EFiled: May 25 2012 5:48PM EDT Transaction ID 44493505 Case No.

7572IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE GYRGY B. BESSENYEI and ROBERT S. GOGGIN, III, Plaintiffs, v. VERMILLION, INC., BRUCE A. HUEBNER, WILLIAM C. WALLEN, PH.D., JAMES S. BURNS, PETER S. RODDY, CARL SEVERINGHAUS and GAIL S. PAGE, Defendants. : : : : : : : C.A. No. _______________ : : : : : :

VERIFIED COMPLAINT Plaintiffs, Gyrgy B. Bessenyei and Robert S. Goggin, III (collectively Plaintiffs), by and through their undersigned counsel, for their Verified Complaint against Vermillion, Inc. (Vermillion or the Company), Bruce A. Huebner, William C. Wallen, Ph.D, James S. Burns, Peter S. Roddy Carl Severinghaus and Gail S. Page (collectively Defendants), allege as follows: NATURE OF THE ACTION 1. This Courts ruling in Blasius Indus. Inc.v. Atlas Corp., 564 A.2d 651 (Del. Ch.

1988) made clear that corporate action designed for the primary purpose of interfering with the effectiveness of a stockholder vote requires that closer scrutiny be accorded to it. As Blasius and other Delaware cases have taught, there is a vast difference between expending corporate funds to inform the electorate about shareholder proxy action and exercising power for the primary purpose of foreclosing effective shareholder action. Shareholders are thus entitled to restrain a board, from acting for the principal purpose of thwarting that action. This case seeks to do just that.

2.

Vermillion has, since its recent bankruptcy restructuring concluded, been in a

rapid downward spiral. Vermillions share price has continuously and precipitously dropped from more than $33 per share in April of 2010 to less than $3 per share now. For the years ended December 31, 2011 and 2010, the Company had net losses of $17,790,000 and $19,034,000. At the same time, the Board compensated itself in the form of special bonuses in an amount over $5 million. 3. Plaintiff Bessenyei thus announced on February 15 of this year his intention to

nominate Plaintiff Robert Goggin and Gregory Novak, who is also a Vermillion stockholder, to fill two of Vermillions seven Board seats that were to stand for election in the 2012 annual meeting. After Plaintiffs and Vermillion spent months communicating with shareholders

through SEC filings, the outcome of the stockholder election likely became clear to Defendants based on information they received from their proxy solicitors and the Companys investor relations firm Messrs. Goggin and Novak were likely to win the two seats. Then, in the midst of the proxy contest and with the annual meeting imminent, Defendants amended the Companys bylaws to eliminate one of the two contested board seats. 4. That the elimination of the board seat was designed to interfere with an ongoing

proxy contest and thwart the stockholder vote is evident from the timing of, stated purpose for and disenfranchising consequences flowing from Defendants action. Defendants elimination of the board seat was done well into a proxy contest that Defendants likely knew they would lose, on the eve of the impending annual meeting and after issuing numerous proxy statements in which Defendants advocated for their own two nominees without ever suggesting that only one seat would be open for election. The only reason Defendants offered for this sudden board reduction an effort to save the Companys cash is demonstrably false. Vermillions own

-2-

amended 10-K makes clear that Vermillions directors are paid only in restricted stock and do not receive any cash consideration. 5. Finally, the director entrenchment and stockholder disenfranchisement flowing

from the elimination of the board seat is significant. If allowed to stand, Defendants actions leave Vermillion with an unevenly staggered board of six directors three classes: a class of three; a class of two; and a class of one. With only one director standing for election this year and two in 2013, stockholders now cannot gain a controlling voice on the Vermillion board until 2014 thus forcing the shareholders to wait another year and wage an additional proxy contest to have a meaningful voice. 6. Plaintiffs seek by this action to preliminarily enjoin Vermillions 2012 annual

meeting until it can be determined whether two directors should stand for election. Plaintiffs also seek a finding that the director Defendants breached their fiduciary duties by eliminating a Board seat in the midst of a proxy contest they were losing and a declaration that both seats must stand for election at the Companys next annual meeting. JURISDICTION 7. This Court has personal jurisdiction over Defendant Vermillion, Inc. because it is

a Delaware corporation. 8. This Court has personal jurisdiction over each of the Director Defendants because

the claims asserted against each are based on actions taken by Defendants in their capacity as Directors of a Delaware corporation. 9. This Court has subject matter jurisdiction over this matter pursuant to 10 Del. C.

341 because the primary relief sought is equitable.

