In this memorandum opinion, the Court of Chancery denied defendants’ motions to dismiss with respect to Plaintiffs’ bad faith claims. The Court’s decision was based on its finding that the complaint stated a “reasonably conceivable” bad faith claim based on the “unexplained, extremely favorable” treatment by the board of directors (the “Directors”) of Novell, Inc. (“Novell” or the “Company”) towards the Company’s acquirer, Attachmate Corporation (“Attachmate”) over other potential acquirers. The motions to dismiss were otherwise granted.
After receiving an unsolicited, non-binding acquisition offer in March 2010, the Directors initiated a sales process in which over fifty potential buyers were contacted. In May 2010, the Directors authorized Attachmate to partner with two of its principal shareholders for the purpose of submitting a preliminary proposal for the Company. The Directors never extended other potential bidders the same courtesy of working with strategic partners. As of August 27, 2010, Attachmate had offered Novell $4.80 per share while an unnamed “Party C” bid $4.86 per share. Upon considering the proposals, the Directors granted Attachmate exclusivity until September 27, 2010, a period the Directors later extended. On October 28, Attachmate submitted a revised bid of $5.25 per share while Party C submitted an unsolicited, non-binding proposal for $5.75 per share. Attachmate later raised its offer to $6.10 per share. After deliberating on its options, the Directors decided to pursue further discussions with Attachmate. On November 21, 2010, the Directors approved a merger agreement under which Novell would be acquired by a wholly-owned subsidiary of Attachmate (the “Acquisition”). On the same day, the Directors also approved the sale of certain patents and pending patent applications to a consortium of technology companies for $450 million (the “Patent Sale”). Subsequently, various Novell shareholders (“Plaintiffs”) filed class actions challenging both the Acquisition and the Patent Sale. Those actions were consolidated into the above named action. Thereafter, the defendants filed motions to dismiss.
Plaintiffs sought damages for, inter alia, various breaches of fiduciary duties by the Directors. They asserted, in part, that the Directors (i) because of “an improper and opaque” sales process failed to maximize shareholder value with respect to the Acquisition and the Patent Sale; and (ii) allowed Attachmate to taint the process.
The Court found that the Complaint stated a “reasonably conceivable” claim that the Directors treated a serious bidder in a materially different way and that the Directors’ approach might have deprived shareholders of the best offer reasonably attainable. The Court found that by not allowing Party C to team with any other interested bidder and not informing Party C of the Patent Sale, which would have provided a substantial amount of cash at closing, the Directors treated Party C in a way that was both adverse and materially different than the way they treated Attachmate. The Court acknowledged that the Directors may be able to offer a reasonable explanation for that disparate treatment, but that they did not have the opportunity to “prove their case” at this stage in the proceeding. The Complaint thus stated a claim for a breach of fiduciary duty.
The Court then turned to the question of whether the Directors acted in bad faith or merely breached the duty of care, because the Directors breach of the duty of care, absent bad faith, would be exculpated by the Section 102(b)(7) provision in Novell’s charter. To find bad faith, the Court stated the fiduciary must have (i) acted with a purpose other than advancing shareholder interests; (ii) intentionally violated relevant positive law; or (iii) intentionally failed to respond to a known duty or exhibited a conscious disregard of a known duty. If the allegations involved a fiduciary’s duty to act, the question would become whether the fiduciary “utterly failed to attempt to obtain the best sale price.” In view of the prolonged sales process, the Court found that the Board far exceeded that low threshold. The burden then shifted to Plaintiffs to overcome the presumption that the fiduciaries acted in good faith. The Court held that Plaintiffs met their burden by demonstrating that the Directors actions were “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any grounds other than bad faith.” In particular, the Court found that the Directors’ failure to tell Party C about the proceeds of the Patent Sale, coupled with the fact that they kept Attachmate fully informed, was enough for pleading stage purposes to support an inference that the Board’s actions were in bad faith.
Accordingly, the Court held that the motions to dismiss must be denied with respect to Plaintiffs’ claim for a bad faith breach of fiduciary duty.
The full opinion is available here.