Cleveland, OH, April 5, 2017. Pursuant to Ohio Rule of Civil Procedure 23.1 DATATRAK International, Inc. (OTCQX: DTRK), Laurence P. Birch (“Birch”), Timothy G. Biro (“Biro”), James M. Karis (“Karis”), Jerome H. Kaiser (“Kaiser”), Nicholas A. Loiacono (“Loiacono”), Andrew T. Pitler (“Pitler”), Tabatabai Investment Management LLC (f/k/a Arosa Investment Management LLC) (“TIM”) and Alex Tabatabai (“Tabatabai” and, collectively with TIM, “Arosa”) (collectively, the “Parties”) hereby provide notice to DATATRAK shareholders of two proposed partial settlements of the lawsuit captioned DATATRAK International, Inc. v. Arosa Investment Management, LLC, et al., Cuyahoga County Court of Common Pleas, Case No. CV-15-854059 (the “Litigation”), currently being considered for final approval by the Honorable Michael E. Jackson. Together, these two settlements result in the global resolution and termination of all claims in dispute among the parties in the Litigation (the “Proposed Settlements”).
The first of the Proposed Settlements is an agreement reached by, between and among Datatrak, Arosa, Biro, Karis, Kaiser, Loiacono and Pitler, which was preliminarily approved by the Court on March 4, 2016, and disposes of all the claims asserted in the Litigation among those parties (the “First Proposed Settlement”). Birch is not a party to the First Proposed Settlement.
On March 16, 2016, Birch filed an objection to the First Proposed Settlement, filed a fourth-party complaint against DATATRAK pertaining to the termination of his employment, and filed counterclaims against Arosa asserting various claims relating to the 2015-2016 proxy contest for the election of three DATATRAK directors and the termination of his employment at DATATRAK.
On January 27, 2017, Birch, DATATRAK and Arosa reached agreement for the resolution of all claims asserted by, between and among those parties in the Litigation (the “Second Proposed Settlement”) that were not addressed in the First Proposed Settlement. Biro, Karis, Kaiser, Loiacono and Pitler are not parties to the Second Proposed Agreement, because all of the claims involving these individuals in the Litigation are addressed by the First Proposed Settlement.
Taken together, the First Proposed Settlement and the Second Proposed Settlement, if approved by the Court, will result in the termination of the Lawsuit and a global resolution of all claims in dispute among the Parties in the Litigation. If approved, the First Proposed Settlement and Second Proposed Settlement will constitute a full and binding settlement of all claims in dispute among the Parties in the Litigation, and will be binding on all DATATRAK shareholders.
Background of the Dispute and Claims Asserted
On November 10, 2015, Defendants Birch, Biro, Karis, Kaiser and Loiacono indefinitely postponed DATATRAK’s November 11, 2015 Annual Shareholder Meeting. On November 10, 2015, DATATRAK initiated the Litigation against Arosa, alleging claims of tortious interference, fraudulent misrepresentation, and civil conspiracy arising from a number of alleged improprieties in connection with Arosa’s proxy contest involving three seats on the DATATRAK Board of Directors. As of November 10, 2015, DATATRAK’s board had five members, so Arosa alleges that a victory in the proxy contest would have given Arosa a majority of three out of five directors on DATATRAK’s board.
After postponing the November 11 Annual Meeting, Defendants Birch, Biro, Karis, Kaiser and Loiacono voted to add a sixth director to DATATRAK’s board – Pitler. Thus, if Arosa was successful in its proxy contest, its slate of three directors would not constitute a majority of the board members, as Arosa alleges it would have had the November 11 Annual Meeting proceeded as scheduled and Arosa’s slate prevailed at that election.
On November 25, 2015, in its original Counterclaim and Third-Party Complaint, Arosa filed a number of direct and derivative claims stemming from the postponement of the Annual Meeting, the appointment of Defendant Pitler to the board of directors, and Birch, Biro, Karis, Kaiser, and Loiacono’s conduct in the proxy contest, alleging that if the shareholder vote had taken place on November 11 as originally scheduled, the most recent vote tallies available indicated that Arosa’s slate would have won the election; Birch disputes this allegation.
On December 21, 2015, the Parties other than Arosa filed a partial motion to dismiss Counts I and II of the original Counterclaim and Third-Party Complaint. In response, Arosa amended its claims on December 28, 2015. Through its December 28 Amended Counterclaim and Third- Party Complaint, Arosa asserted the following derivative claims: a) Count I for Declaratory Judgment against DATATRAK, Birch, Biro, Karis, Kaiser, Loiacono and Pitler; b) Count II for Breach of Fiduciary Duty against Birch, Biro, Kaiser, Karis and Loiacono; and c) Count III for Corporate Waste & Gross Mismanagement against Birch, Biro, Kaiser, Karis, Loiacono and Pitler.
