of KatanaMe to Skipper Wireless, Inc., a Japanese corporation
(Skipper Wireless). The crux of the derivative claim against defendants was that in
February 2005, defendants secretly planned to divert KatanaMe’s assets into a newly
formed corporation, Skipper Wireless, for the purpose of benefitting themselves at the
expense of Sylla and other KatanaMe shareholders. The sale closed and the assets of
KatanaMe were transferred to Skipper Wireless on April 15, 2005, with KatanaMe
shareholders receiving nothing, but director defendants Long and Huang receiving
lucrative compensation plus indemnity from the buyer for alleged breaches of their
fiduciary duties.

1
 The court found defendants breached their fiduciary duties to shareholders of
KatanaMe and entered judgment against defendants Long and Huang, jointly and
severally, in the amount of $2.2 million on the derivative claims prosecuted by Sylla on
behalf of KatanaMe.
Defendants contend the trial court misapplied Delaware laws regarding the
fiduciary duties of disclosure, good faith and loyalty, and erred in refusing to apply the
business judgment rule to defendants’ actions. Specifically, defendants argue: (1) the
court erroneously equated a breach of the duty of disclosure with breaches of the
fiduciary duties of loyalty and good faith; (2) plaintiff failed to prove any false statements
or omissions of material fact; (3) the court’s factual findings did not support its finding a
breach of the duty of loyalty; (4) approval of the asset sale by a majority of KatanaMe’s
disinterested shareholders precluded a claim for breach of the duty of loyalty; (5) the
court applied an incorrect legal standard in finding a breach of the duty of good faith; and
(6) the court’s finding that defendants breached their duty of good faith is unsupported by
substantial evidence. Defendants further contend: (7) the court’s findings regarding
defendants’ destruction of evidence are not supported in the record and are insufficient as
a matter of law; (8) the business judgment rule applies and, even if it did not, defendants
proved the transaction was “entirely fair.” (9) Finally, defendants contend the damage
award was not supported by substantial evidence where the court arbitrarily rejected the
testimony of defendants’ expert and awarded speculative damages.
Plaintiff Sylla appeals from the court’s refusal to award prejudgment interest.
We shall affirm the judgment in its entirety.
FACTS AND PROCEDURAL BACKGROUND
A. Founding of KatanaMe
KatanaMe is a Delaware corporation, founded in February 2002 by Long, Huang,
Ian L. Sayers and Michio Fujimura.1 KatanaMe was founded to develop consumer
broadband wireless technology. The corporation was initially funded through the

1
Neither Sayers nor Fujimura were defendants at the time of trial.

2
purchase of common stock by friends and family of the founders. In 2002, KatanaMe
raised over $1 million from two “seed rounds” of financing. In March 2003, Nintendo
invested $4.5 million in the corporation, receiving 1,666,666 series A preferred shares for
its investment. The Thomas Stewart Family Trust also invested in March 2003 and
Inventech Technology, Ltd. (Inventech) invested in KatanaMe in November 2003. Both
received series A preferred stock. Nintendo was given “board observer rights” in
connection with its investment and Sumitaka (Sam) Matsumoto was named its observer.
Sylla was an investor from the beginning and in March 2003, Sylla became KatanaMe’s
chief operating officer and chief financial officer, as well as a shareholder.
B. Financial Difficulties and the Search for Investors
By late summer of 2003, KatanaMe was facing financial difficulties and the board
of directors approved the indefinite deferral of salaries for its officers, Long, Huang,
Sayers and Sylla, effective September 1, 2003. Sharp Corporation was considering
investing in KatanaMe, provided that the officers would personally guarantee the
investment in the event certain development milestones were not reached. Sylla objected
to the personal guarantees. The relationship between Sylla and Long soured and Sylla
resigned from KatanaMe on September 23, 2003.
In late 2003, KatanaMe sought additional funding from Innotech Corp., IXT Corp.
and Inventech. The efforts were unsuccessful. Nintendo also declined to make an
additional investment in the corporation. However, Long was able to negotiate a series of
payments from Nintendo starting with an immediate payment of $189,300 and three
subsequent payments of $209,417, if certain milestones were met.
On January 15, 2004, Sylla filed a breach of employment contract action against
KatanaMe. (Sylla v. KatanaMe, Super. Ct. San Mateo County (2004) Civ. No. 436822.)
He voluntarily dismissed that action based upon a tolling agreement proposed by
KatanaMe.
C. ATA proposals
In March and April 2004, discussions occurred between KatanaMe representatives
and ATA Ventures (ATA) regarding the latter’s investing in KatanaMe. ATA was

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formed in 2003, and first funded in 2004. It was structured as a partnership with three
managing directors or partners: Hatch Graham, Fujimara (a KatanaMe director and
shareholder at the time) and Peter Thomas (a KatanaMe preferred shareholder through
the Thomas-Stewart Family Trust). On April 20, 2004, ATA submitted a nonbinding
“term sheet” proposing a $12 million investment in the corporation by ATA and two
other as yet unidentified venture capital investors, who together would receive series
B stock amounting to a 42 percent ownership interest in KatanaMe. Under the term
sheet, ATA would invest $5 million and two other investors would provide an additional
$7 million, provided Long resigned as CEO, although he would continue with a lower
title to receive the same salary and benefits. After discussing the matter with both ATA
and Nintendo, which had to approve the deal, the board of directors (at that time
consisting of Long, Sayers, and Fujimura) unanimously approved the term sheet.
On April 26, 2004, at the urging of Fujimura, KatanaMe engineers met secretly
with Graham, who was leading ATA’s due diligence effort, to discuss the actual status of
KatanaMe’s technology. KatanaMe’s engineers expressed concerns that Long and
Huang were misrepresenting the state of KatanaMe’s technology. Nevertheless, the
engineers believed KatanaMe had “valuable technology” that could be fixed by changing
radio frequencies. Huang testified the technology was commercially viable, met
specifications, and that the corporation needed the time and resources to complete
development. He believed that KatanaMe would have made a viable product if it had
adequate funding.
Between May 20 and 24, 2004, ATA withdrew its $12 million term sheet. On
May 26, 2004, ATA presented a term sheet that reduced its proposed investment to
$3.5 million, with no other investors, in exchange for the purchase of series B preferred
stock, giving ATA control of 51 percent of KatanaMe. Under the $3.5 million term
sheet, the founders’ ownership percentage would be reduced from 42.8 percent to
14.68 percent. This term sheet explicitly required Long to step down as a director and
officer, with a severance package of no more than six months salary and benefits.
Graham would become a director and the interim CEO. On May 28, 2004, Nintendo

4
executed and returned a written approval for the $3.5 million term sheet. On May 31, the
KatanaMe board, consisting of Long, Sayers, and Fujimura, unanimously rejected ATA’s
$3.5 million proposal. Huang was also present. In an email to Long, Huang
characterized the $3.5 million as an “idiotic valuation.” Long testified the board rejected
the offer because they did not trust Graham and that the proposal was not a serious
valuation of KatanaMe. Fujimura testified he, the other board members, and Huang all
believed the price was “too low” and KatanaMe had a higher value.
Neither the defendants nor KatanaMe formally told ATA that the $3.5 million
proposal was rejected or the reasons why. An email from Graham to Long indicated
Fujimura had “passed along” to Graham that the term sheet had been rejected. However,
further inquiry by Graham on behalf of ATA asking why the proposal had been rejected
and inviting further discussion of the proposal was ignored. Despite ATA’s repeated
efforts to resume negotiations with KatanaMe, and ATA’s continued interest in investing
in KatanaMe, defendants refused to communicate with Graham. On June 2, 2004,
Graham wrote Long and Sayers expressing ATA’s continued interest in investing in
KatanaMe and in negotiating an acceptable price and terms. Long refused to speak with
Graham. When Long approached ATA partner Thomas, Thomas instructed him to
discuss his concerns with Graham. Graham sent another email seeking to meet to discuss
any issues with the $3.5 million term sheet. Graham never received any further contact
from Long.
D. Continued Difficulties, Board Changes, Further Search For Investment,
KatanaMe Ceases Operations
On June 6, 2004, Fujimura resigned from the KatanaMe board of directors and
was replaced by Huang. In July 2004, Nintendo informed KatanaMe that it was not
interested in proceeding further with development of the company’s technology
prototype, known as “KitKat.” Consequently, KatanaMe shut down its operations and
terminated all of its paid employees. Sayers resigned from the board in late July and
moved to England, leaving Long and Huang as the only board members. In July and
August 2004, KatanaMe offered to sell Nintendo half ownership in KatanaMe patents for

5
$4.5 million and to use the money to finish a prototype as well as continue to prosecute
patents it had filed, on condition that if KatanaMe failed to develop the prototype,
Nintendo would become full owner of KatanaMe’s technology. In August 2004, Long,
Huang and Sayers offered all of their founders’ common stock to Nintendo for Nintendo
to take over control and development of the prototype product. After conducting due
diligence review, Nintendo informed Long in early October 2004, that it was rejecting the
opportunity. Long and Huang continued to seek investment from numerous other
sources, including Microsoft, Netcore Solutions, Venture Tech Alliance, IGlobe Partners,
Walden International, TIF Ventures, Sycamore Ventures, Fujitsu and Intel. No one was
interested.
KatanaMe was being pressured by creditors during this time. It had received a
demand letter from AvNet Inc. in August 2004, and was sued by creditor Agilent
Financial Services for approximately $185,000 in September. Granite Insurance
contacted KatanaMe in November 2004, seeking payment of approximately $45,000. To
have its attorneys (Orrick, Harrington and Sutcliffe, LLP, hereafter Orrick) continue to
represent it, in November 2004, KatanaMe executed a secured promissory note
agreement with Orrick in the amount of $279,980 relating to unpaid fees to Orrick dating
back to February 2004. In early 2005, KatanaMe also needed to engage its outside patent
counsel to prosecute several of its pending patent applications, to prevent them from
being rejected.
E. Sale of Assets to Skipper Wireless for $800,000
Long approached IT-Farm, a Japanese company. It was proposed that IT-Farm
buy KatanaMe’s intellectual property and form a new company, eventually named
Skipper Wireless, that would develop KatanaMe’s intellectual property. Long requested
that IT-Farm loan KatanaMe $32,000 in advance of the new company’s formation for the
purpose of providing “good faith” payments to Avnet and Agilent to keep them from
further prosecuting their claims and to provide its patent attorneys sufficient funds to
complete KatanaMe’s patent applications.

