April 28, 2011
In In re Atheros Communications, Inc. Shareholder Litigation, C.A. No. 6124-VCN (Del. Ch. Mar. 4, 2011), the Court of Chancery preliminarily enjoined Atheros Communications, Inc. ("Atheros") from holding a meeting of its stockholders to vote on a $3.1 billion all-cash merger agreement with Qualcomm Incorporated ("Qualcomm"), pending appropriate distribution of curative proxy disclosures regarding contingency fees to be paid to Atheros' financial advisor, and the potential employment of Atheros' CEO by Qualcomm.
Applying the Revlon standard, the Court first rejected the plaintiffs' breach of fiduciary duty claims due to an allegedly inadequate sale process, instead finding that the board had deployed a "robust and sophisticated process" resulting in a fair price. In so holding, the Court pointed out that a board need not follow one single path under Revlon, rather the issue is whether the approach adopted by a board represented a reasonable choice under the circumstances it faced. In evaluating the board's process, the Court noted that the independent Atheros board had taken an active role at an early point in the lengthy sale process, meeting twelve times with management to discuss the process, vetting eleven potential acquirers and pursuing communications with three of those corporations. While two potential buyers eventually emerged, the Court found that the Atheros board acted reasonably by entering into an exclusivity agreement with Qualcomm in its efforts to preserve the Qualcomm increased offer—rather than risk the offer to pursue a potential competing bid from a sluggish suitor that had provided only vague overtures. Accordingly, the Court declined to second guess the actions of the Atheros board leading up to the execution of the merger agreement.
Regarding the plaintiffs' disclosure claims, the Court found that the Atheros board had omitted a material fact by failing to disclose that 98% of the financial advisor's fee was contingent on the success of the transaction. Reaffirming prior statements by the Court regarding the disclosure standards with respect to financial advisors, the Court pointed out that there should be full disclosure of advisors' compensation and potential conflicts that may influence the financial advisor in the exercise of its judgment. Even though contingency fees are "undoubtedly routine" and "customary," the Court stated, "[s]tockholders should know that their financial advisor, upon whom they are being asked to rely, stands to reap a large reward only if the transaction closes and, as a practical matter, only if the financial advisor renders a fairness opinion in favor of the transaction." The Court emphasized that while there is no bright-line rule for determining whether a contingency percentage requires disclosure, "it is clear that an approximately 50:1 contingency ratio requires disclosure."
In addressing the plaintiffs' other disclosure claims, the Court found that the Atheros board failed to provide sufficient disclosures in the proxy statement regarding the corporation's CEO and his knowledge that Qualcomm intended to offer him employment after the closing of the merger. While the proxy statement contained robust disclosures regarding the terms of the CEO's post-closing employment, the Court noted that the CEO was also aware prior to the time disclosed in the proxy statement that he would likely receive an offer for employment from Qualcomm, which was during the same time period in which he was heavily involved in the price negotiations for the transaction.