Arosa and Tabatabai also brought Counts I and II in their individual capacities, and asserted a direct cause of action against DATATRAK and Birch (Count IV) in their individual capacity only, not derivatively. All causes of action asserted by Arosa in its individual capacity against the Parties other than Birch are also being dismissed with prejudice as part of the First Proposed Settlement; however, the claims asserted against Birch were not released or dismissed as part of the First Proposed Settlement, and are instead addressed by the Second Proposed Settlement. The costs of Birch’s defense to the Arosa and Tabatabai claims have been covered under one or more of DATATRAK’s insurance policies.
On February 24, 2016, DATATRAK terminated Birch’s employment for cause. Birch disputes and denies that he was appropriately terminated for cause. On March 25, 2016, after the Proposed Settlement was initially submitted to the Court, Birch filed an Answer to Arosa’s Amended Third-Party Complaint, substantively denying all liability for the individual and derivative claims asserted against him by Arosa and DATATRAK. Birch also filed a Counterclaim and Fourth-Party Complaint against Arosa, Tabatabai and DATATRAK, raising the following claims: a) Count I for Intentional Interference with Contractual Relations (against Arosa and Tabatabai); b) Count II for Tortious Interference with Business Relations (against Arosa and Tabatabai); c) Count III for Defamation (against Arosa and Tabatabai); d) Count IV for Invasion of Privacy (against Arosa and Tabatabai); e) Count V for Unfair Competition/Unfair Commercial Practices (against Arosa and Tabatabai); f) Count VI for Abuse of Process (against Arosa and Tabatabai); g) Count VII for Civil Conspiracy (against Arosa and Tabatabai); h) Count VIII for Breach of Contract (against DATATRAK); and i) Count IX for Indemnification (against DATATRAK). Arosa, Tabatabai and DATATRAK substantively deny the claims Birch has raised against them.
In particular, Birch alleges that on December 29, 2015 a binding amendment to his employment agreement was voted on and approved by the DATATRAK Board of Directors. Birch alleges that this Board-approved amendment entitles him to certain post-termination compensation from DATATRAK; that DATATRAK violated his employment agreement by withholding his post-termination compensation; that DATATRAK is contractually required to indemnify him for the legal costs and damages he has incurred to date in defending the claims asserted against him by Arosa and Tabatabai; and that DATATRAK will be obligated to continue indemnifying him against these claims in the future, as they would have survived the First Proposed Settlement. DATATRAK, Arosa and Tabatabai deny and dispute these claims. Arosa, Tabatabai and DATATRAK estimate that the total damages sought by Birch in connection with his claims against these parties exceed seven figures; Birch disputes this estimation.
On April 22, 2016, DATATRAK filed its Answer and Affirmative Defenses to Birch’s First Amended Fourth-Party Complaint. DATATRAK denies that it breached its obligations under its employment agreement with Birch. DATATRAK also denies that Birch is entitled to contractual indemnification. DATATRAK further contends that Birch breached the applicable statutory standard of conduct and failed to act in good faith and in a manner believed to be in or not opposed to the best interests of DATATRAK. Additionally, DATATRAK filed a Counterclaim against Birch, alleging claims for: (1) declaratory judgment; (2) fraud; (3) unjust enrichment; (4) breach of the implied covenant of good faith and fair dealing; (5) breach of fiduciary duty; and (6) a claim under the faithless servant doctrine that Birch breached the implied condition of employment that he would carry out his duties in good faith and not act to the detriment of DATATRAK. The costs of Birch’s defense of the DATATRAK claims have been covered under one or more of DATATRAK’s insurance policies.
The claims asserted among DATATRAK, Birch and Arosa (including both the direct and derivative claims asserted by Arosa against Birch) were not released as part of the First Proposed Settlement. However, on January 27, 2017, following several months of negotiation, DATATRAK, Birch and Arosa reached an agreement on the Second Proposed Settlement, which includes the release and termination of all the claims asserted in the Litigation that were not addressed in the First Proposed Settlement, as further set forth in the settlement agreement among DATATRAK, Birch and Arosa. Taken together, the First and Second Proposed Settlements will result in the termination of the Litigation and a final and complete resolution of all claims asserted among the Parties in the Litigation.
The Proposed Settlements
After Arosa filed the Amended Counterclaim and Third-Party Complaint, and over Arosa’s objection, DATATRAK’s then Board of Directors postponed the Annual Meeting two more times — first to December 30, 2015 and then to January 8, 2016. At the January 8, 2016 Annual Meeting, Arosa’s Board of Directors slate prevailed in the proxy contest with roughly 62% of the votes cast. Following the election, Arosa and the parties other than Birch promptly commenced settlement discussions in an effort to avoid further litigation expenses and to facilitate DATATRAK’s business operations given the then-divided Board of Directors.
As a result of the agreement between Arosa and the Parties other than Birch, Defendants Kaiser, Karis and Pitler resigned from the DATATRAK Board of Directors upon execution of the First Proposed Settlement, and Arosa has provided a full release to DATATRAK, Biro, Karis, Kaiser, Loiacono and Pitler, and now seeks approval of a dismissal with prejudice of the claims asserted against those parties, as described more fully in the First Proposed Settlement. These resignations gave the remaining DATATRAK Directors, each elected as part of Arosa’s slate at the January 8, 2016 election, a majority of seats on the DATATRAK Board, which Arosa contends would have been the result if the election had proceeded on November 11, 2015 as originally scheduled; Birch disputes this contention.
