Sunstone Partners Management, LLC v. Synopsys, Inc.

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
PAUL R. WALLACE LEONARD L. WILLIAMS JUSTICE CENTER
JUDGE 500 N. KING STREET, SUITE 10400
WILMINGTON, DELAWARE 19801
(302) 255-0660
Rudolf Koch, Esquire Tammy L. Mercer, Esquire
Nicholas F. Mastria, Esquire Jillian A. Tyson, Esquire
RICHARDS, LAYTON & FINGER P.A. YOUNG CONAWAY STARGATT & TAYLOR, LLP
920 North King Street 1201 N. Market Street
Wilmington, Delaware 19801 Wilmington, Delaware 19801
Adam Slutsky, Esquire (argued) N. Thomas Connally, III, Esquire
GODWIN PROCTER LLP Christopher T. Pickens, Esquire (argued)
100 Northern Avenue Patrick T. Michael, Esquire
Boston, Massachusetts 02210 Samuel W. Yergin, Esquire
HOGAN LOVELLS US LLP
8350 Broad Street, 17th Floor
Tysons, Virginia 22102
Submitted: July 26, 2024
Decided: August 14, 2024
RE: Sunstone Partners Management, LLC v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
Defendant’s Motion to Dismiss
Dear Counsel:
Before the Court is the Rule 12(b)(6) Motion to Dismiss filed by Defendant
Synopsys, Inc (“Synopsys”). The pleading standard in Delaware may be minimal,
but it’s not automatic. Plaintiff Sunstone Partners Management LLC (“Sunstone”)
fails to allege sufficient facts that Synopsys violated a letter of intent’s exclusivity
provision. So, Synopsys’s motion must be GRANTED.
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 2 of 9
I. RELEVANT BACKGROUND
On October 19, 2023, Sunstone and Synopsys entered into the Letter of Intent
(“LOI”) for the potential sale of Synopsys’s security testing services business
(“STS”) to Sunstone.1 Under the LOI, the “Exclusivity” Provision was binding2 and
provided that:
[d]uring the Exclusivity Period (as defined below), Synopsys and its
agents and representatives will not solicit, negotiate or accept any
proposal for any merger with or acquisition of the Business, or the sale
or exclusive license of all or substantially all of the Business’s assets,
from any person other than Sunstone Partners and its representatives
and advisors.3
The “Exclusivity Period” ran from October 19 to November 18, 2023, and
automatically extended to December 3, 2023, if Sunstone remained in “good faith
negotiation with respect to the Transaction.”4
Sunstone believes Synopsys admitted to breaching this provision during a
Synopsys quarterly earnings call (the “Earnings Call”). On November 29, 2023,
Synopsys’s CEO stated, in relevant part, that:
[f]ollowing our strategic portfolio review, and in consultation with the
company’s Board of Directors, we have decided to explore strategic
1
Verified Complaint (“Compl.”) ¶ 13; id., Ex. 1 (“LOI”).
2
See LOI, Preamble.
3
Id. at 4-5; Compl. ¶¶ 13, 18.
4
Id.
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 3 of 9
alternatives for the Software Integrity business. As part of this process,
we’re considering full range of strategic opportunities. We will provide
an update after we conclude that process.5
Synopsys’s Soft Integrity business (“SIG”) is one of three business segments
at Synopsys.6 STS, the business subject to discussions under the LOI, is a part of
SIG. Sunstone believes that, based on the statements during the Earnings Call,
Synopsys had “for weeks” been “soliciting buyer interest in its SIG business” and
the “STS assets.”7
After the Earnings Call, Synopsys’s Senior Vice President of Corporate
Development emailed Sunstone and mentioned that they had retained JP Morgan to
assist in evaluating the “strategic options with respect to our SIG Business.”8
Sunstone and Synopsys continued to negotiate a deal through December.9 On
February 7, 2024, the press reported that Synopsys was near to selling its entire SIG
business.10
Approximately one month later, Sunstone initiated this action by filing a
5
Compl. ¶ 21; see also id. ¶ 22.
6
Id. ¶ 11.
7
Id. ¶ 23.
8
Id. ¶ 25.
9
Id. ¶ 27.
10
Id. ¶ 28.
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 4 of 9
complaint for breach of contract against Synopsys with respect to the Exclusivity
Provision. Sunstone seeks to recover for its costs incurred in conducting due
diligence and negotiations.
