JUNE 2010 NEWSLETTER

Pozzuolo Rodden Trial Team Wins $4.1 Million Binding Award for Former CEO Wrongfully Fired by Publicly Traded Company

In an effort to educate our business clients on the proper procedure to dismiss a senior
employee, we have republished the opinion of the three-member arbitration panel who
awarded this $4.1 million award after an 18 day trial. Hopefully, this opinion will provide our
clients with some instructive real world direction on how not to dismiss a senior employee. The
opinion follows below:

AMERICAN ARBITRATION ASSOCIATION COMMERCIAL ARBITRATION TRIBUNAL
In the Matter of the Arbitration Between
RE: 14 116 Y 00901 08
Louis D. Paolino, Jr.
Claimant
And
Mace Security International, Inc.
Respondent

AWARD OF ARBITRATORS

We, the undersigned Arbitrators/ Bernard D. Beitch, Esquire, George R. Freund and Clyde A. Szuch, Esquire, having been designated in accordance with the Employment Agreement entered into by the above-named parties dated August 21, 2006, and having been duly sworn and having duly heard the proofs and allegations of the Parties, FIND as follows:

(A) Claimant was an experienced and successful chief-executive officer at other companies. He engineered the structure of Respondent as a publicly traded company by combining privately held businesses with a traded shell corporation. He ran the enterprise for several years, collegially with the Board of Directors, until a threatened proxy fight by a hedge fund shareholder was settled by replacing some Board members with three newly designated individuals.

(B) Thereafter, the relationship between the Board and the Chief Executive Officer (Claimant) became contentious. The principal of the hedge fund through the new Board members attempted to achieve various goals, including limiting the compensation of Claimant and attempting to terminate his employment. In August of 2006, Claimant strenuously insisted that the Board of Directors enter into a new Employment Agreement to replace the one that was expiring in that month. After execution, the agreement was somewhat modified at the Board’s behest. Thereafter, the independent directors considered attempting to set aside the Agreement because of the pressured nature of the negotiations. The failure to proceed with any such attempt and actions taken acknowledging existence
of the Agreement in various SEC filings and in acting in accordance with its terms over a long period constituted a ratification.

(C) The newly constituted Board, which had only limited experience in operating an enterprise of the nature of Respondent, disagreed with some of Claimant’s plan for the future success of the Company. It, partly at the behest of the hedge fund principal, was focused on cost cutting while the Claimant wanted to try to achieve success in part through further expansion in the Internet business, He stated that, while open to guidance on cost cuts which could reasonably be achieved, he was concerned about resulting decreases in the viability and expansion of the businesses. Eventually, the independent directors of Respondent (as opposed to its Board of Directors) issued a written directive to the Claimant to cut costs by a specified amount. Claimant responded in writing, questioning the independent directors’ authority to so act and arguing the difficulty of damage-free reduction in costs, It is noted that the ordered actions which the Claimant said were impossible could not be achieved. The replacement Chief Executive Officers and the Board were unable to cut costs without damaging revenues and profits.

(D) The independent directors in a series of secretive meetings decided to carry out the termination of Claimant’s employment. They circulated the notice of a meeting of the Board of Directors stating as the purpose the furtherance of steps and approaches which had been suggested by Claimant, while the real sole purpose of the meeting (which was not mentioned at all) was to terminate his employment. Because of the apparent movement of the independent directors in the direction of his plans for betterment of the business telegraphed by the notice, Claimant sent directives to the managers of the various company divisions directing them to come up with immediate plans to cut costs in sums equivalent to that which the independent directors wished to achieve.

(E) During the brief Board meeting, without any preliminary discussion or opportunity to protest, Claimant’s employment was terminated. His request for the reason was refused during the meeting. He was told that he would receive a written statement in that regard which was sent the next day and that he would not be paid the severance payment called for under his Employment Agreement.

(F) Under the terms of his Employment Agreement, a termination by Respondent without cause would result inentitlement to severance pay. Cause was defined as “causing material harm to the Company by Employee engaging in willful misconduct or a felony.” It went on to state that “ … material harm is caused to Company if the Company incurs expenses of Five Hundred Thousand Dollars ($500,000,00) or more.” To invoke this clause, Respondent was required to send written notice of termination which “ … must specify the nature of the willful misconduct or felony.” None of the reasons cited by the Board of Directors in their subsequent letter constituted willful misconduct and they were all matters that the Board had been well aware of much prior to the termination. The only possible exception was the purported failure to cut costs which had never been a formal Board directive, nor had the Claimant ever refused outright to do so but, instead, had enlisted the Board’s guidance in achieving the result.