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 Long and Huang left it to Sam Matsumoto, a representative of Nintendo, and a
founding member of Skipper Wireless, to communicate with IT-Farm regarding the deal
because Long did not speak or read Japanese. Matsumoto was never a director, officer,
or shareholder of KatanaMe. On February 4, 2005, Long emailed IT-Farm regarding
structuring its payment of the deferred compensation to him, Huang and Sayers, as part of
the KatanaMe technology sale, stating in relevant part: “Also, I have previously
discussed with Sam it is preferable not to include our (Ian, Vic, Jan) executive accrued
salaries as part of this ‘IPR sale.’ There would be many additional tax liabilities as well
as other complications in paying off executive salary as part of the IPR sale. It is best to
simply eliminate KatanaMe’s creditor debt completely, not including the back salary for
Vic, Ian, and myself. If possible, we would like to ask instead to arrange for this
backsalary [sic] to be something treated as a split between a ‘signing bonus’ for Ian, Vic,
and myself, as well as stock for us in the new company. We want to be clear that we will
accept any suggestion/solution you and Sam may have on this, and are not making any
demands whatsoever.”
As Long outlined on February 9, 2005, in a detailed “tasks” list to Matsumoto and
Mori Tesuya of Mitsubishi/Diamond Capital, regarding formation of the new company,
the plan was to: (i) secure the advance of $32,000 by February 11; (ii) form Skipper
Wireless on February 18; (iii) confirm creditor list/liabilities on February 11; (iv) confirm
Mitsubishi/Diamond Capital commitment to the new company on February 28; (v) settle
all creditors on February 28; (vi) infuse new capital into Skipper Wireless on
February 28; (vii) execute the intellectual property purchase agreement on February 28;
and (viii) file Chapter 7 bankruptcy for KatanaMe. According to Long, IT-Farm would
only agree to pay off outside creditors (not including back pay owed to KatanaMe
management), and nothing more, and $800,000 was the amount owed, so that was the
purchase price. Long and Huang wanted to avoid bankruptcy before the asset sale in
order to retain control of the technology. There was no evidence that defendants
evaluated whether bankruptcy would bring a higher price or attempted to see if any other
potential buyers would offer a higher price for KatanaMe’s assets or for the company

7
itself. Defendants did not seek any appraisal of KatanaMe assets. Huang testified that,
because they were unable to get other companies to invest more money into the company,
“$800,000 was the best deal we could get” for the intellectual property assets. Huang
believed it was a fair offer because it was the only offer.
On February 18, 2005, Long sent KatanaMe shareholders a “Stockholder Update.”
The update represented that: (i) The company was in terrible financial shape and had
closed down all operations and all product development back in mid-2004, because of
lack of additional capital. Long stated, “In order to pay off its debt, the Company is
currently seeking buyers for its assets, which consist mainly of the intellectual property
rights associated with the Company’s technology.” (ii) KatanaMe was working to “sell
the Company’s assets for the best deal the Company can negotiate.” (iii) KatanaMe
could not raise any money. Defendants did not disclose their role in setting up Skipper
Wireless, the asset purchaser.
Also on February 18, 2005, KatanaMe entered into a subordinated promissory
note agreement with IT-Farm pursuant to which IT-Farm paid KatanaMe $32,000, which
was used to pay for the prosecution of KatanaMe patents and to temporarily keep
creditors from further prosecution of their claims.
As part of the sale of KatanaMe’s assets, IT-Farm agreed to indemnify KatanaMe
and its affiliates, officers, directors and employees from losses in connection with any
claims related to the business, including claims by any current or former KatanaMe
employees. The indemnification was subject to an $80,000 holdback. On or about
March 18, 2005, KatanaMe’s board (i.e., Long and Huang) voted to approve a sale of
substantially all of the company’s assets to Skipper Wireless. On or about March 21,
Skipper Wireless extended “at-will” offers of employment to Long, Huang and Sayers.
Long’s offer included $130,000 annual salary,2 plus benefits, six months of pre-vested
stock options, plus additional options accruing at 1/48 of the total shares per month.
Huang also received an offer of employment at an annual salary of $130,000, plus
2
According to the offer, Long’s salary was to be increased to $180,000 after
completion of financing anticipated for September 30, 2005.

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benefits and potential bonuses and possible stock options based on development
milestones. As part of the offers, Long was offered the title of chief operating officer of
Skipper Wireless USA (a subsidiary of Skipper Wireless, established after sale of the
assets and referred to as Skipper Labs or Skipper California), Huang was offered the title
of senior vice president (SVP) of engineering of Skipper Labs, and Sayers was offered
the title of SVP of systems of the new company.3 On or about March 23, 2005, Long,
Huang, and Sayers accepted the at-will offers of employment extended to them by
Skipper Wireless. The prospective employment of Long, Huang, and Sayers offered by
Skipper Wireless with Skipper Labs was disclosed to the full KatanaMe board, which
consisted of Long and Huang.
On March 31, 2005, Long sent a letter to KatanaMe’s stockholders describing the
company’s cessation of engineering development, its lack of success in locating either
funding or buyers, and the offer from Skipper Wireless to purchase the company’s
intellectual property assets for $800,000—which would pay off most of KatanaMe’s
largest creditors, but not all. The March 31 letter was accompanied by a seven-page
information statement that summarized the terms of the proposed Asset Purchase
Agreement (APA), attached a copy of the APA, and requested that KatanaMe’s
stockholders consent to Long, Huang and Sayers being entitled to receive stock options
from Skipper Wireless (collectively the “March package”). On April 1, 2005, Sylla
wrote KatanaMe describing what he perceived to be deficiencies in the proposed APA.
On April 6, 2005, KatanaMe became aware that Nintendo, the holder of 84.47 percent of
KatanaMe’s preferred stock, and 15 percent of the voting stock, wanted changes to the
APA.
By April 6, 2005, KatanaMe had received shareholder consents from the majority
of the shareholders to the proposed asset sale. Between April 6 and 12, 2005, KatanaMe
revised the APA and finalized an Amended and Restated Asset Purchase Agreement

3
Long testified he was employed by Skipper Labs as senior vice president of
operations and marketing at a salary of $130,000, plus health benefits and shares in
Skipper Wireless, the parent company.

9
(Amended APA) and circulated an email to Nintendo and all shareholders who had
consented to the March package, explaining the changes to the terms of the proposed
asset sale, attaching the Amended APA, and another round of blank shareholder consents.
On April 13, 2005, Long and Huang as directors approved the Amended APA proposal.
By April 14, KatanaMe had received written consents from KatanaMe’s outstanding and
issued common and preferred stockholders. According to Long, the asset sale received
shareholder approval of 74 percent. On April 15, 2005, the date the sale closed,
KatanaMe circulated the Amended APA proposal to the remaining KatanaMe
shareholders who had not voted in favor of the initial APA, including Sylla, Peter
Thornycroft, Hopkins Guy, Orrick Investments 2002, LLC, the Thomas-Stewart Family
Trust and Inventech. On April 15, KatanaMe and Skipper Wireless executed the
Amended APA and, on the same day effected the closing of the sale of KatanaMe’s
assets to Skipper Wireless.
At the request of Skipper Wireless’s chairman, Long met with Mori of Mitsubishi/
Diamond Capital “several months” before its March 14, 2005 and April 14, 2005
investments in Skipper Wireless. According to Skipper Wireless’s capitalization table,
Mitsubishi/Diamond Capital invested a combined total of $1 million in Skipper Wireless
before the April 15, 2005 asset sale.
From May 2005 to December 2007, Skipper Wireless invested approximately
$9 million in developing the technology acquired from KatanaMe. Despite Skipper
Wireless’s investments and Skipper Labs’s expenditure of time and resources, Skipper
Wireless failed to commercialize any product, Skipper Labs ceased operations in March
2008, and both Skipper Wireless and Skipper Labs filed for bankruptcy protection. On
August 7, 2009, Skipper Wireless shareholders approved the sale of all assets (including
what had been the former KatanaMe technology) to Tadaaka Chigusa for $36,000.
(Chigusa, though his company Inventech, had controlled 12.96 percent of KatanaMe’s
series A preferred stock). According to Sylla, KatanaMe had eight patents issued at the
time of trial, all of which are assigned to and now belong to Chigusa. Huang testified

10
that three patents were issued in late 2009 or early 2010 and are owned by Chigusa,
although Huang is listed on at least one.
E. This Lawsuit
On September 20, 2005, Sylla filed this derivative action.4 On May 24, 2006, he
filed his second amended complaint.
From May 9 through 20, 2011, the court held a bench trial on the derivative claims
against Long and Huang. The court issued a 56-page final statement of decision on
January 9, 2012. On February 14, the court granted Sylla’s motion to sever the derivative
claims and for entry of judgment in favor of Sylla on the derivative claim. On March 16,
the court denied defendants’ new trial motion. On March 22, the trial court entered
judgment against defendants in the amount of $2.2 million, and found Sylla entitled to his
statutory costs. The court retained jurisdiction over future motions related to attorney
fees and nonstatutory costs. In its statement of decision, the court denied Sylla’s motion
for prejudgment interest. On April 23, 2012, the court denied defendants’ motion to
vacate the judgment. This timely appeal by defendants and cross-appeal by Sylla
followed.
1. Trial court’s findings on liability. In its final statement of decision, the court
observed that Sylla had asserted the same acts and transactions constituted a breach of the
duty of loyalty, breach of the duty of good faith, and breach of the duty of due care by
defendants Long and Huang. The court concluded that the claim of the breach of the
duty of due care was moot as plaintiff sought only monetary damages and the KatanaMe
articles of incorporation included a provision eliminating the personal liability of a
director to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director pursuant to title 8 of the Delaware Code [Corporations],

4
Sylla also re-filed his individual employment claims as part of that complaint.
The court bifurcated the derivative claims at issue here and entered a separate judgment
on them. Respondent relates that the trial court appointed a receiver for KatanaMe and
the employment claims were settled with court approval.

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section 102, subdivision (b)(7). 5 That provision specifically excludes from its coverage
breaches of the director’s duty of loyalty and for acts or omissions not in good faith.6
The trial court found Sylla had proven by a preponderance of the evidence that the
director defendants Huang and Long acted in breach of their fiduciary duties of loyalty
and good faith such that the business judgment rule presumption had been rebutted and
the burden shifted to defendants to demonstrate the “entire fairness” of the asset sale
transaction.
The court found Huang and Long breached their fiduciary duty of disclosure to the
minority shareholders of KatanaMe and that “[t]his constitute[ed] a violation of the
fiduciary duty of loyalty and/or good faith,” sufficient to overcome the business judgment
rule presumption and to shift the burden to defendants to prove entire fairness. The court
further found that even if full disclosure of all material facts had been timely and properly
disclosed, “the transaction would still have gone forward, because the controlling and
self-interested shareholders, namely Huang, Long, and Sayers, along with controlling
preferred stock holder Nintendo, all of whom already agreed to the transaction
(regardless of the disclosures), were sufficient shareholdings to provide a majority vote in
favor of the sale of KatanaMe’s assets—a majority of the total shareholders, a majority of
the common stock holders, and a majority of the preferred shareholders.” (Italics added.)

5
All statutory references are to title 8 of the Delaware Code, unless otherwise
indicated.
6
Section 102, subdivision (b)(7), provides in relevant part:
“ (b) In addition to the matters required to be set forth in the certificate of
incorporation by subsection (a) of this section, the certificate of incorporation may also
contain any or all of the following matters: [¶] . . . [¶]
“(7) A provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the liability of a
director: (i) For any breach of the director’s duty of loyalty to the corporation or its
stockholders; (ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any
transaction from which the director derived an improper personal benefit. . . .” (Del.
Code, tit. 8, § 102.)