-3-

FACTUAL BACKGROUND The Parties 10. 11. Plaintiff Gyrgy B. Bessenyei is a Vermillion stockholder. Plaintiff Robert S. Goggin, III is a Vermillion stockholder and a nominee for one

of two Vermillion board seats to be filled at the 2012 annual meeting. 12. Defendant Vermillion is a Delaware corporation with its principal place of

business in Austin, Texas. 13. Defendant Huebner is a Class I Director of Vermillion and has served in that Mr. Huebner, at times, has received consulting fees from the

capacity since May 2011. Company. 14.

Defendant Wallen is a Class I Director of Vermillion and has served in that

capacity since February 2010. 15. Defendant Burns is a Class II Director of Vermillion and has served in that

capacity since June 2005. He has served as Chairman of the Board since September 29, 2011. 16. Defendant Roddy is a Class II Director of Vermillion and has served in that

capacity since February 2010. 17. Defendant Severinghaus is a Class II Director of Vermillion and has served in that

capacity since March 3, 2010. 18. Defendant Hamilton is a Class III Director of Vermillion and has served in that

capacity since April 2008.

-4-

19.

Defendant Page is a former Class III Director of Vermillion who served in that

capacity from approximately December 2005 through May 15, 2012. Ms. Page also served as the Companys President and Chief Executive Officer from December 2005 through March 2009 and February 2010 through May 2012. The Company 20. Vermillion develops and commercializes novel high-value diagnostic tests that

help physicians diagnose and treat patients. Vermillions business is potentially very lucrative. The Companys OVA1 test, the first blood test cleared by the U.S. Food & Drug Administration (FDA) for the evaluation of an ovarian adnexal mass prior to a planned surgery, could potentially generate millions of dollars in revenue. Vermillions other product in the pipeline, the Peripheral Artery Disease test, addresses a minimum $1 billion market opportunity which has largely been ignored by the investment community. The Boards Ineffectual Leadership 21. The Board has, by and large, failed to realize the colossal upside of Vermillions

products and has presided over a severe erosion of shareholder value. Vermillion filed for relief under Chapter 11 of the Bankruptcy Code on March 30, 2009 and emerged from bankruptcy protection on January 22, 2010. Since then, the value of the Companys stock has plummeted. In the first quarter of 2010, the stock traded as high as $34.00/share As of May 24, 2012, the stock closed at less than $2.72 per share, less than 10% of its value from only two years ago. 22. Devaluation of the Companys shares is not Vermillions only problem. The

Companys 10-K filed on March 27, 2012 states that the Company continues to experience significant operating losses, as it has each year since its inception, and is expected to incur a net

-5-

loss for fiscal year 2012.

According to that filing, there is substantial doubt regarding

[Vermillions] ability to continue as a going concern. The Proxy Contest 23. Vermillions Board is made up of three separate classes of directors which have

staggered three-year terms. Until recently, the Board consisted of seven (7) members that were divided as follows: Class I Defendants Huebner and Wallen; Class II Burns, Roddy and Severinghaus; and Class III Hamilton and Page (who also served as Vermillions President and Chief Executive Officer). At the 2012 annual stockholder meeting, which is expected to be held sometime in early June, the Class III director(s) are up for election. 24. Frustrated by Vermillions lackluster performance, Plaintiffs decided to act.

Plaintiffs notified the Company on February 15, 2012 that Mr. Bessenyei would nominate Messrs. Goggin and Novak to serve as Vermillions Class III directors. Plaintiffs believe that the addition of Messrs. Goggin and Novak to the Board would significantly improve the Boards oversight function and provide the Companys stockholders with a much needed independent voice. Plaintiffs fully complied with the procedures proscribed by the Companys bylaws and communicated in good faith with the Board about its intentions and management concerns. 25. In response, the Company retained its own proxy solicitors and issued a series of

proxy filings and press releases promoting its own nominees and attacking Plaintiffs nominees. In those announcements, which were issued between February and early May of this year, the Company always acted as if two seats would be filled at the annual meeting, and it never once suggested that a seat might or would be eliminated.

-6-

26.

