In re PLX Technology Inc. Stockholders Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE PLX TECHNOLOGY INC. ) CONSOLIDATED
STOCKHOLDERS LITIGATION ) C.A. No. 9880-VCL
MEMORANDUM OPINION
Date Submitted: July 18, 2018
Date Decided: October 16, 2018
R. Bruce McNew, COOCH AND TAYLOR, P.A., Wilmington, Delaware; Randall J.
Baron, David A. Knotts, Maxwell R. Huffman, ROBBINS GELLER RUDMAN & DOWD
LLP, San Diego, California; Kent Bronson, MILBERG TADLER PHILLIPS
GROSSMAN LLP, New York, New York; Attorneys for Plaintiffs.
Patricia L. Enerio, Jamie L. Brown, HEYMAN ENERIO GATTUSO & HIRZEL LLP,
Wilmington, Delaware; Lori Marks-Esterman, Renee M. Zaytsev, OLSHAN FROME
WOLOSKY LLP, New York, New York; Attorneys for Defendant.
LASTER, V.C.
In January 2013, defendant Potomac Capital Partners II, L.P. (“Potomac”) launched
an activist campaign to pressure PLX Technology Inc. (“PLX” or the “Company”) into a
sale. Eric Singer, Potomac’s co-managing member, led the activist campaign. Singer’s
investment thesis was simple. PLX had agreed to sell itself to Integrated Device
Technology, Inc. (“IDT”), but PLX and IDT terminated their deal in December 2012 after
the Federal Trade Commission challenged it on antitrust grounds. During the go-shop
period, another bidder had expressed interest in buying PLX. After the IDT deal failed,
PLX’s stock plummeted. Singer bought shares at depressed prices, believing that Potomac
could achieve short-term profits if PLX was sold to the other bidder.
Singer issued a series of highly critical public letters in which he demanded that the
Company’s board of directors (the “Board”) conduct a sale process. During meetings with
members of the Board and PLX management, he insisted that they sell PLX. In March
2013, Potomac nominated five candidates, including Singer, to replace a majority of the
Board. In November 2013, Potomac conducted a proxy contest but sought to replace only
three of the incumbent directors. At PLX’s annual meeting in December 2013, Potomac’s
nominees prevailed. At Singer’s request, the Board made him chair of the Strategic
Alternatives Special Committee, which was charged with exploring strategic alternatives
for the Company.
Shortly after the annual meeting, a senior executive from Avago Technologies
Wireless (U.S.A.) Manufacturing Inc. (“Avago”) contacted Deutsche Bank Securities Inc.,
who was serving as PLX’s financial advisor. Conveniently, Deutsche Bank was also
advising Avago on its acquisition of LSI Corporation, one of PLX’s competitors.
1
Avago had been the other bidder who had approached PLX during the go-shop
period for the IDT deal. Subsequently, in February 2013, Avago had proposed to acquire
PLX for $6.00 per share. The Board had rejected Avago’s offer, telling Avago that the
price needed to “start with a 7.” Since then, PLX’s business had grown stronger.
The Avago executive told Deutsche Bank that he “saw the PLX BoD transition” but
that because of the LSI acquisition, Avago would be in the “penalty box” until that deal
closed. He said that once the LSI transaction was complete, Avago would be “open for
business on all topics,” including an acquisition of PLX, which he described as a “$300M
deal.” With 45.9 million shares outstanding, this figure equated to $6.53 per share.
Deutsche Bank shared the information with Singer. Deutsche Bank and Singer did
not share the information with PLX’s management team or with the other members of the
Board. As a result of the tip from Avago, Singer and Deutsche Bank knew when Avago
was likely to bid (after the LSI acquisition closed) and how much Avago wanted to pay
($300 million).
Over the next four months, Singer bided his time. In May 2014, Avago closed the
LSI transaction and approached PLX, just as it said it would. The same senior executive
from Avago asked to meet personally with Singer. The two discussed the pricing for a sale
of PLX. The next day, Avago proposed to acquire PLX for $6.25 per share. Nine days later,
PLX had agreed in principle to a deal at $6.50 per share—just what Avago said it wanted
to pay when it approached Deutsche Bank in December 2013.
During those nine days, as Chair of the Special Committee, Singer worked with
Deutsche Bank to manage the process and lead the Board to a deal at $6.50. One major
2
problem was management’s business plan, which had been prepared in December 2013,
approved by the Board, and used by the Board when making decisions in the ordinary
course of business. A discounted cash flow analysis based on the five-year projections in
that plan (the “December 2013 Projections”) generated a valuation range well above the
Avago deal price. The Special Committee and Deutsche Bank had management prepare a
new and materially lower set of projections, which management described as a “sensitivity
case” (the “June 2014 Projections”). After presenting the two sets of projections to the
Board, the directors asked for an explanation of the changes. Without ever receiving it, the
Board signed off on Deutsche Bank’s use of the June 2014 Projections for its valuation
work. Deutsche Bank called the June 2014 Projections its “Base Case” and the December
2013 Projections its “Upside Case.” When Avago received the June 2014 Projections, it
correctly labeled them as a “downside case” and continued to treat the December 2013
Projections as its base case.
On June 23, 2014, Avago and PLX formally announced their transaction, which was
structured as a medium-form merger under Section 251(h) of the Delaware General
Corporation Law (the “Merger”). In the recommendation statement that the Board sent to
stockholders, the Board did not disclose Avago’s December 2013 contact with Deutsche
Bank and claimed that the June 2014 Projections had been prepared in the ordinary course
of business. On August 12, the Merger closed. Each publicly held share of PLX common
stock was converted into the right to receive $6.50 in cash.
The plaintiffs sued the directors, contending that they breached their fiduciary duties
when approving the Merger. They also argued that the directors breached their duty of
3
disclosure when recommending the Merger to stockholders. The plaintiffs sued Potomac,
Deutsche Bank, and Avago for aiding and abetting the directors’ breaches of duty.
The claims against Avago and two of the directors were dismissed at the pleading
stage. After discovery, the remaining directors and Deutsche Bank settled. The plaintiffs
proceeded to trial against Potomac.
This post-trial decision finds that the plaintiffs proved all but one of the elements of
their claim against Potomac. The plaintiffs proved that the directors breached their
fiduciary duties by engaging in a sale process without knowing critical information about
Avago’s communications with Deutsche Bank in December 2013. The directors other than
Singer should not be blamed for this oversight in any morally culpable sense; Singer and
Deutsche Bank withheld the information from them. In terms of fulfilling their fiduciary
duties to stockholders, however, the directors fell short. The plaintiffs also proved that the
directors breached their duty of disclosure when recommending that stockholders tender,
both by failing to disclose Avago’s communications with Deutsche Bank in December
2013 and by depicting the June 2014 Projections as having been prepared in the ordinary
course of business.
The plaintiffs proved that Potomac, through Singer, knowingly participated in the
directors’ breaches of duty. Singer knew about the tip from Avago in December 2013 and
failed to disclose the information to his fellow directors. Once Avago engaged, he worked
to engineer the sale that Potomac had sought to achieve from the outset. Singer was the co-
managing member of Potomac and directed the activist campaign on its behalf. His
4
knowledge and actions are therefore imputed to Potomac for purposes of the knowing
participation element of a claim for aiding and abetting.
The plaintiffs did not prove any causally related damages. The plaintiffs theorized
that the Company should have remained a standalone entity and maintained that its value
in that configuration was $9.86 per share. The plaintiffs failed to prove that valuation,
which was more than 50% higher than the Merger consideration. Instead, the record shows
that the Merger consideration exceeded the standalone value of the Company. Judgment is
therefore entered in favor of Potomac.
I. FACTUAL BACKGROUND
Trial took place over three days. The parties submitted 505 exhibits and lodged
fourteen depositions. Only one fact witness—Singer—testified live. Two expert witnesses
testified at trial on damages issues. The parties proved the following facts by a
preponderance of the evidence.
A. PLX
PLX was a Delaware corporation that developed and sold specialized integrated
circuits used in connectivity applications.1 The Company went public in 1999, and its
shares traded on the NASDAQ Stock Market.2
1
PTO ¶ 21. Citations in this format refer to stipulated facts in the pre-trial order.
Dkt. 370. Citations in the form “[Name] Tr.” refer to witness testimony from the trial
transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a
deposition transcript. Citations in the form “JX ––– at –––” refer to trial exhibits using the
JX-based page numbers generated for trial.
2
PTO ¶ 36.
5
In 2008, PLX suffered major losses.3 In an attempt to gain scale, management made
two significant acquisitions, one in 2009 and the other in 2010.4 Both were disasters.5
By 2011, PLX faced an uncertain future.6 To turn things around, the Company began
developing a new product called ExpressFabric.7 The Board also began considering
strategic alternatives.8
B. IDT, Avago, And Balch Hill
In April 2011, PLX discussed a potential transaction with IDT. 9 On June 17, 2011,
IDT proposed to acquire PLX for $5 per share, payable 50% in cash and 50% in IDT
stock.10 The Board rejected the offer, stating that it “wanted to continue to execute on its
long-term business plan.”11 When IDT followed up, PLX told IDT that any proposal
“would have to be at a significantly higher price.”12
3
JX 35 at 2–3.
4
PTO ¶¶ 40–41; see also JX 2 at 4; JX 4 at 8; Raun Dep. 337–38; Salameh Dep.
169–71; Schmitt Dep. 85–87.
5
PTO ¶¶ 42–43; see also Singer Tr. 5–6, 332–40; Riordan Dep. 126, 140.
6
JX 35 at 4.
7
Id. at 4.
8
See JX 6 at 5.
9
PTO ¶ 44; JX 33 at 15.
10
PTO ¶ 45; JX 33 at 15.
11
JX 33 at 16.
12
Id.
6
In October 2011, PLX engaged in discussions with Avago about a potential
transaction. On October 31, 2011, the parties entered into a non-disclosure agreement.13
In February 2012, an activist hedge fund called Balch Hill Partners L.P. disclosed a
9.7% stake in the Company’s equity.14 Balch Hill asserted that “management should seek
a buyer . . . to take advantage of the tremendous market interest in . . . PCI Express
switches.”15 The Board disagreed and announced publicly that the Company’s stockholders
“would be best served by continuing to pursue the strategic projects underway” rather than
“affirmatively pursu[ing] a sale.”16
On March 7, 2012, Balch Hill submitted a slate of nominees to run against the
incumbent directors.17 Facing a proxy contest, the Board began consulting with Deutsche
Bank about strategic alternatives.18
13
PTO ¶ 47; see also JX 551 at 18.
14
JX 9 at 2; see also PTO ¶ 48; JX 33 at 16.
15
JX 9 at 6; see also JX 33 at 16; Schmitt Dep. 98–100. Cf. JX 2 at 27. “PCI
Express” is a connectivity standard for integrated circuits. “PCI” stands for “Peripheral
Component Interconnect.” See PTO ¶¶ 38-39; JX 35 at 2. The plaintiffs objected to JX 35
as containing hearsay and lacking a proper foundation. During their depositions, Schmitt
and Raun authenticated the document and confirmed the accuracy of the statements it
contained. See Schmitt Dep. 89–98; Raun Dep. 321–29.
16
JX 11 at 1; see also JX 33 at 16.
17
JX 14 (Balch Hill letter to stockholders); see also JX 15 (first amendment to
Schedule 13D); JX 16 (Schedule 14A); JX 17 (PLX Form 10-K Annual Report); JX 33 at
17.
18
JX 33 at 18–19.
7
C. The Failed IDT Merger
In March 2012, IDT indicated that it could increase its proposal to between $6.75
and $7.00 per share.19 The Board thought the range was attractive, but wanted IDT to
commit to a specific figure and a meaningful post-signing market check.20
On March 31, 2012, IDT offered to acquire PLX for $7.00 per share, payable 50%
in cash and 50% in stock, and agreed to a post-signing go-shop period.21 The Board
accepted the proposal, and the parties began due diligence.22 The parties signed a formal
merger agreement on April 30, 2012.23
During the next thirty days, Deutsche Bank contacted thirty-seven parties.24 Avago
and three others expressed interest.25 Only Avago submitted a proposal: an all-cash deal at
$5.75 per share.26 The Board declined to pursue it.27 As IDT and PLX moved towards
19
See PTO ¶ 50; JX 33 at 18.
20
See PTO ¶ 51; JX 33 at 18.
21
See PTO ¶ 53; JX 33 at 20.
22
JX 23 at 1; JX 33 at 20.
23
PTO ¶ 56; JX 30 at 1; JX 33 at 22.
24
PTO ¶ 58; JX 551 at 19; see JX 32 at 1.
25
PTO ¶ 58; JX 551 at 19.
26
PTO ¶ 59–60; JX 36 at 2–3; JX 40 at 1; JX 551 at 20; see JX 41 at 2; Krause Dep.
83. Cf. JX 37 (Avago’s analysis of the proposal prepared by Barclays).
27
PTO ¶ 59; JX 551 at 20.
8
closing, Avago made two more attempts to submit a competing bid. Each time, the Board
declined to engage.28
In May 2012, Balch Hill announced that it supported the IDT transaction and had
sold much of its position. The firm waited until October to withdraw its nominees.29
D. The IDT-PLX Deal Falls Through.
On December 18, 2012, the Federal Trade Commission moved to block the IDT-
PLX merger on antitrust grounds.30 The parties abandoned the deal the next day.31
After the termination of the IDT deal, PLX’s stock price “declined precipitously.”32
The Board decided that PLX needed a couple of quarters to stabilize before restarting a
sale process in the second half of 2013.33
To lead the recovery, the Board hired David Raun as the Company’s CEO.34
Management told the markets that “[d]espite the turmoil of the last nine months, we are
now a stronger and more resilient company.”35 Management noted that PLX had made a
28
JX 551 at 20.
29
JX 33 at 22; JX 551 at 20.
30
PTO ¶ 62; JX 55.
31
See PTO ¶ 63; JX 56 at 1; JX 57 at 1.
32
Singer Dep. 40.
33
Salameh Dep. 15-16; see also JX 59 (“the current plan is for the company to
‘recover’ from the long process of the IDT acquisition”).
34
JX 58 at 1–2.
35
JX 1006 at 1.
9
significant, well-received divestiture and was starting 2013 with its “highest-ever PCI
Express market share” of nearly 70%.36
E. Singer Becomes Interested In PLX.
The Company’s floundering stock price after the failed IDT transaction caught the
attention of Eric Singer, who managed Potomac. His investment thesis was simple: “When
the IDT deal fell apart, the stock declined precipitously, and in the company’s [proxy], it
indicated there was a competitive bidder for PLX.”37 Because “the Board already made a
decision to sell the company,” he felt that “they should go back to the other party in the
bidding process” and follow through on a transaction.38
On January 25, 2013, Potomac disclosed its ownership of 5.1% of the Company’s
common stock.39 Potomac had acquired its position at prices ranging from $3.46 to $4.55
per share.40 If Potomac could convince PLX to sell in the near term at something close to
what IDT had offered, then Potomac would generate a healthy rate of return.41
36
Id. at 2.
37
Singer Dep. 40.
38
Id. at 41.
39
PTO ¶ 64.
40
See JX 65 at 10–11.
41
Cf. Riordan Dep. 80 (testifying that Singer only cared about getting “whatever
premium he could get based on whatever he bought the stock at and whatever he could
currently sell it at”).
10
To induce PLX to sell, Potomac sent a strongly worded letter to the Board that it
also released publicly. Potomac “d[id] not believe that PLX should remain an
independent public company” and called on PLX to “immediately commence a process
of a thorough review of all strategic alternatives available to the Company.”42 Potomac
urged that “action must be taken urgently and decisively” and that “[i]t is imperative that
the Board and management translate this interest into a value-maximizing transaction.”43
Singer made clear that he wanted PLX to talk to the other bidder who had come
forward during the go-shop process: “One interested party submitted a formal
competing offer to the Company proposing a potential all-cash acquisition of PLX.”44
Potomac insisted that “it is time for the Board and management of the Company to give
this competing proposal some serious consideration.”45 He added that “it is imperative
and urgent that the Board and management immediately engage a nationally
recognized investment bank and commence a robust process of exploration and
evaluation of all available strategic options and value-maximizing opportunities.”46
42
JX 63 at 1; see also Schmitt Dep. 37–39.
43
JX 63 at 1.
44
JX 63 at 2.
45
Id.
46
Id.
11
Singer followed up this letter by leaving Raun a voice message and sending him an
email requesting a call.47 Raun and Singer eventually spoke over the phone on January 30,
2013, and Singer reiterated the views expressed in Potomac’s letter.48
The Board correctly perceived that Singer wanted PLX sold. As the directors saw
it, “Eric Singer’s position was that we should sell the company, and that was . . . his one
and only agenda.”49 But the directors did not agree that an immediate sale was in the
Company’s best interest.50
On February 13, 2013, Potomac sent another public letter to the Board.51 Potomac
again demanded that the Board “immediately commence a process of thorough review of
all strategic alternatives available to PLX,” stressing that “[a]ction must be taken decisively
and urgently.”52 Potomac argued that “shareholder value can best be created by capitalizing
on the historic interest in PLX from potential acquirers, while leveraging the improved
47
JX 70 at 1.
48
Id.
49
Riordan Dep. 53; see also id. at 76 (Singer’s “clear intentions, what he told us,
was that . . . we should sell the company”); Raun Dep. 217 (“I believe most of the time
[Singer] was only interested in the sale of PLX in 2013”); Whipple Dep. 22 (describing
Singer as the type of activist “who think they can achieve shareholder value by forcing the
sale of the company” rather than the type who “join the board because they think they can
make the operations better”).
50
See JX 74 at 2.
51
PTO ¶ 64; JX 77.
52
JX 77 at 2.
12
operating model of the Company.”53 Potomac added that “the Company’s strong
fundamentals make it an attractive target of strategic interest.”54 Potomac concluded by
calling for new directors who would “break the current Board’s historic complacency and
reactive practices and ensure objective analysis of value enhancing opportunities.”55
After Potomac’s second letter, PLX arranged a meeting.56 On February 26, 2013,
Singer met with Company’s two senior executives, Raun and Art Whipple, the Company’s
Chief Financial Officer, and two of its outside directors, co-founder Michael Salameh, who
had served as CEO until 2008, and Tom Riordan.57 Singer took affront, expressing
disappointment that PLX did not also send James Guzy, the Chairman of the Board, and
Ralph Schmitt, Raun’s predecessor as CEO.58
The PLX attendees did not have a good impression of Singer. Riordan reported that
it was “not possible to have a constructive conversation with [Singer] because he doesn’t
care one whit about the company or its employees or its contribution.”59 Whipple described
53
Id.
54
Id. at 3.
55
Id.
56
See JX 74; see also JX 70 at 1–2; JX 71 at 1; JX 73 at 1.
57
See JX 81 at 1; JX 89 at 1; Riordan Dep. 50, 52.
58
JX 82 at 1; JX 86 at 1.
59
JX 88 at 1; see also Riordan Dep. 47–55; id. at 63 (“Q. So did Singer make any
operational suggestions about what the company could do differently? A. Other than for
all the board to resign, no.”).
13
Singer’s “apparent knowledge of PLX [as] broad but shallow. We asked him several times
what he thought we could do differently that would deliver shareholder value. He was
blank.”60
F. Avago Reappears.
Like Singer, Avago saw the failed IDT deal as an opportunity and began
accumulating PLX shares. By January 22, 2013, Avago had accumulated a 3.1% stake.61
With the assistance of Barclays Capital, Inc.,62 Avago examined strategies for completing
an acquisition, including via hostile bid.63
60
JX 89 at 1; accord Riordan Dep. at 17; JX 102 at 2. At trial, Singer disagreed with
the directors’ accounts. See Singer Tr. 81–83, 85–88. On this issue and on others, Singer
was not a credible witness. Compare, e.g., Whipple Dep. at 53 (testifying that Singer
“routinely threatened management and board members that he was going to sue them
individually . . . if they didn’t do what he wanted them to do”), and Riordan Dep. 68–69
(“Q. But he threatened to sue you? A. Yeah, he did that all the time, right. That was his
standard.”), and Schmitt Dep. 30 (testifying that Singer “threatened . . . lawsuits all the
time. That was his mode of operation at that point.”), with Singer Tr. 79–80, 83 (“Q. But
they were right that you were planning to threaten people and be a bully. Right? A. I don’t
believe so.”; “I don’t believe Mr. Whipple—look, this is a sound bite of 30 seconds. I never
threatened a director if they were not doing what I wanted them to do. . . . For him to make
a statement that I routinely threatened people if they didn’t do what I wanted, I believe
that’s a categorically false statement”; “I don’t believe that that’s an accurate statement”;
“I think that’s completely . . . incorrect.”)
61
See JX 61 at 2.
62
See JX 60–61; Krause Dep. 36–37.
63
JX 61 at 13.
14
On February 25, 2013, the night before the PLX representatives met with Singer,
Guzy and Raun had dinner with Avago’s CEO, Hock Tan.64 The next day, Avago proposed
to acquire PLX for $6.00 per share in cash.65
During a meeting on February 27, 2013, the Board received updates on Avago and
Potomac. The directors decided to seek an improved offer from Avago.66 They instructed
Whipple “to provide a three-year business plan for review by the Board and to approach
one or more investment bankers for valuation estimates on a no-fee basis.”67 Anticipating
that Singer would launch a proxy contest, they retained MacKenzie Partners, Inc. as their
proxy advisor.68
On March 1, 2013, Schmitt spoke with Tan. Tan said that Avago could “go higher”
but that PLX would need “to make the case.”69 After some back and forth, they agreed that
“$6 is a good starting point and $7 may be too high.” 70 Tan argued that his board “would
64
JX 75.
65
JX 87 at 1; see also Krause Dep. 88–89.
66
JX 92 at 1.
67
Id.
68
PTO ¶ 67.
69
JX 94 at 1.
70
Id.
15
not understand” if he offered the same price as IDT, because IDT had to propose “a higher
premium due to structure and need to keep their position in the market.”71
G. Potomac Nominates A Slate of Directors.
On March 6, 2013, Potomac nominated its slate of candidates.72 In addition to
Singer, the nominees were:
 Martin Colombatto, “a director of ClariPhy Communications, Inc., a
leading developer of highly integrated single chip optical transceivers . .
. , and Luxtera Corp., a world leader in silicon photonics solutions.”73
 Stephen Domenik, “a general partner with Sevin Rosen Funds, a venture
capital firm.”74
 Mark Schwartz, “a director of Pepex Biomedical, Inc., a medical device
company,” and “PurchasePoint Design, a company specializing in point
of purchase display and product design.”75
 Arthur Swift, the CEO “of CUPP Computing AS, a supplier of security
solutions for mobile devices.”76
Colombatto and Schwartz had served as nominees for Balch Hill.77
The Board met that same day . It reviewed the revised three-year plan that Whipple
had prepared and instructed Deutsche Bank to “prepare an analysis of the Company based
71
Id.
72
JX 98.
73
Id. at 3.
74
Id.
75
Id. at 4.
76
Id.
77
Compare JX 14 at 3–4, with JX 98 at 3–4.
16
on the updated plan and current market conditions.”78 The Board directed Raun to tell
Avago that PLX’s value was “substantially above” $6.00 per share. On Potomac, the Board
directed management “to take no action at this time” other than to “determine whether the
nomination letter . . . was in good form.”79
The next day, Raun told Singer that “publicly threatening us with a proxy contest”
was not a productive step.80 Raun also expressed his disappointment that Singer still had
not provided any suggestions for operational improvements or strategic initiatives.81 Singer
stayed on message, responding that “the Company should open up discussions again with
the competing bidders . . . from last year’s sales process.”82
On March 15, 2013, the Board met again.83 Using management’s projections as a
base case, Deutsche Bank presented a valuation range for the Company of $5.25 to $7.78
per share, with a midpoint of $6.41.84 The downside case ranged from $4.06 to $5.89, with
78
JX 99 at 2.
79
Id.
80
JX 100.
81
Id.
82
JX 101 at 1.
83
JX 111 at 1.
84
JX 108 at 3; see Raun Dep. 222–24.
17
a midpoint of $4.91.85 Deutsche Bank reported that it had received four “unsolicited
inquiries” about the Company.86
On March 19, 2013, Raun met with Singer at a conference and offered to provide
additional information subject to a non-disclosure agreement. Singer declined.87
On March 20, 2013, Singer offered to settle the proxy contest for two board seats,
to be filled by Domenik and himself.88 He also wanted the Board to “form[] a strategic
committee of five members to explore all strategic alternatives and appoint[] Eric Singer
and Steven Domenik to this committee.”89 After the Board rejected his proposal,90 Singer
told Raun that “Potomac will not hesitate to take all necessary action to protect its
investment, including to take our ideas directly to our fellow stockholders and ask them to
support the election of our nominees.”91
85
JX 108 at 3.
86
Id. at 13. In April 2013, Cowen and Company provided Whipple with its thoughts
on the Company’s value. Cowen’s base case valued PLX at $4.92 to $6.51 per share, with
a midpoint of $5.66; its upside case valued PLX at $6.66 to $9.01 per share, with a midpoint
of $7.75. JX 136 at 9, 14–15.
87
JX 120 at 1. Cf. Singer Tr. 60–61, 92–94; Whipple Dep. 67 (“He was offered, in
many cases, the opportunity to come in and be an observer on the board, and he declined
any participation to do that.”).
88
JX 117.
89
Id.
90
See JX 120 at 1; JX 121 at 1–2.
91
JX 126.
18
By April 19, 2013, Potomac had increased its stake to 7.0% of the Company.92
During a call on April 19, Singer told Salameh that he might “take it upon himself to contact
prospective acquirers to solicit their interest in PLX and may also seek to involve an
investment banker.”93
H. Further Discussions With Avago
While Potomac pushed for a sale, PLX engaged in further discussions with Avago.94
On April 25, 2013, the Board decided to formally reject Avago’s $6.00 offer, concluding
that the proposal “did not adequately reflect full and fair value to the Company’s
shareholders.”95 In a letter dated April 29, 2013, PLX informed Avago of this decision and
asked Avago for its best and final offer.96 Instead of offering a higher price, Avago
“inquir[ed] about next steps to advance discussions between the companies” and
“confirmed . . . that they had a stock position” in PLX.97
92
PTO ¶ 70.