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However, the court also determined that defendants were not shielded from liability in
this case by the vote of a majority of the disinterested shareholders, as the asset sale was
required to be approved or ratified by a shareholders’ vote and so did not come within the
safe harbor protection of the doctrine. Moreover, the vote was not an informed one
because of the lack of disclosure of material facts and because individual minority
shareholders were given additional information on the transaction orally by Long, which
information was not given to other shareholders—promises of potential benefits in the
future if they would agree to the transaction.
The court found Huang and Long “failed to prove by a preponderance of the
evidence the asset sale transaction, whereby nearly all assets of KatanaMe, including all
of its intellectual property and pending patents, were sold to Skipper Wireless Inc. for
$800,000, was ‘entirely fair’ to the corporation and its shareholders.”
DISCUSSION
I. Fiduciary Duties
Defendants contend the trial court misapplied Delaware’s duty of disclosure law to
find breach of both the duty of loyalty and the duty of good faith. Consequently,
defendants argue, the court erred in refusing to apply the business judgment rule and in
shifting the burden to defendants to show the asset sale was entirely fair.
A. Standards of Review
Generally, appellate courts independently review questions of law and apply the
substantial evidence standard to a superior court’s findings of fact. (See Ghirardo v.
Antonioli (1994) 8 Cal.4th 791, 801 [questions of law are subject to independent review];
Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429 [substantial evidence rule].)
The substantial evidence standard of review has been described by our Supreme Court as
follows: “Where findings of fact are challenged on a civil appeal, we are bound by the
‘elementary, but often overlooked principle of law, that . . . the power of an appellate
court begins and ends with a determination as to whether there is any substantial
evidence, contradicted or uncontradicted,’ to support the findings below. [Citation.] We
must therefore view the evidence in the light most favorable to the prevailing party,

13
giving it the benefit of every reasonable inference and resolving all conflicts in its favor
in accordance with the standard of review so long adhered to by this court.” (Jessup
Farms v. Baldwin (1983) 33 Cal.3d 639, 660.) We do not reweigh the evidence or
evaluate the credibility of witnesses, but rather we defer to the trier of fact. (Lenk v.
Total–Western, Inc. (2001) 89 Cal.App.4th 959, 968.)
B. Fiduciary Duties
The business judgment rule “presumes that ‘in making a business decision the
directors of a corporation acted on an informed basis, in good faith, and in the honest
belief that the action taken was in the best interests of the company.’ [Citation.] Those
presumptions can be rebutted if the plaintiff shows that the directors beached their
fiduciary duty of care or of loyalty or acted in bad faith. If that is shown, the burden then
shifts to the director defendants to demonstrate that the challenged act or transaction was
entirely fair to the corporation and its shareholders.” (In re Walt Disney Co. Derivative
Litigation (Del. 2006) 906 A2d 27, 52 (Disney).)
1. Duty of loyalty. As explained in Balotti and Finkelstein’s “Delaware Law of
Corporations and Business Organizations” (Aspen 2013) section 4.16 (Balotti and
Finkelstein): “Directors owe a duty of loyalty to the corporation, and this duty is a
companion obligation to the duty of care. [Citation.] These duties are based on the fact
that the directors are duty-bound to the true owners of the corporation, the stockholders.
[Citation.] . . . The duty of loyalty both forbids directors to ‘stand on both sides’ of a
transaction and prohibits them from deriving ‘any personal benefit through self-dealing.’
[Citation.] In effect, it mandates that a director not consider or represent interests other
than the best interests of the corporation and its stockholders in making a business
decision. [Citation.] The duty of loyalty also ‘encompasses cases where the fiduciary
fails to act in good faith,’ including the duty of oversight. [Citation.] A court may
nevertheless find a duty-of-loyalty violation even where the fiduciary subjectively acted
in good faith. [Citation.]” (Fns. omitted.)
Where questions regarding the duty of loyalty arise, “[t]he procedural
considerations that often determine these substantive issues are highlighted by the

14
following inquiries: ‘Was adequate disclosure made to the decision maker? Did the
alleged conflict of interest transaction receive independent scrutiny? Who has the burden
of proving that the duty of loyalty has been breached? Is the transaction fair?
[Citation.]” (Balotti and Finkelstein, supra, § 4.16.) “While the general concept
underlying the duty of loyalty—that a director refrain from self-dealing—is simple,
application of the loyalty principle can be difficult, especially in complex transactions
involving corporate control. In such circumstances, this application can become a highly
fact-intensive exercise.” (Balotti and Finkelstein, supra, § 416, italics added, fns.
omitted.)
“When directors do not act ‘fairly’ in structuring a transaction, they breach their
duty of loyalty, and the result may be either an injunction or damages. In Strassburger
[v. Earley (Del. Ch. 2000) 752 A.2d 557], for example, the Court of Chancery held that
directors may be held personally liable for breach of their duty of loyalty even if they do
not personally benefit from the breach. [(Id. at p. 581.)]” (Balotti and Finkelstein, supra,
§ 4.16, fns. omitted.)
2. Duty of good faith. The duty to act in good faith is a subsidiary element of the
duty of loyalty and “a failure to act in good faith is not conduct that results, ipso facto, in
the direct imposition of fiduciary liability. [Citation.] The failure to act in good faith
may result in liability because the requirement to act in good faith ‘is a subsidiary
element[,]’ i.e., a condition, ‘of the fundamental duty of loyalty.’ [Citation.]” (Stone ex
rel. AmSouth Bancorporation v. Ritter (Del. 2006) 911 A.2d 362, 369-370, fns. omitted
(Stone); see Balotti and Finkelstein, supra, § 3:2, fns. omitted.) Breach of the duty of
good faith “cannot result in direct liability, but instead may serve to shift the presumption
of the business judgment rule or to support a claim for breach of the duty of loyalty.”
(Balotti and Finkelstein, § 4.17, fns. omitted.)
Subjective bad faith is not necessary to breach the duty of good faith, although
they may overlap in some cases. Breach of the duty of good faith lies somewhere
between lack of due care or gross negligence and subjective bad faith. (Disney, supra,
906 A.2d at p. 66.) Intentional dereliction of duty or conscious disregard for one’s

15
responsibilities is “properly treated as a non-exculpable, nonindemnifiable violation of
the fiduciary duty to act in good faith.” (Ibid.)
“ ‘A failure to act in good faith may be shown, for instance, where the fiduciary
intentionally acts with a purpose other than that of advancing the best interests of the
corporation, where the fiduciary acts with the intent to violate applicable positive law, or
where the fiduciary intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties. There may be other examples of bad
faith yet to be proven or alleged, but these three are the most salient.’ [Citation.]”
(Stone, supra, 911 A.2d at p. 369, quoting Disney, supra, 906 A.2d at p. 67.)7
3. Duty of disclosure. The duty of disclosure is not a separate fiduciary duty, but
stems from the fiduciary duties of care and loyalty. (Balotti and Finkelstein, supra,
§ 4.18.) “Disclosure violations may, but do not always, involve violations of the duty of
loyalty. A decision violates only the duty of care when the misstatement or omission was
made as a result of a director’s erroneous judgment with regard to the proper scope and
content of disclosure, but was nevertheless made in good faith. Conversely, where there
is reason to believe that the board lacked good faith in approving a disclosure, the
violation implicates the duty of loyalty.” (In re Tyson Foods, Inc. Consol. Shareholder
Litig. (Del.Ch. 2007) 919 A.2d 563, 597-598; Balotti and Finkelstein, § 4.18, fns.
omitted.)

7
“This view of a failure to act in good faith results in two additional doctrinal
consequences. First, although good faith may be described colloquially as part of a
‘triad’ of fiduciary duties that includes the duties of care and loyalty [citation], the
obligation to act in good faith does not establish an independent fiduciary duty that stands
on the same footing as the duties of care and loyalty. Only the latter two duties, where
violated, may directly result in liability, whereas a failure to act in good faith may do so,
but indirectly. The second doctrinal consequence is that the fiduciary duty of loyalty is
not limited to cases involving a financial or other cognizable fiduciary conflict of interest.
It also encompasses cases where the fiduciary fails to act in good faith. As the Court of
Chancery aptly put it in Guttman [v. Huang (Del.Ch. 2003)] 823 A.2d 492, 506, fn. 34],
‘[a] director cannot act loyally towards the corporation unless she acts in the good faith
belief that her actions are in the corporation’s best interest.’ [Citation.]” (Stone, supra,
911 A.2d at pp. 369-370, fns. omitted.)

16
 “It is well-settled law that ‘directors of Delaware corporations [have] a fiduciary
duty to disclose fully and fairly all material information within the board’s control when
it seeks shareholder action.’ [Citation.] ” (Gantler v. Stephens (Del. 2009) 965 A.2d
695, 710, quoting Stroud v. Grace (Del. 1992) 606 A.2d 75, 84, fns. omitted.) “That duty
‘attaches to proxy statements and any other disclosures in contemplation of stockholder
action.’ [Citations.]” (Gantler v. Stephens, at p. 710, fn. omitted.) “Directors are
required to provide shareholders with all information that is material to the action being
requested and to provide a balanced, truthful account of all matters disclosed in the
communications with shareholders.” (Malone v. Brincat (Del. 1998) 722 A.2d 5, 12.)
“An omitted fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote. . . . It does not require
proof of a substantial likelihood that disclosure of the omitted fact would have caused a
reasonable investor to change his vote. What the standard does contemplate is a showing
of a substantial likelihood that, under all the circumstances, the omitted fact would have
assumed actual significance in the deliberations of the reasonable shareholder. Put
another way, there must be a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having significantly altered the
‘total mix’ of information made available.” (Arnold v. Society for Savings Bancorp, Inc.
(Del. 1994) 650 A.2d 1270, bolding omitted, italics added (Arnold); see e.g., Gantler v.
Stephens, supra, 965 A.2d at p. 710.)
II. Breach of the Duty of Disclosure
1. Breach of the duty of disclosure implicates the duty of loyalty here. The trial
court recognized that “[a]s a corollary to the duty of loyalty, the Delaware courts hold
that it includes a duty of disclosure. . . . [T]he failure of the Director Defendants to meet
their duty of disclosure bears on the issue of whether they acted in accordance with their
fiduciary duty of loyalty to the corporation, and specifically whether they obtained a fair
price for the sale of substantially all of the corporation’s assets.”
In arguing that the court misapplied Delaware’s duty of disclosure law, defendants
first contend a breach of the duty of disclosure is not a breach of the duty of loyalty and

17
that a breach of good faith must still be proven. As they do throughout this appeal,
defendants attempt to isolate each particular dereliction of duty by Long and Huang and
contend it is not sufficient, while ignoring the whole complex pattern of behavior that the
court found in this case amounted to breach of the duties of good faith and loyalty.
“The ‘duty of disclosure is not an independent duty, but derives from the duties of
care and loyalty.’ [Citation.] The duty of disclosure arises because of ‘the application in
a specific context of the board’s fiduciary duties . . . .’ [Citation.] Its scope and
requirements depend on context; the duty ‘does not exist in a vacuum.’ [Citation.] When
confronting a disclosure claim, a court therefore must engage in a contextual specific
analysis to determine the source of the duty, its requirements, and any remedies for
breach. [Citation.]” (In re Wayport, Inc. Litigation (Del. Ch., May 1, 2013) ____A3d
____, 2013 WL 5345477, *14.)
Defendants rely on Arnold, supra, 650 A.2d 1270 and Zirn v. VLI Corp (Del.
1996) 681 A.2d 1050 (Zirn) for the proposition that a breach of the duty of disclosure
does not amount to a breach of the duty of loyalty. Neither case assists them.
Arnold, supra, 650 A.2d 1270, held a violation of the duty of disclosure does not
necessarily amount to a breach of the duty of loyalty. (Cinerama, Inc. v. Technicolor,
Inc. (Del. 1995) 663 A.2d 1156, 1163, fn. 9 (Cinerama).) The Arnold court concluded
that the “individual defendants did not violate the duty of loyalty under the facts of this
case” (Arnold, at pp. 1287-1288) and that “on this record, the single disclosure violation
which we have found was consistent only with a good faith omission.” (Id. at p. 1288,
fn. 36.) That a violation of the duty of disclosure does not necessarily amount to a breach
of the duty of loyalty does not mean that such violation cannot support a finding of
breach of the duty of loyalty where circumstances warrant.
Zirn, supra, 681 A.2d 1050, held it materially misleading to advise stockholders in
a tender offer transaction that patent counsel had stated there was a significant possibility
the patent office would not reinstate a lapsed patent on a critical product, while not
informing them that patent counsel had also stated ultimate success was “likely.” The
court concluded from the record that the statement was made in good faith. (Id. at