For example, on March 7 and March 15, 2012, the Board filed proxy statements

acknowledging notice from Mr. Bessenyei of his intention to nominate Messrs. Goggin and Novak to the Companys Board of Directors. The Board told investors that Messrs. Goggin and Novak are attorneys who have spent their careers in private practice, with no apparent experience in medical diagnostics, and no apparent public company board or management experience. The Board gave no indication that a seat would be eliminated. 27. On April 20, 2012, Plaintiffs filed a preliminary proxy statement with the SEC

nominating Messrs. Goggin and Novak to serve as Vermillions Class III directors. On April 25, 2012, the Board responded with its own proxy statement, requesting that investors nominate both Ms. Page and another Company nominee, Dr. Paul R. Sohmer, and reject the slate of directors proposed by Plaintiffs. Once again, the Company gave no indication that a Board seat would be eliminated. 28. On May 4, 2012, Plaintiffs filed another proxy filing with the SEC, informing

investors that they intended to: (1) call for the removal of Ms. Page as the Companys CEO and replace her with a more suitable candidate not yet identified; (2) call for an amendment to the Companys bylaws to provide for a stockholder right to call a special meeting at any time, if stockholders holding more than 10% of the Companys outstanding voting stock request such a meeting; (3) press for the reduction of sales, general and administrative costs; (4) press for an increase in research and development spending; (5) advocate for a change in the Companys focus from a sales organization to a corporation more focused on research and development and intellectual property; and (6) shift the direction of the Companys primary focus toward FDA approval of the VASCLIR (PAD) blood test and the OVA2 test.

-7-

29.

On May 9, 2012, the Company filed a Preliminary Proxy Statement noting once

again that an Annual Meeting of the Stockholders will be held to elect two persons as Class III directors, each to serve for a three-year term and until their successors are duly elected and qualified. The Board urged investors to vote for both of the Boards nominees and, once again, urged stockholders to reject the nominees proposed by Plaintiffs. The Board gave no indication that a Board seat would be eliminated. The Boards Purposeful Interference With The Upcoming Election 30. After an expensive and lengthy proxy contest waged by Plaintiffs and the Board

for a period of months, Defendants likely knew based on their information from their proxy solicitors and investor relations firm that Messrs. Goggin and Novak would have enough votes to prevail in the upcoming director election. 31. Shortly thereafter, on May 16, 2012, Vermillion disclosed to the SEC that Ms.

Page had resigned as a member of the Board. The Company also revealed that the Board had amended the Companys bylaws on May 15, 2012 to reduce the size of the Board from seven to six members (the Amendment). This change took effect immediately. The Amendment eliminated the seat vacated by Ms. Page and left only one Class III director. 32. The Amendment demonstrates that the Board understood the eventuality that Ms.

Page and the other Company nominee, Dr. Paul R. Sohmer, would be defeated by Messrs. Goggin and Novak and therefore the Board opted to unlawfully shrink the Boards size only weeks before the annual meeting in order to prevent the Group from nominating and electing its two directors. The Boards action constitutes a flagrant attempt to prevent the stockholders from having a meaningful vote at the annual meeting by halving their influence should they elect Plaintiffs nominees.

-8-

33.

The resulting imbalance an imbalance which the Company has stated it would

seek to avoid in its past public filings between the number of directors in each of the Boards three classes (the Amendment has left Class III with only one member, while Class I has two and Class II has three) has the effect of entrenching the incumbent directors and interfering with the shareholders ability to have a majority voice on the board. Before the seat was eliminated, four of seven directors were to stand for election in the next two annual meetings. As a result of the Companys elimination of a Class III seat, only three of six directors will be elected in the next two cycles, meaning that shareholders must wait two more years year and wage additional proxy contests to gain control of the board from the incumbents. 34. The effect of the Amendment thus is an unjustifiable interference with the

shareholders fundamental corporate rights, and a entrenchment of the incumbent directors at a time when the Companys financial prospects are rapidly declining and the incumbent Board has acknowledged that the Company may not remain a going concern for much longer. The Boards Interference Is Not Justified 35. According to Vermillions 8-K filed on May 16, 2012, the Board reduced the

number of authorized directors from seven to six persons to further ongoing attempts to streamline the organization of the Company and to extend its cash runway. This demonstrably false statement can only be described as pretextual. 36. The elimination of a single director does not streamline the Companys

organization and nothing the Board has previously said supports that contention. The contention that the Amendment will extend the Companys cash runway is nonsense because the Company compensates the Board solely in restricted stock, not cash. Indeed, the Companys own public statements have made clear that its streamlining efforts would be accomplished