93
JX 245 at 15. At trial, Singer could not recall his threats to put the Company in
play. See Singer Tr. 89-92 (“I don’t recall that.” “I don’t recall it . . . .” “There’s no record
of that conversation.” “Just to clarify, I have no recollection of saying this.”).
94
See JX 139 at 2; JX 146 at 2–3.
95
JX 150 at 2; see also Riordan Dep. 87–90 (testifying that his view “was based on
the potential for PCI-Express to significantly increase in revenue based on it being
successful in one of the two businesses, either the ExpressFabric business or the solid state
disk business”).
96
JX 153 at 2; see also JX 150 at 2; JX 152 at 1.
97
JX 158 at 1.
19
On May 3, 2013, the Board decided to break off discussions with Avago.98 The
Board instructed Salameh to inform Avago “that the $6.00/share proposal does not reflect
full value for the Company and that ‘the price should start with a 7.’”99 That afternoon,
Salameh conveyed the message to Thomas Krause, Avago’s Vice President for Corporate
Development.100 Krause responded that “$6 is the right price” and that Avago could not go
higher.101 He also indicated that Avago was prepared to launch a hostile tender offer if PLX
did not agree to a deal.”102 Salameh reiterated “that an offer should start with a 7.”103
On May 9, 2013, Avago’s bankers at Barclays followed up with Salameh, noted that
there was an “activist shareholder in the background,” and again mentioned “the potential
of a tender offer or a public letter from Avago.”104 Salameh reiterated that the price “should
start with a 7.”105 Avago went silent.106
98
Id. at 2.
99
Id.
100
JX 161 at 1.
101
Id.
102
Id. at 2.
103
Id.
104
JX 165.
105
Id.
106
See JX 181 at 2; Krause Dep. 97–98.
20
I. Potomac Continues To Apply Pressure.
By June 27, 2013, Potomac had increased its stake to 9.4% of the Company’s
shares.107 Singer wanted “the board to be reconstituted” and suggested that the directors
agree to a “graceful transition.”108 That same day, Potomac served a demand for books and
records on the Company. In the demand, Potomac asserted that the directors had “a
fiduciary duty to stockholders to explore all strategic alternatives for the Company.”109 The
demand sought books and records regarding:
(i) “any alternative acquisition proposal presented or considered by the Board
during the Company’s ‘go-shop’ period”;
(ii) “any potential acquisition, sale, merger or business combination
including, but not limited to, indications of interest or rejected offers”;
(iii) “any strategic alternatives being considered by the Company including
advice, reports or recommendations from the Company’s investment
bankers”; and
(iv) “any communications with third-parties, including potential acquirors or
acquirees, regarding any potential acquisition, sale, merger or business
combination.”110
On July 5, the Company rejected the demand as resting on “bare accusations” and seeking
documents that were not “essential and sufficient to discharge the stated purposes.”111
107
PTO ¶ 73; JX 176 at 16.
108
JX 177 at 1.
109
JX 178 at 2.
110
Id. at 3.
111
JX 179 at 1.
21
On July 25, 2013, Salameh and Riordan met with Singer.112 Singer accused the
directors of being “incompetent” and said they “had run the company into the ground.”113
“[H]e threatened to hold [Riordan] personally liable for the failures of the company.”114 He
asserted that the directors “should all be replaced and they should just sell the company.”115
After the meeting, Singer sent Riordan an antagonistic letter.116 Singer reiterated
that his “primary interest is to encourage management and the Board to take immediate
steps to enhance stockholder value.”117 He concluded by threatening that “[w]e will not
112
JX 184 at 1.
113
JX 185 at 1; see also Riordan Dep. 82 (testifying Singer made this accusation
“every time [PLX directors] talked to him”); Whipple Dep. 52 (according to Singer
“[e]verything that anybody does is horrible or wonderful; and as far as he’s concerned,
nothing that PLX had managed to do was wonderful”).
114
JX 185 at 1; see also Riordan Dep. 68-69 (“Q. But he threatened to sue you? A.
Yeah, he did that all the time, right. That was his standard.”); Schmitt Dep. 30 (testifying
that Singer “threatened . . . lawsuits all the time. That was his mode of operation at that
point.”); Whipple Dep. 53 (testifying Singer “routinely threatened management and board
members that he was going to sue them individually . . . if they didn’t do what he wanted
them to do”).
115
Riordan Dep. 53; see also id. at 80 (testifying Singer only cared about getting
“whatever premium he could get based on whatever he bought the stock at and whatever
he could currently sell it at”); id. at 47 (“You don’t have to be a mind reader. As we’ve
talked about for hours now, that’s what he said he wanted done. He wanted the company
sold. He made no—he made no [a]llusions to anything other than that. [‘]I want you to sell
the company.[’]”).
116
JX 187.
117
Id.
22
hesitate to hold you and the rest of the Board personally liable for any failure to fully and
faithfully discharge such obligations.”118
Salameh responded and expressed “strong[] disagree[ment]” with Singer’s
position.119 He noted that “[w]hile we can appreciate that, as an activist hedge fund with a
relatively short-term horizon, you would like to be able to force an event that would allow
you to profitably liquidate the position you have been accumulating,” the Board had a
fiduciary obligation to “consider the interests of the holders of PLX stock that you do not
represent, particularly the holders that may have a longer time horizon than Potomac
Capital.”120
J. The Fall 2013 Market Check
During a meeting on August 6, 2013, the Board discussed what other action to take
in response to Potomac’s campaign.121 Deutsche Bank advised that nearly 60% of activist
campaigns in the semiconductor sector had resulted in sales, with another 35% still
ongoing.122 Deutsche Bank saw three options: engage in a proxy fight, settle with Potomac,
118
Id.
119
JX 189 at 1.
120
Id. at 2; see also Salameh Dep. 32–35.
121
PTO ¶ 74.
122
JX 190 at 9.
23
or sell the company.123 Deutsche Bank believed that selling in the near term could “leave[]
value on the table.”124
After excusing Deutsch Bank, the directors revisited their desire to wait for “a few
quarters” after the failed IDT merger before re-starting a sale process so that the Company
could “realize the improved value of . . . structural changes [and the] PCIe Gen3
designs.”125 Despite this plan, the directors concluded that the Company had done enough
and that “the timing seemed optimal” for “pursuing . . . an affirmative process.”126 The
Board made this decision to head off Potomac’s proxy contest; without Potomac’s
presence, the Board would not have been so quick to start a process.127
123
JX 190 at 20–21; see also Schmitt Dep. 47–52.
124
JX 190 at 16.
125
JX 195 at 1.
126
Id. at 2.
127
See Schmitt Dep at 52 (“In a normal business environment, we did not believe it
was best to sell the company. Given the situation, that may have caused us to look at things
a little differently.”); Raun Dep. 339–43 (recalling the Company reinitiated a market check
because “we had some ongoing interest in the company at different points in time and it
made sense to maybe formalize a process and do a market check to see if there was a party
that was in the best interest of the company” and suggesting a price of $7 at that time “was
obtainable”); Riordan Dep. 188–89 (“[T]his is putting ourselves in the shoes of the activist
shareholder an saying, you know, what does the activist shareholder want us to do,
therefore we should get out in front of that and see what . . . the market says and not be
driven by the activist shareholder.”).
24
On August 15, 2013, the Board resolved to create a Special Committee “to select
advisors and run an affirmative process to consider the sale of the Company.”128 On August
17, the Board gave the Special Committee the following more detailed charge:
(i) solicit and evaluate strategic alternatives available to the Company for
maximizing stockholder value; (ii) evaluate and make recommendations to
the Board with respect to any strategic alternatives, solicited or unsolicited,
that may be proposed by parties interested in entering into a strategic
transaction with the Company; (iii) take all necessary action, as the Special
Committee shall determine necessary or appropriate to defend the Company
with respect to any proxy contest or other activist campaign initiated or
threatened by any person or entity against the Company; and (iv) report all
conclusions and recommendations to the Board for its information and
consideration of any binding action.129
The members of the committee were Salameh, Schmitt, John Hart, and Robert Smith.130
With Deutsche Bank’s help, the Special Committee decided to approach a list of
potential bidders without making a public announcement.131 By September 5, 2013,
Deutsche Bank had arranged three meetings, including one with Avago, and identified six
to eight interested prospects.132
128
JX 201 at 1; see also PTO ¶ 75; JX 203 at 2.
129
JX 203 at 2; see also id. at 4; PTO ¶ 76; Hart Dep. 19-24 (describing the Special
Committee’s charge as considering “should we go it alone or should we . . . continue to . .
. pursue getting purchased, and are there any good buyers out there”); Riordan Dep. 106–
07 (agreeing “that the authorization of the Special Committee was prompted by Potomac’s
interaction”).
130
JX 201 at 1; JX 203 at 1; Raun Dep. 67–70.
131
JX 205 at 1–2.
132
JX 208 at 1.
25
Management presentations began in mid-September. The presentation materials
cited the Company’s strengths, including its status as a “leading provider of PCI express
connectivity products with more than 70% market share,”133 the potential for
ExpressFabric to “double [the] served market,”134 and the Company’s projected year-over-
year growth of 33.9% by 2017, resulting in gross profit of $156 million.135 During the
presentations, management explained that PLX would “grow at least 25% per year based
on conservative assumptions, and pointed out many realistic opportunities for substantial
upside.”136
On September 25, 2013, Deutsche Bank reported to the Special Committee that it
had contacted fifteen potential bidders, and nine had executed non-disclosure
agreements.137 All nine expressed significant interest, and Avago expressed a willingness
to “increase [its] offer above $6/share.”138 Other bidders expressed “concern with the
current stock market valuation of the Company.”139
133
JX 206 at 7.
134
Id.
135
Id. at 9.
136
JX 211 at 1.
137
PTO ¶ 78; JX 215 at 5–6; JX 217 at 1; Cho Dep. 195–96.
138
JX 215 at 5; see also JX 217 at 1 (suggesting “that Avago appears to remain
interested in exploring a transaction with the Company but is not willing to participate in a
competitive sales process”).
139
JX 217 at 1.
26
Deutsche Bank also presented the Special Committee with an updated valuation.140
Using a discounted cash flow methodology, Deutsche Bank’s base case valued the
company at between $8.31 and $11.06 per share, with a midpoint of $9.59.141 Its downside
case valued the Company at between $4.83 and $6.27 per share, with a midpoint of
$5.50.142
On October 1, 2013, Cypress Semiconductor Corporation submitted an indication
of interest in a cash deal at a “price per share in the range of $6.50 to $7.50” and requested
two weeks of exclusivity.143 Deutsche Bank thought there were three other bidders who
had serious interest—Inphi Corporation, LSI Corporation, and Avago—and advised
against exclusivity.144 The Special Committee agreed.145 All four parties ultimately
declined to bid.146
140
Id.
141
JX 215 at 16.
142
Id.
143
JX 219 at 1; see also PTO ¶ 79; Cho Dep. 197–99.
144
JX 220 at 1–2.
145
JX 221 at 1.
146
PTO ¶¶ 79, 82; see also JX 225 at 1; JX 236 at 1; JX 239 at 1; JX 243; JX 253 at
1; Raun Dep. 344–52.
27
K. The Proxy Contest
On November 8, 2013, Potomac filed a definitive proxy statement that sought to
elect Singer, Domenik, and Colombatto as replacements for Riordan, Smith, and Guzy. 147
During the ensuing proxy contest, Potomac criticized the incumbent directors for their long
tenure and lack of significant stock ownership. Potomac stressed that the Board should
“immediately commence a thorough review of all strategic alternatives available to the
Company.”148 Although Potomac acknowledged recent improvements, Potomac argued
that these successes should be “translated into a value-maximizing transaction.”149 As
Potomac’s campaign mounted, other activist investors bought shares and voiced their
support for Potomac’s slate.150
The directors’ proxy materials stressed that they were “open to selling the
company.”151 They argued that stockholders would be best served “by the current Board
and our program to strengthen the company while remaining open to value-maximizing
transactions.”152 They criticized Potomac for having “consistently expressed its desire to
147
PTO ¶ 85; JX 255 at 19–20; see also JX 270 at 45–48. Cf. JX 2018 at 2; Singer
Tr. 84, 309–12, 321.
148
JX 245 at 4; see also JX 241 at 1.
149
JX 245 at 11; see also JX 260 at 1-2 (Potomac asserting that its slate would
“maximize stockholder value for all”); PTO ¶ 86.
150
See JX 258 at 1; JX 262 at 1.
151
JX 246 at 1. Cf. JX 257; JX 259; JX 282.
152
JX 246 at 1.
28
have the Company sold immediately.”153 They described Potomac’s agenda as “self-
serving and transparent – its primary goal is to force a quick sale of the Company in order
to realize a short-term gain on its investment, to fulfill the demands of its own investors,
and to transition capital to its next target, without regard for the best interests of all PLX
Technology stockholders.”154
The directors maintained that the Company was “executing well.”155 They cited its
market share of “70 percent . . . and growing,” “three consecutive profitable quarters,” “the
highest year-to-date profits in the Company’s 27-year history,” and the Company’s plan
“to quadruple the size of the addressable market by 2017.”156
As in many proxy contests, the outcome turned on the recommendation of
Institutional Shareholder Services Inc. (“ISS”), and both sides worked on presentations that
would convince ISS to support their nominees. Potomac’s internal communications show
that Singer had no meaningful ideas other than selling the Company. Potomac struggled to
come up with “specific ideas on what we will do differently” because “the company is
taking all the right steps.”157 Singer personally could not come up with anything, so his
153
JX 257 at 3.
154
JX 282 at 3; see also id. at 33, 36; accord Whipple Dep. 73–75; Raun Dep. 284–
85; Hart Dep. 24–29.
155
JX 257 at 3.
156
Id. at 3–4 (emphasis omitted); see also JX 259 at 5. Cf. PTO ¶ 86; Schmitt Dep.
55–60; Riordan Dep. 13–21; Salameh Dep. 279–81.
157
JX 265 at 1.
29
proxy advisor offered some generic ideas that “[h]istorically . . . have worked” at other
companies.158 Potomac’s presentation ultimately focused on the Company’s historical
losses, its failed acquisitions in 2009 and 2010, and its failure to meet revenue forecasts in
2012, 2013, and 2014.159 As its “plan,” Potomac incorporated nearly verbatim its proxy
advisor’s generic list of ideas.160
PLX’s presentation was detailed and substantive.161 It emphasized the incumbent
directors’ willingness to sell the Company if warranted, as evidenced by the IDT
transaction.162 It also emphasized the Company’s improving product pipeline163 and rapidly
growing market share.164 PLX described Potomac as “a self-interested activist investor that
is focused on short-term gains at the expense of other PLX Technology stockholders.”165
158
JX 266 at 2.
159
JX 270 at 29–30.
160
Compare id. at 40, with JX 266 at 2; see Singer Tr. 122–24; see also JX 282 at
65 (describing Potomac’s plan as “a summary of the same plan PLX ha[d] been executing
under the current Board for a year, and ha[d] been described by PLX in investor
presentations throughout the year”). At trial, Singer testified that Potomac presented
numerous ways to improve PLX’s operations. Singer Tr. 114–19. That testimony was not
accurate.
161
Cf. JX 276.
162
JX 276 at 7; see also JX 282 at 58.
163
See JX 282 at 19 (explaining that the “[d]esign activity pipe (which measures our
future potential annual revenue)” had more than tripled since 2009).
164
JX 282 at 20 (noting the “improved competitive landscape”).
165
JX 277 at 55 (emphasis omitted); see also JX 282 at 36 (“Potomac has not
engaged constructively and has been disruptive to the business of PLX as your Board
continues to enhance shareholder value.”); id. at 3 (“Potomac Capital’s agenda appears
30
On December 6, 2013, ISS endorsed Potomac’s slate. ISS noted that PLX’s share
price had outperformed its peers, but posited that the stock had been “bid up by the prospect
of a future transaction, and large positional swings of the dissident and other large
shareholders, rather than shareholder’s belief in core improvement in operating
fundamentals.”166 ISS also expressed concern about the incumbent directors’ long
tenure.167
After ISS issued its endorsement, PLX management began preparing for a Potomac
victory and the arrival of three new directors.168 Riordan felt that once the Potomac
nominees joined the Board, selling the Company was “a done deal” and a “fait
accompli.”169
self-serving and transparent—its primary goal is to force a quick sale of the Company in
order to realize a short-term gain on its investment, to fulfill the demands of its own
investors, and to transition capital to its next target, without regard for the best interests of
all PLX Technology stockholders.”); Hart Dep. 24–29; Raun Dep. 284–85.
166
JX 288 at 15.
167
Id. at 16–17.
168
See JX 308 (preparing for onboarding of three new directors); JX 322 at 1
(reorganizing committees immediately prior to annual stockholder meeting in light of
anticipated arrival of new directors).
169
Riordan Dep. 110–12 (emphasis added); accord Whipple Dep. 76 (explaining
that after ISS endorsed Potomac’s nominees, he believed a sale of the Company was
“virtually assured”).
31
L. The December 2013 Projections
In late November and early December 2013, Whipple began the process of
preparing the next update of the Company’s business plan.170 The Company historically
prepared a three-year plan and treated the first year as its annual operating plan. 171 For
2013, Raun directed Whipple and his financial team to prepare a five year plan.172
Consistent with its standard practice, the team obtained information about year-one
revenue from the sales organization.173 For subsequent years, the team generated revenue
estimates based on their internal views about PLX’s products and pipeline as well as
external industry reports about market trends.174 Once the revenue targets were established,
the individual business units developed spending plans to support those targets. 175 Senior
management debated the resulting figures and made adjustments “to get what . . . the
company believes is the right number.”176
170
See JX 285 at 1; see also JX 286 at 1.
Whipple Dep. 94–95 (“[E]very year around Thanksgiving, we sat down as a
171
group and we did a three—typically a three-year plan, which—the first year of which
became our budget for the following year.”).
172
JX 285 at 1; see JX 286 at 1; Whipple Dep. 96.
173
Whipple Dep. 94–95.
174
See JX 307; Quintero Tr. 593–95; Whipple Dep. 95.
175
Whipple Dep. 95; see also JX 296.
176
Whipple Dep. 106; see also JX 295.
32
On December 10, 2013, management provided the directors with its proposed five-
year plan.177 In small print, at the bottom of a summary page, management described the
assumptions on which the plan was based:
5 year plan summary updated December 2013 for 2014 BOD AOP Meeting.
Assumes continued investments in R&D and SG&A to support growth past
2018 unlike plan for market check where projected expense growth was to
support products in plan but not products beyond plan. Headcount is end of
year headcount with many positions filled in 2nd half and dependent on
financial performance up to that point in time. 2014 and future require
higher PCIe growth than seen recently. Although this is an aggressive plan
compared to the past couple years performance and where we stand today
in a market with soft demand, management believes we should drive
internally for this number as the plan. The key will be getting our strong Gen
3 design pipeline into production, a stable economy and a return of federal
spending with our end customers.178
This language has the look and feel of a customary disclaimer paragraph, yet the six-word
introductory phrase that begins the penultimate sentence—“[a]lthough this is an aggressive
plan”—took on disproportionate importance later in the sale process when it became clear
that the projections supported standalone valuations for the Company that exceeded
Avago’s bid. During this litigation, the concept of an “aggressive plan” became a mantra
for the defense witnesses, most of whom were named defendants who had not yet settled
when they testified by deposition. They repeated those words frequently and volunteered
them gratuitously as if they had been instructed to mention them as often as possible. Their
177
PTO ¶ 91.
178
JX 293 at 8. Cf. JX 298 at 7.
33
coordinated, redundant, and excessively emphatic performances undermined their
credibility.
During a Board meeting on December 12, 2013, management discussed the plan
with the Board.179 The directors suggested minor changes, but otherwise endorsed the
projections.180 The next day, Raun distributed an updated plan “based on the conversation
yesterday at the Board meeting and further review with the management team.” 181 The
revised plan included minor reductions to 2014 revenue and spending and “slight”
reductions to revenues in the projected years.182 At a meeting on December 13, the Board
approved the plan.183 This decision refers to the resulting plan as the “December 2013
Projections.”
During subsequent months, the Company used the plan in the ordinary course of
business as if the Board and management believed it represented the Company’s best
estimates of its future performance. In April 2014, the Board signed off on a proposal for
D&O insurance based on the December 2013 Projections.184 The Board also signed off on
179
See PTO ¶ 92; JX 298; JX 303; Raun Dep. 137–44.
180
See Raun Dep. 137–42.
181
JX 304 at 1; see also JX 305 at 1; JX 307 at 1; Raun Dep. 372–78; Whipple
Dep. 126–30.
182
JX 304 at 1.
183
JX 306 at 2; see PTO ¶ 93. Cf. JX 309.
184
See JX 383 at 32; JX 398 at 1; see also JX 396 at 4–5.
34
an executive compensation program based on the December 2013 Projections.185 It was
only after Avago’s bid that PLX began backing away from these figures, and only during
this litigation that its witnesses derided the numbers as unreliably aggressive.
M. The Potomac Nominees Join The Board.
On December 18, 2013, PLX held its regular annual stockholder meeting. 186 The
stockholders elected Colombatto, Domenik, and Singer.187 Led by Salameh, the incumbent
directors made a genuine effort to welcome the new directors to the Board.188
185
See JX 385 at 20, 61; JX 398 at 2.
186
PTO ¶ 94.
187
Id.; JX 328.
188
See, e.g., JX 317 at 1 (Salameh welcoming the new directors to the Board); JX
321 at 1 (Salameh telling Singer that “[i]n the discussion we had this morning, I got a much
better idea of the experience, contacts and perspective the three of you have. It[’]s going to
help our efforts to maximize shareholder value immensely. Marty [Colambatto’s]
background at Broadcom and LSI I am sure is going to be a huge asset.”); JX 333 at 1
(Salameh emailing Colambatto, “Marty, thanks for diving in. Your questions point to the
key strategic decisions for PLX and provide a good structure for a follow-up session. Your
background in building the Ethernet business at Broadcom is extremely relevant and will
add a fresh perspective. It[’]s important for all the new board members to understand the
business in some depth before we make any big decisions, and these informal sessions are
a good way to build that knowledge.”); JX 335 at 1 (Schmitt observing that Singer had
“commented on how impressed he is with [Raun] and how dedicated [he is] to getting a
good result. That it could be [through] a transaction or not.”); JX 354 at 1 (Raun emailing
Schmitt and Salameh that he “had a good discussion with Eric [Singer] last night in New
York.”); Salameh Dep. 220 (“I was pleased by all three directors . . . . I was very impressed
with . . . Marty Colombatto’s knowledge and his attitude. Steve Domenik was also a very
experienced executive who had a very balanced view. Eric [Singer] was approaching it in
a very professional manner. So I was very happy with how things changed after the annual
meeting.”); Schmitt Dep. 158 (“My perception of how he looked at [the Company] was, he
was more impressed with the company than he was . . . from an overall perspective,
people[,] process, than he was being on the outside, looking in, having now seen . . . all the
detail work . . . and things that have been going on.”).
35
Immediately after the annual meeting, Salameh met with Singer and Domenik and
briefed them about the Company and its sale process. 189 In a private email to Singer,
Domenik expressed his view that “the strategic effort needs more energy.” 190 Singer
responded that the Board was “crazy for turning down $6+ from [A]vago [a] few months
ago.”191 After the meeting with Salameh, management sent Singer the materials that the
Company was using with potential buyers.192 PLX also set up a meeting with Deutsche
Bank so the new directors could get their views on the Company’s prospects.193
On December 19, 2013, a development occurred that mitigated any need for Singer
to push hard for a near-term sale: Krause contacted Adam Howell, a managing director at
Deutsche Bank who was advising PLX. A few days earlier, Avago had announced an
agreement to acquire LSI, one of PLX’s competitors that had shown interest in the
Company during its earlier quiet shopping process. A different team from Deutsche Bank
had represented Avago on its acquisition of LSI.194
189
JX 317.
190
JX 315 at 1.
191
Id.
192
See JX 319.
193
See JX 317 at 1.
194
See JX 311.
36
Krause explained to Howell that he “saw the PLX BoD transition” but that because
of the LSI acquisition, Avago would be in the “penalty box” until that deal closed.195 Once
the LSI transaction was complete, Avago would be “open for business on all topics,”
including an acquisition of PLX.196 Krause described buying PLX as “an interesting little
deal but only at the right price.”197 He also called the PLX acquisition a “$300M deal.”198
With 45.9 million shares outstanding, this figure equated to $6.53 per share.199
Singer spoke with Deutsche Bank later that day. Singer asked about Avago, and
Deutsche Bank “gave him the color” on the conversation with Krause. 200 Based on this
195
JX 1032 at 2.
196
Id.
197
Id.
198
Id. Potomac objected to the admission of JX 1026–32 as untimely. The plaintiffs
introduced these exhibits to impeach Singer’s trial testimony about his interactions with
Deutsche Bank and its interactions with Avago. The pre-trial order permitted the parties
“in good faith to supplement the Joint Exhibit List with additional documents through the
end of trial.” PTO ¶ 150. Both sides submitted additional evidence during trial. The
challenged documents were produced during discovery and fairly responded to Singer’s
testimony. Furthermore, the plaintiffs sought to recall Singer to question him about the
documents, which would have enabled him to explain them, but Potomac objected, and I
sustained the objection. See Tr. 571-74. The documents are properly admitted. Potomac
could have had Singer address them but chose not to subject him to further examination.
199
See JX 551 at 4.
200
See JX 1031 at 1 (“[Singer] asked if I thought Avago would do anything now
and I gave him the color from my Krause email.”). That evening, Singer e-mailed Howell
and his colleague, Thomas Cho, to introduce them to Domenik. Singer suggested that “all
of you should get to together when schedules permit to bring Steve [Domenik] up to speed
in person” and indicated that Domenik’s “deep involvement is essential for a successful
outcome at PLX.” JX 325. It seems likely that Deutsche Bank also shared Krause’s tip
with Domenik and that he was part of the conspiracy of silence. Based on the allegations
in the complaint, I dismissed the claims against Domenik at the pleadings stage. The
37
call, Singer knew about (i) Avago’s interest in a deal for PLX at $300 million and (ii)
Avago’s temporary inability to engage because of the LSI acquisition. Singer already knew
that Avago was the most likely bidder for PLX. As a result of Krause’s conversation with
Deutsche Bank, Singer knew when Avago would be able to bid and how much Avago
wanted to pay.