(G) If the Board had given appropriate notice and stated the reason(s) for termination, the Claimant would have been able to show that he had commenced compliance. Delaware law, which is controlling by stipulation of the parties, requires that the CEO of a corporation be given formal notice of the intended purpose of a meeting to terminate his employment for the very purpose of permitting such discussion and defenses. If Claimant had been given an opportunity to do so, it is possible that the Board would not have then taken the action to terminate his employment (which under Delaware law was not effective) . The Employment Agreement provides for a severance payment formula which is stipulated to be equivalent to the sum of Three Million Eight Hundred Fifty-One
Thousand Dollars ($3,851,000.00) in the event that Respondent terminated Claimant’s employment without cause. This is a negotiated severance amount to be made no matter when employment is terminated during the term of the agreement. It is not based upon the remaining employment period and we find that there is no requirement of mitigation.

(H) The claim for additional stock options is barred by the prior settlement of that claim by the parties. The rescission of One Million Seven Hundred Sixty-Nine Thousand Six Hundred Eighty-Two (1,769,682) stock option grants at the Board of Directors’ meeting of October 9, 2008 was improper and invalid based upon our finding that the termination of employment was not for cause. Those options will be ordered restored and Claimant given a period of days to exercise some or all of them, notwithstanding their stated expiration dates.

(I) The false statements asserting termination for cause were libelous. Claimant made no credible proof of actual damages and we will award nominal damages only, in the sum of One Thousand Dollars ($1,000.00).

(J) Respondent did not meet its burden of proof with respect to the counterclaim asserting Claimant’s alleged conversion of company property, nor was there any credible calculation of alleged damages. Any finding in Respondent’s favor on that claim would be mere conjecture.

(K) No basis for imposition of punitive damages exists.

(L) Both parties agreed to submit Claimant’s Sorbanes-Oxley claim to this panel and we conclude that we have jurisdiction to hear and determine it. We find that Claimant’s actions were not protected activity under that Law and that the actions which he claimed to fall within the purview of that Act did not constitute a reason for the termination of his employment.

(M) Both parties requested counsel fees and expenses. The Claimant prevailed on a substantial portion of his claim and in defending the counterclaim. Thus, we will grant his application while denying Respondent’s request in this regard. The administrative fees of the American Arbitration Association and the compensation and expenses of the Arbitrators will be shared equally. They will not be ordered reallocated in part or in whole pursuant to the indemnification provided for under the Memorandum Opinion of the Delaware Chancery Court dated December 8, 2009 in the matter of Louis D. Paolino, Jr. v. Mace Security_International, Inc., C.A. No. 4462-VCL.. This is because that indemnification relates only to the counterclaim which was but a minor part of this proceeding and not capable of ready calculation.

Accordingly, we AWARD as follows:

1. Respondent shall pay Claimant the sum of Four Million One Hundred Forty-Seven Thousand Nine Hundred Twelve Dollars ($4,147,912), representing severance pay in the sum of Three Million Eight Hundred Fifty-One Thousand Dollars ($3,851,000) and interest.

2. Respondent shall restore 1,769,682 of stock options wrongfully rescinded, in accordance with their terms, except that Claimant shall have until July 15, 2010 to exercise some or all of them. Any options not exercised by that date shall expire and thereafter be null and void.

3. Respondent shall pay Claimant the sum of One Thousand Dollars ($1,000.00) on his defamation claim.

4. We find against Respondent on its counterclaims.

5. We find against Claimant on his Sorbanes-Oxley claim.

6. Jurisdiction of this matter will be retained by the Arbitrators for the limited purpose of determining and assessing the amount of Claimant’s counsel fees and expenses. The Claimant shall file and serve a calculation of his counsel fees and expenses within 20 days of the date of receipt of this Award. The counsel fee calculation shall include hourly rates and time expended by each professional and shall be supported by counsel’s Affidavit of Reasonableness. Respondent shall then have 20 days from the date of service of the fee and expense calculation to file and serve its written objections. The Claimant shall then have 15 days after receipt to file and serve a response. The Arbitrators shall then have 30 days within which to issue a Supplemental Award dealing with the amount of counsel fees and expenses.

7. This Award is in full settlement of all claims and counterclaims submitted to this Arbitration. Any claims not expressly granted herein are hereby denied.

8. This Award may be executed in any number of counterparts, each of which shall be deemed as original and all of which shall constitute one and the same instrument.

Date________________ Bernard D. Beitch, Esquire
Date_________________ George R. Freund
Date_________________ Clyde A. Szuch, Esquire