18
p. 1053.) According to the court: “The record reveals that any misstatements or
omissions that occurred were made in good faith. The VLI directors lacked any
pecuniary motive to mislead the VLI stockholders intentionally and no other plausible
motive for deceiving the stockholders has been advanced. A good faith erroneous
judgment as to the proper scope or content of required disclosure implicates the duty of
care rather than the duty of loyalty. [Citation.] Thus, the disclosure violations at issue
here fall within the ambit of the protection of section 102(b)(7).” (Id. at pp. 1061-1062,
fn. omitted, citing Arnold, supra, 650 A.2d at pp. 1287-1288 and fn. 36.)
In contrast, the trial court’s factual findings in the instant case make it clear the
court found not a single, material misstatement made in good faith, but numerous
material misstatements and nondisclosures made by defendant board members in
connection with the sale of KatanaMe’s assets to Skipper Wireless.
The court found the February 18, 2005 “Stockholder Update” to KatanaMe
shareholders was materially false in numerous respects. Defendants were not “currently
seeking buyers” for the corporate assets. As of that date, Long and Huang had done
nothing to find buyers for the assets, but had already worked out an arrangement behind
the scenes to sell all the assets to IT-Farm or a new company to be funded and created by
IT-Farm for the price of KatanaMe’s existing debt to outside creditors (including IT-
Farm and including its lawyers at Orrick who were putting together the deal).
The representation that KatanaMe was working to “sell the Company’s assets for
the best deal the Company can negotiate,” was also materially false. “[T]he only
directors of KatanaMe[, Long and Huang,] were not involved in the negotiation of the
price or terms for sale of assets. Defendants presented no evidence at trial that they
worked to negotiate the best possible price for [KatanaMe’s] intellectual property and
other assets—rather, the evidence is that there were no arms’ length negotiations on
price.”
The court further found the March 2005 shareholder information statement
recommending that stockholders approve the APA and the sale of corporate assets,
“consent” to Long, Huang, and Sayers’ receiving stock options from buyer Skipper

19
Wireless, and waive the required notice period for preferred shareholders, was materially
false and misleading. It failed to disclose that Long and Huang already knew and
planned, with the IT-Farm principals, that KatanaMe would file for bankruptcy after the
asset sale in order to wipe out the stockholdings of the noncontrolling shareholders. It
failed to disclose that defendants had already accepted employment with Skipper. It
failed to disclose that defendants had no factual or reasonable basis to believe the asset
sale as proposed “ ‘provides consideration representing a just, fair and reasonable price
for the security holders of KatanaMe,’ ” especially as defendants had taken no action to
further negotiate with ATA, to obtain an independent valuation of the company’s assets,
to solicit purchase of the company itself, to find other buyers, to seek competitive bids for
the sale of company assets, or to personally participate in the negotiation of the terms of
sale to IT-Farm/Skipper Wireless, but rather, had delegated that duty to Matsumoto.
The shareholder information statement also stated that in addition to other
requirements, approval by a majority of disinterested shareholders was required for the
asset sale to be consummated. This was materially false. Under section 271,
subdivision (a), an affirmative vote of a majority of the common shareholders was
required and pursuant to the amended articles of incorporation of KatanaMe, a vote of the
holders of a majority of the Series A preferred shares was also required to approve the
sale of assets. The court found that the disinterested shareholder provision was only put
into the information statement for the benefit of the director defendants, to give them the
protection of Delaware law providing that ratification of a board of director’s decision by
a majority of disinterested shareholders may act as a safe harbor in situations where
directors’ conflicts of interest are at issue, such that the business judgment rule
presumptions would still apply.
The court also found Long’s March 31, 2005 personal cover letter to KatanaMe
shareholders was materially false and misleading, in that: he never disclosed that he had
already accepted employment with Skipper on March 23; he was to officially start
working for Skipper as of April 4, 2005; he had an agreement to be chief operating
officer of Skipper operations in the United States; he was receiving an initial salary of

20
$130,000, plus potential bonuses and stock options, including already having received six
months pre-vesting in options for Skipper common stock. The letter also falsely
represented that efforts had been made since June 2004 to find buyers for KatanaMe,
where in fact there were no such efforts. On the contrary, the board’s efforts were toward
finding additional investment and funding only. Further, shareholders were not informed
of the lack of true negotiation of the asset sale price.
The revised, corrected and amended letter (not correcting the foregoing material
false statements) and Amended APA was sent only to those shareholders who had
already given their consent to the transaction, except for Sylla and Nintendo, who had
demanded changes. This information was not disseminated to the other minority
shareholders until after a majority of shareholders had already voted to approve the asset
sale, on the day the sale closed. The court found defendants provided no reasonable
explanation why all shareholders did not receive all of the communications and
information at the same time.
Also not disclosed to KatanaMe shareholders was information that on April 13,
2005, Long, Huang, Sayers and others attended an “all hands” meeting of Skipper
Wireless, where it was announced that Long would be senior vice president of operations
for Skipper Labs and Huang would be senior vice president of engineering for Skipper
Labs and that the goal was to complete the KitKat prototype by November 7, 2005, or
that Long had made a presentation to Diamond Capital/Mitsubishi some months before
April 15th, resulting in the latter’s commitment to invest in Skipper.
The court could well determine on this record, as it did, that these numerous
material misstatements and failures to disclose by defendants constituted both a breach of
the duty of loyalty and a breach of the duty of good faith.
2. Misstatements and omissions. Defendants next contend as a matter of law that
they made no false statements or omissions of material facts.
Defendants first maintain the court’s finding that the statements KatanaMe was
“currently seeking buyers for its assets” and that defendants were working “to sell the
Company’s assets for the best deal the Company can negotiate” were not false, because

21
KatanaMe had offered to sell Nintendo half ownership in its patents for $4.5 million,
defendants had offered to sell Nintendo a controlling share of KatanaMe, and defendants
had made numerous efforts to find investors.
Substantial evidence supports the findings of the court that such statements were
materially false, as the record supports the court’s findings that Huang and Long did not
work to find buyers for the company itself, that is, an acquisition of KatanaMe by
purchase of all outstanding stock. As the court observed, such a transaction potentially
would have provided compensation to all KatanaMe shareholders, whether cash or
exchange of stock, plus given the KatanaMe shareholders their statutory rights to an
appraisal if they were unhappy with the purchase price. Instead, defendants continued to
pursue others to invest in the corporation. As the court observed, these are not the same
thing. Substantial evidence also supports the court’s finding that Huang and Long did not
seek to find a buyer for the KatanaMe assets, particularly the intellectual property and
technology. Indeed, as late as November 2004, defendant “Huang told Intel ‘we are not
selling our IP.’ [Citation.]”
Substantial evidence also supports the court’s finding that assertions by Long and
Huang that they were working to secure the “best deal the Company can negotiate” for
sale of KatanaMe assets had “no factual foundation, because neither one of them was
involved at all in the negotiation of price.” (Italics added.) Rather, substantial evidence
supports the court’s finding that defendants were not involved in the negotiation of the
price or terms for sale of KatanaMe’s intellectual property or other assets, but left it to
Matsumoto (Nintendo representative and a founding member of Skipper Wireless) to
communicate with IT-Farm regarding the deal. The court found this delegation of all key
negotiations regarding the sale of KatanaMe assets was an improper delegation of powers
by Long and Huang.
Defendants contend the record does not support the finding that defendants left it
to Matsumoto to negotiate the price. They argue that Long and his attorneys were
negotiating a deal at arm’s length with Takeshi Nakabayashi of IT-Farm and his lawyers.
We disagree. Huang testified that he never was involved in any way with the actual

22
negotiations between Skipper and KatanaMe. hat Matsumoto provided the documents
that were exchanged between KatanaMe and IT-Farm preliminary to any discussion of
the asset purchase, because Matsumoto was the person interfacing with Nintendo and
KatanaMe and that Matsumoto had taken it upon himself to try to get funding from IT-
Farm, because Long did not speak Japanese. This evidence supports the inference drawn
by the court that defendants left any price negotiations to Matsumoto. The exhibits to
which defendants point as evidence that Long did negotiate with IT-Farm do not indicate
any negotiation concerning the assets’ price. Rather, they deal primarily with setting up
and funding Skipper Wireless and supplying information to IT-Farm regarding the
amounts KatanaMe owed creditors. Further, when asked about negotiations with IT-
Farm, Long testified that IT-Farm asked KatanaMe for a list of KatanaMe’s creditors and
what was owed them and IT-Farm stated they would only pay off the $800,000 owed to
creditors. No attempt was made to value the assets. The only arguable attempt to
negotiate anything by Long appears to be his request to structure any accrued salary
payment as a signing bonus or stock in the new company. However, even in that
communication, Long made clear the request was not part of any negotiation and that
whatever IT-Farm decided to do was fine.
Defendants further argue that plaintiff had the affirmative obligation to prove that
Long and Huang falsely claimed they had obtained the “best price” and they urge that
plaintiff produced no evidence that $800,000 was not the best price. They assert the trial
court’s rejection of defendants’ expert’s opinion that the fair market value of KatanaMe
at the time was “no more than $800,000 was arbitrary,” but they fail to recognize the
specific respects in which the court found that expert testimony wanting. (See
discussion, post, at pages 40-42.) In any event, the court’s rejection of the expert
testimony goes more to the question of the “entire fairness” of the transaction and to the
issue of damages than to the issue of breach of the duty of disclosure. The question here
is whether the court’s findings as a whole are supported by substantial evidence and
whether the findings support the court’s ultimate findings that defendants breached their
fiduciary duties.

