In re Saba Software, Inc. Stockholder Litigation

EFiled: Mar 31 2017 02:06PM EDT
Transaction ID 60410566
Case No. 10697-VCS
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE SABA SOFTWARE, INC. : Consolidated
STOCKHOLDER LITIGATION : C.A. No. 10697-VCS
MEMORANDUM OPINION
Date Submitted: February 17, 2017
Date Decided: March 31, 2017
Peter B. Andrews, Esquire and Craig J. Springer, Esquire of Andrews & Springer
LLC, Wilmington, Delaware; Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire,
Gina M. Serra, Esquire, and Jeremy J. Riley, Esquire of Rigrodsky & Long, P.A.,
Wilmington, Delaware; and Brian J. Robbins, Esquire, Stephen J. Oddo, Esquire,
and Nichole T. Browning, Esquire of Robbins Arroyo LLP, San Diego, California,
Attorneys for Plaintiffs.
Gregory V. Varallo, Esquire, Robert Burns, Esquire, and Sarah A. Galetta, Esquire
of Richards, Layton & Finger, P.A., Wilmington, Delaware; Erik J. Olson, Esquire
of Morrison & Foerster, LLP, Palo Alto, California; and Robert W. May, Esquire of
Morrison & Foerster LLP, San Francisco, California, Attorneys for Defendants
Shawn Farshchi, William V. Russell, Dow R. Wilson, William M. Klein, William N.
MacGowan, Michael Fawkes, and Nora Denzel.
Brian C. Ralston, Esquire, Jordan A. Braunsberg, Esquire, and Christopher G.
Browne, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware;
Alan S. Goudiss, Esquire of Shearman & Sterling LLP, New York, New York;
Alethea Sargent, Esquire and Tiana Peterson, Esquire of Shearman & Sterling LLP,
San Francisco, California, Attorneys for Defendants Vector Capital Management,
L.P., Vector Talent II LLC, and Vector Talent Merger Sub, Inc.
SLIGHTS, Vice Chancellor
This action arises out of the acquisition of Saba Software, Inc. (“Saba” or “the
Company”) by entities affiliated with Vector Capital Management, L.P. in an all-
cash merger in which stockholders received $9 per share for their Saba stock (the
“Merger”). The Plaintiff’s Second Amended Verified Class Action Complaint (the
“Complaint”), and its description of the unfortunate series of events leading up to
the Merger, calls out to Samuel Barber’s Adagio for Strings to set the mood for the
final scene. According to the Securities and Exchange Commission (“SEC”), Saba,
through two of its former executives, engaged in a fraudulent scheme from 2008
through 2012 to overstate its pre-tax earnings by $70 million. Thereafter, Saba
repeatedly promised regulators, its stockholders and the market that it would get its
financial house in order. Each promise included assurances to stockholders that
Saba would restate its financial statements by a certain date. And each time Saba
inexplicably failed to deliver the restatement by the promised deadline. When it
failed to meet a deadline for filing its restatement set by the SEC, the SEC revoked
the registration of Saba’s common stock. Not surprisingly, the stock price suffered.
In the midst of this chaos, the Company announced that “it was exploring strategic
alternatives, including a sale of the Company.”
When Saba’s board of directors ultimately sought stockholder approval of the
Merger, after a months-long sales process, the choice presented to stockholders was
either to accept the $9 per share Merger consideration, well below its average trading
1
price over the past two years, or continue to hold their now-deregistered, illiquid
stock. Not surprisingly, the majority of Saba’s stockholders voted to approve the
Merger.
Plaintiff, a former Saba stockholder, brings two claims: Count I alleges breach
of fiduciary duty against the members of Saba’s Board of Directors (the “Board”)
and Count II alleges aiding and abetting breach of fiduciary duty against the Vector-
affiliated defendants. In this opinion, I conclude the Board may not invoke the
business judgment rule under the so-called Corwin doctrine because the Complaint
pleads facts that allow a reasonable inference that the stockholder vote approving
the transaction was neither fully informed nor uncoerced. I also conclude that
Plaintiff has pled a non-exculpated claim of bad faith and breach of the duty of
loyalty by stating facts that support pleadings-stage inferences that the Board
knowingly failed to disclose material information to stockholders and was motivated
to approve the Merger so that its members could cash-in on equity options and
restricted stock units that would otherwise have been illiquid as a consequence of
the deregistration of the Company’s stock. Plaintiff has failed, however, to state a
claim for aiding and abetting breach of fiduciary duty against the Vector defendants
because he has failed to allege sufficient facts to support a reasonable inference that
Vector knowingly participated in the breach of fiduciary duty.
2
I. BACKGROUND
In considering this motion to dismiss, I have drawn the facts from the well-
pled allegations of the Complaint, documents incorporated into the Complaint by
reference, and judicially noticeable facts.1 As I must at this stage, I have accepted
all well-pled facts in the Complaint as true.2
A. The Parties and Relevant Non-Parties
Plaintiff, Gary Poltash, was a stockholder of Saba at all relevant times who
beneficially owned over 80,000 shares of Saba stock prior to the Merger. He was
appointed lead plaintiff in this consolidated class action on or about April 8, 2015.
Defendants, Nora Denzel, Shawn Farshchi, Michael Fawkes, William M.
Klein, William N. MacGowan, William V. Russell and Dow R. Wilson (the
“Individual Defendants”) all served on the Board during the timeframes that give
rise to Plaintiff’s breach of fiduciary duty claims. Farshchi also served as Saba’s
President and CEO, beginning in August 2013, after previously serving as Saba’s
Interim CEO from March 2013 to August 2013 and Executive Vice President and
1
Solomon v. Armstrong, 747 A.2d 1098, 1126 n.72 (Del. Ch. 1999), aff’d, 746 A.3d 277
(Del. 2000). Plaintiff referred to and relied upon Saba’s Proxy Statement throughout the
Complaint. See e.g., Compl. ¶¶ 45, 48 n.4, 90, 95 n.12, 99 n.13, 104. Therefore, I have
considered facts in the Proxy in addition to those alleged in the Complaint. Transmittal
Aff. of Robert L. Burns, Esq. in Supp. of Opening Br. in Supp. of Individual Defs.’ Mot.
to Dismiss (“Burns Aff.”) Ex. 1 (“Proxy”).
2
Id.
3
Chief Operating Officer from June 2011 to August 2013. Fawkes was the Chairman
of the Board’s Corporate Governance and Nominating Committee and a member of
the Strategic Committee. Klein also served on the Board’s Strategic Committee and
the Ad Hoc Transaction Committee (the “Ad Hoc Committee”). MacGowan served
as Chairman of the Board’s Compensation Committee. Russell was the non-
executive Chairman of the Board, beginning in March 2013, and served on the Ad
Hoc and Strategic Committees. Wilson was a member of the Ad Hoc Committee.
Defendant, Vector Capital Management, L.P., a Delaware limited partnership,
is a private equity firm that manages over $2 billion in equity capital and focuses on
value-oriented investments in technology companies. Prior to the Merger, Vector
Capital Management, L.P. was one of Saba’s lenders. Defendant, Vector Talent II
LLC, is a Delaware limited liability company and affiliate of Vector Capital
Management, L.P. Defendant, Vector Talent Merger Sub, Inc., a Delaware
corporation, is wholly-owned by Vector Talent II LLC and an affiliate of Vector
Capital Management, L.P. (collectively, with Vector Capital Management, L.P. and
Vector Talent II LLC, “Vector” or the “Vector Defendants”). The Merger caused
Saba to merge with Vector Talent Merger Sub, Inc. with Saba surviving as a wholly-
owned subsidiary of Vector Talent II LLC.
Prior to the Merger, non-party Saba Software, Inc. was a Delaware
corporation with its principal executive offices in Redwood City, California. Saba
4
provided “cloud-based human resources solutions, such as products and services for
employee training, performance evaluations, employee planning, collaboration
tools, succession planning and recruiting.”3 Saba’s stock traded on the NASDAQ
exchange until it was delisted on June 17, 2013. Thereafter, it was traded over-the-
counter (“OTC”) until it was deregistered by the SEC on February 19, 2015.
B. The Financial Fraud and Failed Attempts to Restate Financials
As alleged in an SEC complaint filed against Saba and two of its former
executives in September 2014, Saba’s Indian subsidiary engaged in millions of
dollars of financial fraud beginning in 2008 and ending in the second half of 2012.
The fraud caused Saba to overstate its pretax earnings by $70 million from 2007 to
2011. After the fraud was uncovered, Saba continually assured its stockholders,
regulators and the market that it would complete a restatement of its financial
statements by dates certain. In each instance, without explanation, the Company
would fail to file the restatements as promised. On April 9, 2013, NASDAQ
suspended trading of Saba’s shares due to Saba’s ongoing failure to restate its
financials. NASDAQ eventually delisted Saba on June 17, 2013. Saba’s common
stock then began to trade OTC.
3
Compl. ¶ 26.
5
Saba announced that it had reached a settlement with the SEC regarding its
financial fraud on September 24, 2014. The settlement provided that Saba would
pay a $1.75 million civil penalty and “cease and desist from committing or causing
future violations of [] the securities laws.”4 The settlement also required Saba to
complete a restatement of its financials and file its Comprehensive Annual Report
by February 15, 2015 (collectively, the “Restatement”). If Saba failed to complete
the Restatement, the settlement provided that the SEC would deregister Saba’s
common stock pursuant to the Securities Exchange Act of 1934 § 12(j). When Saba
announced the settlement, its then-CFO Mark Robinson stated: “We continue to
anticipate filing the restatement in the fourth quarter of this calendar year [2014].”5
A few days after the announcement of the SEC settlement, Saba’s stock was
trading at $14.08 per share. In the wake of the settlement, an analyst at B. Riley &
Co. reported: “We continue to believe an acquisition of the company, which we
acknowledge could garner a healthy premium to our price target of [$14], is the
likely endgame. Even so, such a scenario is unlikely to transpire before Saba regains
compliance with the SEC and puts its longstanding accounting restatement in the
rearview mirror.”6 Unfortunately, true to past form, on December 15, 2014, Saba
4
Compl. ¶ 30.
5
Compl. ¶ 32.
6
Compl. ¶ 39.
6
announced that it would not complete the Restatement by the February 15, 2015
deadline and thereby ensured that the SEC would deregister Saba’s stock in February
2015. This, in turn, would render the stock untradeable and essentially illiquid.
C. Saba Pursues Strategic Alternatives Including a Sale
At the same time Saba delivered the news that it would fail to comply with
the SEC’s Restatement deadline, it also announced that it was “evaluating strategic
alternatives, including a sale of the Company” and that it was engaging in
“preliminary discussions with potential acquirers.”7 By the end of that day, Saba’s
stock price fell from $13.49 to $8.75 per share. Even so, on December 16, 2014,
analysts at Craig-Hallum Capital Group LLC set a price target for Saba stock at $17
per share and gave it a “Buy” rating.
Saba had been open to exploring strategic alternatives, including a possible
sale, since at least February 2011, and had retained Morgan Stanley to facilitate that
process. Morgan Stanley’s retention agreement was purely contingent; it provided
that Morgan Stanley would be compensated $1,000,000 if Saba signed a merger
agreement and 1.5% of the transaction price if a transaction was completed.
Otherwise, there would be no compensation.
7
Compl. ¶ 34.
7
The Strategic Committee of the Board, comprised of Russell, Klein and
Fawkes, was created in August 2013 to “evaluate strategic alternatives and []
conduct negotiations with potential investors or acquirers.”8 From January to
November 2014, Saba engaged in discussions with twelve parties regarding a
possible sale, including private equity firms and other technology companies, but no
deal came to fruition.
1. The Threat of Deregistration Fuels the Sales Process
By November 2014, Saba knew that it would not complete the Restatement in
time to avoid deregistration. During a Board meeting on November 12, the Board
and Saba management “discussed the difficulties that the [Company] was having in
regaining compliance with the SEC requirements to restate financial statements and
the risks presented to the Corporation as a result of those challenges.” 9 On
November 17, 2014, private equity firm Thoma Bravo, LLC, which had been
engaged in negotiations with Farshchi about a possible acquisition of Saba since
May 2014, submitted an oral indication of interest to acquire Saba at $11 per share.
On November 19, 2014, the Board met with representatives from Morgan
Stanley and Morrison & Foerster LLP, Saba’s legal counsel, to discuss the
8
Compl. ¶ 36.