On December 20, 2013, PLX held an informal meeting to bring Singer and his
fellow new directors up to speed on the Company and its sale process.201 When reporting
on the status of various contacts in its “Process Summary,” Deutsche Bank provided the
following information about Avago:
 Interested and potentially willing to increase offer above $6/share
 Not willing to discuss price until confirmation of being able to move
quickly and likely in exclusivity
 Willing to wait until process is finished at which point they can decide if
price is right.202
plaintiffs have not sought to modify that interlocutory ruling, and they focused their attacks
at trial on Singer, not on Domenik. This decision therefore speaks in terms of Singer having
known about the tip and not sharing it with the other directors, even though that charge
likely could be leveled at Domenik as well.
201
See JX 329; see also JX 323 (Deutsche Bank presentation); JX 1000
(management presentations).
202
See JX 323 at 4.
38
There is no evidence that Singer or Deutsche Bank reported on Krause’s call, shared
Avago’s plan to return to PLX after completing the LSI acquisition, or mentioned the
valuation of $300 million that Avago was contemplating.203
N. The Four-Month Quiet Period
From January until April 2014, knowing that Avago was digesting the LSI
acquisition, Singer did not push hard for a sale. He could afford to be more subtle.
On January 23, 2014, the Board held its first formal meeting with the new
directors.204 Management reported on the Company’s disappointing fourth quarter.205
Although the Company met its public guidance for both net revenues and gross margins,
the results fell below the annual operating plan.206 Despite the soft quarter, 2013 had not
been bad overall. Revenues came in 3.3% below the annual operating plan, and gross
margins were just 0.7% below it.207
During the meeting, the Board assigned the new directors to committees. 208 Before
the meeting, Singer asked to chair the Compensation, Nominating, and Special
203
Deutsche Bank did reach out to Raun, Schmidt, and Salameh to tell them about
Avago’s agreement to acquire LSI, but that call occurred before Krause contacted Deutsche
Bank. See JX 311.
204
See JX 360 at 1.
205
See id.
206
JX 355 at 4–6, 11.
207
Id. at 6.
208
See JX 360 at 2–3.
39
Committees, noting that he was “most interested in the Special Committee and
Comp[ensation] [C]omittee.”209 The Board made him chair of the Special Committee and
the Nominating Committee and a member of the Compensation Committee.210 Colombatto
also joined the Compensation Committee, and Domenik joined the Audit Committee. 211
The Board reconstituted the Special Committee as the “Strategic Alternatives Special
Committee.”212 In addition to Singer, Salameh and Schmitt rounded out its members.213
The reconstituted Special Committee held its first meeting on February 7, 2014.214
Raun reported on a meeting with Cypress, which said it was “too leveraged” to complete a
transaction at the Company’s current valuation.215 The committee instructed management
to “proactively reach out to” other prospects but decided “not to take any action with
respect to Avago at this time.”216 Singer did not mention the information he had received
from Deutsche Bank about Avago’s interest, and Raun’s update on strategic alternatives
suggests no knowledge of Avago’s situation.217 After the meeting, Raun engaged with
209
JX 330 at 1.
210
JX 360 at 2–3.
211
Id. at 2.
212
Id. at 3.
213
See PTO ¶ 96; JX 360 at 3.
214
PTO ¶ 97.
215
JX 374 at 1; see also JX 372 at 2; JX 395 at 14.
216
JX 374 at 1–2.
217
See JX 372 at 3; see also JX 388 at 2.
40
Cypress, Inphi, Exar Corporation, and Semtech Corporation.218 Avago remained silent, as
Singer and Deutsche Bank knew it would.219
For the next three months, Singer did not agitate for a sale, but it remained on his
mind. He expressed concern to Schmitt that there was a “closing window” in which to sell
PLX because of larger economic trends that would negatively affect valuations.220 He
instructed Raun that whatever the “prior policy” might have been at PLX, it was “essential
[that] the Board and or [sic] Strategic Committee is immediately informed of any indication
of interest in any piece of PLX regardless of valuation.”221 As a member of the
Compensation Committee, he became a vocal advocate for more equity compensation that
would align management’s interests with stockholders.222 While this is certainly a
legitimate concept, from Singer’s standpoint it would help ensure that management would
not resist a sale. Not coincidentally, Singer and Colombotto analyzed the Company’s
218
JX 380 at 2–3.
219
Id.
220
See JX 335 at 1.
221
JX 362; see also JX 361 at 2 (Singer instructing Salameh that he required “full
access to all such information [about PLX’s earlier sale process] to fulfill my fiduciary
duties and best contribute to maximizing stockholder value.”).
222
See, e.g., JX 330; JX 338. Singer also weighed in on other compensation issues,
such as his desire to make cash bonuses harder to achieve. See JX 359 at 1 (“[I]t is unheard
of for e-staff (certainly the ceo) to receive nearly 100% target amount when you miss the
revenue and gross margin numbers. Maybe getting to [annual operating plan] gets you 50%
but to get 100% you need to exceed by demonstrable margins. Not get nearly 100% for just
doing your job.”); JX 367 at 2 (“I do not think any exec should receive nearly 90% of bonus
for missing 2 important measuring points.”).
41
change-in-control agreements.223 Singer also resisted new hires and suggested other steps
that made Salameh think the Company was “perhaps operating too far in a short term dress
the company up for sale mode.”224
In April 2014, Singer revealed his true focus when Salameh suggested that there
might no longer be any need for the Special Committee. The Company was preparing its
Form 10-K for FY 2013, and Singer submitted a proposed description of the Special
Committee’s role that made it sound to Salameh “like the special committee is very active
and acting independently to shop the company or actively communicating with
shareholders.”225 Salameh felt the description was “not accurate and could lead to
misperceptions by shareholders, potential acquirers, employees and customers.”226
Salameh toned down the language and proposed (i) not mentioning the committee at all,
(ii) terminating the committee because “the board works well together on these issues and
we get good input and contributions from other board members,” or (iii) terminating the
committee with the understanding that it would be re-formed as needed.227 Singer accepted
Salameh’s edits but rejected the alternatives.228 He viewed it as “essential” that the
223
See JX 389; JX 390.
224
JX 400 at 1.
225
JX 406 at 1.
226
Id.
227
Id.
228
JX 405 at 1.
42
committee was both “maintained and mentioned.”229 Two days later, PLX filed its Form
10-K and publicly disclosed, for the first time, the Special Committee’s existence and
Singer’s role as Chairman.230
O. Avago Re-engages.
On May 9, 2014, Thomas Cho of Deutsche Bank emailed Singer about a call he
received from Barclays.231 The Barclays banker told Cho that they were advising Avago
on a potential bid for PLX and would meet with Krause the following week to discuss next
steps. Cho understood that Avago was “starting to put this in motion.” 232 Cho also
perceived that Barclays was “very motivated to get this through” and would “play a role in
pushing” Krause.233 Deutsche Bank also reported on these calls to Raun, who updated the
other directors.234
229
Id.; see also Salameh Dep. 157–59.
230
JX 408 at 7, 9.
231
JX 413 at 1; see also PTO ¶ 102.
232
JX 413 at 1.
233
Id.
234
See JX 414 at 2.
43
From May 9–17, 2013, Deutsche Bank had a number of calls with Barclays and
Avago.235 Through these calls, Deutsche Bank learned that Krause wanted to move forward
with a bid for PLX and submit an offer “by the 23rd [of May].”236
Singer responded enthusiastically. On Saturday, May 10, 2014, he told Raun that it
was “essential we move on legal in the most expeditious time frame possible since the
Avago download may result in near-term activity.”237 On Sunday, Singer followed up with
Raun to confirm that he received the email.238 When Raun had not formally engaged a legal
team by Sunday evening, Singer told Raun that he would “take care of it from a board
level.”239
On May 17, 2014, the Special Committee convened.240 Deutsche Bank reported that
Avago had asked “to meet with Mr. Singer and to receive an update from Mr. Raun
regarding the status of the business.”241 The Special Committee “directed [Deutsche Bank]
to continue to engage Avago to explore its interest in the Company.”242
See id.; see also JX 422 (Salameh reporting that “[Deutsche Bank] had a number
235
of conversations with Avago and Barclay’s over the last 8 or 9 days”).
236
JX 416 at 1; see also Krause Dep. 100–03.
237
JX 418.
238
Id.
239
JX 419 at 1; see also Schmitt Dep. 79–82.
240
PTO ¶ 103.
241
JX 423 at 1.
242
Id.; see also Salameh Dep. 241–51; Schmitt Dep. 169–70.
44
P. The May 21 Meetings
The bankers set up a meeting between the PLX and Avago management teams for
8:00 a.m. on the morning of May 21, 2014, followed by a dinner that evening between
Singer and Krause.243 During the management meeting, Raun gave Avago an updated
presentation about PLX’s business that included the December 2013 Projections.244
Whipple confirmed that PLX presented these figures because they represented
management’s “best view of what the future held.”245 They were “attainable” and “the basis
for the performance and the variable compensation that was awarded to the executive
officers.”246
Between the management meeting and dinner, the Special Committee received an
update from Raun and Whipple.247 According to the minutes, Raun “noted that he had
indicated to Avago that the plan was aggressive, needed to be updated and might need
further changes.”248 The minutes also claimed that Singer “provided the Committee an
243
See JX 424–25; Krause Dep. 64.
244
JX 427 at 7–9; see also JX 430 (Raun forwarding Singer follow-up email sent to
Avago management following meeting).
245
Whipple Dep. 88.
246
Id. at 89–95. PLX also provided the December 2013 Projections to Semtech in
a due diligence presentation on May 6, 2014. See JX 1002 at 7–9.
247
JX 431 at 1.
248
Id.; see also Raun Dep. 158, 398.
45
update on his discussions with a representative of Avago the prior evening.”249 According
to the minutes, Singer “noted that the representative indicated, among other things, that
Avago believed the then-current PLX stock price already included a takeover premium as
a result of Potomac Capital’s actions.”250 Singer also reported that if Avago submitted a
proposal, “the representative of Avago with whom he had met would want to have further
discussions with him.”251 The Special Committee directed Singer “to meet, or have further
discussions, with such person to discuss a possible acquisition of the Company by
Avago.”252
The minutes’ description of Singer’s meeting with an unidentified Avago
“representative” contradicts other evidence in the record. The definitive proxy statement
for the Merger did not identify any conversation between Singer and Avago that took place
on May 20, 2014.253 The defendants argued initially that the minutes referred to the dinner
that had been scheduled between Singer and Krause, but all of the remaining documentary
evidence establishes that the dinner took place on May 21, after the Special Committee
meeting.254 Accepting that the dinner occurred on May 21, the Special Committee’s
249
JX 431 at 1.
250
Id.; see also Cho Dep. 58–61.
251
JX 431 at 1.
252
Id.
253
See JX 551 at 26.
254
See, e.g., JX 424–25; JX 551 at 26; JX 1026 at 1; JX 1028.
46
mandate for Singer to have further discussions with Avago becomes odd, because it fails
to take into account that he was already scheduled to have dinner with Krause just a few
hours later.
The parties devoted significant resources at trial and in their briefing to attempting
to resolve these discrepancies.255 Based on the record evidence, I think this is an example
of lawyers drafting minutes after the fact in an effort to paper a good process, but not getting
the details right.
The minutes of the May 21 meeting also mark the first appearance in the record of
the theme that the December 2013 Projections were “aggressive.” No one provided any
credible reason why Raun would have said this gratuitously to Avago or why he
subsequently went out of this way to mention his comment to the Special Committee.
Further calling into question the credibility of the supposed comment, the presentation to
Avago retained much of the small-print disclaimer language on the executive summary
slide, but omitted the phrase describing the projections as “aggressive.”256 I suspect the
triggering event for characterizing the December 2013 Projections as “aggressive” was
Deutsche Bank’s preparation of a “PLX Valuation Update” on May 16, 2014. 257 Unlike
Deutsche Bank’s prior and subsequent valuation presentations, this version did not contain
255
See, e.g., Singer Tr. 219–21, 236–38, 247–53, 463, 468–74, 519–25.
256
Compare 427 at 8, with JX 293 at 8, and JX 298 at 7.
257
See JX 420.
47
a discounted cash flow analysis; it only looked at trading multiples and premiums.258 It
seems likely that Deutsche Bank knew from its earlier valuation work that a valuation
based on the December 2013 Projections would exceed the $300 million bid that Avago
was contemplating. As a sophisticated M&A player, Deutsche Bank would not have
wanted to create incremental deal or litigation risk by injecting that type of analysis into
the record unless necessary. The safer course would have been to flag the issue to confirm
whether or not those projections were still the ones that the bankers should use. Flagging
the issue likely led in turn to an off-the-record decision to walk back the projections, using
their ostensible aggressiveness as the justification. When the lawyers documented the deal
process, they started building the case for the subsequently lowered projections in the
minutes for the May 21 meeting.
That evening, Singer and Krause had dinner in Palo Alto. Krause told Singer that
he had been “very frustrated” by the Company’s valuation demands during prior
negotiations.259 Krause told Singer that there was a “window in time” for Avago to acquire
PLX before moving on to “other initiatives,” but that Avago had “no interest in acquiring
the company at any valuation near th[e] level” of $7.00 per share.260 At trial, it became
258
See id.
259
Krause Dep. 105; see Singer Dep. 107.
260
Singer Dep. 107–08.
48
apparent that Krause signaled to Singer that Avago would propose acquiring PLX for
approximately $6.25 per share.261
Q. A Very Busy Nine Days: May 22-31, 2014
Over the next nine days, Avago and PLX engaged in a brief back and forth that
resulted in a transaction at $6.50 per share, roughly the same valuation of $300 million that
Krause mentioned to Deutsche Bank in December 2013.
1. Day 1: May 22, 2014
On the afternoon of May 22, 2014, Barclays told Deutsche Bank that a bid from
Avago was coming and that Avago “want[ed] to move quickly and efficiently.” 262 When
Deutsche Bank reported the information to Singer, Salameh, Schmitt, and Raun, Singer
emailed back privately, asking “do u htink [sic] they come in initial 6.20 ish?” Deutsch
Bank replied: “feels like 6.25. said [Krause] relayed to you last night.”263 Singer
subsequently set up a private call with Deutsch Bank to discuss the proposal.264
261
See Singer Tr. 236–44; see also JX 433 at 1; JX 1026 at 1.
262
JX 433 at 1.
263
Id.
264
See JX 1026 (e-mail from Singer to Cho stating “k i land in 20 mnts talk later”);
JX 1029 (e-mail from Singer to Howell and Cho, stating: “lets try for a call at 6 pm ET if
i can break from this board meeting”). At trial, Singer maintained that he never had “off-
line conversations” with Deutsche Bank. Singer Tr. 526. The contemporaneous record
demonstrates otherwise. See, e.g., JX 413; JX 433; JX 1026; JX 1029–31.
49
Shortly thereafter, Krause sent Raun and Singer a proposal to acquire PLX “at a
price of $6.25 per share.”265 The proposal contemplated “enter[ing] into a definitive
agreement with PLX on substantially the same terms” as the IDT merger agreement, but
without “the ‘go shop’ provisions.”266
Either Raun or Singer sent the proposal to Salameh, who circulated it to the full
Board. He also reported that the Special Committee was discussing the offer with Deutsche
Bank.267 No minutes exist for that meeting. There is a set of minutes from a meeting of the
Special Committee on May 22, 2014, but it occurred before Avago submitted its proposal,
and the only topic of discussion was the engagement of Pillsbury Winthrop Shaw Pittman
LLP as transaction counsel.268
That evening, Deutsche Bank prepared a draft response to Avago that countered at
$6.75 per share.269 Deutsche Bank also spoke with Barclays and “gave them a heads up
that [PLX] would be coming back with a written counter either tomorrow or Saturday.”270
265
JX 432 at 2.
266
Id.
267
JX 437 at 1; see JX 436 at 2 (update to directors from Raun dated Friday, May
23, 2014, referring to “Thursday: PLX received proposal. Mike forwarded to Board.
Special committee discussing response.”).
268
See JX 438.
269
JX 434 at 2–3; Cho Dep. 61–63.
270
JX 434 at 1.
50
The Barclays banker said that Avago expected PLX “to do a quick market check with a
few parties,” to be followed by “an exclusivity period to start in the next week or so.”271
My impression is that Deutsche Bank took these steps after having the private call
with Singer.272 During the call, Singer also asked Deutsche Bank to prepare some pages of
valuation analysis to support a counteroffer at $6.75 per share.273
2. Day 2: May 23, 2014
At 10:30 a.m. on May 23, 2014, the Special Committee met to discuss Avago’s
offer.274 At 10:40 a.m., Deutsche Bank circulated the market-based analysis that Singer had
requested, which highlighted a price of $6.75 per share.275
The Special Committee began by formally approving the engagement of Pillsbury
Winthrop as transaction counsel.276 Deutsche Bank then presented the market-based
analysis that Singer had requested.277 Deutsche Bank noted that the Company’s stock had
outperformed “similar large and small cap companies” and advised that the performance
271
Id.
272
See JX 1026 at 1.
273
See JX 1030 at 1 (email from Cho to Deutsche Bank colleague at 7:58 AM on
May 23, 2014: “Eric [Singer] wants us to pull together a couple of pages to show how 6.75
compares against comps, etc”).
274
PTO ¶ 106; JX 459 at 1.
275
JX 443 at 3–9.
276
JX 459 at 1; see also JX 448 at 3.
277
JX 459 at 1–3. Cf. JX 443.
51
reflected “the takeover premium built into the Company’s share price following Potomac
Capital’s proxy contest.”278
The Special Committee asked Deutsche Bank to prepare a revised valuation
presentation that included a discounted cash flow analysis.279 According to the minutes,
the committee members debated what projections to use and discussed that the December
2013 Projections “reflected aggressive revenue goals set by the Company’s management
team.”280 According to the minutes, the committee members asked for a discounted cash
flow analysis based on the December 2013 Projections “as well as a separate DCF Analysis
based on revised and more updated revenue projections, reflecting management’s current
thinking about what would be a reasonable forecast.”281 The minutes do not discuss, and
the Special Committee’s materials do not identify, any new information that would have
necessitated adjustments to the December 2013 Projections.
Deutsche Bank then reviewed “the market checks done in the last two years,”
including the go-shop during the IDT transaction, the market check during the fall of 2013,
and an additional market check that the Special Committee had asked Deutsche Bank to
conduct in light of Avago’s interest.282 Deutsche Bank reported that it had contacted three
278
JX 459 at 2.
279
Id. at 3.
280
Id.
281
Id.; see also Schmitt Dep. 177–79.
282
JX 459 at 3.
52
companies: Inphi, Semtech, and Cypress.283 Inphi and Semtech declined to proceed.284
Cypress had “indicated possible interest,” but was “concerned about price” and “had not
taken any further steps to pursue a transaction.”285 The Special Committee decided that this
limited market check process “appeared sufficient” since “the two prior market checks had
only resulted in an offer from Avago and that the terminated IDT transaction had already
put potential buyers on alert.”286
Towards the end of the meeting, the Special Committee discussed how to respond
to Avago. The members decided that achieving a possible transaction “would require a
counter offer of less than $7.00 per share and that such a counter offer would be in the best
interest of the Company’s stockholders.”287 According to the minutes, it was only then that
the Special Committee “agreed to recommend to the Board that the Company prepare a
counter proposal of $6.75 per share.”288 This was the same price that Deutsche Bank had
283
See id. Although the minutes use pseudonyms for the participants, other
documents suggest Cypress was the remaining interested party. See JX 436 at 2; JX 448 at
2. Cf. Cho Dep. 47, 56–57 (identifying pseudonyms of companies within the
Recommendation Statement); Raun Dep. 57 (identifying pseudonym of Cypress within the
Recommendation Statement).
284
See JX 459 at 3.
285
Id. The minutes recite that the Special Committee instructed Deutsche Bank to
continue to engage with Cypress. In an email sent the day before, however, Raun instructed
a colleague not to purse Cypress further, saying: “They can contact us if interested. We
should not contact them anymore.” JX 457.
286
JX 459 at 4.
287
Id.
288
Id.
53
included in the draft response it had prepared the night before and highlighted in the
valuation materials that Singer had requested.289 Schmitt testified that the counteroffer of
$6.75 per share “came from guidance from Eric.”290
When it made the decision to counter at $6.75, the Special Committee had not
received any valuation of the Company on a standalone basis. According to Schmitt, by
selecting $6.75, the Special Committee was engaging in the “art of the possible.”291 Singer
testified that the Special Committee was focused on maintaining “deal momentum.”292
While the Special Committee was meeting, Raun learned that Broadcom wanted to
meet with management.293 Recognizing that he had to move quickly, he “offered up
Monday, Tuesday morning and Thursday.”294 The parties were unable to schedule a
meeting in that time frame.295
After the meeting, Deutsche Bank signaled to Barclays that a deal was likely.296
Deutsche Bank framed its message by saying that PLX was working on a response with “a
289
Cf. JX 434 at 2–3; JX 443; 1026 at 1.
290
Schmitt Dep. 172.
291
Id.
292
Singer Tr. 254–55.
293
JX 449 at 1.
294
Id.
295
See JX 470; JX 473 at 1.
296
JX 447 at 1.
54
more constructive tone” and reporting Singer had “found his dinner with [Krause] to be
positive and [Avago’s] letter in keeping with that positive tone.”297
Deutsche Bank also contacted Raun and Whipple after the meeting to develop a
revised set of projections.298 In tension with the minutes of the Special Committee meeting,
which had already characterized the December 2013 Projections as “aggressive,” Deutsche
Bank asked Raun and Whipple, “How would [you] classify [the December 2013] plan
(aggressive, conservative)?”299 Raun and Whipple responded in writing that the December
2013 Projections were “positioned as aggressive at the [Board] meeting when presented in
December 2013” and “stated as aggressive when presented to Avago.”300
Deutsche Bank also inquired if there had been “[a]ny major changes to the business
model in the out years that are different than what we have discussed in the past?”301
Management responded: “No. Still includes similar assumptions like a system level
product component, continued use of PCIe, [and] success with the ExpressFabric
297
Id.
298
PTO ¶ 107; JX 445 at 1; JX 453 at 1.
299
JX 441.
300
JX 446 at 2; see also Whipple Dep. 143–45.
301
JX 446 at 2.
55
devices.”302 Whipple subsequently sent Deutsche Bank the worksheets underlying the
December 2013 Projections.303
Also on May 23, 2018, Singer agreed to amend Deutsche Bank’s engagement letter.
The new terms increased Deutsche Bank’s base fee from 1% of transaction value to 1.35%
and remove a 1.5% cap on Deutsche Bank’s total compensation.304 Singer executed the
amendment as Chair of the Special Committee.305
3. Day 3: May 24, 2014
On the morning of May 24, 2014, the Board met to consider Avago’s proposal.306
Deutsche Bank circulated a revised presentation that summarized the Company’s three
market checks. The materials noted that each time, Avago was the only party who bid. The
materials also noted that Avago’s offers had slowly increased from $5.75 during the IDT
go-shop, to $6.00 during the fall 2013 market check, and now to $6.25.307 Deutsche Bank
302
Id.
303
See JX 451.
304
JX 439 at 1; see JX 440 at 1 (Raun informing Schmitt that the revised engagement
letter was “something that the Special Committee agreed to not me.”); see also Raun Dep.
110–19.
305
JX 439 at 3; see also JX 440; JX 444; JX 450 at 1.
306
PTO ¶ 108; JX 465 at 1; see JX 462 at 1.
307
JX 462 at 5.
56
noted that after receiving Avago’s offer, the Company had contacted Inphi, Cypress, and
Semtech.308 Deutsch Bank opined that the market check “had been thorough.”309
Deutsche Bank’s presentation next provided the discounted cash flow analyses that
the Special Committee had requested.310 Using the December 2013 Projections, Deutsche
Bank’s model yielded a range of $6.90 to $9.78 per share, with $8.27 at the midpoint. 311
This was the first time that Deutsche Bank had provided the directors with a valuation
based on the December 2013 Projections. The low-end of the range exceeded Avago’s bid
and the Special Committee’s recommended counteroffer.
In describing Deutsche Bank’s valuation analyses, the minutes went out of their way
to characterize the December 2013 Projections as “aggressive.”312
In particular, management noted that the December 2013 Plan forecast
growth rates and profit margins far in excess of what the Company and the
majority of similar semiconductor companies had experienced in the past and
entailed creating a sizeable systems business in which the Company had no
market experience, and was therefore characterized as aggressive.313
The minutes also recited that “members of the Board and management commented on
various events and trends since the projections in the December 2013 Plan were prepared
308
See JX 465 at 2. Cf. JX 459 at 2.
309
JX 465 at 2.
310
Id. at 2–3.
311
JX 462 at 13.
312
JX 465 at 4.
313
Id.
57
that had already affected or might in the future affect the achievement of the projections
contained therein, particularly those for fiscal years after 2014.”314
Deutsche Bank’s materials included a second discounted cash flow valuation that
used what Deutsche Bank had labeled the “Preliminary Management sensitivity case” (the
“Preliminary Sensitivity Case”).315 According to the minutes, Deutsche Bank reported that
the Preliminary Sensitivity Case was “intended to reflect events and trends since the
December 2013 Plan was prepared” and “reflected lower spending in response to the
projected reduction in revenue during these periods.”316 In reality, this case decreased all
of the revenue projections in the December 2013 Projections by 10% and cut the annual
increase in operating expense by half.317 Using the resulting numbers, Deutsche Bank’s
model yielded a range of $5.48 to $7.67 per share, with $6.52 at the midpoint.318 The new
projections generated a valuation result that perfectly framed the anticipated transaction
value of $300 million.
According to the minutes, “management stated that the revenue and operating
expense projections were reasonable based on the current thinking of the Company’s
314
Id.
315
JX 462 at 14; see JX 465 at 4; Cho Dep. 67–73.
316
JX 465 at 4.
317
JX 462 at 14.
318
Id.