23
 The court found the information statement and accompanying package and letter
from Long were inadequate and materially false in stating, among other things, that
KatanaMe would likely go into bankruptcy if the asset sale were not approved and that
the asset sale transaction “ ‘provide[d] consideration representing a just, fair and
reasonable price for the security holders of KatanaMe,’ ” The March package was
materially false and misleading as it failed to disclose that Long and Huang already
planned with IT-Farm principals that KatanaMe would file for bankruptcy after the asset
sale in order to wipe out stockholdings of the non-controlling shareholders, failed to
disclose that defendant directors (who were the only two directors left to “unanimously
recommend” stockholder consent to the asset sale) had already accepted employment
with Skipper Wireless, and failed to disclose that defendants had “no factual or
reasonable basis to believe the Asset Sale as proposed ‘provides consideration
representing a just, fair and reasonable price for the security holders of KatanaMe.’ ”
Substantial evidence of all of the above is found in the record, including Long’s “task”
list showing the planned bankruptcy filing after the asset sale, testimony that no valuation
of the assets was performed, and evidence that defendants did not seek to sell the
company or all of its assets to any company other than to Skipper Wireless, the company
they helped establish solely to purchase the assets and in which they would continue to
have a stake, as employees, executives, and shareholders.
Defendants further maintain that the trial court made no finding that the statements
or omissions were made in bad faith and rely on the truism that an “inadequate or flawed”
effort to carry out one’s fiduciary duties is not a breach of the duty of good faith.
(Lyondell Chem. Co. v. Ryan (Del. 2009) 970 A.2d 235, 243 (Lyondell).) First, we
disagree with defendants that the court was required to specifically find a particular
material misrepresentation was made in bad faith in order to support the judgment. We
observe that the Lyondell court concluded “the record establishes that the directors were
disinterested and independent” and that there was “no evidence . . . from which to infer
that the directors knowingly ignored their responsibilities, thereby breaching their duty of
loyalty.” (Id. at p. 237.) That is not the case here. Substantial evidence supports the

24
court’s finding that Long and Huang were “self-interested” in the sales transaction. On
the evidence presented, the court properly determined that Long and Huang were far less
interested in securing a fair price to the shareholders for the assets than in securing jobs
for themselves (including salaries and benefits) and a place in the management structure
of a new corporation that would continue the research and development of the intellectual
property and that would provide defendants with stock and stock options in the new
corporation.
Defendants contend there was no evidence of their specific financial
circumstances such that they would be motivated to approve the sale by their own
personal financial interests. Such a showing was not required in order for the court to
draw the reasonable inference from the evidence that defendant directors were “not
disinterested” in the transaction.
The court’s findings of numerous instances of defendants’ breach of their duty of
disclosure, its finding that defendants were “self-interested” in the transaction, and its
finding that defendants’ breach of the duty of disclosure constituted a breach of both the
duty of loyalty and the duty of good faith sufficient to overcome the presumptions of the
business judgment rule, were more than adequate on this record.
Defendants contend that asking for approval of the asset sale by a majority of
disinterested shareholders cannot be a false statement in this context because defendants
were not purporting to represent what the law required. We disagree. The March 30,
2005 information statement sent to shareholders stated under the caption “The Asset
Sale” the following: “The affirmative vote of the holders of (i) a majority of Seller’s
outstanding capital stock, (ii) a majority of Seller’s outstanding shares of Preferred Stock,
voting as a single class, and (iii) a majority of the stockholders of KatanaMe (holders of
both common stock and preferred stock) who are not parties to the Related Party
Transaction voting together as a single class are required to approve and adopt the
Purchase Agreement and the Asset Sale.” (Italics added.) The foregoing appears to set
forth legal requirements for approval of the asset sale, bundling the “disinterested
shareholder requirement” together with approvals required by Delaware law and the

25
KatanaMe articles of incorporation in such a way that a reasonable shareholder would
believe that the vote of a disinterested shareholder was required by law.
The court did not abuse its discretion in determining this falsehood was material in
that it was “only put into the letter to shareholders for the benefit of the Director
Defendants,” who were attempting to secure the protection of Delaware law providing
that shareholder ratification of a board’s decision by a majority of disinterested
shareholders may act as a safe harbor and trigger the presumptions of the business
judgment rule where directors’ conflicts of interest are at issue, as they were in this
transaction. As the court recognized, the disinterested shareholder ratification provision
does not protect directors under the business judgment rule where the decision or
transaction is required to be approved or ratified by a vote of the shareholders. (Gantler
v. Stephens, supra, 965 A.2d at pp. 712-713 [the sale of substantially all corporate assets
and the waiver of notice rights require shareholders’ voting approval—and thus cannot be
the basis of “ratification” under the common law].) Further, we agree with the court that
there was a “substantial likelihood” that this information, particularly when viewed
together with the other material misstatements and omissions by defendants, “would have
been viewed by the reasonable investor as having significantly altered the ‘total mix’ of
information made available.” (Arnold, supra, 650 A.2d at p. 1277.)
Defendants counter that when a majority of disinterested shareholders approve a
transaction, it is subject to review under the business judgment standard pursuant to
statute (§ 1448), rather than under common law. They rely upon section 144 and cases

8
Section 144 provides in relevant part:
“(a) No contract or transaction between . . . a corporation and any other
corporation . . . in which 1 or more of its directors or officers, are directors or officers, or
have a financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of the board or
committee which authorizes the contract or transaction, or solely because any such
director’s or officer’s votes are counted for such purpose, if:
“(1) The material facts as to the director’s or officer’s relationship or interest and as to the
contract or transaction are disclosed or are known to the board of directors or the
committee, and the board or committee in good faith authorizes the contract or

26
involving the question of ratification by disinterested directors, not shareholders. They
argue Gantler v. Stephens, supra, 965 A.2d 695, applies only to the common law doctrine
of ratification, as the court in that case specifically disavowed any intent to change the
statutory rule. (Id. at p. 713, fn. 54.) Defendants’ argument is meritless.
“Section 144 of the General Corporation Law of the State of Delaware was
adopted for a limited purpose: to rescue certain transactions, those in which the directors
and officers of a corporation have an interest, from per se voidability under the common
law. That is all. Under its plain language, section 144 plays no part in validating
transactions or in ensuring the business judgment rule’s application. Over time, however,
practitioners and courts have suggested a broader role for section 144, linking the statute
to the common-law analysis of interested transactions.” (Rohrbacher, Zeberkiewicz &
Uebler, Finding Safe Harbor: Clarifying the Limited Application of Section 144 (2008)
33 Del. J.Corp.L. 719, 720, italics added.) “[I]f a transaction complies with the
section 144 safe harbor, it will not be invalidated solely on the grounds of the offending
interest, but will be analyzed under the common law regarding breach of fiduciary duty.
Section 144 will then have nothing more to do with the transaction. If, by contrast, the
transaction fails to comply with section 144, it will be analyzed under both the common
law regarding voidability and the common law regarding breach of fiduciary duty.” (Id.
at p. 221.)9

transaction by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
“(2) The material facts as to the director’s or officer’s relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders entitled to
vote thereon, and the contract or transaction is specifically approved in good faith by
vote of the shareholders; or
“(3) The contract or transaction is fair as to the corporation as of the time it is authorized,
approved or ratified, by the board of directors, a committee or the shareholders.
“(b) Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the board of directors or of a committee which authorizes the
contract or transaction.” (Italics added.)
9
The cases upon which defendants rely, Benihana of Tokyo, Inc. v. Benihana, Inc.
(Del. 2006) 906 A.2d 114, 120 and Cede & Co. v. Technicolor, Inc. (Del. 1993) 634 A.2d

27
 Furthermore, section 144 allows ratification by disinterested shareholder approval
only when the “material facts as to the director’s or officer’s relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, . . .” (§ 144, subd. (a)(2).) The court here determined, and we agree, that
material facts as to defendants’ interest in the transaction were not fully disclosed or
known to the shareholders. Finally, we note the court’s finding that three individual
minority shareholders were given additional information on the transaction orally by
Long. This information was not told to other shareholders. Long held out the promise of
potential benefits that could not be shared-in by other shareholders in the future if these
few would agree to the transaction and waivers.10 Ultimately, the three received nothing.
3. Materiality. Defendants challenge the court’s finding that defendants’ failure
to disclose they had already accepted employment with Skipper Wireless, their failure to
disclose their titles, salary and details of their receipt of stock options, and their failure to
disclose that KatanaMe would file for bankruptcy were material omissions. They
contend such failures to disclose were not material as a mater of law. They argue that
plaintiff here failed to “demonstrate ‘a substantial likelihood that the disclosure of the

345, 366, fn. 34 (Cede), modified on other grounds in Cede & Co. v. Technicolor, Inc.
(Del. 1994) 636 A.2d 956 (Cede II), involve purported ratification by disinterested board
members who were fully informed about the transaction. In Cede, the question was
whether, in light of a charter requirement of director unanimity, the chancellor’s finding
of board approval of the sale by an overwhelming vote of disinterested directors was
sufficient to support a finding that the board had met its duty of loyalty. The court
declined to address this question in the first instance and until the implications of section
144, subdivision (a) were addressed by the court below.
10
Common stock shareholder John Emery testified he and two other KatanaMe
shareholders met periodically with Long, who provided updates on KatanaMe. Long told
them they needed to sign shareholder consents to the sale to Skipper Wireless. Long told
them he could not guarantee it, but that he would try to get the three some stock in the
new company. He assured them that “family” would be taken care of, but they had to
keep it quiet because it was not “proper procedure” and Long would not be able to “take
care” of all of the KatanaMe investors. Emery would not have consented to the
transaction had he known the truth. Later, Long also told Emery that “it was all over”
and they would get nothing. Long also falsely told Emery that KatanaMe was in
bankruptcy and all debts had been discharged before any bankruptcy had been filed.

28
omitted fact would have been viewed by the reasonable investor as having significantly
altered the “total mix” of information made available.’ [Citation.]” (Gantler v. Stephens,
supra, 965 A.2d at p. 710.) Again, we disagree.
In Gantler v. Stephens, supra, 965 A.2d at page 711, the court determined that a
statement by the board that they had “ ‘careful[ly] deliberat[ed]’ ” was a representation to
shareholders that the board had considered the sales process on its objective merits and
had determined that reclassification of shares in that case would better serve the company
than a merger. The court found such statement material even though the defendant
fiduciaries had disclosed their admitted conflict of interest. “Given the defendant
fiduciaries’ admitted conflict of interest, a reasonable shareholder would likely find
significant—indeed, reassuring—a representation by a conflicted Board that the
Reclassification was superior to a potential merger which, after ‘careful deliberations,’
the Board had ‘carefully considered’ and rejected. In such circumstances, it cannot be
concluded as a matter of law, that disclosing that there was little or no deliberation would
not alter the total mix of information provided to the shareholders.” (Id. at p. 711.) As
indicated by the court in Gantler v. Stephens, depending upon the circumstances
presented, the question whether a reasonable shareholder would likely find significant a
particular statement or omission material may be a factual determination. (See Gilliland
v. Motorola, Inc. (Del. 2004) 859 A.2d 80, 88 [adequacy of disclosure and materiality
“inquiry is highly contextual”].)
In the circumstances here, we believe the question of materiality is an aspect of the
“highly fact-intensive exercise” in which the court must engage to determine the question
whether the directors breached their duty of loyalty. (See Balotti and Finkelstein, supra,
§ 4.16; Cede II, supra, 636 A.2d 956, 957 [“We must defer to the factfinder on a mixed
question of fact and law, as to which reasonable minds may differ on the question of
materiality. [Citation.]”].)
We conclude the court properly determined the foregoing nondisclosures were
material. Given defendants’ admitted conflicts of interest in the transaction, there is
substantial reason to believe that disclosure of the extent of their conflicts—that they had

29
already accepted employment with Skipper Wireless, that Long had begun working for
Skipper as of April 4th, that Long had an agreement to be chief operating officer (or
senior vice president of operations and marketing) of Skipper operations in the United
States, that Huang had accepted the position of senior vice president of engineering, and
that they were receiving salaries of $130,000, plus potential bonuses and were receiving
six months pre-vesting in options for Skipper—would have been significant to a
reasonable shareholder in evaluating the truth of defendants’ material misrepresentation
that the consideration to be received for the proposed asset sale represented “a just, fair
and reasonable price for the security holders,” and that the undisclosed information
would have altered that shareholder’s view of the “total mix” of information made
available.
III. Breach of the Duty of Loyalty
The foregoing breaches of the duty of disclosure were sufficient to support the
court’s findings that defendants breached their fiduciary duties of loyalty and good faith.
Defendants contend that their actions, apart from their material misstatements and
nondisclosures, did not support the finding that they breached their duty of loyalty.
Again, defendants “cherry pick” from the court’s findings, arguing that the fact
defendants accepted employment offers from Skipper Wireless “is not enough”; that they
did not seek to sell all of KatanaMe’s assets at some prior point or to declare bankruptcy
is “insufficient”; and that Long’s belief he had a duty to creditors is “no basis for finding
a breach of loyalty.” Finally, defendants contend the disinterested shareholder approval
of the transaction eviscerates any duty of loyalty claim.
That any particular action may not have amounted to a breach of the duty in other
circumstances, does not undermine the court’s determination that in the circumstances
here presented, defendants breached their duty of loyalty.
The duty of loyalty owed by a director to the corporation and its shareholders was
described by the Delaware Supreme Court in Cede, supra, 634 A.2d 345: “Essentially,
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