9
Compl. ¶ 42 (internal quotation marks omitted).
8
Restatement and possible strategic alternatives. Morgan Stanley told the Board that
it had approached eleven potential buyers, six had signed non-disclosure agreements,
four had met with management but only Thoma Bravo had actually submitted any
indication of interest. Morgan Stanley also told the Board that many parties had
submitted feedback regarding their “concerns about the impact of the restatement
and SEC regulations on consummating a timely transaction,” and explained that
these concerns were discouraging many potential buyers from submitting a bid.10
At the conclusion of the November 19 meeting, the Board formed the Ad Hoc
Committee, with Russell, Klein and Wilson as members, to explore strategic
alternatives, “provide additional oversight regarding the process of evaluating
strategic alternatives” 11 and “ensur[e] that [the Company] ran a robust process.”12
While the Ad Hoc Committee was supposed to direct the sales process, it allowed
Farshchi as CEO to communicate directly with interested parties, even on the subject
of “his future employment and compensation” with potential acquirors.13
The Ad Hoc Committee was advised during its meeting on December 3, 2014,
that the Restatement was unlikely to be completed in the first quarter of 2015. The
10
Compl. ¶ 44 (internal quotation marks omitted).
11
Compl. ¶ 45 (quoting Proxy at 26) (internal quotation marks omitted).
12
Compl. ¶ 45 (internal quotation marks omitted).
13
Compl. ¶ 48.
9
consequences of the failure to complete the Restatement on time were well known
to all concerned. At this meeting, Morgan Stanley indicated that, at the Board’s
direction, Saba was “progressing toward a [] mid-December transaction signing with
Thoma Bravo,”14 even though the deal likely would come in below the current OTC
market price and eliminate the possibility of upside that stockholders might achieve
if Saba remained a standalone company. Morgan Stanley also advised the Ad Hoc
Committee that by signing a deal before the deregistration date, Saba “would be able
to consummate a transaction . . . [that] it may not normally be able to accomplish if
it was still under the purview of the SEC.”15
In early December, private equity firm Golden Gate Capital submitted its
expression of interest in acquiring Saba at a price of $11–$12 per share. When the
Board met again with representatives from Morgan Stanley and Morrison & Foerster
on December 10, 2014, however, Morgan Stanley advised that Thoma Bravo was
the only party interested in acquiring Saba and that the consideration it would offer
would be below $9 per share. This drop in price was attributed, at least in part, to
Saba’s inability to complete the Restatement and concerns about the SEC’s reaction
to an acquisition. According to Morgan Stanley, no other parties were interested as
14
Compl. ¶ 51.
15
Compl. ¶ 52 (internal quotation marks omitted).
10
they would not be able to complete due diligence in the short time that remained
before deregistration. Morgan Stanley also told the Board that all price feedback it
had received was below the current market price. Finally, Morgan Stanley informed
the Board that Vector would be interested in engaging in a go-shop if the Thoma
Bravo final offer came in at less than $15 per share.
After the announcement on December 15, 2014 that Saba would be unable to
complete the Restatement by the SEC’s deadline, the Board directed Morgan Stanley
to contact additional parties who may be interested in acquiring Saba.16 On
December 17, 2014, the Ad Hoc Committee was informed that one of Saba’s current
stockholders had indicated that it might be willing to provide additional funding to
the Company on a standalone basis. The Ad Hoc Committee was also told that a
group of Saba stockholders had expressed an interest in acquiring the Company at a
price above $8–$9 per share, the latest range indicated by Thoma Bravo. There is
no indication, however, that the Ad Hoc Committee followed up on either of these
overtures. In total, Morgan Stanley contacted twenty-six parties by the end of
December 2014, but no indications of interest remained extant by year-end other
than Thoma Bravo’s proposal at $8–$9 per share.
16
Proxy at 29–30.
11
2. Vector Enters the Fray
Vector surfaced on January 15, 2015, with a written indication of interest to
acquire Saba at $9 per share. As if on que, Saba then received written indications of
interest from Golden Gate Capital, Sumeru Equity Partners L.P. and Silver Lake
Partners working together and Thoma Bravo, as well as verbal indications of interest
from H.I.G. Capital and Symphony Capital between January 15 and 16, ranging from
$5.25–$9 per share.
Vector had a prior relationship with Saba as one of its lenders dating back to
2013. Most recently, Vector had provided Saba $15 million in debt financing on
September 23, 2014, in addition to the $30 million of debt previously outstanding.
In 2013, Vector engaged in due diligence of Saba in relation to a possible further
debt financing transaction and therefore had access to Saba’s recent and detailed
financial information through that process. Morgan Stanley also had a prior
relationship with Vector, having previously provided financing services to a Vector
affiliate for which it had received fees. Additionally, it was disclosed to the Board
that representatives of Morgan Stanley who were working with Saba on its sales
process “may have committed and may commit in the future to invest in private
equity funds managed by [Vector].”17
17
Compl. ¶ 105 (quoting Proxy at 42).
12
On January 20, 2015, Saba issued a press release announcing its intention to
enter into a definitive acquisition agreement prior to the February 15, 2015
Restatement deadline if the Board determined that pursuing a sale was in the best
interests of the Company. Outside counsel provided drafts of a merger agreement
to Vector’s counsel on January 22, 2015. On January 23, 2015, however, Morgan
Stanley informed the Board that more potential bidders had just signed non-
disclosure agreements and that it was receiving interest from additional parties.
On February 2, 2015, Vector again submitted an indication of interest to
acquire Saba at $9 per share. The OTC closing price for Saba’s common stock on
that day was $9.45 per share. Vector indicated that it would be able to execute the
transaction agreements by February 6, 2015, and that it had completed its due
diligence except for some confirmatory accounting and legal diligence. The
proposal also indicated Vectors’ intent to retain CEO Farshchi and Williams, who
was Saba’s Executive Vice President, General Counsel and Corporate Development
officer, after the acquisition. The Ad Hoc Committee met with Morgan Stanley and
Saba management on February 3, 2015 to discuss Vector’s offer.
Beginning in October 2014, as part of the process of exploring strategic
alternatives, Saba management created four sets of projections incorporating various
assumptions about whether and when Saba would complete the Restatement and
whether its stock would be deregistered. At its February 3, 2015 meeting, the Ad
13
Hoc Committee ultimately adopted scenarios reflecting the negative impact of
deregistration on Saba stock and assumed that the Company would complete the
Restatement in either August 2015 or December 2015. The Board then instructed
Morgan Stanley to rely on this negative scenario for purposes of its fairness analysis.
This, of course, resulted in the lowest valuation of Saba as among all of the scenarios
created.
3. The Board Accepts Vector’s Proposal
At the conclusion of the February 3 meeting, the Ad Hoc Committee decided
to respond to Vector that day and ask for $9.25 per share. Vector responded that it
would not pay more than $9 per share given the pending deregistration of Saba’s
shares. On February 4, 2015, the Ad Hoc Committee agreed to an exclusivity
agreement with Vector at $9 per share, set to expire February 10, 2015. The Ad Hoc
Committee also discussed Vector’s desire to enter into new employment contracts
with Farshchi and Williams as a condition of the Merger. During a February 6, 2015
meeting of the Board with representatives from Morgan Stanley and Morrison &
Foerster, after determining that due diligence on the deal was “essentially complete,
[the Board] authorized Farshchi and Williams to negotiate with Vector with regards
to their post-merger employment.”18 Ultimately, the post-Merger company
18
Compl. ¶ 71 (internal quotation marks omitted).
14
employed Farshchi and Williams on an at-will basis with a guarantee that their base
salaries would not be reduced. They also retained “‘the cash incentive compensation
target amount opportunit[ies]’” and employee benefits “no less favorable” than those
they had received from Saba prior to the Merger.19
The Board received Morgan Stanley’s fairness opinion at a Board meeting on
February 9, 2015. At this meeting, the Board also granted themselves equity awards
that would be cashed-out upon consummation of the merger in place of “unvested,
suspended, lapsed and/or cancelled equity awards,” including those suspended,
lapsed and/or canceled due to the Company’s failure to complete the Restatement.20
Having just approved cash consideration for their otherwise illiquid equity awards,
the full Board then approved the Merger at $9.00 per share. That day, Saba stock
closed at $8.94 per share.
On February 10, 2015, only five days before the Restatement deadline, Saba
and Vector executed the Merger agreement at $9 per share and Saba issued a press
release announcing the Merger. The Merger consideration constituted a 2% discount
to the average stock price for the week prior to the announcement. On February 19,
2015, the SEC issued an order to deregister Saba stock under the Securities
19
Compl. ¶ 99 (quoting Proxy).
20
Compl. ¶ 73.
15
Exchange Act of 1934 § 12(g), meaning that the stock was ineligible for trading
using means of interstate commerce and, therefore, essentially illiquid.
Because the stockholder vote was to take place after Saba’s stock was
deregistered, Saba was not required to submit its Proxy or GAAP financials for SEC
review and was able, therefore, to accelerate the time from signing, to mailing of the
Proxy, to stockholder vote. Saba mailed the Proxy to its stockholders on or about
March 6, 2015, only twenty-four days after announcing the Merger. Twenty days
later, on March 26, 2015, the Saba stockholders voted to approve the Merger. When
asked to vote on the Merger, in the wake of deregistration, Saba stockholders were
left with a choice either to accept the $9 per share offered through the Merger or
hold onto their illiquid stock with no real sense of when or if that circumstance might
change. While projections in the Proxy indicated that Saba would complete the
Restatement in August of 2015, the stockholders also knew that Saba had failed to
complete restatements of its financials on several occasions in the past despite
assurances that various filing deadlines would be met. The Merger closed on
March 30, 2015.
16
D. The Equity Awards are Converted to Cash
The ongoing failure to restate its financials left Saba unable to award equity
compensation to Board members, executives and employees. As noted, that changed
on February 9, 2015, the day before the Company executed the Merger Agreement,
when the Board approved changes to the compensation plan that allowed executives
and Board members to receive cash payments in the form of synthetic options and
synthetic Restricted Stock Units (“RSUs”), equal to the amount of their suspended
equity awards. These cash payments were “contingent on the consummation of the
[Merger] and certain other conditions.”21 In addition to the cash payments in lieu of
suspended equity awards, the Saba Board also approved cash payments to executives
whose equity awards were canceled or lapsed during the restatement process.
Through this process, Denzel, Fawkes, Klein, MacGowan, Russell and
Wilson each were granted 10,000 RSUs and Williams was granted 63,000 RSUs.
Further, the expiration of 15,000 stock options held by Wilson and 50,000 stock
options held by Williams was rescinded, thereby allowing them to receive cash
compensation in lieu of these awards upon consummation of the Merger. In addition
to the grant of new options, all Saba options and RSUs that were vested and
outstanding prior to the Merger (including those vested through acceleration or
21
Compl. ¶ 90 (quoting Proxy).
17
otherwise due to the Merger) would be canceled and converted to cash payments
upon completion of the Merger. Based on these revisions to the compensation plan,
the following payments were due to Board members and Saba executives as a result
of the Merger:
Name Total Merger-Related Compensation
Shawn Farshchi $2,828,050
Peter Williams $908,194
William Russell $270,000
William Klein $270,000
William MacGowan $270,000
Nora Denzel $270,000
Michael Fawkes $270,000
Dow Wilson $270,000
II. PROCEDURAL STANDARD
When considering a motion to dismiss:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are ‘well-pleaded’ if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the ‘plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.’22
III. ANALYSIS
As noted, the Complaint is comprised of two counts: Count I alleges breach
of fiduciary duty against the Individual Defendants and Count II alleges aiding and
22
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citations omitted).
18
abetting that breach of fiduciary duty against the Vector Defendants. The Individual
Defendants have moved to dismiss on three grounds. First, they contend that the
Merger has been “cleansed” by a fully informed, uncoerced stockholder vote and
therefore is subject to the business judgment rule. If the Court agrees, then the
Merger would be assailable only for waste, which Plaintiff has not pled here.
Second, they argue that Plaintiff’s allegations regarding the failure to complete the
Restatement state derivative claims that were extinguished in the Merger. Third,
they maintain that any direct claims that might remain are exculpated by the
Section 102(b)(7) provision in Saba’s certificate of incorporation. Vector joins the
Individual Defendants in these arguments, and asserts (correctly) that if there is no
underlying breach, then Vector cannot be liable for aiding and abetting. Further,
Vector argues that the aiding and abetting claim must be dismissed in any event
because Plaintiff has not adequately pled a necessary element of the claim––
knowing participation in the underlying breach of fiduciary duty.