58
management but a more detailed analysis needed to be completed.”319 The record does not
support this description. Raun testified that the “10 percent, as I recall, was just a quick,
you know, kind of what if 10 percent. Oh, yeah, looks good.”320
At this point, the Special Committee recommended that the Company counter at
$6.75 per share.321 The Board unanimously agreed and gave the Special Committee
authority to accept any price of $6.50 or higher.322 The Board also signed off on not asking
for a reverse break-up fee or a go-shop period.323
Deutsche Bank and the Special Committee promptly finalized a response.324 Raun
sent it that evening.325
319
JX 465 at 4; see also Raun Dep. 146–57; Schmitt Dep. 180–82; Whipple Dep.
110–14.
320
Raun Dep. 408.
321
JX 465 at 5.
322
Id.
323
Id.
324
JX 466–67.
325
PTO ¶ 109.
59
4. Days Six through Nine: May 27-30, 2014
On May 27, 2014, Deutsche Bank reported that Avago was willing to increase its
bid to $6.50 per share.326 The Special Committee instructed Singer to speak with Krause
and agree to proceed with due diligence on those terms.327
On May 28, 2014, Singer spoke with Krause.328 That evening, Avago sent over its
“best and final proposal” of $6.50 per share.329
On May 29, 2014, the Special Committee convened to consider the proposal.330
Deutsche Bank provided an update on its current market check, advised that Cypress and
Broadcom had declined to bid, and reported that although Semtech had not formally
declined to bid, they did not seem genuinely interested.331 The Special Committee reviewed
and approved draft confidentiality and exclusivity agreements and resolved to recommend
that the Board authorize the Company to enter into them.332
On May 30, 2018, the full Board met, received an update from the Special
Committee, and adopted the Special Committee’s recommendation. 333 The Board did not
326
JX 472 at 1; see also PTO ¶ 110.
327
JX 472 at 1.
328
JX 475 at 1; see also Singer Tr. 502–03; Krause Dep. 65.
329
JX 476 at 1–2; see also PTO ¶ 111.
330
PTO ¶ 112.
331
JX 480 at 1–2.
332
Id. at 2–3.
333
JX 482 at 1–2.
60
receive any additional financial analysis or further input from management on the
Company’s projections.
On June 2, 2014, PLX and Avago formally executed an exclusivity agreement
lasting twenty-one days.334 The agreement precluded PLX from soliciting additional offers,
furnishing information to other parties, engaging in negotiations, or otherwise cooperating
with a potential competitive bidder.335 The exclusivity agreement did not contain any outs.
R. The June 2014 Projections
After the parties had agreed on price and entered into exclusive negotiations, Raun
and Whipple began preparing the “new haircut 5 year plan for [Deutsche Bank]” that the
Special Committee and Board had requested.336 On June 7, 2014, Gene Schaeffer, PLX’s
Vice President for Sales, circulated the raw data underlying the December 2013 Projections
to the sales managers for “a deeper dive into our funnel and revenue projections.” 337 He
noted that “[w]e clearly have enough wins and momentum to drive the 2014-2018 numbers
in the 5 year plan” but nonetheless asked for revised “inputs . . . no later than Tuesday
6/10.”338
334
See JX 484; JX 485 at 1.
335
JX 484 at 1–2.
336
JX 486 at 1; see also JX 487 (coordinating due diligence meetings); JX 490
(summarizing diligence as of June 6, 2014); JX 493 (due diligence questions).
337
JX 491 at 1.
338
Id.; see also Singer Tr. 278–80; Raun Dep. 177–78 (confirming that “the June
five-year analysis [was] very similar” to the analysis in December 2013 “for the outlying
years”); Salameh Dep. 164, 273 (testifying management “did a detailed, bottoms-up . . . ,
customer, product by product” review for 2014–2016 and also a “top-down, just a reality
61
On June 9, 2014, Whipple circulated a single page PDF reflecting an “[u]pdated
plan” to Deutsche Bank.339 This decision refers to these figures as the “Initial June
Projections.”
The Initial June Projections reflected nominally increased sales compared to the
Preliminary Sensitivity Case that Deutsche Bank had used on May 24, 2013. 340 The
Preliminary Sensitivity Case had projected revenue growing to $244.3 million by 2018.341
The Initial June Projections forecasted that revenue would reach $248.6 million by 2018.342
On the morning of June 11, 2014, Whipple and Deutsche Bank spoke about the
Initial June Projections.343 The next day, Whipple sent Deutsche Bank a revised set of
projections—again as a single page PDF. These were the final projections that Deutsche
Bank used in its fairness opinion, so this decision calls them the “June 2014 Projections.”344
check”); Whipple Dep. 149 (discussing preparation of “the revenue forecast by product, by
year” as well as development of “the expense forecast by year and . . . the out year balance
sheets and statements of cash flow”).
339
JX 492.
340
Compare JX 492 at 2, with JX 464 at 14.
341
JX 464 at 14.
342
JX 492 at 2.
343
JX 494.
344
JX 503.
62
The June 2014 Projections slashed PLX revenue to $208.4 million in 2018. 345 The
primary driver for the reductions was significantly decreased sales during the out years for
the Company’s system-level products.346 The following chart shows the differences
between the December 2013 Projections and the June 2014 Projections:
2014 2015 2016 2017 2018
347
December 2013 Projections $117.5 $139.4 $166.9 $211.5 $271.5
June 2014 Projections348 $114.7 $130.1 $149.4 $174.9 $208.4
Change ($2.8) ($9.3) ($17.5) ($36.6) ($63.1)
As soon as Deutsche Bank received the June 2014 Projections, the bankers ran them
through their discounted cash flow model. The result made the Avago deal look more
attractive: “With these numbers the new range is $4.81-$6.79, as opposed to $5.16-$7.40
using [the Initial June Projections].”349 The Deutsche Bank analysts who ran the model
noted that they had “not been provided with updated CAPEX, working capital or
depreciation figures” to support the June 2014 Projections.350
345
Id. at 2.
346
Raun Dep. 445–46; Beaton Dep. 38–39; see also JX 521A (showing customer-
by-customer, product-by-product revenue estimates for 2014–2016).
347
JX 429 at 8 (in millions).
348
JX 529 at 19 (in millions).
349
JX 499 at 1.
350
Id.
63
On the morning of June 13, 2014, Whipple had a call with Deutsche Bank to discuss
what he described as the “sensitivity case.”351 Whipple then circulated the final June 2014
Projections to the Deutsche Bank team, labeling it the “5 year sensitivity case.” 352 Deutsche
Bank sent the figures on to Barclays, who immediately labeled them the “Management
Downside Case.”353 Barclays referred to the December 2013 Projections as the
“Management Case.”354
Deutsche Bank took a different view on what to call the June 2014 Projections. In
internal communications, one banker noted that Deutsche Bank had been referring to the
December 2013 Projections as “the Base case.”355 He wondered if the December 2013
Projections should now be “upside case.”356 Alternatively, he suggested calling the June
2013 Projections the “downside case.”357 Cho instructed the team to “re-label as Upside
Case (original) and Base Case (new #s).”358
351
JX 502 at 1.
352
JX 510 at 1; see also PTO ¶ 114.
353
JX 532 at 20; see also JX 511 at 1.
354
JX 532 at 19.
355
JX 514 at 2.
356
Id.
357
Id.
358
Id. at 1.
64
The parties have debated at length about the amount of work that went into the June
2013 Projections, the extent and reliability of the data that supported them, and the
legitimacy of the process. My impression is that both sides have made exaggerated claims.
Significant work went into preparing the June 2014 Projections, but the bulk of it took
place over six calendar days from June 7–12, 2014. The June 2014 Projections were not a
slapdash effort, but they also did not result from the same rigorous process used to develop
the December 2013 Projections. They were prepared for purposes of Deutsche Bank’s
valuation analysis in the shadow of the pending deal.
S. Singer Continues To Lead The Process.
From June 15–19, 2014, the Special Committee met almost daily to finalize details
in anticipation of a signing on June 20. During this process, Singer took a leading role and
discussed various issues directly with Avago’s management.359 During a meeting on June
19, Deutsche Bank asked the Special Committee to sign off on the firm’s conflicts.360 The
bankers mentioned their work for Avago on the LSI acquisition, but represented that the
team advising Avago had been walled off from the team advising PLX.361 Deutsche Bank
359
See, e.g., JX 512 at 1 (Singer to Krause: “Let me know if you have 5 minutes to
talk this afternoon or over next few days.”); JX 518 at 2 (Singer reporting that Avago
wanted tender and support agreements as a condition to the transaction); JX 524 at 2 (“It
was agreed that Mr. Singer would reach out to the representative of Avago to discuss the
overall transaction, and then meet again the following day to discuss transaction status at
that time.”); Singer Tr. 288–89; Krause Dep. 65–68.
360
See JX 527 at 2. See generally Raun Dep. 120–29.
361
JX 527 at 2; see Salameh Dep. 61–79. Avago financed the acquisition with cash
on hand and did not require any debt financing. Deutsche Bank had a $90 million position
in Avago’s undrawn revolving credit facility and a $159 million position in a term loan
65
stated that it anticipated “generally seek[ing] to continue working with Avago, but that
there was no specific project that they were currently working on with Avago.”362
On June 20, 2014, the full Board met to receive a report on the status of the deal.363
During the meeting, Deutsche Bank gave a presentation that compared the December 2013
Projections and the June 2014 Projections,364 treating the December 2013 Projections as an
upside case and the June 2014 Projections as the base case.365 The materials showed that
the June 2014 Projections resulted in substantial reductions from the December 2013
Projections.366 Deutsche Bank’s materials stated that PLX’s operating plan “has been
meaningfully reduced since the IDT transaction.”367 In reality, the plan was meaningfully
reduced in May 2014 at Deutsche Bank’s request.
Deutsche Bank’s materials included two discounted cash flow analyses. The
analysis based on the December 2013 Projections yielded a range of $6.39 to $8.98 per
share, with $7.62 at the midpoint.368 The analysis based on the June 2014 Projections
extended to Avago. Deutsche Bank earned just over $30 million for its role in the LSI
acquisition. See JX 489.
362
JX 527 at 2.
363
PTO ¶ 116.
364
See JX 529 at 9.
365
See id.
366
See id.
367
Id.
368
Id. at 20.
66
yielded a range of $5.07 to $6.99 per share, with $5.98 at the midpoint.369 During the
presentation, an attorney from Pillsbury Winthrop made a point of noting that “the forecast
prepared in December 2013 contained a legend describing it as an aggressive plan.”370
After the presentation, Schmitt asked for “an explanation of the assumptions used
in calculating the June 2014 forecast and the differences between those assumptions and
the ones used in the December 2013 plan.”371 The Board directed Raun to provide the
explanation at the next meeting.372 Without having the benefit of the explanation, the Board
“instructed [Deutsche Bank] to rely on the Base Case as the primary basis of its analysis.373
The next day, Whipple sent Raun an explanation for the June 2014 Projections:
While we had detailed operating cost forecasts for 2014, our 2015 through
2018 forecasts were based on quarterly growth rates. As we calculated the
out years in the [December 2013 Projections] we initially had relatively low
growth rates for OPEX that gave what appeared to be unreasonable growth
in profitability. We increased R&D and to a lesser extent SG&A spending in
the final aggressive AOP forecast [i.e., the December 2013 Projections].
Based on the revised revenue growth in the sensitivity plan [i.e., the
Preliminary Sensitivity Case], I reduced the OPEX in the out years to
maintain ratios of R&D and SG&A spending to revenue and growth to reflect
the lower need to support revenue growth. While R&D and SG&A spending
continue to expand, they decrease slowly as a percentage of revenues. In my
judgment, PLX management would limit growth in spending to be
commensurate with revenue growth to continue to expand profitability and
369
Id. at 19.
370
JX 525 at 5.
371
Id.
372
Id.
373
Id.
67
to take advantage of the leverage we believe is inherent in our business at
this time.374
There is no credible evidence that would support a finding that that this explanation was
ever provided to the other directors.
T. The Board Approves The Merger Agreement.
On June 22, 2014, the full Board met to consider final terms of the transaction with
Avago.375 According to the minutes, “[p]rior to the meeting, Mr. Raun had circulated to
the Board a detailed description of the assumptions used in calculating the June 2014
forecast and the differences between those assumptions and those used in the December
2013 plan . . . , as requested by the Board at the previous Board meeting.”376 This statement
appears to be wishful minute drafting. There is no evidence that this actually happened.
The minutes also recite that Raun “explained the December 2013 plan was intended
to be an aggressive plan” and that “various events had affected the achievement of the
projections underlying the December 2013 Plan and that the June 2014 forecast reflected
management’s current thinking as to what would be a reasonable forecast.”377 According
to the minutes, “[t]he Board affirmed that Mr. Raun had prepared the June 2014 forecast
374
JX 536.
375
PTO ¶ 118.
376
JX 540 at 2.
377
Id.
68
at the request of the Board and the Strategic Alternatives Special Committee and agreed
that the assumptions on which it was based were reasonable.”378
Based on the June 2013 Projections, Deutsche Bank rendered its oral fairness
opinion.379 The Board adjourned, and the Special Committee met.380 After the Special
Committee recommended entering into the Avago transaction, the full Board reconvened
and followed the Special Committee’s recommendation.381 On June 23, 2014, PLX
formally announced the transaction.
U. The Merger Agreement
The final merger agreement contemplated a medium-form merger effected pursuant
to Section 251(h) of the Delaware General Corporation Law.382 The merger agreement
prohibited PLX from soliciting competing offers and required the Board to continue to
support the transaction, subject to a fiduciary out with matching rights.383 It contemplated
a termination fee of $10.85 million, representing 3.5% of equity value ($309 million) and
3.7% of enterprise value ($293 million).384 Holders of approximately 14.7% of PLX’s
378
Id.
379
Id. at 3; see also JX 544–45.
380
See PTO ¶ 118; JX 541.
381
JX 540 at 3.
382
JX 542 § 1.3.
383
JX 542 § 5.3.
384
See JX 529 at 5; JX 542 § 7.2(b).
69
outstanding shares—including Potomac, management, and the entire Board—entered into
tender and support agreements. PLX’s second largest stockholder—Discovery Group I,
LLC—publicly announced its support for the transaction.385
Avago launched the first-step tender offer on July 8, 2014.386 PLX concurrently filed
its Recommendation Statement.387 The tender offer closed on August 11.388 Holders of
approximately 80.3% of PLX’s outstanding shares tendered into the offer.389 No competing
bidders emerged. The Merger closed on August 12.390
V. This Litigation
On July 14, 2014, after the announcement of the Merger, the plaintiffs filed suit
naming as defendants PLX’s directors, Potomac, Avago, and the acquisition subsidiary that
Avago used to effectuate the merger.391 The plaintiffs moved for a preliminary injunction
that would block the merger. On July 22, 2014, I approved an expedited schedule leading
385
See JX 543; PLX Technology, Inc., Current Report (Form 8-K) (June 23, 2014).
386
JX 555 at 3.
387
See JX 551; PLX Technology, Inc., Solicitation/Recommendation Statement
(Schedule 14 D-9) (July 8, 2014).
388
JX 554 at 2.
389
PTO ¶ 125.
390
PTO ¶ 126.
391
Dkt. 1. The separate role of the acquisition subsidiary is not important to this
decision, so I do not refer to it separately.
70
up to a hearing on August 8.392 By letter dated July 31, the plaintiffs withdrew their request
for an injunction, citing the adequacy of money damages.393
On September 12, 2014, the defendants moved to dismiss the complaint. 394 After
the plaintiffs amended their pleading,395 the defendants again moved to dismiss.396 After
the Delaware Supreme Court issued its opinion in In re Cornerstone Therapeutics, Inc.
Stockholders Litigation,397 the parties submitted supplemental briefing in light of the
decision.
On September 3, 2015, I dismissed the claims against Avago, Domenik, and
Colombatto.398 On August 17, 2016, the plaintiffs settled with all of the defendants except
for Potomac.399 On November 18, I approved the settlement.400 On November 21, I granted
the plaintiffs’ motion for class certification.401
392
Dkt. 26.
393
Dkt. 42.
394
Dkts. 48, 49, 52.
395
Dkt. 66, 67.
396
Dkts. 77, 78, 80, 81.
397
115 A.3d 1173 (Del. 2015).
398
See Dkts. 127, 131, 207.
399
Dkt. 159.
400
Dkts. 192, 204.
401
Dkt. 195.
71
On June 22, 2017, Potomac moved for summary judgment. 402 By order dated
February 6, 2018, I denied the motion.403 Trial took place from April 10–12.404
II. LEGAL ANALYSIS
The plaintiffs seek damages from Potomac for aiding and abetting breaches of
fiduciary duty. This claim has four elements: (i) the existence of a fiduciary relationship,
(ii) a breach of the fiduciary’s duty, (iii) knowing participation in the breach by a non-
fiduciary defendant, and (iv) damages proximately caused by the breach.405 The plaintiffs
established all of the elements except for causally related damages.
A. The Existence Of A Fiduciary Relationship
The plaintiffs easily satisfied the first element of their claim. The Company’s
directors were fiduciaries who owed duties “to the corporation and its shareholders.”406
“This formulation captures the foundational relationship in which directors owe duties to
the corporation for the ultimate benefit of the entity’s residual claimants.”407
402
Dkt. 214.
403
Dkt. 347.
404
Dkts. 381–83.
405
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).
406
N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92,
99 (Del. 2007); accord Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989)
(“[D]irectors owe fiduciary duties of care and loyalty to the corporation and its
shareholders . . . .”); Polk v. Good, 507 A.2d 531, 536 (Del. 1986) (“In performing their
duties the directors owe fundamental fiduciary duties of loyalty and care to the corporation
and its shareholders.”).
407
In re Trados Inc. S’holder Litig. (Trados II), 73 A.3d 17, 36–37 (Del. Ch. 2013).
72
Directors of a Delaware corporation owe two fiduciary duties: loyalty and care.408
The duty of loyalty included a requirement to act in good faith, which is “a subsidiary
element, i.e., a condition, of the fundamental duty of loyalty.”409 To act in good faith means
to seek subjectively to “promote the value of the corporation for the benefit of its
stockholders.”410 A failure to act in good faith may be shown where the fiduciary “acts with
a purpose other than that of advancing the best interests of the corporation.”411
408
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006);
accord Mills Acq., 559 A.2d at 1280; Polk, 507 A.2d at 536.
409
Stone, 911 A.2d at 370 (internal quotation marks omitted).
410
eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010); accord
Gheewalla, 930 A.2d at 101 (“The directors of Delaware corporations have the legal
responsibility to manage the business of a corporation for the benefit of its shareholder[ ]
owners.”); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (citing
“the basic principle that corporate directors have a fiduciary duty to act in the best interests
of the corporation’s stockholders”). See generally Leo E. Strine, Jr., The Soviet
Constitution Problem in Comparative Corporate Law: Testing the Proposition That
European Corporate Law Is More Stockholder Focused than U.S. Corporate Law, 89 S.
Cal. L. Rev. 1239, 1249 (2016); (“[U]nder Delaware law . . . directors are required to focus
on promoting stockholder welfare.”); Leo E. Strine, Jr., The Dangers of Denial: The Need
for a Clear-Eyed Understanding of the Power and Accountability Structure Established by
the Delaware General Corporation Law, 50 Wake Forest L. Rev 761, 771 (2015) (“Revlon
could not have been more clear that directors of a for-profit corporation must at all times
pursue the best interests of the corporation’s stockholders . . . .”); Leo E. Strine, Jr. et al.,
Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law, 98 Geo.
L.J. 629, 634 (2010) (“[I]t is essential that directors take their responsibilities seriously by
actually trying to manage the corporation in a manner advantageous to the stockholders.”).
411
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006) (internal
quotation marks omitted); accord Stone, 911 A.2d at 369; see Gagliardi v. TriFoods Int’l,
Inc., 683 A.2d 1049, 1051 n.2 (Del. Ch. 1996) (Allen, C.) (defining a “bad faith”
transaction as one “that is authorized for some purpose other than a genuine attempt to
advance corporate welfare or is known to constitute a violation of applicable positive law”);
In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036, at *15 (Del. Ch. Jan. 31, 1989)
(Allen, C.) (explaining that the business judgment rule would not protect “a fiduciary who
73
The fiduciary duties of directors have context-specific manifestations. When
directors consider selling the corporation, their fiduciary duties obligate them “to seek the
transaction offering the best value reasonably available to stockholders.” 412 The best
transaction reasonably available is not always a sale; it may mean remaining independent
and not engaging in a transaction at all.413
could be shown to have caused a transaction to be effectuated (even one in which he had
no financial interest) for a reason unrelated to a pursuit of the corporation’s best interests”);
see also In re El Paso Corp. S’holder Litig., 41 A.3d 432, 439 (Del. Ch. 2012) (Strine, C.)
(“[A] range of human motivations . . . can inspire fiduciaries and their advisors to be less
than faithful to their contextual duty to pursue the best value for the company’s
stockholders.”); RJR Nabisco, 1989 WL 7036, at *15 (“Greed is not the only human
emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge,
. . . shame or pride. Indeed any human emotion may cause a director to place his own
interests, preferences or appetites before the welfare of the corporation.”).
412
Paramount Commc’ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 43 (Del. 1993);
see Kahn v. Stern, 183 A.3d 715, 2018 WL 1341719, at *1 n.3 (Del. Mar. 15, 2018)
(TABLE) (describing “Revlon duties” as a “context-specific articulation of the directors’
duties”).
413
See Huff Energy Fund, L.P. v. Gershen, 2016 WL 5462958, at *13 (Del. Ch.
Sept. 29, 2016); Chen v. Howard-Anderson, 87 A.3d 648, 672 (Del. Ch. 2014); Trados II,
73 A.3d at 37. Compare QVC, 637 A.2d at 43 (holding that it was reasonably probable that
the directors breached their fiduciary duties by pursuing an ostensibly superior value to be
created by a long-term strategic combination when, post-transaction, a controller would
have “the power to alter that vision,” rendering its value highly contingent), and Revlon,
Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 182 (Del. 1986) (holding that
the alternative of maintaining the corporation as a stand-alone entity and the use of
defensive measures to preserve that alternative “became moot” once the board determined
that the values achievable through a sale process exceeded the board’s assessment of stand-
alone value), with Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del.
1989) (holding that it was not reasonably probable that the directors breached their
fiduciary duties by pursuing a superior long-term value of strategic, stock-for-stock merger
without a post-transaction controller), and Unocal, 493 A.2d at 956 (holding that it was not
reasonably probable that the directors breached their fiduciary duties by adopting a
selective exchange offer to defend against a two-tiered tender offer where the blended value
of the offer was less than $54 per share and the board reasonably believed the stand-alone
74
Another situational manifestation is the duty of disclosure.414 When directors ask
stockholders to take action, whether by approving a transaction (such as a merger, sale of
assets, or charter amendment) or making an investment decision (such as tendering shares
or making an appraisal election), directors must disclose truthfully to stockholders “all facts
that are material to the stockholders’ consideration of the transaction or matter and that are
or can reasonably be obtained through their position as directors.”415
When approving the Merger and making the decisions that led to it, the directors
were acting as fiduciaries for the corporation and its stockholders. When distributing the
Recommendation Statement and advising stockholders to tender into the first step of the
medium-form Merger, the directors were again acting as fiduciaries. The plaintiffs
therefore established the first element of their claim.
B. A Breach Of Fiduciary Duty
The second element of a claim for aiding and abetting requires that the plaintiffs
prove a predicate breach of fiduciary duty. For purposes of the second element, the
value of corporation was much greater), and Air Prods. & Chems., Inc. v. Airgas, Inc., 16
A.3d 48, 112 (Del. Ch. 2011) (holding that the board complied with its fiduciary duties by
maintaining a rights plan to protect a higher stand-alone value of corporation rather than
permit an immediate sale).
414
Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (explaining that the “duty of
disclosure is not an independent duty, but derives from the duties of care and loyalty”
(internal quotation marks omitted)).
415
In re Wayport Inc. Litig., 76 A.3d 296, 314 (Del. Ch. 2013) (internal quotation
marks omitted); accord Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992) (“[D]irectors 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.”).
75
plaintiffs attack both the sale process and the disclosures in the Recommendation
Statement. Doctrinally, these seemingly separate species of misconduct blend, because the
selection of the proper standard of review for evaluating the directors’ decisions during the
sale process depends in the first instance on whether the directors complied with their duty
of disclosure.
“When determining whether directors have breached their duties, Delaware
corporate law distinguishes between the standard of conduct and the standard of review.”416
“The standard of conduct describes what directors are expected to do and is defined by the
content of the duties of loyalty and care. The standard of review is the test that a court
applies when evaluating whether directors have met the standard of conduct.”417
416
Chen, 87 A.3d at 666; see William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr.,
Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A
Critique of Van Gorkom and Its Progeny as a Standard of Review Problem, 96 Nw. U. L.
Rev. 449, 451–52 (2002); William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function
Over Form: A Reassessment of the Standards of Review in Delaware Corporation Law, 56
Bus. Law. 1287, 1295–99 (2001); see also E. Norman Veasey & Christine T. Di
Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992–
2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 1416–25
(2005) (distinguishing between the standards of fiduciary conduct and standards of
review). See generally Julian Velasco, The Role of Aspiration in Corporate Fiduciary
Duties, 54 Wm. & Mary L. Rev. 519, 553–58 (2012); Melvin Aron Eisenberg, The
Divergence of Standards of Conduct and Standards of Review in Corporate Law, 62
Fordham L. Rev. 437, 461–67 (1993).
417
Trados II, 73 A.3d at 35–36.
76
“Delaware has three tiers of review for evaluating director decision-making: the
business judgment rule, enhanced scrutiny, and entire fairness.”418 Which standard of
review applies will depend initially on whether the board members:
(i) were disinterested and independent (the business judgment rule), (ii) faced
potential conflicts of interest because of the decisional dynamics present in
particular recurring and recognizable situations (enhanced scrutiny), or (iii)
confronted actual conflicts of interest such that the directors making the
decision did not comprise a disinterested and independent board majority
(entire fairness). The standard of review may change further depending on
whether the directors took steps to address the potential or actual conflict,
such as by creating an independent committee, conditioning the transaction
on approval by disinterested stockholders, or both.419
Delaware’s default standard of review is the business judgment rule, a principle of
non-review that “reflects and promotes the role of the board of directors as the proper body
to manage the business and affairs of the corporation.”420 The 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
418
Reis v. Hazelett Strip–Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011). For
reasons discussed at length elsewhere, this summary groups together under the heading of
enhanced scrutiny what were once seemingly separate standards of intermediate review.