30
shareholder and not shared by the stockholders generally. [Citations.] [¶] Classic
examples of director self-interest in a business transaction involve either a director
appearing on both sides of a transaction or a director receiving a personal benefit from a
transaction not received by the shareholders generally. [Citations.]” (Id. at pp. 361-362,
fns. omitted.)
Substantial evidence supported the court’s determination that the actions of
defendant directors in this case did not comport with those standards and constituted a
breach of the duty of loyalty.
Contrary to defendants’ contention, acceptance of employment offers with a
purchasing or acquiring company is not as a matter of law, insufficient to constitute a
conflict of interest or a breach of the fiduciary duty of loyalty. In support of the
proposition that “Long’s and Huang’s offers of employment with Skipper Wireless do
not, as a matter of law, establish a breach of the duty of loyalty,” defendants cite an
unpublished opinion of the Delaware chancery court, In re Western National Corporation
Shareholders Litigation (Del. Ch., May 22, 2000) 2000 WL 710192. However, in that
case, the chancery court found that plaintiff had established triable issues of fact with
respect to the independence of several Western National directors. In addition, two board
members (otherwise totally unconnected to the acquiring company) “might be burdened
by potential conflicts of interest exclusively with respect to the merger transaction in
question [because they had] entered into employment contracts with [the acquiring
company] around the time of the merger negotiations.” (Id. at p. *20, italics added.) The
court examined the facts of each challenged director’s interests and found the conflicts to
be minimal. The chancery court’s ultimate finding of no breach of the fiduciary duties of
loyalty or good faith rested on its determination that “fully informed,” unaffiliated and
disinterested Western National stockholders overwhelmingly approved the challenged
merger, which was a product of arm’s length negotiations between the acquiring

31
company and the merged company’s special negotiating committee composed of three
outside directors, assisted by its own financial and legal advisors. (Id. at pp. *2, 4.)11
Here, there was no “fully informed” shareholder vote to approve the sale; nor was
the asset sale the product of arm’s length negotiations with KatanaMe being represented
by outside directors not burdened by conflicts. The court could and did determine from
the evidence that Long and Huang’s main interest was in continuing to be significantly
involved in the development of KatanaMe’s intellectual property and in continuing to
have a financial stake in development of the product through stock options and positions
in Skipper Wireless. These interests, in addition to their acceptance of employment with
Skipper Labs, were sufficient in these circumstances to constitute a material self-interest,
whatever defendants’ personal financial circumstances. Additional evidence supporting
the court’s finding included the defendants’ actions with regard to the ATA proposal,
including defendants’ refusal to continue negotiations with ATA (and their complete
refusal to communicate with Graham, ATA’s designated representative) following their
refusal of its $3.5 million investment proposal, where the proposal required Long not
only to step down as CEO and a director, but to receive no more than six months’ salary
and benefits.
We reject defendants’ assertion that Long and Huang did not stand on both sides
of the deal because they were not founders of IT-Farm or Skipper Wireless, never held
director level positions there, and had no ownership interest in either. Defendants
certainly assisted in creating Skipper Wireless, as Long’s task list indicates. They may
not have held director positions in Skipper Wireless, but at the time they approved the
11
In Orman v. Cullman (Del.Ch. 2002) 794 A.2d 5, 28-29, also cited by
defendants, the chancery court concluded that the allegation that a director had a financial
interest in a merger because he would be a director in the surviving corporation, was
insufficient to where that was the only allegation regarding the director’s interest. (Ibid.)
However, the chancery court ultimately concluded that the issue of whether a majority of
the board of directors was either interested in merger or not independent, and thus
whether entire fairness standard rather than business judgment standard applied to review
of the merger, could not on the facts before it be resolved as a matter of law on a motion
to dismiss. (Id. at p. 31)

32
asset sale they had accepted employment with Skipper Wireless that made Long senior
vice president of operations and Huang senior vice president of engineering in Skipper
Labs. Further, although they may not have been actual “owners” of Skipper Wireless at
the time they approved the sale, they held pre-vested stock options in the company—a
prospect of future ownership and a substantial financial incentive to support the asset
sale.
Defendants’ assertion that Long’s belief he had a fiduciary duty to creditors cannot
support a finding that he breached his duty of loyalty begs the question. First, there is no
duty to creditors superseding the fiduciary duty of directors to the corporation and its
shareholders. (NACEPF [North American Catholic Educational Programming
Foundation, Inc.] v. Gheewalla (Del. 2007) 930 A.2d 92, 94 [recognizing traditional
reluctance to expand directors’ fiduciary duties to creditors].12) Second, assuming Long
thought he had such a duty (and the court determined Long was not credible in many
respects), it would not justify defendants’ actions in putting the interests of corporate
creditors before those of the shareholders of the corporation.
IV. Breach of the Duty of Good Faith
Defendants argue the court applied the wrong standard in determining that they
breached their duty of good faith in connection with the sale of KatanaMe assets. Our
determination that the court did not err in concluding defendants breached their fiduciary
duty of loyalty makes examination of the court’s finding of breach of good faith
unnecessary. As plaintiff demonstrated that defendants breached their duty of loyalty, the
burden of proving the entire fairness of the transaction shifted to defendants, regardless
whether the court properly concluded they also breached their duty of good faith.
12
“It is well established that the directors owe their fiduciary obligations to the
corporation and its shareholders. While shareholders rely on directors acting as fiduciaries to
protect their interests, creditors are afforded protection through contractual agreements, fraud
and fraudulent conveyance law, implied covenants of good faith and fair dealing, bankruptcy
law, general commercial law and other sources of creditor rights. Delaware courts have
traditionally been reluctant to expand existing fiduciary duties. Accordingly, ‘the general rule is
that directors do not owe creditors duties beyond the relevant contractual terms.’ ” (NACEPF v.
Gheewalla, supra, 930 A.2d at p. 99.)

33
Nevertheless, we are persuaded the record supports the court’s finding as to breach of
good faith as well. The evidence we have relied upon above in support of the court’s
finding of breach of the duty of loyalty also supports the court’s finding that defendants
“breached their fiduciary duty of good faith, by intentional dereliction of duty and
conscious disregard for their fiduciary obligations and directors and/or officers of
KatanaMe Inc. . . .” This was the appropriate measure for good faith in this case. (See
Stone, supra, 911 A.2d at p. 369; Disney, supra, 906 A.2d at p. 67.)
Relying primarily on Lyondell, supra, 970 A.2d at page 244, defendants assert the
inquiry the court should have made was whether directors “utterly failed to obtain the
best sale price.” Defendants take the sentence upon which they rely out of context and
misquote it to boot. The Lyondell court observed: “Directors’ decisions must be
reasonable, not perfect. ‘In the transactional context, [an] extreme set of facts [is]
required to sustain a disloyalty claim premised on the notion that disinterested directors
were intentionally disregarding their duties.’ The trial court denied summary judgment
because the Lyondell directors’ ‘unexplained inaction’ prevented the court from
determining that they had acted in good faith. But, if the directors failed to do all that
they should have under the circumstances, they breached their duty of care. Only if they
knowingly and completely failed to undertake their responsibilities would they breach
their duty of loyalty. The trial court approached the record from the wrong perspective.
Instead of questioning whether disinterested, independent directors did everything that
they (arguably) should have done to obtain the best sale price, the inquiry should have
been whether those directors utterly failed to attempt to obtain the best sale price.” (Id. at
pp. 243-244, italics added, fns. omitted.)
In marked contrast to the premise upon which the statement in Lyondell rested, the
trial court in this case properly determined that defendants were not “disinterested”
directors, but had put their own interests before that of the corporation and its
shareholders. Consequently, the court was not required to determine that directors

34
“utterly failed to attempt to obtain the best sale price.” (Lyondell, supra, 970 A.2d at
p. 244.)13
V. Destruction of Intellectual Property/Evidence
In a section of the statement of decision entitled “Lack of Documentation,” the
court questioned “[d]efendants’ oral recitation of what occurred in negotiation of the sale
and in regard to discussion of the fairness of the price and terms—given that written
documentation such as executed agreement(s), emails, and other such communications
were allegedly destroyed while under the custody and responsibility of [d]efendants.”
The court concluded that Long’s testimony regarding the failure of various computers
and servers during the first quarter of 2004 and after May 2004 when the engineers were
laid off, made defendants’ assertions of unintentional destruction of evidence and
technology “not credible.” The evidence “further call[ed] into question the assertion by
[d]efendants that the intellectual property of KatanaMe was worth no more than $800,000
at the time [it was] sold, given that the intellectual property was basically destroyed while
in the custody and responsibility of [d]efendants, such that it could not be given to an
independent expert for valuation or appraisal after the filing of this lawsuit in September
2005. As directors and officers of a corporation there certainly could not be a fiduciary
duty more fundamental than preservation of corporate assets.”14
Defendants contend there was no destruction of evidence and they challenge
portions of the court’s description of defendants’ testimony, specifically, its statement
that Long testified “all data was lost after May 2004 . . . .” Defendants also assert the
sale of KatanaMe’s intellectual property to IT-Farms after the claimed computer server

13
Were the test as urged by defendants, we believe that substantial evidence on the
facts here presented would have supported a finding that defendants “utterly failed to
attempt to obtain the best sale price.”
14
The court did not identify the fiduciary duty breached by defendants’ failure to
preserve these corporate assets. Most likely, such breach went to the question of duty of
care. As the court recognized, breach of the duty of care could not provide a basis for the
award of money damages. It does not appear that the court relied on the loss of corporate
assets to bolster its findings of liability for defendants’ breach of the duties of good faith
and loyalty.