I begin my analysis with the Individual Defendants’ argument that a fully
informed, uncoerced stockholder vote has cleansed any claim for breach of fiduciary
duty stated in the Complaint. Because I have concluded that a cleansing vote did
not occur here, I next take up the argument that Plaintiff’s claims are derivative and
therefore he lost standing to assert them after the Merger. Because I have concluded
that Plaintiff has asserted direct, not derivative, claims that survive the Merger, I turn
19
next to the Individual Defendant’s argument that Plaintiff has failed to plead non-
exculpated claims against the Individual Defendants. Here again, I disagree and
therefore deny the Individual Defendants’ motion to dismiss. Finally, I address the
aiding and abetting claim and conclude that Plaintiff has failed to state that claim as
a matter of law.
A. The Corwin Analysis
In Corwin v. KKR Financial Holdings LLC,23 our 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.”24 This reasoning flows from Delaware’s “long-standing policy . . . to
avoid the uncertainties and costs of judicial second-guessing when the disinterested
stockholders have had the free and informed chance to decide on the economic
merits of a transaction for themselves.”25 The so-called Corwin doctrine, however,
only applies “to fully informed, uncoerced stockholder votes, and if troubling facts
regarding director behavior were not disclosed that would have been material to a
voting stockholder, then the business judgment rule is not invoked.”26
23
125 A.3d 304 (Del. 2015).
24
Id. at 309.
25
Id. at 313.
26
Id. at 312.
20
Here, Plaintiff does not dispute that the majority of Saba’s disinterested
stockholders approved the Merger.27 The inquiry, then, turns to whether the Plaintiff
has pled facts from which one might reasonably conceive that the vote was not fully
informed or was coerced.28 If yes, then Corwin will not apply, the business judgment
rule will not be available to the Individual Defendants at the pleadings stage and
enhanced scrutiny will be the standard of review; if no, then the motion to dismiss
must be granted because Plaintiffs have not alleged waste.29
1. Plaintiff has Adequately Pled that the Stockholder Vote was not Fully
Informed
As noted, to overcome a Corwin defense, the “plaintiff challenging the
decision to approve a transaction must first identify a deficiency in the operative
disclosure document, at which point the burden would fall to defendants to establish
27
See Compl. ¶ 109.
28
See In re Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *7 (Del. Ch. Jan. 5,
2017) (holding that, in the Corwin context, the plaintiff must plead facts that allow a
reasonable inference that the stockholder vote was not informed).
29
See Singh v. Attenborough, 137 A.3d 151, 151–52 (Del. 2016) (“When the business
judgment rule standard of review is invoked because of a vote, dismissal is typically the
result. That is because the vestigial waste exception has long had little real-world
relevance, because it has been understood that stockholders would be unlikely to approve
a transaction that is wasteful.”) (citations omitted). See also In re Volcano Corp. S’holder
Litig., 143 A.3d 727, 750 (Del. Ch. 2016), aff’d, 2017 WL 563187 (Del. Feb. 9, 2017)
(after finding that the tender offer was subject to the cleansing effect of Corwin and was
therefore subject to the business judgment rule standard of review, the court held that the
transaction could “therefore only can be challenged on the basis that it constituted waste”).
21
that the alleged deficiency fails as a matter of law in order to secure the cleansing
effect of that vote.”30 Delaware law requires directors to “disclose fully and fairly
all material information within the board’s control” when soliciting stockholder
action.31 This obligation of disclosure extends only to information that is material,32
and information is material when “there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote.”33 Stated
differently, a disclosure is material only if it “significantly alter[s] the ‘total mix’ of
information made available” to the stockholders.34
Plaintiff has alleged four areas where the Proxy omitted material facts: “(i)
the reasons why Saba was unable to complete the restatement; (ii) Saba
management’s financial projections; (iii) Morgan Stanley’s financial analyses
supporting its fairness opinion and potential conflicts of interest; and (iv) the process
30
In re Solera Hldgs., 2017 WL 57839, at *7–8.
31
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).
32
In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 511 (Del. Ch. 2010) (holding that
stockholders are not entitled to every fact and figure that a shareholder might theoretically
want or might find helpful). See also In re Merge Healthcare Inc. S’holders Litig., 2017
WL 395981, at *9 (Del. Ch. Jan. 30, 2017) (“‘Fully informed’ does not mean infinitely
informed, however.”).
33
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).
34
Arnold v. Soc’y for Sav. Bancorp, 650 A.2d 1270, 1277 (Del. 1994).
22
leading up to the execution of the Merger Agreement.”35 Two of the four categories
of disclosure deficiencies identified by the Plaintiff, relating to the management
projections and the work of Morgan Stanley, recast disclosure allegations that this
court repeatedly has rejected under similar circumstances. I address these first. I
then address Plaintiff’s allegations in support of the other two material omissions
identified in the Complaint relating to the failure to explain the circumstances
surrounding the Company’s failure to complete the Restatement and the events
leading up to the Merger. For reasons explained below, applying a reasonably
conceivable standard to these allegations, I conclude that Plaintiff has identified
material omissions from the Proxy that undermined the stockholder approval of the
Merger.36
(a) The Omitted Management Projections
Plaintiff has alleged a litany of alleged omissions regarding the financial
projections prepared by Saba’s management which Morgan Stanley relied upon for
its fairness opinion. Specifically, Plaintiff finds fault with the Proxy’s failure to
disclose management’s financial projections for “(i) revenue; (ii) EBITDA (2020–
35
Compl. ¶ 110.
36
I am mindful that Plaintiff could have (but did not) seek to enjoin the Merger which is a
preferred means to address serious disclosure claims in connection with a proposed
transaction. See In re Transkaryotic Therapies, Inc., 954 A.2d 346, 360 (Del. 2008).
Failing to pursue that remedy, however, does not deprive the Plaintiff of a right to press
disclosure claims post-closing. Id.
23
2024); (iii) EBIT (or depreciation and amortization); (iv) restatement expenses
(2020–2024); (v) taxes (2020–2024); (vi) capital expenditures (2020–2024);
(vii) changes in net working capital (2020–2024); (viii) stock-based compensation
expense (2020–2024); and (ix) unlevered free cash flow (2020–2024).”37
Management projections are clearly material to stockholders when deciding
whether to vote for a merger.38 Plaintiff has focused his criticisms on management
projections for years 2020–2024. The Proxy disclosed the management projections
for 2015–2019.39 The only indication that projections existed for 2020–2024 is in
Morgan Stanley’s description of its discounted cash flow analysis (“DCF”), where
the Proxy states that Morgan Stanley developed the numbers for 2020–2024 used in
its DCF “by an extrapolation of the 2019 estimates in the management projections
based on 2019 growth and margin performance in the Management Case to reach a
steady state margin and growth profiled by 2024.”40
37
Compl. ¶ 113.
38
In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *15 (Del. Ch. Aug. 18,
2006).
39
Proxy at 40, 44.
40
Proxy at 40.
24
“I reiterate this Court’s consistent position that ‘management cannot disclose
projections that do not exist.’”41 The Proxy’s failure to disclose management
projections for 2020–2024 cannot constitute a material omission because Plaintiff
has failed to plead facts that would allow an inference that such projections even
existed. And the omission from a proxy statement of projections prepared by a
financial advisor for a sales process rarely will give rise to an actionable disclosure
claim.42
Turning next to Plaintiff’s claim that the Proxy should have disclosed
management projections for revenue and EBIT (or depreciation and amortization),
I note that the Proxy clearly disclosed revenue for fiscal years ending May 31, 2016,
2017 and 2018.43 To the extent Plaintiff quibbles with the omission of projections
for later years, once again, Plaintiff has failed to allege that these projections exist.
With regard to the omission EBIT-related data, the Proxy discloses adjusted
EBITDA for 2015–2019, which is what Morgan Stanley relied upon when
41
In re BioClinica, Inc. S’holder Litig., 2013 WL 673736, at *5 (Del. Ch. Feb. 25, 2013)
(quoting In re CNX Gas Corp. S’holders Litig., 4 A.3d 397, 419 (Del. Ch. 2010)).
42
See, e.g., In re Plains Exploration & Prod. Co. S’holder Litig., 2013 WL 1909124, at *8
(Del. Ch. May 9, 2013) (refusing to recognize as material the omission in the proxy of cash
flow numbers derived by the investment banker from projections prepared by the company
which were included in the proxy).
43
Proxy at 44.
25
conducting its DCF.44 Plaintiff fails to explain why the disclosure of EBIT (or
depreciation and amortization, from which a stockholder presumably could calculate
EBIT from the disclosed EBITDA), would be anything more than merely
“helpful.”45
Plaintiff also contends that “even more importantly, the Proxy does not
adequately disclose the justifications for the modifications to the Company’s
forecasts throughout the process and, in particular, following receipt of Vector’s
offer.”46 This court typically is not receptive to these kinds of “why” or “tell me
more” disclosure claims that criticize the board for failing to explain its motives
when making transaction-related decisions.47 Yet this is precisely what the Plaintiff
44
Proxy at 40.
45
In re Cogent, 7 A.3d at 509–10.
46
Compl. ¶ 114.
47
See In re Sauer-Danfoss Inc. S’holders Litig., 65 A.3d 1116, 1131 (Del. Ch. 2011)
(holding that the omission of information as to why the board of directors negotiated to
remove a condition from the tender offer did not state a valid disclosure claim). See also
In re Solera Hldgs., 2017 WL 57839, at *12 (holding that the omission of the reasons
behind a supposed shift in compensation strategy did not state a valid disclosure claim);
Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *14 (Del. Ch. June 30, 2014) (holding
that the omission of why a financial advisor applied certain multiples in its analysis did not
state a valid disclosure claim). See also Se. Pa. Transp. Auth. v. Volgenau, 2013 WL
4009193, at *20 (Del. Ch. Aug. 5, 2013) (refusing to recognize “tell me more” disclosure
claims seeking additional minor details as material given extensive disclosure provided in
the proxy), aff’d, 91 A.3d 562 (Del. 2014) (TABLE) ; In re Plains Exploration, 2013 WL
1909124, at *10 (same); Freedman v. Adams, 2012 WL 1345638, at *17 (Del. Ch. Mar. 30,
2012) (same), aff’d, 58 A.3d 414 (Del. 2013).
26
is seeking here: a further disclosure as to why management and the Board elected to
make modifications to the Company’s financial projections. The Proxy discloses
the assumptions and data upon which management created the various scenarios that
were set forth in the forecasts.48 By comparing the changing assumptions that went
into the various scenarios, a stockholder could readily track the changes and
reasonably infer the rationale that went into the changes from one scenario to
another. Plaintiff does not allege any facts or assumptions regarding the
modifications that were omitted or misleading. He fails, therefore, to state a viable
disclosure claim regarding the Saba management projections included in the Proxy.
(b) The Omitted Information Regarding Morgan Stanley’s Valuation
Analysis and Conflicts
Plaintiff identifies two categories of omissions in the Proxy in connection with
Morgan Stanley’s work: (1) omissions regarding Morgan Stanley’s valuation of
Saba and (2) omissions regarding Morgan Stanley’s conflicts of interest arising from
its prior relationship with Vector. Neither reflect material omissions.
First, Plaintiff alleges that Morgan Stanley did not adequately disclose various
facts, in four different categories, related to its valuation of Saba. For the first
category—information pertaining to Morgan Stanley’s Public Trading Comparables
Analysis—Plaintiff alleges that the Proxy failed to disclose the “2014–2016
48
Proxy at 43.