-9-

through employee reductions not through the elimination of board seats that do nothing to effect the Companys cash position. 37. The Board therefore has no valid justification for adopting the Amendment and

interfering with the stockholders right to elect directors of their choosing. The Board Refuses To Reverse Course 38. After the Boards adoption of the Amendment, on May 17, 2012, Plaintiffs

counsel wrote to the Company, advising that the defendant Directors had breached their fiduciary duties by adopting the Amendment and demanded that the Board nullify the Amendment and allow the Companys stockholders to elect two Class III directors, as had been previously represented. Plaintiffs advised the director Defendants that they had unjustifiably interfered with the Companys stockholders basic corporate rights and had acted to seriously entrench themselves and, therefore, faced personal liability for their wrongful conduct. 39. Plaintiffs entreaties have apparently fallen on deaf ears because the Amendment

has not been revoked and the Board is pushing forward towards the impending annual meeting, intent and apparently determined to only allow Vermillions stockholders to elect one Class III director. COUNT I BREACH OF FIDUCIARY DUTY (BLASIUS) 40. fully herein. 41. As directors of a Delaware corporation, the director Defendants owe Plaintiffs incorporate by reference Paragraphs 1 through 39 above as if set forth

uncompromising fiduciary duties of loyalty, care and good faith to Plaintiffs and Vermillions other stockholders. The director Defendants have failed to honor these obligations and have breached their fiduciary duties.

- 10 -

42.

The director Defendants have acted disloyally and in contravention of their

fiduciary duties by reducing the size of the Companys board of directors from seven to six members. On information and belief, the Board knew that both Messrs. Goggin and Novak would be elected as the Companys Class III directors at the upcoming stockholder meeting. Defendants therefore adopted the Amendment and eliminated one of the Class III seats to prevent the Companys stockholders from electing both Messrs. Goggin and Novak to the Board. As such, the director Defendants acted with the primary purpose of thwarting the exercise of a stockholder vote. 43. As has been shown, the director Defendants have no justification for adopting the

Amendment, let alone a compelling one as required by Delaware law. 44. Because of the director Defendants wrongful actions, Plaintiffs cannot vote their

shares at the upcoming annual meeting as they please. Because of the implication of Plaintiffs fundamental right to vote, they possess direct claims against the director Defendants. 45. Plaintiffs have no adequate remedy at law. COUNT II BREACH OF FIDUCIARY DUTY (UNOCAL) 46. fully herein. 47. The effect of the Amendment is an unjustifiable interference with the Plaintiffs incorporate by reference Paragraphs 1 through 45 above as if set forth

stockholders basic corporate rights and is a serious entrenchment of the incumbent directors. By causing a greater imbalance between the number of directors in each of the Boards three classes (the Amendment has left Class III with only one member, while Class I has two and Class II has three), stockholders of the Company will be further disenfranchised next year,

- 11 -

because, due to the imbalance, even over two annual meeting cycles, it will not be possible for the stockholders of the Company to elect a majority of the Board. 48. Because the incumbent directors acted to protect themselves and to prevent the

Companys stockholders from removing them from office, the Amendment is an improper defensive measure and by adopting it, the individual directors have breached their fiduciary duties of loyalty they owe to Plaintiffs and the other Vermillion stockholders. 49. The director Defendants had no reasonable basis for believing that a danger to

corporate policy or effectiveness existed. Even if they did, the purposeful interference with director elections is not a reasonable response to any imaginable threat. 50. Because of the director Defendants wrongful actions, Plaintiffs cannot vote their

shares at the upcoming annual meeting as they please. Because of the implication of Plaintiffs fundamental right to vote, they possess direct claims against the director Defendants. 51. Plaintiffs have no adequate remedy at law. COUNT III DECLARATORY RELIEF 52. fully herein. 53. As discussed above, the director Defendants have breached their fiduciary duties Plaintiffs incorporate by reference Paragraphs 1 through 51 above as if set forth

by reducing the size of the Board from seven to six members for the purpose of preventing the Companys stockholders from placing both Messrs. Goggin and Novak on the Board. 54. Because the director Defendants breached their fiduciary duties by adopting

Amendment, the Amendment is not a valid act of the Board and is null and void.

- 12 -

55.