See generally Pell v. Kill, 135 A.3d 764, 784–85 (Del. Ch. 2016) (explaining how
“[p]articularly during the 1980s, standards of review seemed to proliferate,” but that
Delaware courts have subsequently consolidated the various intermediate standards within
the framework of enhanced scrutiny); Reis, 28 A.3d at 457–58 (discussing variants of
enhanced scrutiny).
419
Trados II, 73 A.3d at 36.
420
In re Trados Inc. S’holder Litig. (Trados I), 2009 WL 2225958, at *6 (Del. Ch.
July 24, 2009).
77
company.”421 Unless one of its elements is rebutted, “the court merely looks to see whether
the business decision made was rational in the sense of being one logical approach to
advancing the corporation’s objectives.”422 “Only when a decision lacks any rationally
conceivable basis will a court infer bad faith and a breach of duty.”423
“Entire fairness, Delaware’s most onerous standard, applies when the board labors
under actual conflicts of interest.”424 Once entire fairness applies, the defendants must
establish “to the court’s satisfaction that the transaction was the product of both fair dealing
and fair price.”425 “Not even an honest belief that the transaction was entirely fair will be
sufficient to establish entire fairness. Rather, the transaction itself must be objectively fair,
independent of the board’s beliefs.”426
In between lies enhanced scrutiny, which is Delaware’s “intermediate standard of
review.”427 It applies to “specific, recurring, and readily identifiable situations involving
potential conflicts of interest where the realities of the decisionmaking context can subtly
421
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds
by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
422
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010) (Strine,
V.C.).
423
In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 34 (Del. Ch. 2014).
424
Trados II, 73 A.3d at 44.
425
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) (internal
quotation marks omitted).
426
Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).
427
Trados II, 73 A.3d at 43.
78
undermine the decisions of even independent and disinterested directors.”428 Inherent in
these situations are subtle structural and situational conflicts that do not rise to a level
sufficient to trigger entire fairness review, but also do not comfortably permit expansive
judicial deference.429 Framed generally, enhanced scrutiny requires that the defendant
fiduciaries “bear the burden of persuasion to show that their motivations were proper and
not selfish” and that “their actions were reasonable in relation to their legitimate
objective.”430
Traditionally, enhanced scrutiny would apply to decisions made in connection with
a sale of a corporation for cash, as occurred in this case. 431 In Corwin v. KKR Financial
Id.; accord Reis, 28 A.3d at 457–59; see QVC, 637 A.2d at 42 (“[T]here are rare
428
situations which mandate that a court take a more direct and active role in overseeing the
decisions made and actions taken by directors. In these situations, a court subjects the
directors’ conduct to enhanced scrutiny to ensure that it is reasonable.”); Dollar Thrifty, 14
A.3d at 598 (“In a situation where heightened scrutiny applies, the predicate question of
what the board’s true motivation was comes into play. The court must take a nuanced and
realistic look at the possibility that personal interests short of pure self-dealing have
influenced the board to block a bid or to steer a deal to one bidder rather than another.”).
In re Rural Metro Corp., 88 A.3d 54, 82 (Del. Ch. 2014), aff’d sub nom. RBC
429
Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015); accord Huff Energy Fund, 2016
WL 542958, at *13; see Dollar Thrifty, 14 A.3d at 597 (“Avoiding a crude bifurcation of
the world into two starkly divergent categories—business judgment rule review reflecting
a policy of maximal deference to disinterested board decisionmaking and entire fairness
review reflecting a policy of extreme skepticism toward self-dealing decisions—the
Delaware Supreme Court’s Unocal and Revlon decisions adopted a middle ground.”);
Golden Cycle, LLC v. Allan, 1998 WL 892631, at *11 (Del. Ch. Dec. 10, 1998) (locating
enhanced scrutiny under Unocal and Revlon between the business judgment rule and the
entire fairness test).
430
Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del. Ch. 2007) (Strine,
V.C.).
431
See QVC, 637 A.2d at 42–43, 45; Revlon, 506 A.2d at 182.
79
Holdings, LLC, the Delaware Supreme Court held that “when a transaction not subject to
the entire fairness standard is approved by a fully informed, uncoerced vote of the
disinterested stockholders, the business judgment rule applies.”432 Applying Corwin, this
court has held that when the holders of a majority of a company’s shares make a fully
informed, disinterested, and uncoerced decision to tender into a medium-form merger
under Section 251(h), the business judgment rule applies.433 To determine what standard
of review applies therefore requires an assessment of whether the stockholder decision was
fully informed, which in turn requires determining whether the directors breached their
duty of disclosure. This decision starts with that issue.
1. The Disclosure Claim
When asking stockholders to tender into the first step of the medium-form Merger,
the members of the Board owed a “fiduciary duty to disclose fully and fairly all material
information within the board’s control when it seeks shareholder action.” 434 A fact is
material “if there is a substantial likelihood that a reasonable shareholder would consider
it important in deciding how to vote.”435 The test does not require “a substantial likelihood
432
125 A.3d 304, 309 (Del. 2015).
In re Volcano Corp. S’holder Litig., 143 A.3d 727, 747 (Del. Ch. 2016), aff’d,
433
156 A.3d 697 (Del. 2017) (TABLE).
434
Stroud, 606 A.2d at 84; accord Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998)
(“The directors of a Delaware corporation are required to disclose fully and fairly all
material information within the board’s control when it seeks shareholder action.”).
435
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
80
that [the] disclosure . . . would have caused the reasonable investor to change his vote.”436
The question is rather whether there is “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.”437
a. The December 2013 Tip And Singer’s Role
The plaintiffs argue that the Recommendation Statement failed to disclose Krause’s
tip to Deutsche Bank in December 2013, which Deutsche Bank relayed to Singer. In this
tip, Krause conveyed in substance that after Avago completed the LSI deal, it wanted to
acquire PLX for approximately $300 million.438 The plaintiffs argue that the
Recommendation Statement also failed to disclose that Krause and Singer discussed the
pricing of the deal during their dinner meeting on May 21, 2014. Adding to the mix, the
plaintiffs have identified other aspects of the Recommendation Statement that misleadingly
downplay Singer’s involvement in the deal process. The plaintiffs proved that the
Recommendation Statement’s presentation of these events was materially misleading.
As a general matter, when “arm’s-length negotiation has resulted in an agreement
which fully expresses the terms essential to an understanding by shareholders of the impact
of the merger, it is not necessary to describe all the bends and turns in the road which led
436
Id. (same).
437
Id. (same).
438
See JX 1032 at 2.
81
to that result.”439 Early contacts that do not lead to more formal negotiations or a transaction
are not required to be disclosed.440
In this case, Krause’s tip to Deutsche Bank, which Deutsche Bank relayed to Singer,
was more than just a bend or turn in the road. On December 19, 2013, Krause told Deutsche
Bank (and Deutsche Bank told Singer) that Avago wanted to buy PLX, when it would bid,
and how much it wanted to pay. 441 The Recommendation Statement fails to mention the
tip. It describes the surrounding events as follows:
On December 18, 2013, the PLX annual meeting of stockholders resulted in
the election of three new members of PLX’s Board of Directors from the
slate proposed by Potomac Capital.
2014 Sales Process
On December 23, 2013, the PLX Board of Directors updated the new
directors on PLX’s consideration of strategic transactions over the preceding
two years, including the 2012 Go-Shop Process and the Fall 2013 Market
Check. Deutsche Bank also noted that the Fall 2013 Market Check had not
resulted in any formal proposal to acquire PLX and that several prospective
bidders had indicated that PLX’s stock price already reflected a significant
acquisition premium.442
439
Van de Walle v. Unimation, Inc., 1991 WL 29303, at *15 (Del. Ch. Mar. 7, 1991)
(internal quotation marks omitted).
440
See Wis. Inv. Bd. v. Bartlett, 2000 WL 238026, at *8 (Del.Ch. Feb. 24, 2000)
(“One cannot conclude that a failure to disclose the details of negotiations gone south
would be either viably practical or material to shareholders in the meaningful way intended
by our case law.”).
441
See JX 1031; JX 1032 at 2.
442
JX 551 at 24.
82
According to the Recommendation Statement, Avago did not renew its interest in PLX
until May 2014.443
A stockholder who knew about the tip could take a very different view of the
Board’s subsequent efforts to explore alternatives and negotiate with Avago, as well as the
role Singer played in the process. The early communication undercuts the legitimacy of the
eventual price negotiations with Avago that Singer led. Rather than appearing like arm’s-
length negotiations, the quick back-and-forth in May 2014 can be seen as a means of
arriving at the $300 million valuation that Krause identified in December 2013. Instead of
Singer and the Board negotiating for the best transaction reasonably available and being
prepared to remain an independent company, it looks like they engaged in the “art of the
possible”444 and accepted what Avago had planned to offer all along. The fact that Deutsche
Bank and Singer did not share Krause’s tip calls into question their motivations on behalf
of PLX. Rather than actors attempting in good faith to obtain the best outcome possible,
they look like self-interested agents who were happy with a quick sale that would serve
their interests. The Recommendation Statement’s failure to mention Krause’s tip was a
material omission.
443
See Id. at 25.
444
Schmitt Dep. 172–73.
83
Next, the Recommendation Statement failed to mention that Singer and Krause
discussed pricing when they had dinner on May 21, 2014.445 The Recommendation
Statement describes the timeline as follows:
On May 19, 2014, representatives of Avago contacted PLX to directly
communicate Avago’s interest in renewing its offer to acquire PLX. A
follow-up meeting was held on May 21, 2014, at which representatives of
PLX provided Avago an update on PLX’s business. Also on May 21, 2014,
Mr. Singer met with Mr. Thomas Krause of Avago to discuss Avago’s
potential offer to acquire PLX. Mr. Krause and Mr. Singer discussed general
terms for a potential acquisition of PLX by Avago. Mr. Krause noted that
Avago believed that the then-current PLX stock price already included a
premium as a result of Potomac Capital’s actions. Following the meeting, the
Special Committee discussed Avago’s interest.
On May 22, 2014, Avago sent a non-binding letter of interest to the PLX
Board of Directors proposing to acquire PLX at a price of $6.25 per share.
The letter stated Avago’s willingness to enter into a merger agreement with
PLX on substantially the same terms as the IDT merger agreement, with
changes to reflect an all-cash transaction and the deletion of the “go-shop”
provision in the IDT merger agreement.446
Particularly when viewed against the backdrop of Krause’s early communication with
Deutsche Bank and Singer’s knowledge of that communication, the fact that Krause and
Singer discussed pricing on May 21 was material information. A reasonable stockholder
would want to know that information to evaluate whether Singer and his fellow directors
actually bargained at arms’ length with Avago, or whether Singer was guiding the Board
to the figure that Avago was already willing to pay.
445
JX 433 at 1; JX 1026.
446
JX 551 at 26.
84
Given this backdrop, the Recommendation Statement’s discussion of the
development of PLX’s counteroffer also becomes problematic. The Recommendation
Statement describes the process as follows:
Later on May 22, 2014, the Special Committee and Deutsche Bank discussed
the proposal from Avago and what further steps should be taken to be able
to respond to the proposal. The Special Committee also discussed the PLX
valuation issues and directed Deutsche Bank to prepare a valuation
assessment to present to the Special Committee.
On May 23, 2014, the Special Committee met with Deutsche Bank . . . .
Deutsche Bank then provided an update on market conditions and PLX
valuation issues, and the Special Committee discussed the proposal from
Avago of $6.25 per share. Deutsche Bank presented and discussed with the
Special Committee certain valuation analyses, including, among other
things, Deutsche Bank’s view that the PLX share price was impacted by the
takeover premium built into the share price following Potomac Capital’s 13D
filing in January 2013. Deutsche Bank and the Special Committee also
discussed the market analysts’ 2014 and 2015 projected estimates for PLX
as compared against management’s projections. The Special Committee
directed Deutsche Bank to include both in future analyses and discussions.
...
After considering the analyses presented by Deutsche Bank, the prior market
checks, the other indications of interest received by PLX from time to time
and the sufficiency of the 2014 Market Check (noting in particular that the
first two market checks had only resulted in an offer from Avago, and that
the terminated IDT Merger had already put potential buyers on alert but only
Avago made a proposal to acquire PLX), the Special Committee
unanimously agreed to recommend to the PLX Board of Directors that PLX
prepare a counter proposal at $6.75 per share and a strategy for responding
to any further counter proposals from Avago.447
The record in this case calls into question whether there was a meeting of the Special
Committee and Deutsche Bank on May 22. What seems more likely is that Singer discussed
447
Id.
85
the offer with Deutsche Bank, and they decided on a counter offer of $6.75. After that
discussion, Deutsche Bank prepared a letter to that effect and circulated it to Raun, Schmitt,
Singer, and Salameh.448 Singer also asked Deutsche Bank to prepare some market analysis
to support a $6.75 counter.449
Viewed in isolation, I would not regard these last details as material. But considered
in the context of Krause’s tip and Singer’s dinner with Krause, the prominent role that
Singer played in developing the counteroffer with Deutsche Bank becomes material. A
stockholder would want to know about Singer’s role when evaluating whether the directors
were negotiating at arms’ length, or whether Singer was orchestrating a deal at a price that
Krause set in December 2013.
Finally, the plaintiffs point out that Singer had undisclosed conversations with “a
member of Avago’s management” about tender and support agreements. The minutes of a
meeting of the Special Committee on June 15, 2014 establish that the conversation
occurred.450 The Recommendation Statement fails to mention it, stating only that the
Special Committee discussed Avago’s request.451
Here too, I would resist viewing Singer’s involvement as material in the abstract.
Taken as a whole, however, the Recommendation Statement appears to have sought to
448
See JX 434 at 2–3.
449
JX 1030 at 1.
450
JX 516 at 1.
451
JX 551 at 29.
86
minimize Singer’s role. The Recommendation Statement should have described Singer’s
involvement accurately and candidly by identifying him as the interlocutor.452
b. The Reliability Of The June 2014 Projections
The plaintiffs next contest the Recommendation Statement’s description of the June
2014 Projections as having been prepared “in the ordinary course of business for operating
purposes . . . .”453 The plaintiffs proved at trial that this description was misleading.
The Recommendation Statement discusses the June 2014 Projections at length in a
section titled “Projected Financial Information,” which states:
PLX does not, as a matter of course, make detailed or long-term public
forecasts or projections as to its future financial performance due to the
unpredictability of the underlying assumptions and estimates. At the
December 12, 2013 PLX Board of Directors meeting, PLX management
presented a five year plan covering the period 2014–2018 (the “December
2013 [Projections]”). A notation to the December 2013 [Projections] stated,
“Although this is an aggressive plan compared to the past couple years
performance and where we stand this quarter with soft demand from Storage
market, management believes we should drive internally for this number as
the plan. The key will be getting our strong Gen 3 design pipe into
production, a stable economy and a return of federal spending with our end
customers.” The December 2013 [Projections] reflected growth rates
significantly higher than historic levels and was based on certain assumptions
with respect to investment levels on certain products, timing of production
and ramp of certain products, stable economic conditions, and return of
federal spending with the end customers. Between December 2013 and June
2014, the PLX Board of Directors and PLX management discussed updating
the five year forecast based on more current information. In June 2014, PLX
management prepared a revised five year plan to better reflect management’s
current expectations of future company performance. On June 13, 2014, PLX
452
See van der Fluit v. Yates, 2017 WL 5953514, at *8 (Del. Ch. Nov. 30, 2017)
(holding that plaintiff had stated claim for breach of duty of disclosure where complaint
failed to identify who the negotiators were who had contact with bidders).
453
JX 551 at 55.
87
management delivered the revised five year plan (the “June 2014
[Projections]”) to Deutsche Bank. The June 2014 [Projections] w[ere] based
on updated assumptions as of June 2014 and reflected downward adjustments
to revenue due to lower than expected design activity for, anticipated
production delays on, and reduced market demand for, certain products. . . .
The December 2013 [Projections] were provided to [Avago] in May 2014
and did not include PLX’s first quarter actual revenue results. The Upside
Case projections as presented below are consistent with those presented to
[Avago] in May 2014 except that they now incorporate PLX’s actual revenue
results for the first quarter. . . . The December 2013 [Projections] w[ere] later
updated to include PLX’s actual first quarter results. The December 2013
[Projections], as updated, and the June 2014 [Projections[ (collectively, the
“Projections”), which are summarized below, were also furnished to
Deutsche Bank, which were relied upon by Deutsche Bank in connection
with their financial analysis and Fairness Opinion as follows, except . . .
where PLX management and the PLX Board of Directors instructed
Deutsche Bank to analyze both the Base Case and the Upside Case, Deutsche
Bank was instructed by PLX management and the PLX Board of Directors
to rely on the Base Case as the primary basis of its analyses. The June 2014
[Projections are] referred to as the “Base Case” in Deutsche Bank’s analysis
(and in the further discussion below), because PLX’s management informed
Deutsche Bank that the Base Case represented the best currently available
estimates and judgments by management as to the expected future results of
operations and financial conditions of PLX, and accordingly are the
projections which, with PLX’s consent, Deutsche Bank relied upon in
performing its analysis. The December 2013 [Projections], as updated, [are]
referred to as the “Upside Case” in Deutsche Bank’s analysis . . . .454
This paragraph is misleading.
For starters, PLX prepared detailed and long-term forecasts in the ordinary course
of business. Although it was accurate to say that the figures were not for public
consumption, PLX prepared a three-year plan on an annual basis.455 As discussed in the
454
Id. at 54–55.
455
Whipple Dep. 94–95 (“[E]very year around Thanksgiving, we sat down as a
group and we did a three—typically a three-year plan, which—the first year of which
became our budget for the following year.”).
88
Factual Background, it was also technically true that the December 2013 Projections
contained the notation described in the Recommendation Statement, but the language in
context did not approach the prominence it received in the Recommendation Statement.
Next, contrary to the impression created by the Recommendation Statement, the
Board and management did not discuss updating the December 2013 Projections
“[b]etween December 2013 and June 2014 . . . based on more current information.” The
issue first came up on May 23, 2014 after the Special Committee received Avago’s offer
of $6.25 per share.456 While it is technically true that May 2014 is “[b]etween December
2013 and June 2014,” the Recommendation Statement creates the impression of regular
discussion and review. Instead of updating the plan, the Board used it as late as April 2014
for decisions in the ordinary course of business involving insurance and compensation.457
Relatedly, the effort to produce the June 2014 Projections did not actually begin
until June 7, 2014, after PLX and Avago had agreed on $6.50 per share. 458 The new figures
did not reflect “more current information,” as the Recommendation Statement suggested.
456
JX 459 at 3; see also Cho Dep. 130–37; Raun Dep. 440–42; Salameh Dep. 90–
91; Schmitt Dep. 177–79; Whipple Dep. 104–05.
457
See JX 385 at 20; JX 383 at 32. The plaintiffs’ expert noted that the use of the
projections for insurance purposes evidences their reliability, because providing false
information to insurance companies can be pursued as insurance fraud and can result in a
policy becoming void. Quintero Tr. 602–03. Cf. Del. Open MRI Radiology Assocs. v.
Kessler, 898 A.2d 290, 317 n.57 (Del. Ch. 2006) (finding projections credible where they
had been presented to “federally-regulated financial institutions for financing purposes”
and “it is a felony to knowingly obtain any funds from a financial institution by false or
fraudulent pretenses or representations”).
458
See JX 491 at 1.
89
When PLX’s Vice President of Sales asked his sales managers to revisit their estimates as
part of this process, he noted that “[w]e clearly have enough wins and momentum to drive
the 2014–2018 numbers in the 5 year plan.”459 The June 2014 Projections were prepared
for Deutsche Bank’s valuation analysis. When Deutsche Bank ran the numbers, they
generated the answer the banker’s wanted: a range of $4.81 to $6.79 per share.460
In light of the circumstances surrounding their preparation, it was misleading for the
Recommendation Statement to claim that the June 2014 Projections “were prepared in the
ordinary course of business for operating purposes.” The June 2014 Projections were
prepared after Avago made its bid so that Deutsche Bank could use them in its fairness
opinion.
c. The May 24 Analysis
Finally, the plaintiffs argue that the Recommendation Statement was materially
misleading because it failed to include a discounted cash flow analysis based on the
459
Id. There was testimony from interested witnesses to the effect that management
followed the same process to develop the June 2014 Projections that they had followed in
December 2013. See Raun Dep. 177–78 (confirming that “the June five-year analysis [was]
very similar” to the analysis in December 2013 “for the outlying years”); Salameh Dep.
164, 273 (testifying management “did a detailed, bottoms-up . . . , customer by customer,
product by product” review for 2014–2016 and also a “top-down, just a reality check”).
Given the circumstances surrounding the preparation of the June 2014 Projections, I am
unable to credit this testimony, which was given by obviously interested parties. In
weighing the credibility of this testimony, I have also taken into account the interested
witnesses’ widespread efforts to reconfigure the record by drafting questionable minutes
and overemphasizing the “aggressive” nature of the December 2013 Projections.
460
JX 499 at 1. During this litigation, the interested witnesses testified that this was
the proper characterization. See Cho Dep. 191–95; Salameh Dep. 257–58.
90
December 2013 Projections. On the facts of this case, failing to disclose that analysis was
material.
Under Delaware law, when a board relies on the advice of a financial advisor in
making a decision that requires stockholder action, the stockholders are entitled to receive
“a fair summary of the substantive work performed by the investment bankers upon whose
advice the recommendations of their board as to how to vote on a merger or tender rely.”461
A fair summary “need not contain all information underlying the financial advisor’s
opinion contained in its report. . . .The essence of a fair summary is not a cornucopia of
financial data, but rather an accurate description of the advisor’s methodology and key
assumptions.”462
Information in a banker’s analysis also may require disclosure because of the
directors’ fiduciary obligation “to avoid misleading partial disclosures.”463 “[O]nce
defendants travel down the road of partial disclosure . . . , they ha[ve] an obligation to
provide the stockholders with an accurate, full, and fair characterization.”464 “When a
document ventures into certain subjects, it must do so in a manner that is materially
461
In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 449 (Del. Ch. 2002) (Strine,
V.C.).
462
In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 900–-01 (Del. Ch. 2016)
(internal citations omitted).
463
Zirn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996).
464
Id. at 1056 n.1 (internal quotation marks omitted).
91
complete and unbiased by the omission of material facts.”465 Even if the additional
information independently would fall short of the traditional materiality standard, it must
be disclosed if necessary to prevent other disclosed information from being misleading.466
When the Special Committee met on May 23, 2014, to discuss Avago’s offer of
$6.25 per share, the Special Committee asked for a discounted cash flow analysis based on
the December 2013 Projections.467 The Special Committee also asked for a separate
discounted cash flow analysis based on new projections, which Deutsche Bank prepared
using the Preliminary Sensitivity Case.468 During a meeting of the Board on May 24, the
directors received and reviewed the two discounted cash flow analysis.469 When the Special
Committee negotiated the price with Avago, the only discounted cash flow analyses it
possessed were based on the December 2013 Projections and the Preliminary Sensitivity
Case. For its final fairness opinion, Deutsche Bank replaced the Preliminary Sensitivity
Case with the June 2014 Projections.470
When describing the Special Committee meeting on May 23, 2014, the
Recommendation Statement discusses the Special Committee’s request for two discounted
465
Pure Res., 808 A.2d at 448.
466
Johnson v. Shapiro, 2002 WL 31438477, at *4 (Del. Ch. Oct. 18, 2002).
467
JX 459 at 3.
468
Id.; see also Schmitt Dep. 180–83.
469
See JX 462 at 13–14; JX 465 at 4.
470
Compare JX 462 at 14, with JX 529 at 19.
92
cash flow analyses.471 When describing the Board meeting on May 24, the
Recommendation Statement mentions that the Board received and discussed the two
discounted cash flow analyses.472 The Recommendation Statement does not, however,
disclose the results of the May 24 discounted cash flow analysis based on the December
2013 Projections. The record shows that it yielded a valuation range of $6.90 to $9.78 per
share, with a midpoint of $8.27 per share.473 The entire range of the analysis exceeded both
the directors’ counteroffer and the eventual deal price.
Subsequently, in a section titled “Discounted Cash Flow Analysis,” the
Recommendation Statement describes two analyses that Deutsche Bank prepared for the
Board’s meetings on June 20 and 22, when the Board formally approved the Merger. Those
analyses used the December 2013 Projections and the January 2014 Projections. The June
analysis that Deutsche Bank prepared using the December 2013 Projections generated a
range of $6.39 to $8.98 per share, with a midpoint of $7.69. Under the revised analysis, the
directors’ counteroffer and the final deal price fell within the range.474
Whether the directors were obligated to disclose the analysis from May 24, 2014
strikes me as a close call. It was not part of Deutsche Bank’s final analysis, and the
471
JX 551 at 26–27.
472
Id. at 27.
473
JX 462 at 13.
474
Potomac has argued that the later valuation more accurately accounted for the
Company’s options and restricted stock units and used a more appropriate tax rate.
Compare JX 529 at 20 with JX 462 at 13. A description of the two ranges could easily have
made those points.
93
midpoint of the May range was only 7% lower than the midpoint of the June range. Under
the facts and circumstances of this case, however, I believe that omitting the May valuation
range constituted a misleading partial disclosure. Even if the information was not
independently material, once the Recommendation Statement discussed the May 24
valuation, stockholders were entitled to know the range it produced, particularly when it
was one of only two valuations that the directors possessed when they negotiated the price
of the deal and when both the counteroffer and the final deal price fell below the valuation
range.
d. The Predicate Breach Of The Duty Of Disclosure
The plaintiffs proved that the directors breached their duty of disclosure by
describing the June 2014 Projections in misleading fashion and by failing to disclose other
information that would be material to a stockholder’s decision to tender, including Krause’s
tip to Deutsche Bank. The breaches of the duty of disclosure satisfy the second element of
the plaintiffs’ claim against Potomac for aiding and abetting. As discussed in the next
section, the breaches also affect the operative standard of review for purposes of the sale
process claim.