27
aggregate value/revenue and AV/EBITDA multiples for each of the selected public
companies analyzed,” the revenue growth rates, gross margin and EBIT margin and
“why Morgan Stanley relied on the multiples from the Enterprise Software peers
instead of the Human Capital Management peers.”49 For Morgan Stanley’s
Precedent Transactions Analysis, Plaintiff claims that the Proxy failed to disclose
the AV/last twelve months revenue, the AV/next twelve months revenue (and the
one-day unaffected price premium multiples for each of the transactions analyzed)
and “the specific subset of transactions that were analyzed with respect to the
application of one-day unaffected premium paid analysis.”50 Plaintiff further alleges
that the Proxy failed to disclose, with regard to Morgan Stanley’s DCF analysis, “the
implied terminal EBITDA multiple range and the implied terminal revenue multiple
range,” various “individual inputs and assumptions utilized by Morgan Stanley to
derive the discount range of 7.1%–8.1%,” “that Morgan Stanley incorporated Saba’s
net operating losses (‘NOLs’) in its analysis and assumed a present value of
approximately $25 million, per management, from the total $274.1 million of NOLs
available to the Company,” “the inputs and assumptions utilized by management to
determine the $25 million present value of Saba’s NOLs,” and “the specific
49
Compl. ¶¶ 115(a)(i)–(iii).
50
Compl. ¶¶ 115(b)(i)–(ii).
28
arithmetic errors with respect to the treatment of certain stock based compensation
and restatement expenses within Morgan Stanley’s analysis.”51 Finally, Plaintiff
alleges that the Proxy failed to disclose, with regard to Morgan Stanley’s Discounted
Equity Value Analysis, the “2018 estimated cash and estimated debt utilized by
Morgan Stanley in its analysis” and “that Morgan Stanley utilized a revenue multiple
range of 1.2x–2.4x as opposed to the range of 1.5x–2.5x referred to in the Proxy.”52
When voting on a merger, “stockholders are entitled to 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 offer rely.”53
“A fair summary, however, is a summary.”54 The relevant disclosure document must
disclose “the valuation methods used to arrive at that opinion as well as the key
inputs and the range of ultimate values generated by those analyses.” 55 “Whether a
particular piece of an investment bank’s analysis needs to be disclosed, however,
depends on whether it is material, on the one hand, or immaterial minutia, on the
51
Compl. ¶¶ 115(c)(i)–(v).
52
Compl. ¶¶ 115(d)(i)–(ii).
53
In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 449 (Del. Ch. 2002).
54
In re Trulia S’holder Litig., 129 A.3d 884, 900 (Del. Ch. 2016) (emphasis in original).
55
In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 203–04 (Del. Ch. 2007).
29
other.”56 In this regard, the summary of the banker’s work need only “be sufficient
for the stockholders to usefully comprehend, not recreate, the analysis.”57
Here, the Proxy, over the course of nine single-spaced pages, described
Morgan Stanley’s analyses, including the methodology and projections used, the
lists of comparable companies and transactions considered, and the valuation range
resulting from these analyses.58 Plaintiff has failed to well-plead any facts, or
provide any explanation, as to why any of the minutia he says should have been in
the Proxy would have significantly altered the “total mix” of information Saba
shareholders received.59 The Proxy provided Saba stockholders with a fair summary
of the Morgan Stanley valuation analysis including its key inputs, and the “additional
56
Id.
57
In re Merge Healthcare, 2017 WL 395981, at *10.
58
Proxy at 36–44.
59
The Complaint recites these many alleged material omissions at some length, but when
the Individual Defendants challenged the materiality of these omissions in their motion to
dismiss, Plaintiff’s answering brief offers little resistance in a single sentence: “[t]he Proxy
also omits material information regarding Morgan Stanley’s financial analyses supporting
its fairness opinion.” Pl. Gary Poltash’s Answering Br. in Opp’n to the Individual Defs.’
and the Vector Defs.’ Mot. to Dismiss the Second Am. Verified Class Action Compl.
(“Answering Br.”) 54.
30
granularity” Plaintiff has pointed to would be nothing “more than helpful or
cumulative to the information already disclosed.”60
In addition to these classic “tell me more” disclosure claims, Plaintiff alleges
that the Proxy did not adequately disclose the “specific services Morgan Stanley
provided to [Vector], and/or any of its affiliates in the past two years and the amount
of compensation received for such services rendered.”61 That the Board was obliged
to disclose “potential conflicts of interest of [its] financial advisors” so that
“stockholders [could] decide for themselves what weight to place on a conflict faced
by the financial advisor” has not been, and cannot be, disputed.62 Whether the Proxy
fulfilled this obligation, however, is very much contested. On this point, the
Individual Defendants have the better of the argument. The Proxy disclosed that, in
the two previous years, “Morgan Stanley or its affiliates have provided financing
services to a Vector Capital affiliate and received customary fees of approximate[ly]
$1 million in connection with those services.”63 This disclosure addresses precisely
60
Dent, 2014 WL 2931180, at *12. See also id. at *14 (explaining that the issue of whether
the financial advisor’s analysis was correct is distinct from whether all material facts
relating to the analysis were disclosed).
61
Compl. ¶ 117.
In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *16 (Del. Ch.
62
Oct. 2, 2009).
63
Proxy at 42.
31
what Plaintiff claims is missing, except that it does not detail the specific services
rendered. Here again, Plaintiff offers no explanation of how the specific services
Morgan Stanley provided to Vector affiliates in the past would materially alter the
total mix of information that Saba stockholders would find important when deciding
how to vote. What was material, and disclosed, was the prior working relationship
and the amount of fees.
(c) The Omitted Information Regarding the Failure to Complete the
Restatement
Plaintiff points to the failure to describe the circumstances surrounding the
Company’s failure to complete the Restatement by the deadline set by the SEC as
“the most glaring information missing from the Proxy.”64 According to the Plaintiff,
this information is material because the deregistration clearly depressed the amount
potential buyers were willing to pay for Saba and stockholders needed to understand
whether the Company’s state of deregistration was likely to continue or whether the
Company had a legitimate prospect of completing the Restatement and regaining
registered status with the SEC. Plaintiff also contends that the explanation of why
the Company missed the SEC’s deadline was material to stockholders as they
64
Compl. ¶ 111.
32
assessed “the reliability of the financial projections relied on by Morgan Stanley in
rendering its fairness opinion.”65
As already noted, this court repeatedly has held that “asking ‘why’ does not
state a meritorious disclosure claim.”66 But in each of those cases, the “why”
involved a decision made either by the board of directors, an officer or a company
advisor. That is not what the Plaintiff alleges was omitted here. Rather, he alleges
that the Board failed to disclose the factual circumstances regarding its failure, yet
again, to complete the restatement of its financials. This was not a purposeful
decision of the Board (at least it was not disclosed as such); it was a factual
development that spurred the sales process and, if not likely correctible, would
materially affect the standalone value of Saba going forward.
To be sure, the Proxy was by no means silent with respect to the Restatement.
It disclosed details regarding the events that led up to Saba’s need to restate its
financials,67 explained the consequences of the deregistration—that Saba stock
would no longer be freely tradeable,68 provided the best estimate of Saba’s
65
Answering Br. 50.
66
In re Sauer-Danfoss, 65 A.3d at 1131; In re Solera Hldgs., 2017 WL 57839, at *12;
Dent, 2014 WL 2931180, at *14.
67
Proxy at 78.
68
Proxy at 23, 79.
33
management and Board of when the Restatement would be completed if Saba was
not sold (August 2015),69 and provided the projected value of Saba as a standalone
company if the Restatement was completed in August 2015 or if it was not
completed until December 2015.70 Given its past history, however, unless the
stockholders were armed with information that would allow them to assess the
likelihood that Saba would ever complete a restatement of its financials, they would
have no means to evaluate the choice they were being asked to make—accept merger
consideration that reflected the depressed value caused by the Company’s regulatory
non-compliance or stay the course in hopes that the Company might return to the
good graces of the SEC.71
Plaintiff has also earned a pleading-stage inference that the stockholders
would need all material information regarding the likelihood that the Company could
ever complete the Restatement in order meaningfully to assess the credibility of the
69
Proxy at 43.
70
Proxy at 43–44.
71
Cf. In re MONY Gp. Inc. S’holder Litig., 852 A.2d 9, 24–25 (Del. Ch. 2004) (“[O]nce a
company travels down the road of partial disclosure of the history leading up to the
Merger . . . [it has] an obligation to provide the stockholders with an accurate, full and fair
characterization of those historic events.”) (citations and internal quotations omitted).
Specifically, Plaintiff argues that “[w]hile the Company had repeatedly promised Saba
stockholders for nearly three years that the Company would file restated financial results,
the Proxy was silent on why the investigation was never completed, despite the fact that
the Company expended three years and more than $37 million on expenses related to the
investigation.” Answering Br. 49–50 (citations omitted).
34
management projections. The Company had repeatedly failed to meet deadlines to
restate its financials. The management projections assumed the Company would
complete the Restatement at some point in the future. Without the means to test that
assumption by drilling down on the circumstances surrounding the Company’s past
and latest failure to deliver its restated financials, stockholders had no basis to
conclude whether or not the projections made sense.72
(d) The Omitted Information Regarding the Sales Process
Finally, Plaintiff alleges that the Proxy omitted material information regarding
the sales process. The Proxy, over the course of nine single-spaced pages, detailed
the “Background of the Merger,” including the lengthy sales process and all contacts
with parties that were potentially interested in acquiring Saba.73 Nevertheless,
Plaintiff alleges that the Proxy failed adequately to describe the events leading up to
the Merger in several respects. While most of these criticisms fall well short of
identifying material omissions or misstatements, Plaintiff has identified one
omission within the Proxy’s description of the events leading up to the Merger that
a reasonable shareholder likely would have deemed important when deciding
72
I acknowledge that directors are not obliged to engage in “self-flagellation” in their
disclosures to stockholders. Khanna v. McMinn, 2006 WL 1388744, at *29, 34 (Del. Ch.
May 9, 2006). That is not what the Plaintiff says is missing here. Rather, he alleges that
the Proxy failed to disclose the facts surrounding the Company’s failure to meet the SEC
deadline, whether benign or otherwise.
73
Proxy at 24–33.
35
whether to approve the Merger.74 Specifically, Plaintiff’s allegations with respect to
the omission of the post-deregistration options available to Saba, as discussed by the
Ad Hoc Committee on December 3, 2014, make a compelling case for materiality.
It is true, as the Individual Defendants trumpet, that Delaware law “does not require
management ‘to discuss the panoply of possible alternatives to the course of action
it is proposing . . . .’”75 As then-Chancellor Chandler explained, this settled guidance
with respect to disclosure is justified because “stockholders have a veto power over
fundamental corporate changes (such as a merger) but entrust management with
evaluating the alternatives and deciding which fundamental changes to propose.”76
74
Plaintiff’s other criticisms, including the omission of information regarding financing
options available to Saba in 2013, the terms of an expression of interest from “PE Firm D”
in 2013, details relating to the formation of the Ad Hoc Committee, details relating to the
financial models considered by the Ad Hoc Committee in 2014, details relating to
Farshchi’s discussions with other suitors regarding employment, all miss the mark. After
carefully reviewing the Proxy, I am satisfied either that the Proxy discloses what Plaintiff
alleges is omitted (e.g. material information regarding the Ad Hoc Committee or Farshchi’s
motivations as a negotiator, as found in the Proxy at 26, 32, 48–50), or that the alleged
omissions, if included in the Proxy, would have provided nothing more than immaterial
“additional granularity.” See In re Lear Corp. S’holder Litig., 926 A.2d 94, 114 (Del. Ch.
2007) (holding that “a reasonable stockholder would want to know an important economic
motivation of the negotiator singularly employed by a board to obtain the best price for the
stockholders, when that motivation could rationally lead that negotiator to favor a deal at a
less than optimal price, because the overall procession of a deal was more important to
him, given his overall economic interest, than only doing a deal at the right price . . .”);
Dent, 2014 WL 2931180, at *12 (proxy need not disclose unnecessarily “granular”
information).
75
In re 3Com S’holders Litig., 2009 WL 5173804, at *6 (Del. Ch. Dec. 18, 2009) (quoting
Seibert v. Harper & Row, Publ’rs, Inc., 1984 WL 21874, at *5 (Del. Ch. Dec. 5, 1984)).
76
Id.
36
While this holds true in a typical case, this is hardly a typical case given the
deregistration of Saba’s shares by the SEC just prior to the time the stockholder vote
on the Merger was to occur.77 This caused a fundamental change to the nature and
value of the stockholder’s equity stake in Saba over which the stockholders had no
control. The deregistration also dramatically affected the environment in which the
Board conducted the sales process and in which stockholders were asked to exercise
their franchise. The Board needed to take extra care to account for this dynamic in
its disclosures to stockholders.