An actual controversy exists as to whether the Amendment is invalid. Plaintiffs

rights or other legal relations are implicated because the Amendment prevents them from voting their shares as they please. The director Defendants have a legal interest in contesting this claim because they face liability for breaching their fiduciary duties. Because of these legal interests, the parties have real and adverse interests. This issue is ripe for judicial determination because proxies are now being solicited for the director election and Plaintiffs and other stockholders cannot vote their shares as they please. 56. Plaintiffs have no adequate remedy at law. COUNT IV PRELIMINARY INJUNCTIVE RELIEF 57. fully herein. 58. Plaintiffs have a likelihood of success on the merits. In response to the likelihood Plaintiffs incorporate by reference Paragraphs 1 through 56 above as if set forth

of Messrs. Goggin and Novak being elected to the Board, Defendants adopted the Amendment to prevent that from happening. The director Defendants therefore purposefully interfered with the Companys stockholders rights to elect directors without a compelling reason for doing so. The director Defendants also had no reasonable basis for believing that a danger to corporate policy or effectiveness existed and, even if they did, their response was not reasonable in relation to the alleged threat. 59. Plaintiffs have demonstrated a threat of irreparable harm. If the Amendment is

not voided and the annual meeting is not enjoined until the stockholders have a chance to elect both Messrs. Goggin and Novak, the director Defendants will have denied Plaintiffs and Vermillions other stockholders from freely voting their shares in addition to unnecessarily frustrating their attempt to obtain representation on the Board. This irreparable harm is

- 13 -

imminent because, as the last annual meeting was held in June 2011, the next annual meeting is likely to be held sometime during the next several weeks. 60. The balancing of harms that will be incurred by Plaintiffs if no injunction is

issued against the harms that may be incurred by the Defendants if an injunction is granted favors Plaintiffs. Plaintiffs are aware of no significant harm that would be incurred by the Defendants if the injunctive relief requested by Plaintiffs is granted. A denial of that injunctive relief, however, would not only inflict on Plaintiffs the irreparable harm described above, but would also undermine Delawares commitment to ensuring effective corporate elections and the requirement that those elections to be conducted with scrupulous fairness. COUNT V PERMANENT INJUNCTIVE RELIEF 61. fully herein. 62. At the conclusion of this case, any preliminary injunction will expire and there Plaintiffs incorporate by reference Paragraphs 1 through 60 above as if set forth

will remain no Court order preventing the director Defendants from holding an annual meeting without ensuring the Companys stockholders can elect two Class III directors. 63. At the appropriate time, Plaintiffs will show that their claims succeed on the

merits. In response to the likelihood of Messrs. Goggin and Novak being elected to the Board, the director Defendants adopted the Amendment to prevent that from happening. Defendants therefore purposefully interfered with the Companys stockholders rights to elect directors without a compelling reason for doing so. The director Defendants also had no reasonable basis for believing that a danger to corporate policy or effectiveness existed and, even if they did, their response was not reasonable in relation to the alleged threat.

- 14 -

64.

Plaintiffs have demonstrated a threat of irreparable harm. If the Amendment is

not voided and the annual meeting is not enjoined until the stockholders have a chance to elect both Messrs. Goggin and Novak, the director Defendants will have denied Plaintiffs and Vermillions other stockholders from freely voting their shares in addition to unnecessarily frustrating their attempt to obtain representation on the Board. This irreparable harm is

imminent because, as the last annual meeting was held in June 2011, the next annual meeting is likely to be held sometime during the next several weeks. 65. The balancing of harms that will be incurred by Plaintiffs if no injunction is

issued against the harms that may be incurred by the Defendants if an injunction is granted favors Plaintiffs. Plaintiffs are aware of no significant harm that would be incurred by

Defendants if the injunctive relief requested by Plaintiffs is granted. A denial of that injunctive relief, however, would not only inflict on Plaintiffs the irreparable harm described above, but would also undermine Delawares commitment to ensuring effective corporate elections and the requirement that those elections to be conducted with scrupulous fairness. WHEREFORE, Plaintiffs respectfully requests the following relief: A. Declaring the May 15, 2012 Amendment to the Companys bylaws reducing the

members of Vermillions Board from seven to six members null and void; B. C. Finding that the individual Defendants breached their fiduciary duties of loyalty; Enjoining and further declaring that the next Vermillion annual stockholder

meeting may not take place until it can be determined whether the Companys stockholders are allowed to vote for two Class III directors at the 2012 annual meeting; D. E. Awarding Plaintiffs the costs and disbursements of this action; and Granting such other and further relief as the Court deems appropriate.

- 15 -

Dated: May 25, 2012

DUANE MORRIS LLP /s/ Matt Neiderman Matt Neiderman (Del. Bar No. 4018) Gary W. Lipkin (Del. Bar No. 4044) Benjamin A. Smyth (Del. Bar No. 5528) 222 Delaware Avenue, Suite 1600 Wilmington, DE 19801-1659 Tel.: (302) 657-4900 Fax: (302) 657-4901 Attorneys for Plaintiffs Gyrgy B. Bessenyei and Robert S. Goggin.

- 16 -