35
failures demonstrated there was no basis in the record for the court’s statement that “the
intellectual property was basically destroyed . . . .”
Defendants’ challenges to these out-of-context snippets of the statement of
decision miss the point. The court did not believe Long’s somewhat confusing trial
testimony or his conflicting declaration concerning details about the loss of documents
and computer data. The statement of decision makes clear that the data with which the
court was primarily concerned was written documentation and data that would have
assisted an independent expert in valuing or appraising KatanaMe’s intellectual property
as of the sale date—such as documents providing details of the negotiations around the
sale and itemizing or describing the KatanaMe intellectual property sold to Skipper
Wireless.
Furthermore, substantial evidence supports the court’s findings regarding Long’s
testimony and the destruction of evidence. Long did testify that the computer servers
containing the engineering and technology information of KatanaMe were destroyed
sometime in 2004. He testified that in 2003, his individual notebook hard drive was
damaged and data was lost. He testified that the computer servers were water damaged
and ceased to function in late 2004. (He acknowledged they may have been computers
and not servers, as he had stated in his declaration. Long had also stated in a declaration
that the engineering development code server was destroyed by overheating in the first
quarter of 2004, and that the hard drive data was lost.) He testified at trial that, in July
2004, the hard drive on the software development server failed and the data was lost.
Long testified the lost data on the code development server would have been the software
code as well as the hardware blueprints for the hardware design. Long testified the data
was still on the engineers’ individual personal computers or laptops, but that after May
2004, when the engineers were laid off, “ ‘[t]he hard disk drive on the software
development server failed and could not be recovered or repaired. The data on the drive
was totally lost.’ ” Long’s personal laptop failed again and when he sent it to Apple for
repairs the hard drive data was lost. Consequently, documents and emails regarding the
asset sale and negotiations that were contained on Long’s laptop were lost when its hard

36
drive failed. Huang testified he gave his functioning laptop to the engineers at Skipper
Wireless and did not retain any copies or back up of data or documents.
Testimony from former KatanaMe engineer, Dinesh Nambisian, was credited by
the court and undermined Long’s testimony about the circumstances under which hard
drive data was allegedly lost. Nambisian testified that he had set up the system of having
two servers, with a copy of all data on each; that the data was backed up every night and
thus, if there were a computer crash, only one day’s data at most would be lost. He
would also periodically back up all the data on CD-Roms and take them off-site as extra
protection against data loss. He testified there was never a server failure while he worked
at KatanaMe from October 2002 to May 2004.
Defendants assert there was no evidence to support a finding of “spoliation” as a
matter of law or that any documents were destroyed by defendants with a culpable state
of mind. These claims are for the most part red herrings. First, the court did not make a
specific finding of “spoliation.” It also refused to award plaintiff the sanctions he sought
for such asserted spoliation. The court did not believe Long’s explanation as to how data
and documents became lost or destroyed. The evidence and inferences reasonably drawn
from the evidence supported the court’s findings that Long was not credible and
specifically that Long’s explanations regarding the destruction and loss of data and
documents were not credible. Consequently, the evidence supported the court’s drawing
of inferences against defendants with respect to their claims that KatanaMe intellectual
property was worth no more than $800,000 at the time it was sold to Skipper Wireless.
(Evid. Code, § 413 [“In determining what inferences to draw from the evidence or facts
in the case against a party, the trier of fact may consider, among other things, the party’s
failure to explain or to deny by his testimony such evidence or facts in the case against
him, or his willful suppression of evidence relating thereto, if such be the case”].)
VI. “Entire Fairness” Analysis
Defendants challenge the court’s finding that they “failed to prove . . . the asset
sale transaction, whereby nearly all assets of KatanaMe, including all of its intellectual

37
property and pending patents, were sold to Skipper Wireless Inc. for $800,000, was
‘entirely fair’ to the corporation and its shareholders.”
Because the presumptions of the business judgment rule were rebutted by
plaintiff’s showing that defendants had breached their fiduciary duty of loyalty and, as
well, by plaintiff’s showing that defendants had breached their duty of good faith, the
burden then shifted to defendants to demonstrate the “entire fairness” of the asset sale
transaction to the shareholder plaintiff. (Disney, supra, 906 A.2d at p. 52; Emerald
Partners v. Berlin (Del. 2001) 787 A.2d 85, 92; Cinerama, supra, 663 A.2d at p. 1162.
The Delaware Supreme Court “has described the dual aspects of entire fairness, as
follows: [¶] ‘The concept of fairness has two basic aspects: fair dealing and fair price.
The former 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. The latter aspect of fairness relates to the economic
and financial considerations of the proposed [transaction], including all relevant factors:
assets, market value, earnings, future prospects, and any other elements that affect the
intrinsic or inherent value of a company’s stock. . . . 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 v.
UOP, Inc. (Del. 1983) 457 A.2d 701, 711.)] Thus, the entire fairness standard requires
the board of directors to establish ‘to the court’s satisfaction that the transaction was the
product of both fair dealing and fair price.’ [(Cede, supra, 634 A.2d at p. 361.)] In this
case, because the contested action is the sale of a company, the ‘fair price’ aspect of an
entire fairness analysis requires the board of directors to demonstrate ‘that the price
offered was the highest value reasonably available under the circumstances.’ [(Ibid.)]”
(Cinerama, supra, 663 A.2d at pp. 1162-1163.)
Although rebuttal of the procedural presumption of the business judgment rule
does not establish substantive liability under the entire fairness standard, “ ‘[b]ecause the
effect of the proper invocation of the business judgment rule is so powerful and the
standard of entire fairness so exacting, the determination of the appropriate standard of

38
judicial review frequently is determinative of the outcome of [the] litigation.’
[Citations.]” (Cinerama, supra, 663 A.3d at p. 1163, and fn. 8.) The analysis of entire
fairness required the court to “consider carefully how the board of directors discharged
all of its fiduciary duties with regard to each aspect of the non-bifurcated components of
entire fairness: fair dealing and fair price.” (Id. at p. 1172.) The court here did so.
A. Fair Dealing Analysis
An important factor in the fair dealing aspect of the entire fairness analysis is
whether the transaction was an arm’s-length negotiation. “[A]rm’s-length negotiation
provides ‘strong evidence that the transaction meets the test of fairness.’ [Citations.]”
(Cinerama, supra, 663 A.2d at p. 1172; see Weinberger v. UOP, Inc., supra, 457 A.2d at
p. 711 [no fair dealing where, among other things, negotiations, were “modest at best”].)
Here, as we have discussed above, the court specifically found an absence of arm’s-
length negotiation.
“Another well-recognized aspect of fair dealing is the board of directors’ duty of
disclosure to the shareholders. [(Weinberger v. UOP, Inc., supra, 457 A.2d at p. 711.)]”
(Cinerama, supra, 663 A.3d at p. 1176.) Our conclusion that the trial court’s finding that
defendants breached their fiduciary duty of disclosure to shareholders by their numerous
misstatements and omissions of material facts regarding the sale transaction would be
sufficient in and of itself to warrant a finding that defendants did not demonstrate the
“entire fairness” of the transaction. The court also found there was no fair dealing with
respect to the shareholders, as the “purpose and effect of the asset sale was to ‘freeze out’
the minority shareholders, who received nothing and had no further interest in the
KatanaMe assets. Defendants and other insiders, on the other hand, had continuing
monetary benefits by participating in the new entity, Skipper, and having financial
interests in the new company and its intellectual property assets that used to belong to
KatanaMe.”
Other aspects of fair dealing that the court may consider include: whether the
board was motivated in good faith to achieve a transaction that was the best available
transaction for the benefit of the shareholders (Cinerama, supra, 663 A.2d at p. 1174);

39
whether the board exercised due care in making a market check as part of its sales
approval process (id. at p. 1176); whether the board focused carefully on whether the
offer constituted the best price available in a sale of the company (id. at p. 1176); whether
the board relied upon the advice of neutral advisors or outside legal counsel (ibid.); and
whether board members were materially influenced in their negotiations by any self-
interest (ibid.). The trial court’s findings on these and other matters as described above,
further support its conclusion that defendant board members did not engage in fair
dealing with respect to the sale of KatanaMe assets to Skipper Wireless. Whether or not
a “fair price” was received for the assets, the court’s findings with respect to the lack of
“fair dealing” provide an adequate basis, in the circumstances, for its finding that
defendants failed to carry their burden of showing the “entire fairness” of the transaction.
B. Fair Price Analysis
Moreover, with respect to the “fair price” component of the entire fairness
analysis, the court found that the price paid for the assets was not a “fair price.” It had
previously found that defendants had not attempted to sell all of the assets of KatanaMe
or the entire company, before assisting in the creation of Skipper Wireless; but rather, had
sought “investors” for KatanaMe. It further found that “the transaction was not
inherently fair to the minority shareholders or to the corporation itself. Even if placed in
bankruptcy, rather than an asset sale, the minority shareholders and/or KatanaMe might
have received more money for its assets or may have found a buyer for the company or
may have reduced or negated the debts against the corporation—because the transaction
would be placed in the neutral hands of a trustee and bankruptcy court. Instead, the
[transaction] was specifically designed to leave the minority shareholders with nothing,
and designed to put the company in bankruptcy anyway after stripping away all of its
assets for the price of the creditors’ debt.” Further, in its damages calculation, the court
found that, at the time it was sold, the intellectual property and technology was worth at
least the $3.5 million that ATA Ventures had offered in May 2004 (less than a year
before the asset sale to Skipper) for control and majority ownership and that the board
had rejected as too low. This finding was supported by substantial evidence and further

40
supports the court’s determination that the price paid by Skipper Wireless for
KatanaMe’s assets was not a “fair price.”
The cases cited by defendants in support of the entire fairness of the transaction
are not helpful to them. Cinerama, supra, 663 A.2d 1156, found substantial evidence
supporting the trial court’s finding that the transaction was “entirely fair.” (Id. at
pp. 1178-1179 [applying the substantial evidence standard of review].) 15 That the
Cinerama court relied upon a few factors that the court here did not address (lack of
evidence that the timing of the transaction was such as to benefit defendants at
shareholders’ expense or that the buyer had the power to force the initiation of the deal)
(id. at p. 1172), does not somehow undermine the findings of unfairness that the court
here made upon ample evidence. Defendants’ contentions that the negotiation was at
arm’s length, that there was no evidence they had any material conflict of interest, and no
evidence that they put their interests ahead of shareholders are at odds with the court’s
findings and with the evidence, as we have described above.
Defendants contend the court “arbitrarily” rejected the testimony of their expert’s
opinion as to the fair price for the corporate assets. However, defendants cite no
authority for that proposition and make little argument beyond that bald assertion. They
claim that the court based its rejection on the ground that defendants’ expert “focused on
criticizing the analysis by Plaintiff’s expert” and that the expert merely asserted that
$800,000 was the best offer. Defendants ignore the court’s explanation for why it placed
no confidence in defendants’ expert’s analysis: that the expert “inexplicably mismatched
financial information,” taking categories and components of balance sheets and mixing
them together with those of profit and loss statements. Defendants do not argue that this
criticism was unjustified.

15
“[T]his Court will not ignore the findings of the Court of Chancery if they are
sufficiently supported by the record and are the product of an orderly and logical
deductive process. [Citation.]” (Cinerama, supra, 663 A.2d at p. 1179.)

41
 In sum, it was defendants’ burden to show the sale transaction was “entirely fair”
to the corporation and its shareholders. Substantial evidence on this record amply
supports the court’s finding that defendants failed to carry that burden of proof.
VII. Damages
Defendants maintain that the damages award must be reversed, even if the court
correctly found against them on liability. They first contend that to the extent the trial
court’s findings are premised on the conclusion that defendants breached their duty of
disclosure, only injunctive relief before consummation of the transaction, and not
monetary damages, was available to plaintiff. (In re Transkaryotic Therapies, Inc. (Del.
Ch. 2008) 954 A.2d 346, 361-362.)16 We have heretofore upheld the court’s findings that
defendants breached their duty of loyalty and their duty of good faith. Defendants’
breach of the duty of disclosure contributed to the court’s findings on the loyalty and
good faith issues, but was by no means the sole basis for the court’s findings of breach of
those duties. Consequently, monetary damages were appropriate.
Defendants next contend that the only support for a damages award was the
testimony of plaintiff’s expert, which the court properly rejected as unduly “speculative.”
Defendants do not dispute that an award of monetary damages is within the court’s
equitable powers, but they contend that the damage award here was not supported by any
cause and effect relationship between the breaches found and the damages awarded. We
disagree.