In considering whether or not Saba was viable as a going-concern without the
Merger, a reasonable stockholder would have needed to understand what alternatives
to the Merger existed. Plaintiff alleges that Morgan Stanley advised the Ad Hoc
Committee during its meeting on December 3, 2014, that the Thoma Bravo proposal
was a “discount to current market prices” of Saba stock and, importantly, that a
transaction with Thoma Bravo “would ‘eliminate[] further upside for investors from
standalone value creation.’”78 Morgan Stanley cautioned that further pursuit of the
77
See In re Answers Corp. S’holder Litig., 2012 WL 3045678, at *2 (Del Ch. July 19,
2012) (in noting that the “case [was] not typical,” the court observed: “Most cases do not
involve a company’s board speeding up the sales process to get a deal done” after the
company’s financial advisor told the board that “a failure to act quickly” might result in
“the market learn[ing] the company is worth more than the deal price and the deal will be
scuttled”).
78
Compl. ¶ 51.
37
Thoma Bravo deal “could trigger ‘[l]ikely shareholder litigation … due to price
below market.’”79 It is reasonably conceivable that Plaintiff will be able to
demonstrate a substantial likelihood that a reasonable Saba stockholders would have
found this information to be important when deciding how to vote on the Merger.
The failure to disclose it in the Proxy undermines the cleansing effect of the
stockholder vote under Corwin.
2. Plaintiff Has Adequately Pled that the Stockholder Vote Was Coerced
In addition to requiring a fully informed stockholder vote as a predicate to
cleansing, Corwin also directs that the court consider whether the Complaint
supports a reasonable inference that the stockholder vote was coerced.80 It is settled
in our law that a stockholder vote may be invalidated “by a showing that the structure
or circumstances of the vote were impermissibly coercive.”81 The court will find
wrongful coercion where stockholders are induced to vote “in favor of the proposed
transaction for some reason other than the economic merits of that transaction.”82 It
79
Id.
80
Corwin, 125 A.3d at 312.
81
Will. v. Geier, 671 A.2d 1368, 1382 (Del. 1996).
82
Williams, 671 A.2d at 1382–83. See also Eisenberg v. Chi. Milwaukee Corp., 537 A.2d
1051, 1061 (Del. 1996) (“The standard applicable to the plaintiff’s claim of inequitable
coercion is whether the defendants have taken actions that operate inequitably to induce
the [] shareholders to tender their shares for reasons unrelated to the economic merits of
the offer.”); Gradient OC Master, Ltd. v. NBC Univ., Inc., 930 A.2d 104, 119 (Del. Ch.
2007) (“[A] shareholder is actionably coerced when he is forced into ‘a choice between a
38
is not enough for an offer to be “economically ‘too good to resist’” to constitute
wrongful coercion.83 Rather, in determining whether vel non stockholders were
inequitably coerced, the court must be mindful that
for purposes of legal analysis, the term ‘coercion’ itself—covering a
multitude of situations—is not very meaningful. For the word to have
much meaning for purposes of legal analysis, it is necessary in each
case that a normative judgment be attached to the concept
(‘inappropriately coercive’ or ‘wrongfully coercive’, etc.). But, it is
then readily seen that what is legally relevant is not the conclusory term
‘coercion’ itself but rather the norm that leads to the adverb modifying
it.84
new position and a compromised position’ for reasons other than those related to the
economic merits of the decision.”) (quoting In re Gen. Motors Class H S’holders Litig.,
734 A.2d 611, 621 (Del. Ch. 1999)); In re Siliconix Inc. S’holder Litig., 2001 WL 716787,
at * 15 (Del. Ch. June 19, 2001) (“A tender offer is wrongfully coercive if the tendering
shareholders are ‘wrongfully induced by some act of the defendant to sell their shares for
reasons unrelated to the economic merits of the sale.’”) (quoting Ivanhoe P’rs v. Newmont
Mining Corp., 533 A.2d 585, 605 (Del. Ch.), aff’d, 535 A.2d 1334 (Del. 1987)).
83
Newmont, 533 A.2d at 605 (quoting Lieb v. Clark, 1987 WL 11903, at *4 (Del. Ch.
June 1, 1987)).
84
Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). See also Gradient, 930 A.2d
at 117 (“[T]he ordinary definition of ‘coercion,’ something akin to intentionally persuading
someone to prefer one option over another, is not the same as saying that the persuasion
would so impair the person’s ability to choose as to be legally actionable. The challenged
conduct must be ‘wrongfully’ or ‘actionably’ coercive for a legal remedy to ensue.”)
(citations omitted); Solomon, 747 A.2d at 1131 (“All disclosure of material information
may cause shareholders to vote in a particular way, and so is, in some general sense,
‘coercive.’ Considering the legal imperative that all shareholders be armed with all
material information, it cannot be that the mere potential to influence a shareholder’s vote
renders disclosed information actionable.”); Next Level Commc’ns v. Motorola, Inc., 834
A.2d 828, 853 (Del. Ch. 2003) (“Generally, reports of factual matters that are neutrally
stated and not threatening do not amount to wrongful coercion.”).
39
Whether a particular vote was inequitably coerced and therefore “robbed of its
effectiveness . . . depends on the facts of the case.”85
The determination of whether coercion was inequitable in a particular
circumstance is a relationship-driven inquiry.86 A corporation’s directors are
fiduciaries of their stockholders “whose interests they have a duty to safeguard.”87
Therefore, when addressing a potentially coercive interaction between a board of
directors and the stockholders it serves, the relevant legal norms stem from the law
of fiduciary duty. And, in this regard, whether the fiduciary’s motives were benign
or unfaithful when creating the circumstances that cause coercion is not dispositive
of the determination of whether the coercion was inequitable.88 The coercion
85
Williams, 671 A.2d at 1383. See also Brazen v. Bell Atl. Corp., 1997 WL 153810 at *5
(Del. Ch. Mar. 19) (“Whether coercion is inequitable depends on the particular facts and
circumstances of the case. What might be inequitably coercive in one situation, might be
coercive, but not inappropriately so, in another.”) (citations omitted), aff’d on other
grounds, 695 A.2d 43 (Del. 1997).
86
Cf. Katz., 508 A.3d at 880 (looking to the law of contracts to determine whether
inequitable coercion occurred where the relevant relationship was contractual––between a
corporation and the holders of its debt securities).
87
Eisenberg, 537 A.2d at 1062.
88
Lacos Land Co. v. Arden Gp., Inc., 517 A.2d 271, 278 (Del. Ch. 1986) (holding that
motivation behind the challenged vote was not relevant to the determination that the vote
was coerced because “[a]s a corporate fiduciary, [the CEO] has no right to take such a
position, even if benevolently motivated in doing so”). Cf. Chesapeake Corp. v. Shore,
771 A.2d 293, 318 (Del. Ch. 2000) (discussing Chancellor Allen’s decision in Blasius in
determining whether the board’s action impeding stockholder franchise was inequitable as
one where the “real question was ‘whether, in these circumstances, the board, even if it is
acting with subjective good faith . . . may validly act for the principal purpose of preventing
the shareholders from electing a majority of new directors. The question thus posed is not
40
inquiry, instead, focuses on whether the stockholders have been permitted to
exercise their franchise free of undue external pressure created by the fiduciary that
distracts them from the merits of the decision under consideration.89 In the deal
context, the vote must be structured in such a way that allows shareholders a “free
choice between maintaining their current status [or] taking advantage of the new
status offered by” the proposed deal.90
Here, in voting on the Merger, Saba stockholders were given a choice between
keeping their recently-deregistered, illiquid stock or accepting the Merger price of
$9 per share, consideration that was depressed by the Company’s nearly
contemporaneous failure once again to complete the restatement of its financials.91
one of intentional wrong (or even negligence), but one of authority as between the fiduciary
and the beneficiary . . . ’”) (quoting Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 658
(Del. Ch. 1988)).
89
Williams, 671 A.2d at 1382–83. See also Gradient, 930 A.2d at 117–121 (collecting
coercion cases).
90
Gen. Motors, 734 A.2d at 621. See also AC Acqs. Corp. v. Anderson, Clayton & Co.,
519 A.2d 103, 113 (Del. Ch. 1986) (inequitable coercion occurs when the board creates
circumstances that surround the stockholder vote where “no rational shareholder could
afford not to [vote in favor of the board proposal] . . . at least if that transaction is viewed
in isolation.”).
91
The Proxy advised stockholders that because the Company had failed to complete the
Restatement by the time agreed to in its settlement with the SEC, and because the SEC had
deregistered the stock as a consequence, “until [Saba] has regained compliance and filed a
registration statement . . . and such registration statement has become effective, shares of
[Saba] stock [could not] be traded on the OTC or any other market and broker dealers
[were] prevented from effecting transactions involving [Saba] securities using means of
interstate commerce.” Proxy at 2, 13, 23. See also Proxy at 78 (“As a result of the
deregistration of our common stock, there is no longer any active trading market for shares
41
This Hobson’s choice was hoisted upon the stockholders because the Board was hell-
bent on selling Saba in the midst of its regulatory chaos. Yet the Board elected to
send stockholders a Proxy that said nothing about the circumstances that were
preventing the Company from filing its restatements and therefore offered no basis
for stockholders to assess whether the choice of rejecting the Merger and staying the
course made any sense.92 The forced timing of the Merger and the Proxy’s failure
to disclose why the Restatement had not been completed and what financing
alternatives might be available to Saba if it remained a standalone company left the
Saba stockholders staring into a black box as they attempted to ascertain Saba’s
future prospects as a standalone company. This left them with no practical
alternative but to vote in favor of the Merger.
The Individual Defendants argue that to find “actionable coercion” the court
must identify “some affirmative action by the fiduciary in connection with the vote
[] that reflect[s] some structural or other mechanism for or promise of retribution
of our common stock.”). The Proxy then reiterated, repeatedly, that “any resulting ‘market’
for shares of our common stock would be extremely limited and illiquid until such time as
we complete the restatement and regain eligibility for trading on the OTC or another active
securities market.” Proxy at 2, 13, 23. See Eisenberg, 537 A.2d at 1062 (stating the
obvious: an ability to trade represents a large component of a stock’s market value).
92
While the Proxy disclosed that the Company anticipated it could complete the
Restatement by August 2015, Saba had known about the need to restate its financials since
at least June 2012, and yet over two years later it still had not delivered on its repeated
assurances that it would get the job done. See Proxy at 24, 43.
42
that would place the stockholders who reject the proposal in a worse position than
they occupied before the vote.”93 While I disagree that the Complaint has failed to
allege wrongful affirmative action by the Board, I also disagree that affirmative
action is a predicate to wrongful coercion. Inequitable coercion can exist as well
when the fiduciary fails to act when he knows he has a duty to act and thereby
coerces stockholder action.94
Plaintiff’s case for inequitable coercion, as alleged in the Complaint, tells a
compelling story of Board action and inaction in the face of a duty to act. Saba
engaged in financial fraud with its Indian subsidiary. To account for this fraud, the
Company was required to restate its financials. When it inexplicably and repeatedly
failed to do so, its stock was delisted from NASDAQ. Saba then settled an
enforcement action with the SEC and promised to complete the Restatement by a
date certain. When it failed to act, again inexplicably, the SEC deregistered its stock.
The subsequent events unfolded like a tragic requiem. The stock price fell; the Board
93
Letter to The Honorable Joseph R. Slights, III dated February 17, 2017 from Gregory V.
Varallo in response to the Court’s January 31, 2017 request for supplemental letter
memoranda (“Individual Defs.’ Supplemental Letter Br.”) 5, citing, inter alia, Gradient,
930 A.2d at 117; Gen. Motors, 734 A.2d at 621.
94
Cf. In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006) (holding that a
director acts in bad faith when he “intentionally fails to act in the face of a known duty to
act”); NHB Advisors, Inc. v. Monroe Capital LLC, 2013 WL 3790745, at *2 (Del. Ch.
July 19, 2013) (“If a fiduciary has a duty to act, and fails to act, the failure to act is a breach
of duty.”).
43
rushed the sales process while the Company was in turmoil and then lost all
negotiating leverage; the Proxy left stockholders in the dark regarding the
circumstances surrounding the Company’s incomprehensible failure to file its
Restatement and whether it could ever prepare proper financial statements, leaving
them unable meaningfully to assess the value of Saba on a standalone basis; the
deregistration allowed the Company to avoid SEC review of the Proxy and to rush
the stockholder vote; and then, in this environment, the Board forced stockholders
to choose between a no-premium sale or holding potentially worthless stock.95
Under these circumstances, I am satisfied that the Plaintiff has well-pled that, at the
time of the stockholder vote, “situationally coercive factors”96 may have wrongfully
induced the Saba stockholders to vote in favor of the Merger for reasons other than
the economic merits of the transaction.