2. The Sale Process Claims
In addition to asserting disclosure claims, the plaintiffs contend that the directors
breached their fiduciary duties during the sale process. In substance, the plaintiffs assert
that the directors breached their fiduciary duties by permitting Singer to lead them into a
near-term sale when PLX would have been better served by remaining independent,
building its business, and potentially pursuing a sale at a later date.
94
a. The Standard of Review
As discussed previously, when determining whether corporate fiduciaries have
breached their duties, a court applying Delaware law evaluates the directors’ conduct
through the lens of a standard of review. The Delaware Supreme Court has held that the
intermediate standard of enhanced scrutiny applies when directors consider selling the
corporation for cash.475 Subsequent decisions have clarified that enhanced scrutiny applies
in this context because of the potential conflicts of interest that fiduciaries face when
considering whether to sell the corporation, to whom, and on what terms.476
In this case, the Board approved a sale of PLX to Avago for cash, making enhanced
scrutiny the operative standard of review. Under Corwin, however, the business judgment
rule would apply if the directors had complied with their duty of disclosure. 477 This
decision has held that the Recommendation Statement was misleading, so the fact that
holders of a majority of the Company’s shares tendered into the first step of the medium-
form Merger does not lower the standard of review.478
475
Revlon, 506 A.2d at 180–82.
476
See, e.g., El Paso, 41 A.3d at 439 (“[T]he potential sale of a corporation has
enormous implications for corporate managers and advisors, and a range of human
motivations, including but by no means limited to greed, can inspire fiduciaries and their
advisors to be less than faithful . . . .”); Dollar Thrifty, 14 A.3d at 597 (“The heightened
scrutiny that applies in the Revlon (and Unocal) contexts are, in large measure, rooted in a
concern that the board might harbor personal motivations in the sale context that differ
from what is best for the corporation and its stockholders.”).
477
See Corwin, 125 A.3d at 309; Volcano, 143 A.3d at 747.
478
Potomac has also argued that after Corwin, enhanced scrutiny only applies before
closing, when a plaintiff seeks a preliminary injunction. At least for purposes of an aiding-
and-abetting claim, the Delaware Supreme Court has rejected this position and held that
95
The operative standard of review is therefore enhanced scrutiny. When that standard
applies, the defendant fiduciaries bear the burden of proving that they “act[ed] reasonably
to seek the transaction offering the best value reasonably available to the stockholders.”479
When a plaintiff sues a third party for aiding and abetting a breach of fiduciary duty, the
plaintiffs bear the burden of proving that the directors’ conduct fell outside the range of
reasonableness.480
enhanced scrutiny remains the operative standard of review in a post-closing damages
action. RBC Capital, 129 A.3d at 857 (“[W]e reject RBC’s contention that the trial court
erred by finding a due care violation without finding gross negligence. RBC argues that
intermediate scrutiny under Revlon exists to determine whether plaintiff stockholders
should receive pre-closing injunctive relief, but it cannot be used to establish a breach of
fiduciary duty that warrants post-closing damages. . . . We agree with the trial court that
the individual defendants breached their fiduciary duties by engaging in conduct that fell
outside the range of reasonableness, and that this was a sufficient predicate for its finding
of aiding and abetting liability against RBC.”). In pre-Corwin decisions, the Delaware
Supreme Court applied enhanced scrutiny in post-closing damages actions. See, e.g.,
Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64–65 (Del. 1989) (holding
that enhanced scrutiny was the proper standard of review in a post-closing damages action
but affirming the trial court’s finding that the directors had carried their burden of proof);
Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (holding that enhanced
scrutiny would have been the proper standard of review in a post-closing damages action,
if the case had not settled). For lengthier discussions of precedent indicating that the fact
of closing, standing alone, would not historically have altered the standard of review, see
Chen, 87 A.3d at 668–69; see also In re PLX Technology, Inc. S’holder Litig., 2018 WL
747180, at *2–3 (Del. Ch. Feb. 6, 2018) (denying summary judgment on this point).
479
QVC, 637 A.2d at 43.
480
See, e.g., Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1039 (Del.
Ch. 2006) (“[T]he test for stating an aiding and abetting claim is a stringent one . . . —a
plaintiff must prove [its elements]”); Arnold v. Soc’y for Sav. Bancorp, Inc., 1995 WL
376919, at *7 (Del. Ch. June 15, 1995) (agreeing with the defendants’ contention that
“[p]laintiff must prove his aider and abettor theory to hold [a third party] liable”), aff’d,
678 A.2d 533 (Del. 1996).
96
Determining whether directors acted reasonably requires that the court consider
both (i) “the decisionmaking process employed by the directors, including the information
on which the directors based their decision,” and (ii) “the directors’ action in light of the
circumstances then existing.”481 “Through this examination, the court seeks to assure itself
that the board acted reasonably, in the sense of taking a logical and reasoned approach for
the purpose of advancing a proper objective, and to thereby smoke out mere pretextual
justifications for improperly motivated decisions.”482
“The reasonableness standard permits a reviewing court to address inequitable
action even when directors may have subjectively believed that they were acting
properly.”483 The objective standard does not, however, permit a reviewing court to freely
substitute its own judgment for the directors’:
There are many business and financial considerations implicated in
investigating and selecting the best value reasonably available. The board of
directors is the corporate decisionmaking body best equipped to make these
judgments. Accordingly, a court applying enhanced judicial scrutiny should
be deciding whether the directors made a reasonable decision, not a perfect
decision. If a board selected one of several reasonable alternatives, a court
481
QVC, 637 A.2d at 45.
Dollar Thrifty, 14 A.3d at 598; see In re Netsmart Techs., Inc. S’holder Litig.,
482
924 A.2d 171, 192 (Del. Ch. 2007) (Strine, V.C.) (“Although linguistically not obvious,
this reasonableness review is more searching than rationality review, and there is less
tolerance for slack by the directors.”); In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d
975, 1000 (Del. Ch. 2005) (Strine, V.C.) (“[T]he Supreme Court held that courts would
subject directors subject to Revlon . . . to a heightened standard of reasonableness review,
rather than the laxer standard of rationality review applicable under the business judgment
rule.”).
483
In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 830–31 (Del. Ch.
2011).
97
should not second-guess that choice even though it might have decided
otherwise or subsequent events may have cast doubt on the board’s
determination. Thus, courts will not substitute their business judgment for
that of the directors, but will determine if the directors’ decision was, on
balance, within a range of reasonableness.484
Enhanced scrutiny “is not a license for law-trained courts to second-guess reasonable, but
debatable, tactical choices that directors have made in good faith.”485 “What typically
drives a finding of unreasonableness is evidence of self-interest, undue favoritism or
disdain towards a particular bidder, or a similar non-stockholder-motivated influence that
calls into question the integrity of the process.”486 “[W]hen there is a reason to conclude
that debatable tactical decisions were motivated not by a principled evaluation of the risks
and benefits to the company’s stockholders, but by a fiduciary’s consideration of his own
financial or other personal self-interests, then the core animating principle of Revlon is
implicated.”487
b. Conflicts Of Interest In The Boardroom
The divergent interest that led to a predicate breach of duty in this case was Singer’s
interest in achieving a near-term sale. As Potomac’s agent and co-managing member,
484
QVC, 637 A.2d at 45.
Toys “R” Us, 877 A.2d at 1000; accord Dollar Thrifty, 14 A.3d at 595–96 (“[A]t
485
bottom Revlon is a test of reasonableness; directors are generally free to select the path to
value maximization, so long as they choose a reasonable route to get there.”).
486
Del Monte, 25 A.3d at 831.
487
El Paso, 41 A.3d at 439.
98
Singer faced the dual fiduciary problem identified in Weinberger v. UOP, Inc.488 There,
the Delaware Supreme Court held that there was “no dilution” of the duty of loyalty when
a director “holds dual or multiple” fiduciary obligations and “no ‘safe harbor’ for such
divided loyalties in Delaware.”489 “If the interests of the beneficiaries to whom the dual
fiduciary owes duties diverge, the fiduciary faces an inherent conflict of interest.”490 “If
the interests of the beneficiaries are aligned, then there is no conflict.”491
Ordinarily, the fact that Potomac held a large block of common stock would be
488
457 A.2d 701 (Del. 1983).
489
Id. at 710.
490
Chen, 87 A.3d at 670; see, e.g., Krasner v. Moffett, 826 A.2d 277, 283 (Del.
2003) (“[T]hree of the FSC directors . . . were interested in the MEC transaction because
they served on the boards . . . of both MOXY and FSC.”); McMullin, 765 A.2d at 923 (“The
ARCO officers and designees on Chemical’s board owed Chemical’s minority
shareholders ‘an uncompromising duty of loyalty.’ There is no dilution of that obligation
in a parent subsidiary context for the individuals who acted in a dual capacity as officers
or designees of ARCO and as directors of Chemical.” (footnote omitted)); Rabkin v. Philip
A. Hunt Chem. Corp., 498 A.2d 1099, 1106 (Del. 1985) (holding that parent corporation’s
directors on subsidiary board faced conflict of interest); Weinberger, 457 A.2d at 710
(holding that officers of parent corporation faced conflict of interest when acting as
subsidiary directors regarding transaction with parent); see also Rales v. Blasband, 634
A.2d 927, 933 (Del. 1993) (explaining for purposes of demand futility that “[d]irectorial
interest exists whenever divided loyalties are present” (internal quotation marks omitted));
Goldman v. Pogo.com Inc., 2002 WL 1358760, at *3 (Del. Ch. June 14, 2002) (“Because
Khosla and Wu were the representatives of shareholders which, in their institutional
capacities, [were] both alleged to have had a direct financial interest in this transaction, a
reasonable doubt is raised as to Khosla and Wu’s disinterestedness in having voted to
approve the . . . [l]oan.”); Sealy Mattress Co. of N.J. v. Sealy, Inc., 532 A.2d 1324, 1328,
1336–37 (Del. Ch. 1987) (same).
491
Chen, 87 A.3d at 670; see, e.g., Van de Walle, 1991 WL 29303, at *11.
99
helpful to Singer and undermine any concern about divergent interest.492 “Delaware law
presumes that investors act to maximize the value of their own investments.”493 “When a
large stockholder supports a sales process and receives the same per-share consideration as
every other stockholder, that is ordinarily evidence of fairness, not of the opposite . . . .”494
When directors or their affiliates own “material amounts” of common stock, it aligns their
interests with other stockholders by giving them a “motivation to seek the highest price”
and the “personal incentive as stockholders to think about the trade off between selling
now and the risks of not doing so.”495 If the decision is made to sell, “[a] director who is
also a shareholder of his corporation is more likely to have interests that are aligned with
the other shareholders of that corporation as it is in his best interest, as a shareholder, to
negotiate a transaction that will result in the largest return for all shareholders.”496
492
This is not a case where a large blockholder owned a security other than common
stock with a return profile that created divergent incentives. Cf. Frederick Hsu Living Trust
v. ODN Hldg. Corp., 2017 WL 1437308, at *28–29 (Del. Ch. Apr. 14, 2017) (finding that
representatives of venture capital fund who served on board faced the dual fiduciary
problem where the fund owned preferred stock carrying a redemption right and the
directors engaged in a de facto liquidation to raise funds to redeem the shares); Trados II,
73 A.3d at 46–47 (finding that three of the directors faced the dual fiduciary problem
because the merger triggered the preferred stockholders’ liquidation preference, which
gave those directors “a divergent interest in the [m]erger that conflicted with the interests
of the common stock”).
493
Katell v. Morgan Stanley Gp., Inc., 1995 WL 376952, at *12 (Del. Ch. June 15,
1995).
494
Iroquois Master Fund Ltd. v. Answers Corp., 2014 WL 7010777, at *1 n.1 (Del.
2014) (ORDER).
495
Dollar Thrifty, 14 A.3d at 600.
496
Orman v. Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002); see In re Mobile
Commc’ns Corp. of Am., Inc. Consol. Litig., 1991 WL 1392, at *9 (Del. Ch. Jan. 7, 1991)
100
Delaware law recognizes that in some scenarios, circumstances may cause the
interests of investors who hold common stock to diverge. For example, liquidity is one
“benefit that may lead directors to breach their fiduciary duties,” and stockholder directors
may be found to have breached their duty of loyalty if a “desire to gain liquidity . . . caused
them to manipulate the sales process” and subordinate the best interests of the corporation
and the stockholders as a whole.497 For similar reasons, particular types of investors may
espouse short-term investment strategies and structure their affairs to benefit economically
(Allen, C.) (noting that directors’ substantial stockholdings gave them “powerful economic
(and psychological) incentives to get the best available deal”), aff’d, 608 A.2d 729 (Del.
1992).
497
In re Answers Corp. S’holder Litig., 2012 WL 1253072, at *7 (Del. Ch. Apr. 11,
2012); see McMullin, 765 A.2d at 922–32 (reversing grant of motion to dismiss where
complaint alleged that controlling stockholder and its director designees sacrificed value
in a sale to achieve controlling stockholder’s goal of obtaining near-term liquidity and
significant component of the transaction consideration in cash); N.J. Carpenters Pension
Fund v. infoGROUP, Inc., 2011 WL 4825888, at *4, *9–10 (Del. Ch. Sept. 30, 2011,
revised Oct. 6, 2011) (denying motion to dismiss where the plaintiff alleged that the
director who was also a large stockholder sacrificed value in sale because he needed
liquidity to satisfy personal debts and fund a new venture); In re TeleCorp PCS, Inc.
S’holders Litig., Cons. C.A. No. 19260-VCS, at 16 (Del. Ch. June 17, 2002)
(TRANSCRIPT) (“What [these large stockholders] weren’t entitled to do was to use their
influence as fiduciaries to procure liquidity from AT&T Wireless on the backs of public
stockholders in an unfair merger.”); see also In re S. Peru Copper Corp. S’holder Deriv.
Litig., 52 A.3d 761, 780 (Del. Ch. 2011) (Strine, C.) (considering large stockholder’s desire
for liquidity when evaluating performance of affiliated special committee member as part
of assessment of entire fairness of transaction with controller; stating “[a]lthough I am not
prepared on this record to find that Handelsman consciously agreed to a suboptimal deal
for Southern Peru simply to achieve liquidity for Cerro from Grupo Mexico, there is little
doubt in my mind that Cerro’s own predicament as a stockholder dependent on Grupo
Mexico’s whim as a controller for registration rights influenced how Handelsman
approached the situation.” (emphasis omitted)), aff’d sub nom. Americas Mining v.
Theriault, 51 A.3d 1213 (Del. 2012).
101
from those strategies, thereby creating a divergent interest in pursuing short-term
performance at the expense of long-term wealth.498 In particular, “[a]ctivist hedge funds . .
. are impatient shareholders, who look for value and want it realized in the near or
intermediate term. They tell managers how to realize the value and challenge publicly those
who resist the advice, using the proxy contest as a threat.”499
It is not enough for a plaintiff simply “to argue in the abstract that a particular
director has a conflict of interest because she is affiliated with a particular type of
institution” that has particular incentives or pursues a particular strategy. 500 At trial, a
498
See Glob. GT LP v. Golden Telecom, Inc., 993 A.2d 497, 508–09 (Del. Ch. 2010)
(Strine, V.C.) (“[C]ertain institutional investors may be happy to take a sizeable merger-
generated gain on a stock for quarterly reporting purposes, or to offset other losses, even if
that gain is not representative of what the company should have yielded in a genuinely
competitive process.”), aff’d, 11 A.3d 214 (Del. 2010); Leo E. Strine, Jr., Toward Common
Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor
in a More Rational System of Corporate Governance, 33 J. Corp. L. 1, 5 (2007) (explaining
that “[hedge] funds are under pressure to generate short-term results” and that one
“standard pressure play[]” is “to see if a public company can be put into play”); Marcel
Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control,
155 U. Pa. L. Rev. 1021, 1071 (2007) (“Hedge funds are set up to make money for their
investors without regard to . . . shareholders generally . . . . Indeed, because hedge funds
frequently engage in hedges and other sophisticated trading and arbitrage strategies, such
conflicts of interest are likely to arise more frequently for hedge funds than for other
institutional investors.”).
499
William W. Bratton & Michael L. Wachter, The Case Against Shareholder
Empowerment, 158 U. Pa. L. Rev. 653, 682 (2010). See generally Leo E. Strine, Jr., Who
Bleeds When the Wolves Bite? A Flesh-And-Blood Perspective on Hedge Fund Activism
and Our Strange Corporate Governance System, 126 Yale L.J. 1870, 1892–1910 (2017).
But see Lucian A. Bebchuk et al., The Long-Term Effects of Hedge Funds Activism, 115
Colum. L. Rev. 1085, 1093–96 (2015) (disputing “the myopic-activists claim”).
500
Chen, 87 A.3d at 671; see id. at 672 (granting summary judgment in favor of two
directors affiliated with private equity funds where plaintiffs asserted that funds were
winding down and needed liquidity to make distributions but the evidence showed that one
102
plaintiff must prove by a preponderance of the evidence that the director harbored a
divergent interest.501
The record in this case convinces me that Singer and Potomac had a divergent
interest in achieving quick profits by orchestrating a near-term sale at PLX. During their
activist campaign and subsequent proxy contest, Singer and Potomac argued vehemently
that PLX should be sold quickly.502 Singer’s thesis for investing in PLX depended entirely
on a short-term sale to the other bidder who emerged during the go-shop period for the IDT
fund did not have a wind-down issue, the other fund’s life had been extended and could be
extended further, the underlying shares could be distributed in-kind to investors, and the
director and fund principal had proposed further investment in the company); In re
Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 667 (Del. Ch. 2013) (Strine, C.)
(dismissing complaint challenging sale that was the product of a lengthy and thorough pre-
signing market check in which plaintiff conceded that “all logical buyers were made aware
. . . and that they all had the time and fair opportunity to bid,” and rejecting allegation that
private equity firm “typically flips companies it invests in every three to five years” and
favored a sale to achieve liquidity for the investors in one of its funds and to invest in a
new fund); In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1036 (Del. Ch. 2012) (Strine,
C.) (applying general rule of equal treatment where controlling stockholder received same
consideration as minority in third party sale to dismiss challenge to transaction; recognizing
there could be “very narrow circumstances in which a controlling stockholder’s immediate
need for liquidity could constitute a disabling conflict of interest irrespective of pro rata
treatment” and rejecting liquidity-based interest given lack of specific allegations in
complaint).
501
See Trados II, 73 A.3d at 54 (“At trial, the plaintiff could not rely on general
characterizations of the VC ecosystem. The plaintiff had to prove by a preponderance of
evidence that Prang was not disinterested or independent in this case.”).
502
See JX 63 (Potomac letter asserting that PLX must be sold); JX 77 (same).
103
transaction.503 He never prepared any valuation or other analysis of the fundamental value
of PLX.504 He lacked any ideas for generating value at PLX other than to sell it.505
After Singer and Potomac surfaced, PLX’s management team and the incumbent
directors investigated the firm and its tactics, then met with Singer face to face. They
concluded that Singer wanted PLX sold,506 and they said that in public filings in response
to Potomac’s activist campaign and in their proxy materials.507 When making statements
about Potomac and Singer in public filings with the SEC and in communications with
503
Singer Dep. 40–41; see JX 65.
504
Singer Dep. 42.
505
See JX 88 at 1; JX 89 at 1; JX 192 at 2; JX 266 at 2–3; Riordan Dep. 63 (“Q. So
did Singer make any operational suggestions about what the company could do differently?
A. Other than for all the board to resign, no.”).
506
See, e.g., JX 189 at 2 (Salameh describing Potomac as “an activist hedge fund
with a relatively short-term horizon”); JX 245 at 11 (Salemeh reporting on Singer’s threat
to “take it upon himself to contact prospective acquirers to solicit their interest in PLX”);
Whipple Dep. 22 (describing Singer and Potomac as activist stockholders “who think they
can achieve shareholder value by forcing the sale of the company”); id. at 13 (testifying
that Singer “had one motive in buying stock in PLX. That was to take control and sell it”);
Riordan Dep. 53 (“Eric Singer’s position was that we should sell the company, and that
was . . . his one and only agenda.”); id. at 181 (“You don’t have to be a mind reader. As
we’ve talked about for hours now, that’s what he said he wanted done. He wanted the
company sold. He made no . . . [a]llusions to anything other than that. I want you to sell
the company.”); id. at 76 (Singer’s “clear intentions, what he told us, was that . . . we should
sell the company”).
507
See, e.g., JX 282 at 3 (PLX characterizing Potomac as “a self-interested activist
investor that is focused on short-term gains at the expense of other PLX Technology
stockholders” (emphasis omitted)); Raun Dep. 276–77, 284–85 (confirming accuracy of
criticisms of Potomac as an activist investor with a short-term focus); Hart Dep. 25–29
(same).
104
stockholders, the federal securities laws obligated the defendant directors and PLX to speak
truthfully.508 So did Delaware law.509
Once on the Board, Singer consistently acted with that intent. He initially focused
on what the Board had done to try to sell the Company, concluding that the Board was
“crazy for turning down $6+ from avago few months ago.”510 He only backed off when he
learned that Avago could not re-engage for several months. When Avago did re-engage,
he got to a deal within days.
In addition to Singer’s divergent interest, Deutsche Bank also had significant
reasons to favor a near-term sale to Avago. Because the plaintiffs settled with Deutsche
Bank, they did not spend significant trial time on Deutsche Bank’s issues, but they appear
to have influenced the boardroom dynamic and therefore deserve mention..
One factor was Deutsche Bank’s contingent fee arrangement, which gave Deutsche
508
See 15 U.S.C. § 78n (enabling statute); 17 C.F.R. § 240.14a-9 (“No solicitation
subject to this regulation shall be made by means of any proxy . . . containing any statement
which . . . is false or misleading with respect to any material fact . . . .”); Virginia
Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1087 (1991) (holding that “knowingly false
statements of reasons [for recommending certain actions] may be actionable even though
conclusory in form”).
509
See Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) (“Whenever directors
communicate publicly or directly with shareholders about the corporation’s affairs, with or
without a request for shareholder action, directors have a fiduciary duty to shareholders to
exercise due care, good faith and loyalty. It follows a fortiori that when directors
communicate publicly or directly with shareholders about corporate matters the sine qua
non of directors’ fiduciary duty to shareholders is honesty.”); id. at 10–11 (“Shareholders
are entitled to rely upon the truthfulness of all information disseminated to them by the
directors they elect to manage the corporate enterprise.”).
510
JX 315.
105
Bank a powerful financial incentive to favor a sale over having PLX remain independent.511
The other factor was Deutsche Bank’s longstanding and thick relationship with Avago,
which included advising Avago contemporaneously on its acquisition of LSI. Avago
announced the LSI deal on December 16, 2013, meaning that Deutsche Bank was
representing both PLX and Avago during PLX’s market check in fall 2013.512 It also meant
that Deutsche Bank was representing both PLX and Avago on December 19, 2013, when
Krause tipped Deutsche Bank about Avago’s plan to acquire PLX for $300 million after it
completed the LSI acquisition. Deutsche Bank only stopped formally representing Avago
511
See In re TIBCO Software Inc. S’holder Litig., 2015 WL 6155894, at *26 (Del.
Ch. Oct. 20, 2015) (recognizing that a contingent fee can provide a banker with “a powerful
incentive . . . to refrain from providing information to the Board” that could have
jeopardized a deal or caused the board to seek a fee reduction); Rural Metro, 88 A.3d at 94
(“Although a contingent compensation arrangement that pays an agent a percentage of deal
value generally will align the interests of the agent in getting more compensation with the
principal’s desire to obtain the best value, the interests of the agent and principal diverge
over whether to take the deal in the first place. The agent only gets paid if the deal happens,
but for the principal, the best value may be not doing the deal at all.” (footnote omitted));
El Paso, 41 A.3d at 442 (discussing how a $35-million-or-nothing contingent fee made
“more questionable some of the tactical advice given by Morgan Stanley and some of its
valuation advice”); In re Atheros Commc’ns, Inc., 2011 WL 864928, at *8 (Del. Ch. Mar.
4, 2011) (noting that a “contingent fee can readily be seen as providing an extraordinary
incentive for [an investment bank] to support the [t]ransaction”); Forgo v. Health Grades,
Inc., C.A. No. 5716-VCS, at 10 (Del. Ch. Sept. 3, 2010) (TRANSCRIPT) (“[T]he reality
is if [the investment bank] can get a deal, they get a deal.”); Netsmart, 924 A.2d at 199
(noting that although investment bank would receive 1.7% of any deal, it had “a strong
incentive to bring about conditions that would facilitate a deal that would close”); In re
Tele-Communications, Inc. S’holders Litig., 2005 WL 3642727, at *10 (Del. Ch. Jan. 10,
2006) (“[T]he contingent compensation of the financial advisor, DLJ, of roughly $40
million creates a serious issue of material fact, as to whether DLJ (and DLJ’s legal counsel)
could provide independent advice to the Special Committee.”).
512
See JX 311.
106
on the LSI deal in May 2014, days before Avago re-engaged with PLX. Deutsche Bank’s
ongoing relationship with Avago gave it a powerful incentive “to maintain good will and
not push too hard” during the negotiations.513 From a formalistic standpoint, Deutsche
Bank narrowly avoided simultaneously representing the buyer and the seller on the same
deal, but when dealing with an industry that values relationships, and recognizing that
bankers frequently provide advisory services first and document the engagement letter
later, a reviewing court cannot ignore the situation that Deutsche Bank created. As with
Singer’s conflict, Deutsche Bank’s position on both sides of the deal necessarily colors the
513
Rural Metro, 88 A.3d at 94; see El Paso, 41 A.3d at 444 (noting that conflicted
negotiator has a duty “to squeeze the last drop of the lemon out for . . . stockholders,” but
that the conflict gave the negotiator “a motive to keep juice in the lemon that he could use
to make a financial Collins for himself”); id. (“[A] fist fight of a negotiation might leave a
bloodied [adversary] unreceptive to a [future deal] . . . .”); Gesoff, 902 A.2d at 1150–51
(holding that investment bank’s relationship with buy-side controlling stockholder “robs
[its] fairness opinion of its value as an indicator of fairness”); see also Del Monte, 25 A.3d
at 835 (granting a preliminary injunction postponing the vote on a merger where the
financial advisor manipulated the sale process to engineer a transaction that would allow it
to obtain lucrative buy-side financing fees); Toys “R” Us, 877 A.2d at 1005 (considering
whether an investment bankers role in providing stapled financing created a conflict of
interest that merited injunctive relief); Ortsman v. Green, 2007 WL 702475, at *1–2 (Del.