Synopsys moved to dismiss the complaint under Court of Chancery Rule
12(b)(6) (“Motion to Dismiss”).
II. STANDARD OF REVIEW
Delaware’s pleading standard is “minimal”11 but the Court need not “accept
conclusory allegations unsupported by specific facts or . . . draw unreasonable
inferences in favor of the non-moving party.”12 The Court (1) accepts as true all
well-pleaded factual allegations in the complaint; (2) credits vague allegations if
they give the opposing party notice of the claim; (3) draws all reasonable factual
inferences in favor of the non-movant; and (4) denies dismissal if recovery on the
claim is reasonably conceivable.13
A complaint for breach of contract is sufficient if it contains “a short and plain
statement of the claim showing that the pleader is entitled to relief.”14 Such a
11
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 536 (Del. 2011)
citation omitted).
12
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on other
grounds by Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018).
13
Cent. Mortg. Co., 27 A.3d at 535.
14
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 611 (Del. 2003).
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 5 of 9
statement must only give the defendant fair notice of a claim and is to be liberally
construed.15 The plaintiff need only allege facts that, if true, state a claim upon which
relief can be granted.16
III. DISCUSSION
Sunstone alleges that Synopsys solicited buyer interest in STS in violation of
the Exclusivity Provision. Synopsys seeks dismissal of the complaint because
Sunstone has failed to allege any breach of the Exclusivity Provision, and separately,
it cannot show damages for any alleged breach. In opposition to the motion,
Sunstone contends that Synopsys’s statements during and after the Earnings Call
raise a reasonable inference of solicitation. Synopsys focuses on two factual
allegations: Synopsys’s announcement that it would “explore strategic alternatives”
for the SIG business during the Earnings Call, and Synopsys’s retention of JP
Morgan to assist in that process.17
15
Id.16
Id.17
Plaintiff Sunstone Partners Management, LLC’s Answering Brief in Support of Its Opposition
to Defendant Synopsys, Inc.’s Motion to Dismiss at 1 (D.I. 42). Sunstone also characterizes certain
statements in an email from Synopsys to Sunstone regarding the impact of Synopsys’ decision to
potentially sell the SIG business. The statements by Synopsys in that email thread that Sunstone
relies upon in its complaint do not show that Synopsys was admitting that it was soliciting any
proposals for the sale of the STS business during the exclusivity period. For example, “the decision
regarding the whole SIG business does have an impact on our deal” does not raise the reasonable
inference of any prior solicitation of the STS assets, nor does the statement that Synopsys would
only take a “minimum of effort on [its] part” going forward in negotiations with Sunstone. Compl.
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 6 of 9
The elements of a breach-of-contract claim are: a contractual obligation; a
breach of that obligation by the defendant; and a resulting damage to the plaintiff.18
At issue is the Exclusivity Provision, and whether Sunstone has adequately pled a
breach of that provision and any damages.
The Exclusivity Provision is narrow. It provides that during the exclusivity
period, “Synopsys . . . will not solicit, negotiate or accept any proposal” for the STS
assets from anyone besides Sunstone.19 Because “solicit” is an undefined term in
the contract, the Court interprets it according to its plain and ordinary meaning. 20
Solicit means “to approach with a request or plea,” or “request[] or seek[] to obtain
something.”21 Too, the object of the solicitation must be a “proposal” for the sale of
the STS assets, not expressions of general interest or preliminary discussions.22 Had
the parties wished to prohibit any communications that could invite or entice
¶ 26.
18
Cedarview Opportunities Master Fund, L.P. v. Spanish Broad. Sys., Inc., 2018 WL 4057012,
at *6 (Del. Ch. Aug. 27, 2018) (citation omitted).
19
LOI at 4-5.
20
See, e.g., Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Rhone-Poulenc Basic Chemicals Co.,
1992 WL 22690 at *12 (Del. Super. Ct. Jan. 16, 1992) (“In the absence of such a definition, the
applicable rules of construction require that the term be given its plain, ordinary meaning.”).
21
Solicit, MERRIAM-WEBSTER DICTIONARY, https://www.merriam-webster.com/dictionary/
solicit (last visited Aug. 13, 2024). (2024); see also Solicitation, BLACK’S LAW DICTIONARY 1677
(11th ed. 2019).