I acknowledge, as the Individual Defendants note,97 that the Proxy stated the
facts neutrally and in a non-threatening manner and that this is often a telltale
95
The Individual Defendants argue that the deregistration of Saba stock “was a matter of
history, not a threat for the future.” Individual Defs.’ Supplemental Letter Br. 6. That is
not how Plaintiff has pled his breach of fiduciary duty claim. Rather, he has alleged that
the stockholder vote was tainted by the uncertainty created by the Company’s ongoing
failure to complete restatements of its financials and the stockholders’ inability
meaningfully to assess whether the Company would ever return to a state of compliance.
Compl. ¶¶ 13, 33, 110, 111–19.
96
Brazen, 695 A.2d at 50.
97
Individual Defs.’ Supplemental Letter Br. 7.
44
indicator of a non-coercive proxy statement.98 In this case, however, it was not the
Proxy’s words or even its tone that created the coercion; the inequitable coercion
flowed from the situation in which the Board placed its stockholders as a
consequence of its allegedly wrongful action and inaction. Stated succinctly, the
Board created a “circumstance[] [that was] impermissibly coercive.”99
98
Williams, 671 A.2d at 1383 (finding that a proxy was not inequitably coercive when it
“merely stat[ed] facts which were required to be disclosed” and where the required
disclosures were “neutrally stated and not threatening in any respect”).
99
Id. at 1382. The Individual Defendants seize on the language in General Motors where
the court observed that, in cases that have found actionable coercion, “the electorate was
told that retribution would follow if the proposed transaction was defeated.” Gen. Motors,
734 A.2d at 621. While it is true that the Board stopped short of threatening retribution,
the implicit threat was no less compelling. The stockholders cast their votes in favor of the
Merger under the threat that their only alternative was to hold onto deregistered stock with
the knowledge that the Company may continue indefinitely to ignore its obligation to
restate its financial statements and thereby foreclose any possibility that the stock might
ever be registered and freely tradable again. I note that General Motors is distinguishable
in other ways as well. Unlike the stockholders in General Motors, the Saba stockholders
were not afforded the “free choice” to select between the Merger and a settled status quo.
The Saba Board had already impaired the status quo by causing the stock to be deregistered
just prior to the vote, rushing the sales process and then failing to provide stockholders
with adequate information to evaluate the new, impaired status quo. According to the
Individual Defendants, as of the date of the vote, “Saba’s stockholders had two options: (1)
merge with Vector (the ‘new status’); or (2) hold Saba’s stock and let the Company pursue
efforts to re-register (which was ‘precisely the same position they were in before the
vote.’).” Individual Defs.’ Supplemental Letter Br. 9 (quoting Gen. Motors, 734 A.2d at
620). This characterization minimizes if not ignores the fact that the Board had already
put the stockholders into a “compromised position” by failing to complete the Restatement
and thereby causing the stock to be deregistered. Against this backdrop, the Saba
stockholders were forced to choose between the “new position” of relinquishing their
shares in exchange for $9 in consideration, or the “compromised position” of holding onto
illiquid shares for the foreseeable and perhaps indefinite future. As Plaintiff observes, “[a]
‘no’ vote would have left Saba stockholders with illiquid stock and, on the heels of three
years of unexplained delays in completing the restatement, with no clue as to if and/or
when the Company’s financials would be brought current and the de-registration reversed.”
45
3. Revlon Enhanced Scrutiny Will Apply
Plaintiff urges the Court to review the transaction under Revlon enhanced
scrutiny.100 Since Corwin does not apply, I agree that the Merger is subject to
enhanced scrutiny and that the Individual Defendants will bear the initial burden of
demonstrating that they were fully informed and acted reasonably in the sales
process to secure the best available price.101 Having now fully addressed the gating
issue of standard of review, I turn next to the contention that Plaintiff cannot state a
breach of fiduciary duty claim against the Individual Defendants.
B. The Complaint States a Direct, Non-Exclupated Claim for Breach of
Fiduciary Duty Against the Individual Defendants
Plaintiff alleges that the Individual Defendants breached their fiduciary duties
of care and loyalty in connection with the Merger by “fail[ing] to negotiate a full and
Letter to Vice Chancellor Slights from Peter B. Andrews, Esq. in response to January 31,
2017 Letter requesting supplemental briefing 5. To make matters worse, the
“compromised position” was one that stockholders could not fully comprehend given the
failure of the Proxy to disclose why the Restatement had not been completed and what
other post-deregistration options might be available to Saba as discussed by the Board on
December 3, 2014. And, of course, because the stock was deregistered, the Board was able
to hurry the vote since SEC review of the Proxy materials and GAAP financials was no
longer required. If Plaintiff can prove that this, in fact, was the choice Saba stockholders
were given, then they will prove that the stockholders were given no real choice at all.
100
Answering Br. 34 (citing Paramount Commc’ns. Inc. v. QVC Network Inc., 637 A.2d
34, 42 (Del. 1994); In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1000 (Del. Ch.
2005)).
101
Id.
46
fair price for Saba’s public shares following a process riddled with missteps and
conflicts of interest.”102 The Individual Defendants dispute these claims on the
merits but also raise two predicate defenses that they argue require the Court to
dismiss the claims as a matter of law. First, the Individual Defendants characterize
the gravamen of Plaintiff’s Complaint as alleging that the Board mismanaged Saba
during its Restatement process in a manner that caused the stock price to fall. This
claim, according to the Individual Defendants, is a derivative claim that was
extinguished in the Merger. Second, the Individual Defendants contend that even if
the claims are direct claims, the Complaint fails to state any non-exculpated claims
that can pass through the Section 102(b)(7) exculpatory clause in Saba’s certificate
of incorporation.103 I will address each argument in turn.
1. Plaintiff has Pled Direct Claims
The Individual Defendants argue that at the core of Plaintiff’s breach of
fiduciary duty claim is the allegation that the Board failed adequately to oversee or
otherwise manage the Company’s effort to restate its financials, especially in
connection with the SEC-mandated Restatement. According to the Individual
Defendants, this is a classic derivative claim that the Plaintiff no longer has standing
102
Id. at 7.
103
8 Del. C. § 102(b)(7).
47
to pursue in the wake of the Merger. “Under Delaware law, it is well established
that a merger which eliminates a derivative plaintiff’s ownership of shares of the
corporation for whose benefit she has sued terminates her standing to pursue those
derivative claims.”104
In determining whether a claim is derivative or direct, the court will consider
“(1) who suffered the alleged harm (the corporation or the suing stockholders,
individually); and (2) who would receive the benefit of any recovery or other remedy
(the corporation or the stockholders, individually).”105 Claims of corporate
mismanagement are classically derivative claims because, if proven, they represent
“direct wrong to the corporation that is indirectly experienced by all
shareholders.”106 While claims that challenge directors’ conduct during a merger
104
Lewis v. Ward, 852 A.2d 896, 900–01 (Del. 2004).
105
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
106
Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1998) (“[W]here a plaintiff
shareholder claims that the value of his stock will deteriorate and that the value of his
proportionate share of the stock will be decreased as a result of alleged director
mismanagement, his cause of action is derivative in nature.”). See also Albert v. Alex.
Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *13 (Del. Ch. Aug. 26, 2005) (“The
gravamen of these claims is that the Managers devoted inadequate time and effort to the
management of the Funds, thereby causing their large losses. Essentially this [is] a claim
for mismanagement, a paradigmatic derivative claim.”); Agostino v. Hicks, 845 A.2d 1110,
1123 (Del. Ch. 2004) (holding a claim that a company impeded the pursuit of a value-
maximizing transaction was a claim of mismanagement and therefore derivative); In re
Syncor Int’l Corp. S’holders Litig., 857 A.2d 994, 997–98 (Del. Ch. 2004) (same).
48
process are direct claims,107 claims that corporate fiduciaries mismanaged the
enterprise in a manner that lowered the price an acquiror is willing to pay in
connection with a merger are derivative claims belonging to the corporation.108
Here, Plaintiff’s claim against the Individual Defendants for breach of
fiduciary duty arises from their conduct during the sales process and in
recommending the Merger to stockholders. Specifically, Plaintiff alleges that
the Individual Defendants initiated a process to sell Saba that
undervalued the Company and vested them with benefits that were not
shared equally by Saba’s public stockholders. In addition, by agreeing
to the Merger, the Individual Defendants capped the price of Saba stock
at a price that does not adequately reflect the Company’s true value.
Moreover, the Individual Defendants disregarded the true value of the
Company, in an effort to benefit themselves. The Individual
Defendants made materially inadequate disclosures and material
disclosure omissions in the Proxy disseminated to Company
stockholders and completed the Merger pursuant to an uninformed vote
of Saba’s stockholders.109
As reflected in this summary of the Plaintiff’s allegations, and as reiterated in
Plaintiff’s response to the motions to dismiss, the essence of the breach of fiduciary
claim is “that the sales process was flawed, controlled by a conflicted insider, and
that the price Saba stockholders received in the Merger was unfair.”110 While
107
See, e.g. Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999).
108
Feldman v. Cutaia, 951 A.2d 727, 734–35 (Del. 2008).
109
Compl. ¶ 125.
110
Answering Br. 23.
49
Caremark or Kramer-like claims might reside somewhere within the pled facts,
Plaintiff has not made those claims and acknowledges that he would face a nearly
vertical climb to establish his standing to do so now that the Merger has closed.111
Instead, Plaintiff has endeavored to state a direct claim for breach of fiduciary duty
relating to the Board’s conduct of an allegedly flawed sales process, its role in
approving a transaction that delivered unique benefits to management and members
of the Board to the detriment of the stockholders and its failure to make complete
disclosures in the Proxy. These are direct claims that “constitute a direct challenge
to the fairness of the merger itself”; “[t]hey are not extinguished by the merger.”112
Plaintiff undeniably has recited facts that spell out the Company’s tortured
history, including the financial fraud and repeated failures to restate its financial
statements notwithstanding assurances to the market, regulators and stockholders
that it would complete the task. Plaintiff has also related these facts to adverse
consequences to the Company and its stockholders. These facts provide the
111
In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) (addressing the
derivative claim of breach of the directors’ duty of corporate oversight); Kramer, 546 A.2d
at 353 (addressing the derivative claim of mismanagement that causes an acquiror to offer
less in an acquisition). See Tr. of Oral Arg. on Mots. to Dismiss Dec. 8, 2016 at 64.
112
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 973 (Del. Ch. 2000). See Chen v.
Howard-Anderson, 87 A.3d 648, 672–73 (Del. Ch. 2014) (holding that “enhanced scrutiny
requires that the defendant fiduciaries show that they acted reasonably to seek the
transaction offering the best value reasonably available to the stockholders, which could
be remaining independent and not engaging in any transaction at all”) (citations and
internal quotation marks omitted).
50
background that animates the Plaintiff’s theory that the Board timed the Merger to
advance selfish objectives, including the desire to avoid further regulatory scrutiny
and the push to monetize otherwise illiquid equity awards that had been suspended
or canceled due to the failure to complete the Restatement. The fact that Plaintiff
highlights mismanagement to enrich his breach of fiduciary duty narrative does not
convert the claim from direct to derivative. He has standing to pursue Merger-
related claims directly against the Individual Defendants and their effort to dismiss
the claims on that basis is rejected.113
2. Plaintiff has Pled Non-Exculpated Claims
Saba’s certificate of incorporation, of which I take judicial notice,114 contains
an exculpatory provision in Article IX which provides:
The personal liability of the directors of the corporation is hereby
eliminated to the fullest extent permitted by the provision of paragraph
113
In the briefing, the parties addressed whether claims of mismanagement might survive
the Merger under the so-called “fraud exception” to the continuous ownership requirement
for derivative suits as recognized in Ark. Teacher Ret. Sys. v. Countrywide Fin. Corp., 75
A.3d 888 (Del. 2013) (“Countrywide II”). Under Countrywide II, a former stockholder
will not lose standing to pursue a derivative claim if she can establish that the merger “was
the final step of a conspiracy to accomplish an unlawful end by unlawful means.” Id. at
896. Plaintiff has not pled any such conspiracy here. While the Complaint alleges that the
“Merger allowed Defendants to sweep their wrongdoing under the rug,” Compl. ¶ 88, it
nowhere alleges that the purpose of the Merger was to extinguish stockholders’ derivative
standing to challenge the mismanagement as required by Countrywide II.