The full release given by Arosa contained in the First Proposed Settlement would preclude the Parties other than Birch from being sued by DATATRAK, Arosa, Tabatabai, or by other DATATRAK shareholders regarding the released claims.
As Birch was not a party to the First Proposed Settlement, DATATRAK, Birch and Arosa subsequently engaged in a series of negotiations, including a mediation, which ultimately led to an agreement, the Second Proposed Settlement, resulting in the resolution and release of all claims at issue in the Litigation that were not addressed in the First Proposed Settlement. The Second Proposed Settlement involves a payment by DATATRAK to Birch of $260,000, which amount partially represents an exchange for Birch’s return to DATATRAK of 19,438 shares of DATATRAK restricted stock at a price of $4/share (or $77,752).
The full release given by Arosa contained in the Second Proposed Settlement would preclude Birch from being sued by DATATRAK, Arosa, Tabatabai, or by other DATATRAK shareholders regarding the released claims.
Due to the derivative nature of the claims asserted against DATATRAK, Birch, Biro, Karis, Kaiser, Loiacono and Pitler, which are being released in their entirety by virtue of the First and Second Proposed Settlements, Ohio Rule of Civil Procedure 23.1 requires Court approval of any dismissal of those claims and that notice of the proposed dismissal be given to the shareholders. Specifically, Rule 23.1 states that a derivative “action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal shall be given to shareholders in such a manner as the court directs.”
Request for Court Approval of Settlement and Deadline for Shareholders to Object
In keeping with the requirements of Civ.R. 23.1, the Parties have requested that Judge Michael E. Jackson, who has presided over the Litigation from its inception, approve the Proposed Settlements and the proposed dismissal with prejudice of the derivative claims asserted against DATATRAK, Birch, Biro, Karis, Kaiser, Loiacono and Pitler. Because the First Proposed Settlement resulted in the resignations of Kaiser, Karis and Pitler, making Arosa’s slate a majority of the DATATRAK board, and because the Second Proposed Settlement accomplishes the resolution of all claims among DATATRAK, Birch and Arosa, including the termination of claims pertaining to Birch’s employment and board service at DATATRAK, Arosa does not believe that maintenance of the derivative claims asserted in the Litigation and the accompanying litigation costs for DATATRAK are warranted under the circumstances.
Shareholder Objections to Proposed Settlements
The Proposed Settlements and copies of all pleadings filed in this matter are available online at http://cpdocket.cp.cuyahogacounty.us/CV_CaseInformation_Summary.aspx?q=3HfgRtBU4x-6LJ0Zefyn4g2, selecting “Yes” to agree to the Court’s Conditions of Use for its online docket, clicking the “Civil Search by Case” button in the left-hand column, selecting “Civil” in the Case Type dropdown box, selecting “2015” in the Case Year dropdown box, and typing “854059” in the “Case Number” box. The First Proposed Settlement was filed on February 23, 2016, and the Second Proposed Settlement was filed on March 9, 2017. In addition, the Proposed Settlements can be accessed in .pdf form at http://www.datatrak.com/company/investor-information/.
The Court will hold a final hearing on the approval of the Proposed Settlements on June 2, 2017 (the “Final Hearing”) at 9:30 AM at the Cuyahoga County Justice Center, Courtroom 15-D, 1200 Ontario St., Cleveland, Ohio 44113. Any DATATRAK Shareholder wishing to object to the terms of the Proposed Settlements must provide such objections to Judge Jackson no later than May 5, 2017. Objections must be submitted in writing by mail to Judge Michael E. Jackson, Cuyahoga County Justice Center, Courtroom 15-D, 1200 Ontario St., Cleveland, Ohio 44113. All objections must contain all of the following information:
- The shareholder’s name, legal address and telephone number;
- Information sufficient to allow DATATRAK or any entity charged with the responsibility of maintaining the official list of DATATRAK shareholders to confirm that the shareholder submitting the objection is a current DATATRAK shareholder as of the commencement of the litigation, November 25, 2015, including the number of shares owned, purchase date(s), and how the shares are held;
- A statement of the shareholder’s position with respect to the matters to be heard at the Final Hearing, including a statement of each objection being made;
- The grounds for each objection or the reasons for desiring to appear and be heard;
- Notice of whether the shareholder intends to appear at the Final Hearing (this is not required if a shareholder has filed his/her objection with the Court); and
- Copies of any papers the shareholder intends to submit to the Court, along with the names of any witness(es) shareholder intends to call to testify at the Final Hearing and the subjects of their testimony.
The Court is not obligated to consider any objection that does not substantially comply with these requirements. Objecting shareholders have the right to appeal the Court’s decision regarding the Proposed Settlements. Information contained in the objection will be shared with the parties prior to the date of the final hearing.