In re Art Technology Group, Inc. Shareholders Litigation and Steinhardt v. Howard-Anderson: Court of Chancery Enjoins Two Transactions Pending Additional Disclosures and Comments on Applicability of Revlon to Mixed Consideration Transaction
February 1, 2011
The Court of Chancery in In re Art Technology Group, Inc. Shareholders Litigation, C.A. No. 5955-VCL (Del. Ch. Dec. 20, 2010), enjoined a merger until the target company disclosed to its stockholders additional information about its financial advisor’s prior work for the buyer. In Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011), the Court of Chancery applied the enhanced Revlon standard of review to a stockholder’s motion to preliminarily enjoin the acquisition of Occam Networks, Inc. (“Occam Networks”) by Calix, Inc. (“Calix”) whereby Occam stockholders would receive cash and stock consideration. Although the Court denied the injunction request based on process grounds, the Court of Chancery enjoined the transaction until additional disclosures are made and the deposition of a managing director of Occam Networks’ financial advisor is taken.
In re Art Technology Group, Inc. Shareholders Litigation
In Art Technology, Plaintiffs filed suit to challenge a merger of Oracle Corporation and Art Technology Group, Inc. (“ATG”) and moved for a preliminary injunction. Plaintiffs argued that ATG had improperly failed to disclose information regarding the process undertaken by ATG, aspects of Morgan Stanley’s financial analysis, and details of Morgan Stanley’s prior work for Oracle. The Court found that only one of plaintiffs’ disclosure claims was reasonably likely to succeed. Morgan Stanley was ATG’s financial advisor, but Morgan Stanley had also performed work for Oracle for a number of years. In an order dated December 21, 2010, the Court enjoined the stockholder vote on whether to approve the ATG/Oracle merger agreement pending further disclosures regarding Morgan Stanley’s work for Oracle.
The Court ruled that ATG and Oracle had to disclose to ATG’s stockholders (i) the aggregate annual compensation paid by Oracle to Morgan Stanley from 2007 to 2010 and (ii) a description of the nature of services that Morgan Stanley provided to Oracle. The Court did not require a separate mailing regarding the supplemental disclosures; it allowed ATG to make the disclosures in a public filing with the Securities and Exchange Commission. Further, the Court required the vote to await only 10 calendar days after the disclosure to ATG’s stockholders. The Court noted during the hearing that, had the disclosures been more price-related, such as ATG’s financial projections, the Court might have required 15 days’ notice. The Court also suggested that ATG could convene the stockholders’ meeting and adjourn it until after the 10-day period had ended.
The Court opted not to require a bond before issuing the injunction, but stated that it was not announcing a “rule for all-time.” Further, in the order granting the preliminary injunction, the Court made clear that it would entertain an interim fee application from the plaintiffs relating to the injunction they obtained.
A review of the supplemental disclosures reveals that Oracle’s payments to Morgan Stanley over the four-year period were not much more than ATG’s payment to Morgan Stanley for its work regarding the merger. The Court’s ruling in Art Technology therefore suggests that the Court will scrutinize proxy statements when the target’s financial advisor has done substantial past work for the buyer and may require disclosures regarding that work, even if it is no more extensive, in dollar terms, than the merger-related work performed for the target.
Steinhardt v. Howard-Anderson
Similarly demonstrating the scrutiny with which the Court of Chancery will review disclosures pertaining to and the role of financial advisors, the Court enjoined the acquisition of Occam Networks by Calix in Steinhardt v. Howard-Anderson until additional proxy disclosures are made and the deposition of a managing director of Occam Network’s financial advisor is conducted.
Plaintiff in Steinhardt sought to enjoin the transaction on process and disclosure grounds. First, the Court addressed the standard of review to be applied to the process claims. Under the terms of the transaction, Occam Networks’ public stockholders were to receive approximately 50% of the merger consideration in cash and 50% in the acquiror’s stock (and thus retaining an approximate 15% equity interest in the post-transaction entity). Defendants argued that enhanced Revlon review was not necessary or appropriate in this combined cash and stock transaction. In its transcript ruling, the Court indicated its view that Revlon did apply noting that “now is the time  when the target fiduciaries are bargaining for how much of [any] future control premium their folks will get.” Ultimately, however, the Court determined to deny the injunction request based on process grounds.
With respect to plaintiff’s disclosure claims, the Court concluded that Occam Networks must disclose additional information with respect to the involvement of Occam Networks’ financial advisor in shopping the company and the mix of consideration negotiated, the accretion/dilution analysis conducted by the financial advisor, and the identity of a certain director of the surviving company. Finally, and of particular note, the Court expressed concern with respect to the discrepancies between preliminary books prepared by Occam’s financial advisor for the board and the final book presented to the board and ordered that the transaction could not close until 10 business days after curative disclosures and the lodging of a transcript of a deposition of one of the financial advisor’s managing directors involved in the deal. The 30(b)(6) deposition witness previously provided by the financial advisor was a banker who had only worked on 6 fairness opinions and who had only been involved at the tail end of this transaction’s 18-month process. The Court expressed that “managing directors who quarterbacked the process need to do so with the expectation that when there is expedited litigation challenging the deal, that they will respond and be available for a deposition and [provide] testimony if warranted about what happened in the deal.”