114
See McMillan v. Intercargo Corp., 768 A.2d 492, 501 n.40 (Del. Ch. 2000).
51
(7) subsection (b) of Section 102 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented.115
“[A] plaintiff[] must plead a non-exculpated claim for breach of fiduciary duty
against an independent director protected by an exculpatory charter provision, or that
director will be entitled to dismissal from the suit.”116 Regardless of the standard of
review that applies to the transaction, the charter’s exculpatory provision insulates
the Individual Defendants from claims they violated their duty of care in their
capacity as directors.117 It does not, however, insulate the Individual Defendants
from alleged acts of bad faith or other breaches of the duty of loyalty.118 In this
regard, the Plaintiff must well-plead the loyalty breach or other non-exculpated
claim against each individual director; group pleading will not suffice in the face of
an exculpatory provision.119
115
Burns Aff. Ex. 2 (Saba Software, Inc. Amended and Restated Certificate of
Incorporation, dated April 12, 2000 (and subsequent amendments thereto)), Art. IX.
116
In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1179 (Del. 2015).
117
Malpiede v. Townson, 780 A.2d 1075, 1093–94 (Del. 2001). The exculpatory provision
does not apply to Farshchi to the extent he was acting in his capacity as an officer. See
Gantler v. Stephens, 965 A.2d 695, 709 n.37 (Del. 2009).
118
See Emerald P’rs v. Berlin, 787 A.2d 85, 90 (Del. 2001) (“The purpose of
Section 102(b)(7) was to permit shareholders . . . to adopt a provision in the certificate of
incorporation to exculpate directors from any personal liability for the payment of
monetary damages for breaches of their duty of care, but not for duty of loyalty violations,
good faith violations, and certain other conduct.”).
119
In re Cornerstone Therapeutics, 115 A.3d at 1179.
52
Plaintiff argues that he has pled both director bad faith and breaches of the
duty of loyalty. I address his arguments in that order.
(a) Plaintiff has Alleged Actionable Bad Faith
Plaintiff alleges in various ways that the process by which the Board sold Saba
was defective, in that the Board (1) abdicated oversight and control of the process to
Farshchi and Morgan Stanley, (2) relied on a financial advisor with material
conflicts, and (3) failed properly to ascertain Saba’s value and growth prospects or
fully consider alternatives to a sale. Under Revlon v. MacAndrews & Forbes
Holdings, Inc.,120 directors must engage in a sales process designed to maximize the
price for its stockholders when there is a change of control.121 The process need
only be a reasonable process, however, not a perfect process, and there is no
particular path the board must take to discharge its mandate.122
In light of the exculpatory provision, to state an actionable Revlon claim,
Plaintiff must plead that the Individual Defendants consciously disregarded their
duties, “knowingly and completely failed to undertake their responsibilities,” and
“utterly failed to attempt to obtain the best sale price.”123 Plaintiff’s argument with
120
506 A.2d 173 (Del. 1986).
121
Id. at 182.
122
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009).
Id. at 243–44. See also In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL
123
3044721, at *7 (Del. Ch. May 20, 2016) (holding that “to state a bad-faith claim, a plaintiff
53
respect to bad faith is that the Complaint’s “allegations are sufficient to infer that the
Board breached their fiduciary duties in accepting a Merger value which, under any
reasonable analysis and by Defendants’ own admission, was at best a small fraction
of what Saba was truly worth.”124 The bad faith, according to Plaintiff, is revealed
by the fact that the Board rushed to complete the transaction prior to the February 15,
2015 deadline for the Restatement set by the SEC, inter alia, to enable the Board
and members of management to cash-in on their equity awards knowing that the
deregistration would otherwise render the awards practically worthless.
Vice Chancellor Glasscock aptly described a finding of bad faith as “a rara
avis” (rare bird) in the fiduciary duty context.125 In cases where “there is no
indication of conflicted interests or lack of independence on the part of the
directors,” a finding of bad faith should be reserved for situations where “the nature
of [the director’s] action can in no way be understood as in the corporate interest.”126
With this in mind, the question of whether the Complaint pleads prima facie bad
must show either an extreme set of facts to establish that disinterested directors were
intentionally disregarding their duties, or that the decision under attack is so far beyond the
bounds of reasonable judgment that it seems essentially inexplicable on any ground other
than bad faith”) (citations and internal quotation marks omitted).
124
Answering Br. 46.
125
In re Chelsea Therapeutics, 2016 WL 3044721, at *1.
126
Id. I address Plaintiff’s allegation that the Board acted with “conflicted interests” below.
54
faith is a close call. The Complaint acknowledges that the Board began meeting
with Morgan Stanley in 2012 regarding possible strategic alternatives and formed a
Strategic Committee of three independent directors in August 2013 to focus
specifically on strategic alternatives. Saba then engaged in sale discussions with at
least twelve parties from January to November 2014, and formed the Ad Hoc
Committee of independent directors in November 2014 to provide additional
oversight of the sales process. In December 2014, at the request of the Ad Hoc
Committee and the Board, management developed projections for the Company to
ascertain the impact of the likely deregistration on the Company. The Board
considered those projections and from them determined the scenario it deemed most
reasonable for Morgan Stanley to use in evaluating bids for the Company. The
Board continued to evaluate the Company’s options throughout January, when it
received several new indications of interest, including Vector’s. When Vector’s
proposal was the highest, the Board tried but failed to negotiate a price increase from
Vector. Then, after receiving a fairness opinion from Morgan Stanley, the Board
approved the Merger with Vector. At first glance, it is difficult to discern bad faith
from this narrative.
But there was an elephant in the boardroom from 2012 forward. The
Company had engaged in fraud. It needed to restate its financial statements to
account for that fraud. When it repeatedly failed to do so, the exchange on which its
55
stock was listed, the SEC and the market reacted––in each instance badly for the
Company. The SEC said “enough is enough” in September 2014 and set a deadline
by which the Restatement had to be filed in order for the Company to avoid
deregistration. This looming consequence became a foregone conclusion on
December 15, 2014, when the Company announced that it would not complete the
Restatement on time. Why the Company yet again could not complete the
restatement of its financials remains a mystery. But the impact of this failure,
according to the Complaint, is readily apparent. It is alleged that the members of the
Board, collectively, rushed the sales process, refused to consider alternatives to a
sale, cashed-in significant, otherwise worthless equity awards before the Merger,
directed Morgan Stanley to rely upon the most pessimistic projections when
considering the fairness of the transaction and then rushed the stockholder vote after
supplying inadequate disclosures regarding the circumstances surrounding the
failure to complete the Restatement.127 Whether Plaintiff can develop proof to
127
In re PLX Tech. Inc. S’holders Litig., C.A. No. 9880-VCL, at *9–10 (Del. Ch. Sept. 3,
2015) (TRANSCRIPT) (holding that plaintiff’s bad faith allegations survive a motion a
dismiss, even though bad faith was not the only possible inference, where the plaintiffs
alleged that the board “did not decide to sell and did not engage in the sale process entirely
because it was in the best interests of the stockholders but rather did so, in part, [for reasons
contrary to those interests]”); In re Answers, 2012 WL 1253072, at *4 (holding that
plaintiffs stated a claim for bad faith that would overcome a 102(b)(7) exculpatory clause
by pleading facts that the board consciously violated its duties under Revlon by rushing a
sales process to closing before the stockholders “could appreciate the Company’s favorable
prospects”); Parnes, 722 A.2d at 1246 n.12 (holding that the court need not reach the issue
56
sustain these allegations remains to be seen, but for now, the Complaint alleges facts
from which it is reasonably conceivable that the Board’s conduct with regard to the
sales process and approval of the Merger “can in no way be understood as in the
corporate interest.”128 Stated differently, Plaintiff has pled adequate facts to justify
a pleading-stage inference of bad faith.129
of individual director independence “as our holding is based upon the entire board’s
apparent failure to exercise its business judgment in good faith”).
128
In re Chelsea Therapeutics, 2016 WL 3044721, at *1.
129
Plaintiff has also argued that the Individual Defendants breached their fiduciary duties
by ceding control of the negotiations to Farshchi and Morgan Stanley, by engaging a banker
with conflicts and by engaging in a structurally flawed sales process. These allegations do
not pass through the exculpatory provision as they state, at best, duty of care violations.
See In re NYMEX S’holder Litig., 2009 WL 3206051, at *7 (Del. Ch. Sept. 30, 2009) (“It
is well within the business judgment of the Board to determine how merger negotiations
will be conducted, and to delegate the task of negotiating to the Chairman and Chief
Executive Officer.”); Lyondell, 970 A.2d at 243 (“[T]here are no legally prescribed steps
that directors must follow to satisfy their Revlon duties”); In re Smurfit-Stone Container
Corp. S’holder Litig., 2011 WL 2028076, at *23 (Del. Ch. May 20, 2011, revised May 24,
2011) (holding that contingent fees charged by investment bankers do not create inherent
conflicts). Of these allegations, the closest to state a non-exculpated claim is the allegation
that the Board consciously disregarded its fiduciary duty by engaging Morgan Stanley
knowing that it had previously done work for Vector. Specifically, the Complaint alleges
(and the Proxy disclosed) that after receiving Vector’s indication of interest in January
2015, years after Morgan Stanley’s engagement with Saba began, the Board was apprised
of Morgan Stanley’s prior relationship with Vector, where it and its affiliates had provided
financing services to a Vector affiliate in exchange for customary fees of approximately $1
million. There is no per se rule that after learning of this past relationship, the Board was
obliged to terminate Morgan Stanley and engage a new advisor. And the Complaint does
not support a reasonable inference that Morgan Stanley’s past relationship with Vector was
of such significance that it could not fairly and impartially advise the Board.
57
(b) Plaintiff has Alleged an Actionable Breach of the Duty of Loyalty
To plead a claim for breach of the duty of loyalty that will overcome a motion
to dismiss, a plaintiff must plead sufficient facts to support a rational inference that
the corporate fiduciary acted out of material self-interest that diverged from the
interests of the shareholders.130 Plaintiff has alleged that the Individual Defendants
breached their duty of loyalty by (1) securing for themselves material personal
benefits in connection with the Merger and (2) consciously allowing Farshchi to
negotiate for his own interests during the sale process at the expense of the
stockholders.
(i) The Material Personal Benefits Conferred to the Board
Plaintiff asserts that each member of the Board breached its fiduciary duty of
loyalty by endorsing a less than value-maximizing transaction so that they could
achieve material personal benefits in the form of cash for their otherwise illiquid
equity awards. As pled in the Complaint, Saba had been unable to award equity
compensation to its directors for an extended time due to its need to restate its
financials. Then, on the day before the Merger Agreement was signed, the Board
awarded cash payments equal to the amount of their suspended equity awards,
including those that had either not been settled, had expired, lapsed or even been
130
Cede & Co v. Technicolor, Inc., 634 A.2d 345, 363–64 (Del. 1993).
58
canceled during the Restatement process. Awards that had not yet vested were
accelerated.
The timing of the equity awards bolsters Plaintiff’s self-interest theory. The
Board approved an equity award to all independent directors on January 7, 2015, in
the midst of Saba’s sales process, upon the “recommendation of the Compensation
Committee regarding the annual grant of 10,000 Restricted Stock Units to each
independent Director serving on the Board.”131 The change of control payments,
which converted equity awards into the right to cash payments upon a change of
control, were then approved the day before the Merger Agreement was signed. In
the ordinary course, as the Individual Defendants point out,132 this timing would
hardly support an inference of self-interest. Indeed, it is not at all uncommon for
companies to address outstanding executive compensation on the eve of a merger.133
But, again, this is not the typical case. The looming deregistration neutralized the
equity awards; the prospect of a merger with Vector was the only means to revive
131
Compl. ¶ 93.
132
See Opening Br. in Supp. of the Individual Defs.’ Mot. to Dismiss the Second Am.
Verified Class Action Compl. (“Individual Defs.’ Opening Br.”) 30 (arguing that neither
“[t]he substitution of cash compensation for pre-existing, vested compensation
obligations” nor “[t]he acceleration of equity compensation is . . . a breach of fiduciary
duty.”).