16
The trial court in In re Transkaryotic Therapies, Inc., supra, 954 A.2d 346,
stated it could not grant monetary or injunctive relief for disclosure violations in
connection with a proxy solicitation in favor of a merger three years after that merger had
been consummated, “where there [was] no evidence of a breach of the duty of loyalty or
good faith by the directors who authorized the disclosures.” (Id. at pp. 362-363, italics
added.) In the alternative, the court observed that “not every breach of the duty of
disclosure implicates bad faith or disloyalty” (id. at p. 363) and granted summary
judgment on the ground that a breach of the duty of care alone did not support monetary
damages on account of the exculpatory provision authorized by section 102, subdivision
(b)(7). (In re Transkaryotic Therapies, Inc., at pp. 360, 362-363.)

42
 Once the court has concluded that the transaction was not entirely fair, “the
measure of damages for any breach of fiduciary duty, under an entire fairness standard of
review, is ‘not necessarily limited to the difference between the price offered and the
“true” value as determined under . . . appraisal proceedings. Under Weinberger [v. UOP,
Inc., supra, 457 A.2d 701], the [trial court] “may fashion any form of equitable and
monetary relief as may be appropriate . . . .” ’ [(Cede, supra, 634 A.2d at p. 371.)]”
(Cinerama, supra, 663 A.2d at p. 1166.) That is precisely what the court did in this
instance.
The court used the ATA term sheet value of $3.5 million dollars as a minimum
value, given that the KatanaMe board (consisting at the time of Long, Sayers and
Fujimara) had rejected that term sheet as too low less than one year before. (Huang, who
was present, considered the offer an “idiotic valuation.”) The court deducted from that
sum, the $800,000 paid by Skipper Wireless and an additional $500,000 attributed to the
“functional ‘extinguishment’ of the alleged unpaid deferred salaries,” yielding a net
monetary injury of $2.2 million payable to KatanaMe on its derivative claims.
The court explained its reliance on the ATA term sheet. The court referred to
evidence that the radio technology KatanaMe used or was to use for its products had the
same specifications as a product Sprint was selling and that the technology could have
been finally developed by KatanaMe if they had obtained sufficient funding. The ATA
proposal was made less than a year before the sale to Skipper Wireless. It was “a
proposal actually made by another company and specifically voted upon by the
KatanaMe [b]oard . . . and thus has some earmarks of an arm’s length proposal.
Obviously at the time the [d]efendants considered KatanaMe’s assets to be worth more
than $3.5 million.” Defendants reiterate their claims made at trial that the ATA term
sheet was not a solid offer, as it could be further reduced by ATA at any time. However,
that proposal already represented a significant reduction from the initial $12 million term
sheet, it came after Graham’s due diligence investigation and meeting with the engineers,
and the offer was no longer reliant on contributions by other investors. The court
properly could infer the proposed offer was reasonably solid at that point.

43
 We conclude the court reasonably relied on the $3.5 million proposal made by
ATA less than one year before and rejected by the board as too low a valuation in
determining the minimum value for the corporation.
Defendants again assert, with no accompanying citations or argument, that the
court arbitrarily rejected their expert’s valuation opinion. We have previously found this
claim to be meritless. Furthermore, cases cited by defendants for the proposition that the
court did not have a basis to make a responsible estimate of damages, recognize the
“significant discretion” given to the court in fashioning remedies in cases of this type.
(Bomarko, Inc. v. International Telecharge, Inc. (Del. Ch. 1999) 794 A.2d 1161, 1184-
1186 (Bomarko), affd. (Del. 2000) 766 A2d 437; Cline v. Grelock (Del. Ch., Mar. 2,
2010) 2010 WL 761142, *2 (Cline).)
In its general observations about damage calculations in fiduciary duty cases such
as this, the chancellor in Bomarko, supra,794 A.2d 1161, 1184 observed: “First,
significant discretion is given to the Court in fashioning an appropriate remedy. In
determining damages, the Court’s ‘powers are complete to fashion any form of equitable
and monetary relief as may be appropriate . . . .’ [(Weinberger, supra, 457 A.2d at
p. 714.)] [¶] Second, unlike the more exact process followed in an appraisal action, the
‘law does not require certainty in the award of damages where a wrong has been proven
and injury established. Responsible estimates that lack mathematical certainty are
permissible so long as the Court has a basis to make a responsible estimate of damages.’
[Citations.] [Italics added.] [¶] Third, where, as is true here, issues of loyalty are
involved, potentially harsher rules come into play. ‘Delaware law dictates that the scope
of recovery for a breach of the duty of loyalty is not to be determined narrowly. . . . . The
strict imposition of penalties under Delaware law are designed to discourage disloyalty.’
[Citation.]” (Bomarko, at p. 1184.)
Similarly, the chancellor in Cline, supra, 2010 WL 761142, *2, also noted: “ ‘To
be entitled to compensatory damages, plaintiffs must show that the injuries suffered are
not speculative or uncertain, and that the Court may make a reasonable estimate as to the
amount of damages.’ [Citation.]” The Cline court concluded that although the self-

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interested defendant had breached his fiduciary duty, which “ordinarily” “would have had
consequences that should be remedied by damages” (ibid.), the plaintiff had not provided
any basis for a rational award of damages. The plaintiff “offered no fair value of [the
corporation] or any reasonable basis for calculating a value of [the corporation] at the
time of dissolution.” (Ibid.) In Cline, it was the chancellor—the trier of fact—who made
the determination that it had not been provided “any basis for a rational award of
damages.” (Ibid., italics added.) Here, in contrast, the trial court found the ATA offer
provided a basis for a rational damages award. Such finding was adequately supported
by the record.
Our finding that evidence in the record provides a reasonable basis for the court’s
damage award does not rely upon the court’s findings with regard to the destruction and
loss of evidence that likely would have enabled the court to more easily calculate
damages. Such evidence might have provided a firmer basis for an increased damages
award. However, the evidence before the court regarding the ATA proposal provided an
adequate and not unduly speculative “floor” for the court’s damages calculation.
PLAINTIFF SYLLA’S CROSS-APPEAL
I. Refusal to Award Prejudgment Interest
Plaintiff contends the court abused its discretion in refusing to award KatanaMe
shareholders prejudgment interest pursuant California Civil Code section 3287,
subdivision (a): “Every person who is entitled to recover damages certain, or capable of
being made certain by calculation, and the right to recover which is vested in him upon a
particular day, is entitled also to recover interest thereon from that day . . . .” 17
Plaintiff acknowledges that damages that must be determined by the trier of fact
based on conflicting evidence are not normally ascertainable. However, he argues that in
this case, the trial court’s equitable calculation of KatanaMe’s value at the time of the
sale to Skipper Wireless evidences a “sum certain” under that Civil Code section.
Plaintiff also contends that prejudgment interest can be awarded where equitable

17
The court also refused to award prejudgment interest under Civil Code section
3288, a determination that plaintiff does not challenge.

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principles so demand (Chesapeake Industries, Inc. v. Togova Enterprises, Inc. (1983)
149 Cal.App.3d 901, 909 (Chesapeake Industries), and that defendants’ spoliation of
evidence provides a basis for the award of prejudgment interest under such equitable
principles.
“ ‘[O]ne purpose of section 3287[, subdivision (a)], and of prejudgment interest in
general, is to provide just compensation to the injured party for loss of use of the award
during the prejudgment period—in other words, to make the plaintiff whole as of the date
of the injury.’ [Citation.] Under section 3287[, subdivision] (a), ‘the court has no
discretion, but must award prejudgment interest upon request, from the first day there
exists both a breach and a liquidated claim.’ (North Oakland Medical Clinic v. Rogers
(1998) 65 Cal.App.4th 824, 828.) Courts generally apply a liberal construction in
determining whether a claim is certain, or liquidated. (Chesapeake Industries[, supra,]
149 Cal.App.3d [at p.] 907 . . . .) The test for determining certainty under section 3287[,
subdivision] (a) is whether the defendant knew the amount of damages owed to the
claimant or could have computed that amount from reasonably available information.
(Chesapeake Industries, at p. 907.) Uncertainty as to liability is irrelevant. ‘A dispute
concerning liability does not preclude prejudgment interest in a civil action.’ [Citation.]
The certainty required by section 3287[, subdivision] (a) is not lost when the existence of
liability turns on disputed facts but only when the amount of damages turns on disputed
facts. [Citation.] Moreover, only the claimant’s damages themselves must be certain.
Damages are not made uncertain by the existence of unliquidated counterclaims or offsets
interposed by defendant. (Chesapeake Industries, supra, at p. 907.)” (Howard v.
American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 535-536.)
We reject plaintiff’s argument that the damages awarded by the trial court
amounted to a “sum certain.” Although we have concluded the court did not err in basing
its award of damages on the ATA proposal, the actual amount owing to the corporation
was neither certain nor a liquidated claim until trial. The court could well determine that
at the time they breached their fiduciary duties, defendants did not know the amount of
damages owed to KatanaMe in this derivative action. Nor could defendants have

46
computed the amount from reasonably available information. That the court’s award was
not unduly speculative, but was reasonably based on the evidence presented, does not
compel the conclusion that the damages were “certain” under the statute.
Plaintiff relies upon insurance cases in which “alternative theories required only
the court’s legal determination of which [legal theory] was appropriate [and] the amount
of damages would thereby be fixed.” (Shell Oil Co. v. National Union Fire Ins. Co.
(1996) 44 Cal.App.4th 1633, 1651; Fireman’s Fund Ins. Co. v. Allstate Ins. Co. (1991)
234 Cal.App.3d 1154, 1173-1174 [insurance policy governed amount of the award even
though insurer suggested a specific amount due under each of four theories, the amounts
were certain, the only question was liability].) Unlike those cases, which affirmed the
trial courts’ award of prejudgment interest, the trial court here properly determined that,
at the time of their breach, there was no amount of damages that defendants knew or
could have calculated from reasonably available information.
Nor do we agree with plaintiff that the court erred in failing to find that equitable
principles required the award of prejudgment interest. Plaintiff relies upon the statement
by the court in Chesapeake Industries, supra, 149 Cal.App.3d at page 909, that
“[a]lthough an accounting action is prima facie evidence a claim is uncertain, we do not
foreclose the possibility of prejudgment interest in an accounting action where equity
demands such an award.” The Chesapeake Industries court affirmed the trial court’s
denial of prejudgment interest.
Plaintiff argues that equity demands the award of prejudgment interest in this case
where the evidence demonstrated defendants’ destroyed “critical valuation evidence.”
Were we to conclude the court in these circumstances might have determined that
equitable principles required the award of prejudgment interest, we cannot conclude the
court was required to do so. Plaintiff has cited no case requiring a trial court to award
prejudgment interest on unliquidated damages solely on the ground that “equity”
demanded it. In any event, such an equitable determination will generally lie within the
sound discretion of the trial court. (See., e.g., Estates of Collins & Flowers (2012)

47
205 Cal.App.4th 1238, 1246 [“A trial court sitting in equity has broad discretion to
fashion relief”].)
The trial court did not make an express finding of spoliation of evidence; nor did it
grant sanctions sought by plaintiff based on the destruction or loss of evidence. In these
circumstances, where the damages were not liquidated or certain and where the only
possible basis for prejudgment interest was an equitable one, we cannot conclude the
court erred in refusing to award prejudgment interest.
DISPOSITION
The judgment is affirmed. Plaintiff shall recover his costs on this appeal.

_________________________
Kline, P.J.

We concur:

_________________________
Haerle, J.

_________________________
Richman, J.

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