Ch. Feb. 28, 2007) (ordering expedited discovery where target’s financial advisor
participated in the buy-side financing even though company retained a separate financial
advisor to render a fairness opinion); Khanna v. McMinn, 2006 WL 1388744, at *25 (Del.
Ch. May 9, 2006) (finding plaintiffs had raised facts sufficient to “create a reasonable doubt
that the transaction was the product of a valid exercise of business judgment” where
investment bank provided a bridge loan to the target and thus had an interest in ensuring
the closing of the transaction); In re Prime Hospitality, Inc. S’holders Litig., 2005 WL
1138738, at *12 (Del. Ch. May 4, 2005) (rejecting settlement of Revlon claim and
questioning “how can the Court attribute weight to the notion that [the allegedly conflicted
banker] was retained by Prime to shop the company?”). Cf. In re Lear Corp. S’holder Litig.,
926 A.2d 94, 116 (Del. Ch. 2007) (Strine, V.C.) (noting that if CEO received equity on the
buy side post-merger, “the failure to get the [optimal] price for Lear now would not hurt
him as much as the public stockholders”).
107
court’s assessment of the decisions that the directors made.
c. The Sale Process In This Case
Absent divergent interests, the Board’s sale process in this case would fall within a
range of reasonableness. The Board combined a narrow, pre-signing canvass with a post-
signing market check. This was a reasonable approach.
In the C&J Energy decision,514 the Delaware Supreme Court held that a challenge
to a transaction involving only a passive, post-signing market check could not support a
reasonable likelihood of a breach of duty, explaining that a board may “pursue the
transaction it reasonably views as most valuable to stockholders, so long as the transaction
is subject to an effective market check under circumstances in which any bidder interested
in paying more has a reasonable opportunity to do so.”515 The high court emphasized that
“[s]uch a market check does not have to involve an active solicitation, so long as interested
bidders have a fair opportunity to present a higher-value alternative, and the board has the
flexibility to eschew the original transaction and accept the higher-value deal.”516
The Merger Agreement satisfied the C & J Energy standard. The parties announced
the Merger on June 23, 2014,517 and the Merger Agreement contemplated a first-step tender
514
C & J Energy Servs., Inc. v. City of Miami Gen. Empls.’ and Sanitation Empls.’
Ret. Tr., 107 A.3d 1049 (Del. 2014).
515
Id. at 1067.
516
Id. at 1067–68.
517
See PLX Technology, Inc., Current Report (Form 8-K) (June 23, 2014).
108
offer period that would run from July 8 through August 11.518 From the announcement until
closing, this structure gave competing suitors forty-nine calendar days to express interest.
The Merger Agreement contained a no-shop clause subject to a fiduciary out,519 a
termination fee equal to approximately 3.5% of the equity value and 3.7% of the enterprise
value of the transaction,520 and a matching right.521 Significant stockholders executed
tender and support agreements governing 14.7% of the Company’s outstanding shares.522
These transaction features compare favorably with the passive market checks that this
court’s precedents have approved.523
In addition, in this case, the Board conducted a pre-signing outreach. Between
February and April 2014, Raun was in contact with four potential transaction partners other
than Avago.524 After Avago engaged, Deutsche Bank quickly touched base with the three
most likely to have interest.525 Before that, in fall 2013, the Board had engaged in a non-
518
See JX 554 at 2; JX 555 at 3.
519
JX 542 § 5.3.
520
Id. § 7.2(b); see JX 529 at 5.
521
JX 542 § 5.3(f) (providing Avago with four business days after receiving written
notice of a superior proposal to negotiate in good faith with PLX to adjust the terms and
conditions of the Merger Agreement).
522
See JX 543; PLX Technology, Inc., Current Report (Form 8-K) 3 (June 23,
2014).
523
See Appendix (collecting Delaware decisions approving a passive market check).
524
Cf. JX 420 at 1.
525
See JX 459 at 3.
109
public market check in response to Potomac’s activist campaign and threat of a proxy
contest.526
On these facts, there ordinarily would be not be grounds to debate whether the Board
fulfilled its duties. Where undisclosed conflicts of interest exist, however, even otherwise
reasonable choices “must be viewed more skeptically.”527 Importantly, the plaintiffs do not
contend that the Board improperly titled the playing field or steered the company to a
favored bidder. They argue that PLX should not have been sold at all.
The record in this case indicates that Potomac and Singer succeeded in influencing
the directors to favor a sale when they otherwise would have decided to remain
independent. First, after Potomac launched its proxy contest, the incumbent directors
decided to form the Special Committee and explore a possible sale.528 Deutsche Bank had
warned against a sale process, opining that a sale at that point could “leave[] value on the
table as [PLX] continues to outperform.”529 Management believed that “[g]iven the recent
changes in PLX, we do not think this is a good time to sell.”530 Schmitt admitted that “[i]n
a normal business environment, we did not believe it was best to sell the company. Given
526
See JX 208.
527
El Paso, 41 A.3d at 434; accord Del Monte, 25 A.3d at 817.
528
JX 203 at 4.
529
JX 194 at 14.
530
JX 133 at 33, 75.
110
the situation, that may have caused us to look at things a little differently.”531 Riordan
agreed that the authorization of the Special Committee was prompted by Potomac’s
intervention.532 This was a Board that was susceptible to activist pressure.
Second, after Singer and Potomac’s other nominees joined the Board, the incumbent
directors found within themselves a new willingness to support a sale at prices below the
values that they had previously rejected. In April 2013, PLX had firmly turned down
Avago’s approaches and told Krause that any future proposal would have to “start with a
7.”533 During the ensuing year, PLX’s business grew stronger and its market share
increased.534 Whipple explained the dynamic as follows:
We sold PLX to IDT for $7 a share, cash and stock. A year later, we were
the monopoly in the business. We had killed . . . IDT’s ability to compete in
the PCI Express business. We had finished our most profitable year. We had
gotten rid of Teranetics. We had a technology which we believed was going
to be dramatically more powerful than the Ethernet technologies that existed
in the data center today. And we sold the company for less than $7. I thought
that was wrong.535
531
Schmitt Dep. 52.
532
Riordan Dep. 106.
533
JX 158 at 2; JX 161 at 2.
534
See JX 282 at 19, 21; Whipple Dep. 71, 89–90.
535
Whipple Dep. 60–61; see id. at 62 (testifying that 2014 was not the time to sell
PLX); id. (“A few years later, after PCI ExpressFabric had developed, we would have been
worth a lot more money.”); Riordan Dep. 77–78 (testifying that PLX was “at a low point
in the company’s potential value”); see also JX 189 at 2 (August 4, 2013 letter to Singer
stating: “While we continue to be open to exploring alternatives to maximize stockholder
value, our Board does not believe that a commitment to acting in the best interests of all
stockholders and to maximizing stockholder value means selling PLX at an inopportune
time and for an inadequate price – even if that price represents a premium to the current
trading price.”); JX 133 at 33, 75 (April 8, 2013 presentation to PLX’s insurance carriers
111
Yet once Singer and Potomac’s other nominees had joined the Board, the directors agreed
to accept less than what they had rejected when PLX’s business was weaker.
Third, the incumbent directors deferred to Singer when he sought to position himself
to best achieve a sale. After being elected to the Board, Singer asked to chair the Special
Committee.536 The Board agreed.537 Later, when Salameh suggested that that the Special
Committee was no longer needed, Singer resisted.538 The Special Committee remained in
place, and its existence and Singer’s status as Chair were disclosed in PLX’s Form 10-K.539
Fourth, the directors permitted Singer to take control of the sale process when it
mattered most.540 From January until April 2014, while Avago was busy with the LSI
transaction, Singer bided his time and was not overly forceful. But when Avago resurfaced,
Singer asserted himself. He caucused privately with Deutsche Bank,541 and he had one-on-
stating: “Given the recent changes at PLX, we do not think this is a good time to sell.”);
Schmitt Dep. 17 (“Q. And you formed [the Special Committee], but, again, there was . . .
nothing to indicate that you – that you folks believed that this was a good time to sell the
company, correct? [Objection] A. I’ll say that’s correct.”).
536
See JX 330.
537
JX 360 at 2–3.
538
See JX 405.
539
See JX 408 at 7, 9.
See Whipple Dep. 67 (testifying that Singer “took control of the special
540
committee”).
541
See JX 413; JX 512 at 1; JX 1026; JX 1029; JX 1030.
112
one meetings with Avago.542 During a pivotal meeting on May 23, 2014, Singer guided the
Special Committee to the counteroffer of $6.75 per share.543 On May 24, he obtained Board
approval to make the counteroffer and to conclude a deal at a price of $6.50 or higher.544
Fifth, at the time they approved the counteroffer and granted authority for a deal at
$6.50, the directors lacked essential information. As in Rural Metro, they had not yet
received a valuation of the Company on a standalone basis.545 Deutsche Bank had quickly
pulled together some market information at Singer’s request to support a counteroffer at
$6.75 per share, but that was it.546
542
See JX 423 at 1; JX 424; JX 433 at 1; JX 472 at 1; JX 518 at 2; see Singer Tr.
236–44.
543
Schmitt Dep.172.
544
JX 465 at 5.
545
See Rural Metro, 88 A.3d at 95–96 (“Because RBC did not prepare a valuation
deck until March 27, RBC was not prepared to discuss valuation at critical meetings in
March 2011. During the final negotiations over price, RBC took advantage of the
informational vacuum it created to prime the directors to support a deal at $17.25.”); id. at
96 (“Because the Board’s financial advisors did not provide the directors with valuation
materials until the final board meeting, just hours before the merger was approved, the
directors did not have an opportunity to examine those materials critically and understand
how the value of the merger compared to Rural’s value as a going concern.”). Cf. El Paso,
41 A.3d at 441 (citing problems created by conflicted financial advisor “hav[ing] its hands
in the dough” of the financial analyses of potential alternatives; noting “questionable
aspects” to the conflicted financial advisor’s valuation “that could be seen as suspicious”);
id. at 444–45 (citing “odd aspects to some of the financial analyses presented, which seem
to go some way to making the . . . bid look more favorable . . . than perhaps a more
consistent approach to valuation would have done”).
546
See JX 1030.
113
Sixth, Schmitt candidly recognized when the Special Committee decided on its
counteroffer, it was engaging in the “art of the possible.”547 In contrast to the enhanced
scrutiny standard, which requires that directors “seek the transaction offering the best value
reasonably available to the stockholders,”548 the art of the possible refers to “the attainable
. . . the next best.”549 Singer similarly testified that the Special Committee was focused on
maintaining “deal momentum.”550 This testimony provides direct evidence of breach.551
Seventh, consistent with a desire to get to a result, the Special Committee instructed
management during its meeting on May 23, 2014, to generate a lower set of revenue
projections, even though there had not been any new developments in PLX’s business to
547
Schmitt Dep. 172–173.
548
QVC, 637 A.2d at 43.
549
Brent J. Hutton, For the Protection of Investors and the Public: Why Fannie
Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of
the Securities Act of 1933, 89 Tul. L. Rev. 125, 127 (2014) (internal quotation marks
omitted).
550
Singer Tr. 254–55.
551
Cf. In re First Boston, Inc. S'holders Litig., 1990 WL 78836, at *7 (Del. Ch. June
7, 1990) (Allen, C.) (explaining that directors who serve on a special committee to evaluate
an interested transaction are expected not simply to assess fairness but rather “to approve
only a transaction that is in the best interests of the public shareholders, [and] to say no to
any transaction that is not fair to those shareholders and is not the best transaction
available”); In re Trans World Airlines, Inc. S'holders Litig., 1988 WL 111271, at *5
(1988) (Allen, C.) (observing that special negotiating committee members who believed
their only obligation was to determine fairness and not to maximize value for the common
stock had an “imperfect appreciation of the proper scope and purpose of such a special
committee”), abrogated on other grounds by Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d
1110 (Del. 1994).
114
warrant changing the December 2013 Projections.552 The Special Committee also decided
that Deutsche Bank did not need to engage in any additional pre-signing market check
activities.553
Taken as a whole, this evidence suggests that Potomac and Singer undermined the
Board’s process and led the Board into a deal that it otherwise would not have approved.
Yet in spite of this evidence, I could not conclude that the Board’s decisions fell outside
the range of reasonableness without one other critical fact: Krause’s secret tip to Deutsch
Bank in December 2013 about Avago’s plans for PLX. In my view, by withholding this
information from the rest of the Board, Singer breached his fiduciary duty and induced the
other directors to breach theirs. For present purposes, by withholding this information, he
fatally undermined the sale process.
No one can tell what would have happened if Singer and Deutsche Bank had been
candid, but the Board might well have proceeded differently.554 Knowing that Avago
planned to return to the table once it completed the LSI acquisition, the Board could have
been more vigorous in its pre-signing market canvas. Had the directors been armed with
the knowledge that Avago expected to pay $300 million, they could have negotiated more
552
JX 459 at 3.
553
See id.
554
See Rural Metro, 88 A.3d at 101 (“RBC’s self-interested manipulations caused
the Rural process to unfold differently than it otherwise would have.”); El Paso, 41 A.3d
at 447 (“No one can tell what would have happened had unconflicted parties negotiated the
Merger. That is beyond the capacity of humans.”); Del Monte, 25 A.3d at 833 (“But for
Barclays' manipulations, the Del Monte process would have played out differently.”).
115
effectively for a higher price. Most important, the Board could have taken more time to
consider the Company’s alternatives in depth, rather than agreeing in principle to a deal at
Avago’s preferred price after nine busy days in May. Among other things, they could have
made sure that Deutsche Bank had prepared a current valuation of the Company, and they
could have addressed any concerns about the December 2013 Projections more thoroughly.
Viewing the record as a whole, and with particular emphasis on Singer and Deutsche
Bank’s failure to disclose Krause’s tip, the plaintiffs proved that “the adequacy of the
decisionmaking process employed by the directors, including the information on which the
directors based their decision” fell outside the range of reasonableness.555 The plaintiffs
therefore proved a breach of duty in connection with the sale process.
C. Knowing Participation In The Breach
The third element of a claim for aiding and abetting is the third party’s knowing
participation in the breach. “The adjective ‘knowing’ modifies the concept of
‘participation,’ not breach.”556 The underlying wrong does not have to be knowing or
intentional; it can be a breach of the duty of care.557
555
See QVC, 637 A.2d at 45.
556
Rural Metro, 88 A.3d at 97.
557
Singh v. Attenborough, 137 A.3d 151, 152–53 (Del. 2016) (ORDER); see RBC
Capital, 129 A.3d at 862 (affirming imposition of liability on financial advisor who aided
and abetted the board’s breach of its duty of care). See generally Restatement (Second) of
Torts § 876 cmt. d (Am. Law Inst. 1979) (explaining that secondary liability can attach
where the underlying breach “is merely a negligent act” and “applies whether or not the
[underlying wrongdoer] knows his act is tortious”).
116
Under 876(b) of the Restatement (Second) of Torts, knowing participation exists
when a third party:
(a) does a tortious act in concert with the other or pursuant to a common
design with him, or
(b) knows that the other’s conduct constitutes a breach of duty and gives
substantial assistance or encouragement to the other so to conduct himself,
or
(c) gives substantial assistance to the other in accomplishing a tortious result
and his own conduct, separately considered, constitutes a breach of duty to
the third person.558
For purposes of a board decision, the requirement of participation can be established if the
third party “participated in the board’s decisions, conspired with [the] board, or otherwise
caused the board to make the decisions at issue.”559 In particular, a third party can be liable
for aiding and abetting a breach of the duty of care if the third party “purposely induced
the breach of the duty of care . . . .”560 The method of facilitating the breach can include
558
Restatement (Second) of Torts § 876(b) (Am. Law Inst. 1979); see Anderson v.
Airco, Inc., 2004 WL 2827887, *2–3 (Del. Super. Nov. 30, 2004).
559
Malpiede, 780 A.2d at 1098.
560
Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *28 (Del. Ch. Jan. 25, 1999)
(Strine, V.C.) (granting summary judgment in favor of defendants charged with aiding and
abetting a breach of the duty of care but suggesting that such a claim could proceed if
“third-parties, for improper motives of their own, intentionally duped the Live directors
into breaching their duty of care”); RBC Capital, 129 A.3d at 842 (upholding finding of
aiding and abetting where financial advisor inexplicably modified its precedent transaction
analysis); Wayport, 76 A.3d at 322 n.3 (“[A] non-fiduciary aider and abettor could face
different liability exposure than the defendant fiduciaries if, for example, the non-fiduciary
misled unwitting directors to achieve a desired result.”); see also Mills Acq., 559 A.2d at
1283-84, 1284 n.33 (describing management’s knowing silence about a tip as “a fraud on
the Board”); Del Monte, 25 A.3d at 836 (holding that investment bank’s knowing silence
about its buy-side intentions, its involvement with the successful bidder, and its violation
of a no-teaming provision misled the board). Cf. Singh, 137 A.3d at 152 (“[A]n advisor
117
“creating the informational vacuum” in which the board breaches its duty of care.561
When the aiding and abetting claim targets an unrelated third party, a court’s
analysis of whether a secondary actor “knowingly participated” is necessarily fact
intensive. Illustrative factors include the following:
 The nature of the tortious act that the secondary actor participated in or encouraged,
including its severity, the clarity of the violation, the extent of the consequences,
and the secondary actor’s knowledge of these aspects;
 The amount, kind, and duration of assistance given, including how directly involved
the secondary actor was in the primary actor’s conduct;
 The nature of the relationship between the secondary and primary actors; and
 The secondary actor’s state of mind.562
When the fiduciary and primary wrongdoer is also a representative of the secondary
actor who either controls the actor or who occupies a sufficiently high position that his
whose bad-faith actions cause its board clients to breach their situational fiduciary duties .
. . is liable for aiding and abetting.”); Technicolor, 663 A.2d at 1170 n.25 (“[T]he
manipulation of the disinterested majority by an interested director vitiates the majority’s
ability to act as a neutral decision-making body.”).
561
Rural Metro, 88 A.3d at 97 (holding that a party is liable for aiding and abetting
when it “participates in the breach by misleading the board or creating the informational
vacuum”); see Mesirov v. Enbridge Energy Co., Inc., 2018 WL 4182204, at *15 (Del. Ch.
Aug. 29, 2018) (sustaining claim for aiding and abetting against financial advisor for
preparing misleading analyses and creating an informational vacuum); TIBCO Software,
2015 WL 6155894, at *25 (same); In re Nine Sys. Corp. S’holders Litig., 2014 WL
4383127, at *48 (Del. Ch. Sept. 4, 2014) (holding that interested director aided and abetted
breach of duty by failing to adequately explain valuation, thereby misleading the board and
creating an informational vacuum), aff’d sub nom. Fuchs v. Wren Holdings, LLC, 129 A.3d
882 (Del. 2015) (TABLE).
562
In re Dole Food, Inc. S’holder Litig., 2015 WL 5052214, at *42 (Del. Ch. Aug.
27, 2015).
118
knowledge is imputed to the secondary actor, then the test is easier to satisfy. For example,
this court has recognized that the acquisition vehicles that a controlling stockholder uses to
effectuate an unfair freeze-out merger are liable as aiders and abettors to the same degree
as the controller, because the controller’s knowledge is imputed to those entities. 563 This
court also has employed the same reasoning to recognize that an investment fund can be
liable for aiding and abetting when “the same individuals who have made the Fund’s
investment decisions” are also the fiduciaries who engaged in misconduct.564
In this case, Singer was a co-managing member of Potomac and its agent, and his
knowledge is imputed to Potomac in those capacities.565 Singer led Potomac’s activist
campaign at PLX. Potomac owned PLX stock, filed Schedule 13Ds, served books and
records demands, nominated the dissident director slate, filed the proxy materials, and
stood to collect the short-term gains from a quick sale. Singer directed Potomac’s activities
and, once elected to the Board, Singer continued to act on Potomac’s behalf. By failing to
563
See id. at *39; In re Emerging Commc’ns, Inc. Sholders Litig., 2004 WL
1305745, at *38 (Del. Ch. May 3, 2004).
564
Forsythe v. ESC Fund Mgmt. Co., 2007 WL 2982247, at *13 (Del. Ch. Oct. 9,
2007) (“These investment decisions form the basis of the plaintiffs’ breach of fiduciary
duty claims. Therefore, the court may infer CIBC’s knowledge of the Special Limited
Partner’s and Investment Advisor’s breaches of fiduciary duty.”).
565
See Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 642–43 (Del. Ch. 2013)
(imputing knowledge of fund principals to investment funds for purposes of “knowing
participation” element of aiding and abetting claim); see also Metro. Life Ins. Co. v.
Tremont Gp. Hldgs., Inc., 2012 WL 6632681, at *19 (Del. Ch. Dec. 20, 2012); Khanna,
2006 WL 1388744, at *27; Carlson v. Hallinan, 925 A.2d 506, 542 (Del. Ch. 2006).
119
share Krause’s tip with the Board, Singer created a critical informational gap that
contributed to the Board’s breach of duty.566
Because of Singer’s relationship with Potomac and his role in directing and
implementing Potomac’s strategy, Singer’s knowledge and actions can be attributed to
Potomac. This holding does not stand for the proposition that the actions of the director-
representative of a stockholder can always be attributed to a stockholder.567 For example,
Delaware law does not recognize any basis to attribute the actions of an independent
director to the control of the stockholder that nominated or appointed him, simply by virtue
of the fact of the nomination or appointment.568 In this case, the combination of Singer’s
566
See Rural Metro, 88 A.3d at 99 (holding that investment banker knowingly
participated in board’s breach of duty where “RBC created the unreasonable process and
informational gaps that led to the Board’s breach of duty.” (emphasis added)); see also
Mills Acq., 559 A.2d at 1283–84, 1284 n.33 (describing management’s knowing silence
about a tip as “a fraud upon the Board”); Del Monte, 25 A.3d at 836 (holding that
investment bank’s knowing silence about its buy-side intentions, its involvement with the
successful bidder, and its violation of a no-teaming provision misled the board). Cf.
Technicolor, 663 A.2d at 1170 n.25; El Paso, 41 A.3d at 443 (“Worst of all was that the
supposedly well-motivated and expert CEO entrusted with all the key price negotiations
kept from the Board his interest in pursuing a management buy-out of the Company’s E &
P business.”).
567
Cf. Khanna v. McMinn, 2006 WL 1388744, at *28 (Del. Ch. May 9, 2006)
(declining to impute liability to stockholder who appointed director under doctrine of
respondeat superior”); Emerson Radio Corp. v. International Jensen Inc., 1996 WL
483086, at *20 n.18 (Del. Ch. Aug. 20, 1996) (declining to impose fiduciary status on fund
where one of three general partners who controlled the fund also served as a corporate
director).
568
Cf. Aronson, 473 A.2d at 816 (“[I]t is not enough to charge that a director was
nominated by or elected at the behest of those controlling the outcome of a corporate
election. That is the usual way a person becomes a corporate director. It is the care,
attention and sense of individual responsibility to the performance of one’s duties, not the
method of election, that generally touches on independence.”); Khanna, 2006 WL
120
position with, ties to, and actions on behalf of Potomac supports a different result and
warrants a finding that Potomac knowingly participated in the steps Singer took to breach
his fiduciary duties and induce a breach by the Company’s other directors. The plaintiffs
thus satisfied the third element of their claim for aiding and abetting a breach of fiduciary
duty.
D. Damages
The final element of a claim for aiding and abetting is proof of damages that resulted
from the breach. The plaintiffs failed to carry their burden of proof on this element.
When seeking post-closing damages for breach of the duty of disclosure, the
plaintiff must prove quantifiable damages that are “logically and reasonably related to the
harm or injury for which compensation is being awarded.”569
The traditional measure of damages is that which is utilized in connection
with an award of compensatory damages, whose purpose is to compensate a
plaintiff for its proven, actual loss caused by the defendant's wrongful
conduct. To achieve that purpose, compensatory damages are measured by
the plaintiff's “out-of-pocket” actual loss. Thus, where a merger is found to
have been effected at an unfairly low price, the shareholders are normally
entitled to out-of-pocket (i.e., compensatory) money damages equal to the
1388744, at *15 (“Directors must be nominated and elected to the board in one fashion or
another, and to hold otherwise would unnecessarily subject the independence of many
corporate directors to doubt.” (footnotes and quotation marks omitted)); In re W. Nat. Corp.
S'holders Litig., 2000 WL 710192, at *15 (Del. Ch. May 22, 2000) (“The fact that a
company's executive chairman or a large shareholder played some role in the nomination
process should not, without additional evidence, automatically foreclose a director's
potential independence.”).
569
In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 773 (Del. 2006).
121
“fair” or “intrinsic” value of their stock at the time of the merger, less the
price per share that they actually received.570
The “fair” or “intrinsic” value of the shares is determined using the same methodologies
employed in an appraisal.571 Consequently, this form of damages is sometimes colloquially
called a “quasi-appraisal” remedy.572 The premise for the award is that without the
disclosure of false or misleading information, or the failure to disclose material
570
Strassburger v. Earley, 752 A.2d 557, 579 (Del. Ch. 2000).
571
See, e.g., Weinberger, 457 A.2d 701, 713–14 (Del. 1983) (equating the fair price
measure in fiduciary duty action with the fair value standard in appraisal); Sterling v.
Mayflower Hotel Corp., 93 A.2d 107, 114 (Del. 1952) (adopting for a breach of fiduciary
duty case the valuation standard for appraisal announced in Tri–Continental Corp. v.