133
See, e.g., In re OPENLANE, Inc. S’holders Litig., 2011 WL 4599662, at *5 (Del. Ch.
Sept. 30, 2011); Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *8
(Del. Ch. Nov. 30, 2007); Krim v. ProNet, Inc., 744 A.2d 523, 528 (Del. Ch. 1999).
59
them and convert them to cash. It is reasonably conceivable that this would steer the
Individual Directors away from the standalone option, even if that option was in the
best interests of stockholders.134
The Individual Defendants argue that “[a]t the Merger, Saba was contractually
obligated to make good on its prior compensation commitments.”135 That may well
be true but there is no reference to this alleged contractual obligation anywhere in
the Complaint or in the documents incorporated therein by reference. Instead, the
Complaint states that equity awards were likely illiquid due to the Company’s
ongoing failure to restate its financials and that there was no firm prospect that the
awards would ever be made. While the timing of the equity compensation grants
may not be quite as suspicious as those awarded in K-Sea, the fact that the Board
received this cash compensation in lieu of suspended equity grants in connection
with the Merger, given the uncertainty surrounding the Restatement, supports a
reasonable inference that the Board approved the Merger in order to receive that
134
See Globis, 2007 WL 4292024, at *9 (noting that “the acceleration of unvested options
could be viewed as an inducement to effectuate” a merger, but determining the acceleration
of options in that case was not significant enough to infer that the directors were interested
in the transaction); In re K-Sea Trans. P’rs L.P. Unitholders Litig., 2011 WL 2410395, at
*7 (Del. Ch. June 10, 2011) (noting that significant options granted to members of the
committee tasked with evaluating a transaction close in time to the commencement of
negotiations supported an inference that the members were interested in the transaction).
135
Individual Defs.’ Opening Br. 30.
60
compensation.136 Therefore, I find that the Complaint adequately states a claim that
the Board was interested in and approved the transaction due to the material personal
benefits the directors would receive through cash compensation in lieu of equity
grants in connection with the Merger.
(ii) Farshchi’s Employment and Compensation
Plaintiff also contends that Farshchi was motivated by self-interest in pursuing
and negotiating the transaction with Vector, and that he dominated the Board
throughout the sales process.137 Specifically, Plaintiff contends that Farshchi was
136
This argument applies with equal force to Farshchi, who received even greater merger-
related cash compensation for his equity. As noted earlier, the section 102(b)(7) provision
does not serve to exculpate Farshchi to the extent he was acting in his capacity as an officer.
While not contested by the Individual Defendants, I find that the benefits received by each
of the Individual Defendants were material in that “the alleged benefit was significant
enough ‘in the context of the director’s economic circumstances, as to have made it
improbable that the director could perform her fiduciary duties to the . . . shareholders
without being influenced by her overriding personal interest.’” Orman v. Cullman, 794
A.2d 5, 23 (Del. Ch. 2002) (quoting Gen. Motors, 734 A.2d at 617 (emphasis added)
(citations omitted)). Denzel, Fawkes, Klein, MacGowan, Russell, and Wilson each
received $270,000 in merger-related compensation through the immediate vesting of their
equity awards while Farshchi received $2,828,050. These pled facts support a reasonable
inference of materiality since the synthetic options and synthetic RSUs for which the
Individual Defendants received cash compensation in connection with the Merger
constituted the only holdings that they had in the Company. Compare Globis, 2007 WL
4292024, at *9 (noting the importance of the fact that only a minimal portion of the
directors’ overall holdings were accelerated due to the merger in the court’s determination
that the directors were not conflicted in evaluating the merger) with K-Sea, 2011 WL
2410395, at *7 (finding that the complaint stated a colorable claim that an independent
committee was tainted in evaluating a merger by recent equity grants representing a
significant portion of those directors’ holdings in the company).
137
See Orman, 794 A.2d at 19–20.
61
driven to negotiate a deal with Vector, and then to push the Board to approve the
transaction, so that he could secure employment with new-Saba after the Merger.
Farshchi was an at-will employee at Vector after the Merger with the same base
salary he had received prior to the Merger and a guarantee that the salary would
never be reduced.138
The first meeting Farshchi had with Vector to negotiate his continued
employment occurred on February 4, 2015, five days before the Merger Agreement
was signed and after the economic terms and nearly all due diligence on the deal
were finalized. The Complaint also acknowledges that Vector demanded that it be
permitted to negotiate a new employment contract with Farshchi as a condition to
entering into the transaction. The Complaint lacks any allegations that Farshchi
engaged in any employment negotiations prior to this demand with any of the
potential acquirors or that he was driven to take certain positions during the
negotiations by a desire to be retained at the surviving company. This is unlike In
re Answers Corporation Shareholders Litigation,139 where plaintiffs alleged that the
CEO would lose his job unless he sold the company,140 or In re Lear Corporation
138
Notably, Farshchi left the post-Merger company in July 2015, just months after the
completion of the Merger.
139
2012 WL 1253072 (Del. Ch. Apr. 11, 2012).
140
Id. at *7.
62
Shareholder Litigation,141 where the CEO negotiating the transaction had a unique
and personal need for liquidity that was not shared by all stockholders. 142 Farshchi
shared the liquidity predicament caused by the pending deregistration of Saba’s
stock with all of Saba’s stockholders. Therefore, I find that the Complaint does not
support a reasonable inference that Farshchi was interested in the transaction for any
reason other than the equity-related cash-out he received in connection with the
Merger along with all other members of the Board.
*************
Having found that the Complaint supports a reasonable inference that the
Board acted in bad faith and was interested in the transaction due to its extraction of
merger-related compensation, the Individual Defendants’ motion to dismiss Count I
must be denied as the Complaint adequately states a claim for breach of the fiduciary
duty of loyalty.
C. Plaintiff Has Failed to Plead Aiding and Abetting Against Vector
The Vector Defendants move to dismiss Plaintiff’s aiding and abetting claim
both for failure to plead an underlying breach of fiduciary duty and for failing
adequately to plead that Vector knowingly aided the Individual Defendants in any
141
926 A.2d 94 (Del. Ch. 2007).
142
Id. at 100.
63
breach they may have committed, i.e., scienter. I reject the first argument for the
reasons stated above. I address the second argument below.
To state a claim for aiding and abetting a breach of fiduciary duty, the plaintiff
must plead: “(1) the existence of a fiduciary relationship, (2) the fiduciary breached
its duty, (3) a defendant, who is not a fiduciary, knowingly participated in a breach,
and (4) damages to the plaintiff resulted from the concerted action of the fiduciary
and the non-fiduciary.”143 In order for a third party’s actions to constitute knowing
participation in a breach of fiduciary duty, that third party must “act with the
knowledge that the conduct advocated or assisted constitutes such a breach.”144
The Complaint alleges that the Vector Defendants knowingly aided and
abetted the Board’s breach of fiduciary duty by acquiring Saba at a price it knew
was unfair and by unfairly leveraging its position as a Saba lender armed with
confidential information that other Saba stockholders did not possess.145 Plaintiff
143
Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 172 (Del. 2002)
(quoting Fitzgerald v. Cantor, 1999 WL 182573, at *1 (Del. Ch. Mar. 25, 1999)). See also
Malpiede, 780 A.2d at 1096 (same).
144
Id. at 1097–98 (explaining that “[u]nder this standard, a bidder’s attempts to reduce the
sale price through arm’s-length negotiations cannot give rise to liability for aiding and
abetting, whereas a bidder may be liable to the target’s stockholders if the bidder attempts
to create or exploit conflicts of interest in the board. Similarly, a bidder may be liable to a
target’s stockholders for aiding and abetting a fiduciary breach by the target’s board where
the bidder and the board conspire in or agree to the fiduciary breach.”) (citations omitted).
145
See Compl. ¶ 129 (“Vector has worked with Saba since 2013, and is therefore, familiar
with the Company’s true value. . . . Accordingly, Vector had access to Saba’s most recent
and detailed financial information, information ordinary stockholders were unable to
64
correctly posits that an acquiror “may not knowingly participate in the target board’s
breach of fiduciary duty by extracting terms which require the opposite party to
prefer its interests at the expense of its shareholders.”146 The rationale for this settled
rule is that a bidder may not knowingly “[c]reat[e] or exploit[e] a fiduciary
breach.”147 Plaintiff has pled no facts that would support a reasonable inference that
Vector did anything of the sort here. And, while Plaintiff now argues that Vector
used the confidential information it possessed to “push the Board to end the sales
process quickly to assure the Merger Agreement would be executed before Saba’s
stockholders learned of the Company’s favorable prospects,”148 the Complaint is
devoid of any such factual allegations.149 Plaintiff cannot defeat an argument raised
access. Vector took advantage of the Individual Defendants’ breaches to extract terms
locking up the deal for itself and in order to acquire the Company at an unfair price.”). See
also Answering Br. 55–58.
Gilbert v. El Paso Co., 490 A.2d 1050, 1058 (Del. Ch. 1984), aff’d, 575 A.2d 1131 (Del.
146
1990).
147
In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 837 (Del. Ch. 2011).
148
Answering Br. 56–57.
149
See Compl. ¶¶ 23, 60, 67, 129. I note as well that Plaintiff has not identified specifically
what these “favorable prospects” were, and that nothing in the Complaint or the Proxy
identifies any favorable new developments with Saba’s business or anticipated growth.
Rather, Plaintiff seems to be attempting to invoke In re Answers, where the court refused
to dismiss an aiding and abetting claim for failure to state a claim where the acquirors “used
[confidential] information to push the Board to end the sales process quickly to assure the
Merger Agreement would be executed before Answers’ shareholders learned of the
Company’s favorable prospects.” In that case, however, the acquirors had access to
confidential information that allegedly showed an increase in operating and financial
65
in a motion to dismiss by proffering an after-the-fact theory for this first time in his
answering brief.150
Moreover, “the receipt of confidential information, without more, will not usually
be enough to plead a claim for aiding and abetting.”151 Likewise, conclusory
allegations that a third party received “too good of a deal,” without more, will also
be insufficient to state a claim for aiding and abetting the breach of fiduciary
duties.152 Yet that is exactly what Plaintiff has pled here. Since the Complaint
contains no well-pled allegations from which I can reasonably infer that the Vector
Defendants “act[ed] with the knowledge” that their conduct during the sales process
performance that would likely increase the market price for the target company’s stock
above the acquirors’ offer price. In re Answers, 2012 WL 1253072, at *9–10.
150
See OLL Ventures, Inc. v. Woodland Mills Assocs., L.P., 2001 WL 312452, at *1–2
(Del. Ch. Mar. 8, 2001) (refusing to consider an allegation not found in the complaint when
addressing plaintiff’s response to a motion to dismiss); Dolphin Ltd. P’ship I, L.P. v. Gupta,
2007 WL 315864, at *1 (Del. Ch. Jan. 22, 2007) (same); Orman, 794 A.2d at 28 n.59
(“Briefs relating to a motion to dismiss are not part of the record and any attempt contained
within such documents to plead new facts or expand those contained in the complaint will
not be considered.”).
151
In re Answers, 2012 WL 1253072, at *10.
152
Dent, 2014 WL 2931180, at *18. See also Morgan v. Cash, 2010 WL 2803746, at *8
(Del. Ch. July 16, 2010) (“Under our law, both the bidder’s board and the target’s board
have a duty to seek the best deal terms for their own corporations when they enter a merger
agreement. To allow a plaintiff to state an aiding and abetting claim against a bidder simply
by making a cursory allegation that the bidder got too good a deal is fundamentally
inconsistent with the market principles with which our corporate law is designed to operate
in tandem.”); In re Lukens Inc. S’holders Litig., 757 A.2d 720, 735 (Del. Ch. 1999) (“[I]t
should be obvious that ‘an offeror may attempt to obtain the lowest possible price for stock
through arm’s-length negotiations.’”), aff’d, 757 A.2d 1278 (Del. 2000) (TABLE).
66
aided and abetted the Individual Defendants in any breach of fiduciary duty,153 Count
II of the Complaint must be dismissed.
IV. CONCLUSION
For the foregoing reasons, the Individual Defendants’ motion to dismiss is
DENIED, and the Vector Defendants’ motion to dismiss is GRANTED.
IT IS SO ORDERED.
153
Malpiede, 780 A.2d at 1097–98.
67