22
LOI at 4-5.
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 7 of 9
proposals, it could have done so by crafting broader language.23 Instead, the
Exclusivity Provision narrowly prohibits petitions for the sale of the STS assets.
Sunstone has not adequately alleged a breach of the Exclusivity Provision.
The statements in the Earnings Call are not a solicitation seeking a proposal for the
sale of the STS assets. Stating that “we have decided to explore strategic alternatives
for the Software Integrity business” is not a request for a proposal of a sale of the
STS assets, even if the STS is a subdivision within the Software Integrity business.24
Interpreting these comments in the most plaintiff-friendly light, the Court construes
them as initiating a process that may or may not result in sale proposals. That, under
the narrow terms of the Exclusivity Provision, is not a solicitation. There must exist
a specific request for proposals of a sale of the STS assets. Merely considering a
sale is not soliciting, negotiating, or accepting a proposal.
Furthermore, Sunstone seeks to draw the inference that a company had been
soliciting interest from prospective buyers because it publicly announced several
weeks later that it was considering the sale of the business segment itself. This
inference is unreasonable and speculative. Sunstone identifies no other factual
23
See, e.g., NACCO Industries, Inc. v. Applica Inc., 997 A.2d 1, 14 (Del. Ch. 2009) (defendant
agreed not to “directly or indirectly solicit, initiate or encourage any inquiries or proposals from,
discuss or negotiate with, or provide any non-public information to, any Person.”).
24
Compl. ¶ 21.
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 8 of 9
allegations prior to the announcement such as the identity of any other prospective
buyers, any other meetings, or any other communications. Sunstone’s suspicions of
solicitation rest solely on the Earnings Call and the retention of JP Morgan to assist
in a potential sale process of SIG. Mere suspicion alone does not relieve Sunstone
of its burden to allege a reasonably conceivable claim. Sunstone fails to allege facts
that raise any reasonable inference of solicitation.
Too, several inferences weigh against any suggestion that Synopsys solicited
an alternative proposal for the sale of the STS assets. It makes little sense for
Synopsys to solicit interest from other buyers after the Earnings Call when it was
less than three days away from the expiration of the Exclusivity Period. It is also
not inconsistent to consider the sale of the STS assets to Sunstone and the remaining
parts of the SIG business to another buyer. Announcing a sale process for a
business’s segment does not necessarily mean that all segments of that business will
go through the same process—or have the same buyer. Indeed, Synopsys continued
to engage in negotiations with Sunstone after the Earnings Call and through
December.25 While Delaware’s pleading standard may be plaintiff-friendly, the
Court need not accept conclusory allegations unsupported by specific facts nor draw
25
Id. ¶ 27.
Sunstone Partners v. Synopsys, Inc.
C.A. No. 2024-0261-PRW
August 14, 2024
Page 9 of 9
unreasonable inferences in a plaintiff’s favor.26 Yet, fueled only with a healthy dose
of mere conjecture that is precisely what Sunstone asks the Court to do here. The
Court can’t and still uphold its minimal, but meaningful, pleading standard.
IV. CONCLUSION
In sum, Sunstone’s complaint pens its suspicions, but no sufficient factual
allegations that rise to a reasonable inference that Synopsys breached the narrowly-
drawn Exclusivity Provision. As it confirmed during argument, Sunstone surmises
that maybe discovery might get it there. But even the minimal standard applicable
at this stage hasn’t been met; Sunstone fails in the first instance to adequately allege
a breach of the specific limited Exclusivity Provision here. And because Sunstone
has failed to allege actionable breach, any claim of suffered damages is of no
moment. Accordingly, Synopsys’s Motion to Dismiss is GRANTED.
IT IS SO ORDERED.
/s/ Paul R. Wallace
______________________
Paul R. Wallace, Judge*
26
See Windsor I LLC v. CWCapital Asset Management LLC, 283 A.3d 863, 871 (Del. 2020);
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (“[T]he trial court is not required to accept
every strained interpretation of the allegations proposed by the plaintiff, but the plaintiff is entitled
to all reasonable inferences that logically flow from the face of the complaint.”).
* Sitting by designation of the Chief Justice pursuant to In re Designation of Actions Filed
Pursuant to 8 Del. C. § 111 (Del. Feb. 23, 2023) (ORDER).