Battye, 74 A.2d 71 (Del. Ch. 1950)); see also Bershad v. Curtiss–Wright Corp., 535 A.2d
840, 845 (Del. 1987) (explaining that fair price measure in a breach of fiduciary duty case
“flow[s] from the statutory provisions . . . designed to ensure fair value by an appraisal, 8
Del. C. § 262”); Rosenblatt v. Getty Oil Co., 493 A.2d 929, 940 (Del. 1985) (following
Sterling); Poole v. N.V. Deli Maatschappij, 243 A.2d 67, 69 (Del. 1968) (affirming Court
of Chancery’s conclusion that when determining the stock's “true value” for purposes of
compensatory damages, “the stock is to be evaluated on a going-concern basis and not on
a liquidation basis; that the actual or true [value] of the stock is to be determined by
considering the various factors of value including earnings, dividends, market price, assets,
and the other factors deemed relevant in a stock evaluation problem arising under . . . 8
Del. C. § 262”); Kessler, 898 A.2d at 342–44 (determining fair value and using that as a
basis for damages in breach of fiduciary duty case); Emerging Commc’ns, 2004 WL
1305745, at *24 (finding that “fair value” was $38.05, stating that “[f]rom that fair value
finding it further follows that the $10.25 per share merger price was not a ‘fair price’ within
the meaning of the Delaware fiduciary duty case law beginning with Weinberger,” and
granting the difference as damages). See generally Reis, 28 A.3d at 461–64.
572
See Weinberger, 457 A.2d at 714 (coining the term to describe the measure of
damages for a breach of fiduciary duty by the controlling stockholder and its
representatives on subsidiary board). See generally Orchard Enters., 88 A.3d at 42–48.
122
information, stockholders could have voted down the transaction and retained their
proportionate share of the equity in the corporation as a going concern.573
When seeking post-closing damages for a breach of fiduciary duty in a sale process,
the measure of damages logically depends on what the plaintiffs contend would have
happened absent the breach. If the plaintiffs prove that the defendants could have sold the
corporation to the same or to a different acquirer for a higher price, then the measure of
damages should be based on the lost transaction price.574 In this case, the plaintiffs assert
that the Company should not have been sold at all and should have continued to operate as
an independent going concern. The logical measure of damages is therefore the same as
573
See Arnold, 1995 WL 376919, at *6; Wacht v. Continental Hosts, Ltd., 1994 WL
525222, at *1–2 (Del. Ch. Sept. 16, 1994); see also Turner v. Bernstein, 768 A.2d 24, 39
(Del. Ch. 2000) (Strine, V.C.) (recognizing that either a quasi-appraisal or rescissory
measure of damages could be awarded for a breach the duty of disclosure in a post-closing
damages action). Cf. In re Ocean Drilling & Exploration Co. S’holders Litig., 1991 WL
70028, at *7 (Del. Ch. Apr. 30, 1991) (holding that alleged breaches of fiduciary duty did
not threaten irreparable harm because the class could be awarded a quasi-appraisal
remedy); Steiner v. Sizzler Rests. Int’l, Inc., 1991 WL 40872, at *2 (Del. Ch. Mar. 19, 1991)
(Allen, C.) (same).
574
See Dole, 2015 WL 5052214, at *46 (awarding damages of $2.74 per share,
which suggested that “Murdock and Carter's pre-proposal efforts to drive down the market
price and their fraud during the negotiations reduced the ultimate deal price by 16.9%”);
HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94, 116 (Del. Ch. 1999) (Strine, V.C.)
(finding that although price fell within lower range of fairness, “The defendants have failed
to persuade me that HMG would not have gotten a materially higher value for Wallingford
and the Grossman's Portfolio had Gray and Fieber come clean about Gray's interest. That
is, they have not convinced me that their misconduct did not taint the price to HMG's
disadvantage.”); see also Bomarko, Inc. v. Int'l Telecharge Inc., 794 A.2d 1161, 1184 (Del.
Ch. 1999) (holding that although the “uncertainty [about] whether or not ITI could secure
financing and restructure” lowered the value of the plaintiffs' shares, the plaintiffs were
entitled to a damages award that reflected the possibility that the company might have
succeeded absent the fiduciary's disloyal acts), aff’d, 766 A.2d 437 (Del. 2000).
123
the traditional measure for a breach of the duty of disclosure: quasi-appraisal.
The plaintiffs sought to prove that the standalone value of the Company was $9.86
per share. To support this request, the plaintiffs relied on a discounted cash flow analysis
prepared by their valuation expert, Ronald Quintero.575 Given that the deal price was $6.50
per share, Quintero’s valuation posited that the Company was worth 52% more than what
the Board obtained from a third-party acquirer in a synergistic transaction. In a deal
involving a financial buyer that could be expected to generate few if any combinatorial
synergies, the Delaware Supreme Court recently emphasized the lack of reliability of a
discounted cash flow analysis that yielded a result that was 40% over the deal price.576
“Although widely considered the best tool for valuing companies when there is no
credible market information and no market check, [discounted cash flow] valuations
involve many inputs—all subject to disagreement by well-compensated and highly
credentialed experts—and even slight differences in these inputs can produce large
valuation gaps.”577 Quintero’s discounted cash flow valuation is not sufficiently persuasive
to undergird a damages award exceeding half of the deal price.
575
JX 570 ¶ 7.
576
DFC Glob. Corp. v. Muirfield Value P’rs., 172 A.3d 346, 362 (Del. 2017). Cf.
Merion Capital L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *33 (Del. Ch.
Dec. 16, 2016) (“The proximity between [the discounted cash flow] outcome and the result
of the sale process is comforting.”); In re Appraisal of Ancestry.com, Inc., 2015 WL
399726, at *23 (“The DCF valuation I have described is close to the market, and gives me
comfort that no undetected factor skewed the sales process.”).
577
Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 37–38
(Del. 2017).
124
The principal inputs in Quintero’s valuation came from the December 2013
Projections. They were prepared in the ordinary course of business, adopted by the Board,
and used to structure compensation plans and when applying for D&O insurance. 578
Potomac accurately observes that a sentence in the midst of a paragraph about the
assumptions on which they were based described the projections as “aggressive,” the
defense witnesses’ coordinated testimony placed excessive emphasis on that qualification.
I believe that management thought the projections were a stretch, but that they were
attainable. But that does not mean that the December 2013 Projections were sufficiently
reliable to serve as the basis for a nine-figure damages award.
To reach the results projected for the later years in the projection period, the
December 2013 Projections identified three principal layers of revenue.579 The first layer
contemplated continued growth in PLX’s existing “inside the box” switches, which used a
technology called PCI Express to facilitate ultra-fast data transfers between components
“inside the box” of a single computer.580 PLX dominated this market, and I would have no
difficulty basing a damages award on this aspect of the projections. The second layer
contemplated updating PLX’s “inside the box” switches to use a new technology called
PCI ExpressFabric.581 This layer was a variant on PLX’s existing business, and here too I
578
See JX 385 at 20; JX 383 at 32.
579
See JX 1000 at 5 (depicting three layers of initiatives in varying shades of red).
580
Whipple Dep. 91–92.
581
Id.
125
would have no difficulty using these figures for purposes of a damages award. Together,
these two layers drove compound annual growth rates of 25%, consistent with PLX’s
historical growth rates.582
To achieve even higher growth rates, particularly in 2017 and 2018, the December
2013 Projections contemplated a third layer of future revenue. It depended on PLX
introducing a new line of “outside the box” products that would use the ExpressFabric
technology to connect components located in different computers, such as the multiple
servers in a server rack.583 To succeed with this line of business, PLX would have to enter
the hardware market and compete with incumbent players like Cisco.584 This layer of
revenue effectively contemplated a new line of business involving a new set of customers
with a new set of requirements.585 The evidence at trial did not give me sufficient
confidence to base a damages award on this element of the projections.586
Potomac’s expert, Neil Beaton, conducted a discounted cash flow methodology that
582
See JX 429 at 6.
583
See Whipple Dep. 91–94.
584
See Id. at 93, 101–03.
585
See Salameh Dep. 163–64, 175–77.
586
See OptimisCorp v. Waite, 2015 WL 5147038, at *81 (Del. Ch. Aug. 26, 2015)
(“There is ample support in Delaware precedent for rejecting damages claims based on
speculative evidence.”) (citing In re Mobilactive Media, LLC, 2013 WL 297950, at *24
(Del. Ch. Jan. 25, 2013)); see also Revolution Retail Sys., LLC v. Sentinel Techs., Inc., 2015
WL 6611601, at *24 (Del. Ch. Oct. 30, 2015) (“Delaware courts have held that ‘measuring
money damages for an unproven technology’ is a ‘nearly impossible task’ because ‘such
damages are likely to be merely speculative.’” (quoting Amaysing Techs. Corp. v. Cyberair
Commc’ns, Inc., 2004 WL 1192602, at *5 (Del. Ch. May 28, 2004))).
126
reduced the extent of the third layer of revenue.587 His valuation did not exceed the deal
price of $6.50 per share.588 Lacking confidence in the third layer of revenue, I likewise
cannot award damages that exceed the Merger price.
A second problem for the plaintiffs is that PLX management had a track record of
missing its projections.589 The Delaware Supreme Court has cautioned that
“[m]anagement’s history of missing its forecasts should . . . give[] the Court of Chancery
pause.”590 PLX management missed its 2012 revenue target by approximately $21.7
million and its 2013 revenue target by approximately $15.0 million.591 PLX missed its FY
2014 first quarter target by $1.4 million, then missed its second quarter as well. 592 By the
second quarter, PLX management had reported lower demand for PCI Express switches.593
Moreover, PMC-Sierra Inc., a well-funded competitor that had paid $100 million to acquire
IDT’s PCI Express business, was planning to enter the market for next-generation
587
See JX 572 ¶¶ 64–83.
588
Id. ¶ 3.
589
See JX 571 ¶¶ 51–55.
590
Dell, 177 A.3d at 27 n.129; see Nine Sys., 2014 WL 4383127, at *42 (“The Court
cannot accept that the same people who missed projections three-months out in September
2001 by a factor of three (where there was no intervening change to the Company’s
business) would have been able to produce reliable projections in January 2002 for an
entire year.”).
591
JX 571 ¶ 54 (“exclud[ing] ethernet and satellite sales”).
592
See JX 319 at 9; Raun Dep. 164.
593
See JX 491 at 1.
127
circuits.594 The arrival of a new market entrant would make it more difficult for PLX to
achieve its projections.
A third problem for the plaintiffs is that bidders do not appear to have fully credited
the December 2013 Projections, or at least not to have believed that they supported
valuations in the range that Quintero posited.
[S]elf-interest concentrates the mind, and people who must back their beliefs
with their purses are more likely to assess the value of the judgment
accurately than are people who simply seek to make an argument. Astute
investors survive in competition; those who do not understand the value of
assets are pushed aside. There is no similar process of natural selection
among expert witnesses and . . . judges.595
During its pre-signing market check in fall 2013, PLX provided an earlier and somewhat
rosier set of projections to bidders. During the early months of 2014, PLX provided the
December 2013 Projections to bidders like Cypress, Inphi, and Semtech. The management
team presented the projections as its best estimate of the Company’s future, without the
“Upside Case” gloss that Deutsche Bank later put on them. If the projections were
sufficiently reliable to support a credible valuation of $9.82 per share, then it seems likely
that another buyer would have competed with Avago. The fact that no other bidder made
594
See JX 394; Singer Tr. 64–66.
595
Matter of Cent. Ice Cream Co., 836 F.2d 1068, 1072 n.3 (7th Cir. 1987)
(Easterbrook, J.); see Union Ill. 1995 Inv. Ltd. v. Union Fin. Gp., 847 A.2d 340, 359 (Del.
Ch. 2004) (Strine, V.C.) (“The benefit of the active market for UFG as an entity that the
sales process generated is that several buyers with a profit motive were able to assess these
factors for themselves and to use those assessments to make bids with actual money behind
them. For me (as a law-trained judge) to second-guess the price that resulted from that
process involves an exercise in hubris and, at best, reasoned guess-work.”).
128
a proposal, either before or after the Merger was announced, is strong evidence that the
December 2013 Projections would not support a valuation in the range that Quintero
claims.596
In addition to giving full credit for the third layer of revenue in December 2013
Projections, Quintero calculated a beta of 0.985 by using daily observations during the one-
year period preceding June 20, 2014.597 His beta of less than one implied that a small
technology company operating in the cyclical semiconductor industry exhibited less
volatility than the market as a whole.598 That was not credible and seems to have resulted
from two factors.
First, Quintero selected a period of time when PLX was experiencing relatively low
volatility because Potomac’s activist campaign had driven its stock price “up pretty much
to the ceiling.”599 This period of time was not representative of how PLX’s stock would
perform based on PLX’s fundamentals.
596
See Dell, 177 A.3d at 37 (“When an asset has few, or no, buyers at the price
selected, that is not a sign that the asset is stronger than believed—it is a sign that it is
weaker. This fact should give pause to law-trained judges who might attempt to outguess
all of these interested economic players with an actual stake in a company's future.”).
597
JX 570 Ex. 56.
598
Quinter Tr. 608–09; see also Shannon P. Pratt & Alina V. Niculita, Valuing a
Business 194 (5th ed. 2008) (“Many high-tech companies are good examples of stocks with
high betas. . . . The classic example of a low-beta stock would be a utility that has not
diversified into riskier activities.”).
599
Quintero Tr. 777; see JX 570 Ex. 56.
129
Second, Quintero used daily returns, rather than a more standard interval of weekly
or monthly returns.
[W]hen the return interval is shortened, the following occurs: Securities with
a smaller market value than the average of all securities outstanding (the
market) will generally have a decreasing beta, whereas securities with a
larger market value than the average of all securities outstanding will
generally have an increasing beta.600
This happens because a smaller return interval tends to incorporate instances of nontrading,
biasing beta estimates towards one.601 Beaton derived a more credible beta of 1.72 through
a comparable companies analysis.602 When Beaton replicated Quintero’s beta using
monthly returns, the beta increased to 1.458.603
Quintero’s math supports his valuation conclusion, but the inputs driving that math
were not sufficiently convincing. “Although valuation exercises are highly dependent on
mathematics, the use of math should not obscure the necessarily more subjective exercise
600
Gabriel Hawawini, Why Beta Shifts as the Return Interval Changes, Fin.
Analysts J., May–June 1983, at 73, 73.
601
See Thomas H. McInish and Robert A. Wood, Adjusting for Beta Bias: An
Assessment of Alternative Techniques: A Note, 41 J. Fin. 277, 277 (1986) (citing Myron
Scholes and Joseph Williams, Estimating Betas from Nonsynchronous Data, 5 J. Fin.
ECON. 309 (1977)); see also Aswath Damodaran, Estimating Risk Parameters 10 (2002),
http://pages.stern.nyu.edu/~adamodar/ (unpublished manuscript) (“Betas estimated using
daily or even weekly returns are likely to have a significant bias due to the non-trading
problem.”); Robert W. Holthausen & Mark E. Zmijewski, Corporation Valuation Theory,
Evidence & Practice 300–01 (2014) (“The shorter the periodicity we choose to measure
each return, the more likely that we will encounter statistical issues when we estimate the
market model.”).
602
Compare JX 570 Ex. 56 with JX 572 ¶ 75.
603
JX 571 ¶ 71.
130
in judgment that a valuation exercise requires.”604 After considering the components of the
December 2013 Projections and some of the judgments that Quintero made, I am not
persuaded that the plaintiffs carried their burden of proof on damages.
A far more persuasive source of valuation evidence is the deal price that resulted
from the Company’s sale process. The Delaware Supreme Court has explained that when
a widely held, publicly traded company has been sold in an arm’s-length transaction, the
deal price has “heavy, if not overriding, probative value.”605 Although this decision has
found that the sale process was flawed, largely because of Singer and Deutsche Bank’s
failure to disclose Avago’s tip to the rest of the Board, I believe the sale process was
sufficiently reliable to exclude the plaintiffs’ damages contention.
The Delaware Supreme Court has observed that as a matter of “economic reality . .
. the sale value resulting from a robust market check will often be the most reliable evidence
of fair value, and that second-guessing the value arrived upon by the collective views of
many sophisticated parties with a real stake in the matter is hazardous.”606 The Delaware
Supreme Court has also commented that a deal price “deserved heavy, if not dispositive
weight”607 when it resulted from a sale process that involved “fair play, low barriers to
604
Agranoff v. Miller, 791 A.2d 880, 896 (Del. Ch. 2001) (Strine, V.C.).
605
Dell, 177 A.3d at 30.
606
DFC, 172 A.3d at 366 (Del. 2017); see id. (“[W]e have little quibble with the
economic argument that the price of a merger that results from a robust market check,
against the back drop of a rich information base and a welcoming environment for potential
buyers, is probative of the company’s fair value.”).
607
Dell, 177 A.3d at 23.
131
entry, outreach to all logical buyers, and the chance for any topping bidder to have the
support of [the largest stockholder’s] votes . . . .”608
In this case, PLX conducted a quiet outreach campaign during the second half of
2013. By the end of September, Deutsche Bank had contacted fifteen potential bidders,
executed nine non-disclosure agreements with companies expressing significant interest,
and arranged three meetings.609 In October, Cypress submitted an indication of interest,
and Deutsche Bank believed that Inphi, LSI, and Avago were seriously interested.
Ultimately, none of the companies made a formal bid, but this process provided the Board
with important information about how potential acquirers regarded PLX.610
In early 2014, PLX engaged in a quieter market exploration. In February, Raun
reported to the Special Committee that he met with Cypress, but that they were “too
leveraged” to complete a transaction.611 The Special Committee instructed Raun to
continue to reach out to other companies, but “not to take any action with respect to
608
Id. at 35.
609
JX 217 at 1; see JX 208 at 1; PTO ¶ 78; JX 215 at 5–6; JX 217 at 1; Cho Dep.
195–96.
610
In evaluating the sale process, I have not given meaningful weight to the go-shop
process in 2012 that followed the signing of the IDT transaction. Enough time passed
between 2012 and the Avago deal in 2014 to regard those contacts as stale.
611
JX 374 at 1; see PTO ¶ 97; JX 372 at 2; JX 395 at 14.
132
Avago.”612 Raun engaged further with Cypress and also spoke with Inphi, Exar, and
Semtech.613
After Avago made its offer of $6.25 per share on May 22, 2014, Deutsche Bank
spoke again with Inphi, Semtech, and Cypress.614 Broadcom independently expressed
interest,615 but the Company wanted to move quickly to capitalize on the Avago offer, and
Broadcom was unable to present a bid within that time frame.616
Although this pre-signing process was not extensive, the contacts provide some
support for the reliability of the deal price. In my view, the pre-signing process was not so
thorough that PLX could have entered into a fully locked-up deal with Avago (or the
functional equivalent), but it gave the Board some information about the level of third-
party interest in the Company.
More important than the pre-signing process was the post-signing market check. As
this decision has explained, the structure of the Merger Agreement satisfied the Delaware
Supreme Court’s standard for a passive, post-signing market check. No topping bid
emerged during that process.
Another relevant consideration is that the Merger involved a combination between
612
JX 374 at 2.
613
JX 380 at 2.
614
JX 459 at 3.
615
See JX 460 at 2.
616
See JX 473.
133
two companies operating in the same industry. As a result, the price likely included
synergies.617 The record supports this inference and indicates that Avago anticipated
achieving significant synergies from combining the businesses of LSI and PLX.618 An
analysis of the deal that Barclay’s prepared contemplated revenue synergies of $3 million
and cost synergies of $19.6 million.619 The existence of synergies indicates that the deal
price likely exceeded the standalone value of the Company.
Although flawed from a fiduciary standpoint, the details of the sale process that the
Board conducted and the nature of the synergistic deal with Avago that it generated means
that the plaintiffs received consideration that exceeded the value of the Company on a
617
See DFC, 172 A.3d at 371 (“[I]t is widely assumed that the sales price in many
M & A deals includes a portion of the buyer’s expected synergy gains, which is part of the
premium the winning buyer must pay to prevail and obtain control.”); Lender Processing,
2016 WL 7324170, at *11, *26 (noting that evidence supported the view that the merger
consideration “included a portion of the value that [the acquirers] expected to generate
from synergies” and that “[t]he existence of combinatorial synergies provides an additional
reason to think that” the merger consideration “exceeded the fair value of the Company”);
see also Olson v. Ev3, Inc., 2011 WL 704409, at *10 (Del. Ch. Feb. 21, 2011) (“In an
arm’s-length, synergistic transaction, the deal price generally will exceed fair value
because target fiduciaries bargain for a premium that includes . . . a share of the anticipated
synergies . . . .”); Union Ill., 847 A.2d at 356 (“[A]cquirers typically share a portion of
synergies with sellers in sales transactions and that . . . portion is value that would be left
wholly in the hands of the selling company’s stockholders, as a price that the buyer was
willing to pay to capture the selling company and the rest of the synergies.”).
618
See JX 1032 at 1–2 (Howell describing a conversation with Krause in which
Krause indicated “PCI fits in well with LSIs [sic] storage products, so the rationale is at
least as good for Avago to acquire PLX now, if not slightly improved”); Krause Dep. 28–
29; (“Q. And were you—were you modeling synergies with LSI at this point? Is that part
of your—your analysis in this transaction? A. Well, yeah. . . .”).
619
See JX 526 at 21.
134
stand-alone basis. The real-world market evidence from the sale process provides another
reason to reject the plaintiffs’ damages case. The plaintiffs failed to show causally related
damages, and their claim for aiding and abetting therefore fails.
III. CONCLUSION
The plaintiffs asserted that Potomac aided and abetting the Board’s breaches of
fiduciary duty. The plaintiffs proved that the Board breached its duty of disclosure and that
the directors’ actions during the sale process fell outside the range of reasonableness. The
plaintiffs also proved that Potomac knowingly participated in those breaches of duty, but
they were unable to prove that the breaches resulted in damages. Judgment is entered for
Potomac.
135
APPENDIX
Case Time Between Time from Total Time Termination Fee Other Deal
Announcement Commencement for Protection
of Deal and of Tender Offer Purposes of Measures
Commencement to Closing Court
of Tender Offer Decision
In re Fort Howard 4 business days, 25 business 29 business $67.8 million; No-shop
Corp. S’holders 4 calendar days days, 38 days, 42 1.9% of equity permitting
Litig., 1988 WL calendar days calendar target to
83147 (Del. Ch. days provide
Aug. 8, 1988) information
(Allen, C.) and
negotiate
(i.e., a
window-
shop).
Yanow v. Scientific 4 business days, 19 business 23 business Expense Window-
Leasing, Inc., 1988 4 calendar days days, 28 days, 32 reimbursement shop, 16.6%
WL 8772 (Del. Ch. calendar days calendar stock option
Feb. 5, 1988) days lock-up
In re KDI S’holders 4 business days, 24 business 28 business $8 million; 4.3% Window-
Litig., 1988 WL 6 calendar days days, 35 days, 41 of equity shop
116448 (Del. Ch. calendar days calendar
Nov. 1, 1988) days
Braunschweiger v. 3 business days, 30 business 33 business Graduated fee Strict no-
American Home 3 calendar days days, 43 days, 46 capped at 1.9% shop
Shield Corp., 1989 calendar days calendar equity
WL 128571 (Del. days
Ch. Oct. 26, 1989)
(Allen, C).
In re Formica Corp. Single-step merger. No tender offer. 143 business 4.5% of equity None
S’holders Litig., days, 205 calendar days, between announcement of
1989 WL 25812 merger and stockholder vote approving deal.
(Del. Ch. Mar. 22,
1989)
Roberts v. General 5 business days, 25 business 30 business $33 million; 2% of Window-
Instr. Corp., 1990 7 calendar days days, 35 days, 42 equity shop
WL 118356 (Del. calendar days calendar
Ch. Aug. 13, 1990) days
(Allen, C.)
McMillan v. Single-step merger. No tender offer. 102 business $3.1 million; 3.5% Window-
Intercargo Corp., days, 148 calendar days between announcement of of equity shop
768 A.2d 492 (2000) merger and stockholder vote approving deal.
(Strine, V.C.)
In re Pennaco 9 business days, 20 business 29 business $15 million; 3% of Window-
S’holders Litig., 787 17 calendar days days, 28 days, 45 equity shop
A.2d 691 (Del. Ch. calendar days calendar
2001) (Strine, V.C.) days
In re Cysive, Inc. Single-step merger. No tender offer. 45 business Expenses up to Window-
S’holders Litig., 836 days, 63 calendar days between announcement of $1.65 million; up shop with
A.2d 531 (Del. Ch. merger and stockholder vote approving deal. to 1.7% of deal matching
2003) (Strine, V.C.) value rights
136
In re MONY Gp. Single-step merger. No tender offer. 82 business $50 million; 3.3% Window-
Inc. S’holders Litig., days, 121 calendar days between announcement of of equity; 2.4% of shop
852 A.2d 9 (Del. Ch. merger and stockholder vote approving deal. deal value
2004)
In re Dollar Thrifty Single-step merger. No tender offer. 100 business $44.6 million with Window-
S’holder Litig. 14 days, 144 calendar days between announcement of up to additional $5 shop with
A.3d 573 (Del. Ch. merger and stockholder vote approving deal. million in matching
2010) (Strine, V.C.) expenses; 4.3% of rights
deal value after
accounting for
options, RSUs and
performance units.
In re Smurfit-Stone Single-step merger. No tender offer. 89 business $120 million;3.4% Window-
Container Corp. days, 123 calendar days between announcement of of equity shop with
S’holder Litig., 2011 merger and stockholder vote approving deal. matching
WL 2028076 (Del. rights
Ch. May 20, 2011)
In re El Paso Corp. Single-step merger. No tender offer. 51 business $650 million; Window-
S’holder Litig., 41 days, 75 calendar days between announcement of 3.1% of equity shop with
A.3d 432 (Del. Ch. merger and stockholder vote approving deal. matching
2012) (Strine, C.) rights
In re Plains Expl. & Single-step merger. No tender offer. 79 business $207 million; 3% Window-
Prod. Co. S’holder days, 117 calendar days between announcement of of deal value shop with
Litig., 2013 WL merger and stockholder vote approving deal. matching
1909124 (Del. Ch. rights
May 9, 2013)
C & J Energy Single-step merger. No tender offer. 130 business $65 million; Window-
Servs., Inc. v. City of days, 189 calendar days between announcement of 2.27% of deal shop
Miami Gen. Empls.’ merger and stockholder vote approving deal. value
and Sanitation
Empls.’ Ret. Tr., 107
A.3d 1049 (Del.
2014)
137