In re Compellent Technologies, Inc. Shareholder Litigation: Court of Chancery Awards Fee for Settlement that Reduced Buyer-Friendly Deal Protections
March 2, 2012
In In re Compellent Technologies, Inc. Shareholder Litigation, C.A. No. 6084-VCL (Del. Ch. Dec. 9, 2011), the Court of Chancery ruled on an application for attorneys’ fees brought by class counsel who had secured a settlement loosening the “buyer-friendly” deal protection provisions of a merger agreement. Based upon the benefits conferred by the settlement, which shifted the merger agreement’s protective array of defensive measures from the aggressive end of the spectrum towards the middle, the Court rejected plaintiffs’ counsel’s request for a $6 million fee award and awarded $2.4 million.
On December 13, 2010, Dell Inc. (“Dell”) and Compellent Technologies, Inc. (“Compellent” or the “Company”) announced a definitive merger agreement whereby Dell agreed to acquire Compellent for $27.75 per share, valuing the Company’s equity at approximately $960 million. Following announcement of the transaction, eight putative stockholder class actions were filed in Delaware and Minnesota. Each lawsuit challenged, among other things, the various deal protection measures included in the merger agreement. The merger agreement contained a no-shop provision with a fiduciary out, information and matching rights, a “force-the-vote” provision, support agreements from the holders of 27% of Compellent’s outstanding stock, and a termination fee of 3.85% of equity value, and required Compellent to adopt a stockholder rights plan, which exempted Dell, with a 15% trigger. The Court observed that “to identify defensive measures by type without referring to their details ignores the spectrum of forms in which deal protections can appear” and that the merger agreement “combined aggressive variants of each familiar [deal protection] provision with additional pro-buyer twists.”
Following expedited discovery, Dell and Compellent agreed to modify certain deal protection provisions and to issue supplemental disclosures in order to settle the litigation. In considering whether to approve the settlement, the Court focused on five provisions of the original merger agreement: (i) the no-shop provision; (ii) the information rights provision, including the matching rights; (iii) the recommendation or “force-the-vote” provision; (iv) adoption of the stockholder rights plan; and (v) the termination fee.
With respect to the no-shop provision, the Court observed that the prohibition on solicitation in the original merger agreement was “expansive and unqualified,” while the exception to the prohibition was “cabined and constrained.” The Court found that several features of the no-shop provision were particularly pro-buyer. These included the imposition of strict contractual liability for any breach by any representative of the Company, the lack of knowledge or materiality qualifiers on the requirements of the provision, the broad definition of the terms “Acquisition Proposal” and “Acquisition Inquiry,” and the requirement that a potential bidder enter into a 275-day (or nine-month) standstill agreement before the Company could provide any information. The Court also noted that Compellent’s compliance with the mechanics of the no-shop provision “literally required the Board to knowingly breach its fiduciary duties, albeit for a limited period of time, by first requiring the Board to determine that failing to act constituted a breach of its fiduciary obligations and then forbidding the Board to act until subsequent contractual conditions were met.”
Next, the original information rights provision, which required the Company to notify Dell of the identity of a competing bidder at least two days before initiating negotiations, to provide Dell with any non-public information at least 24 hours before the competing bidder, and to update Dell on negotiations with any competing bidder, was characterized by the Court as “expansive.” The merger agreement also required Compellent to submit the transaction for approval at a special meeting of the Company’s stockholders, regardless of whether the Company’s board changed its recommendation, and imposed procedural restrictions on the board’s ability to change its recommendation. The Court noted that the “aggressive [recommendation] provision raise[d] a host of questions,” including, among others, whether the board could agree to delay changing its recommendation with respect to the merger consistent with its duty of candor to the stockholders, and whether the board could agree not to postpone or to adjourn a special meeting without Dell’s consent if the board had determined such action was required to fulfill its fiduciary duties.
Further, the merger agreement required Compellent to adopt a stockholder rights plan with a 15% trigger that exempted Dell. The Court stated that the stockholder rights plan was “novel and bidder-friendly” and that merger agreements “have not traditionally required that a target board adopt a rights plan.” Finally, the Court stated that the 3.85% termination fee, together with the expense reimbursement fee, gave the board a “strong financial inducement not to respond to a bid or provide stockholders with an updated recommendation.”
As part of the settlement, each of these deal protections was modified. The no-shop provision was changed to eliminate the 275-day standstill requirement and to add materiality qualifiers relating to breaches committed by representatives of the Company other than directors, officers, or financial advisors. The “force-the-vote” provision was modified to allow the Company’s board to change its recommendation in a wider variety of circumstances. The information rights were modified by reducing the advance notice periods to require notification “prior to” entering into discussions with a competing bidder, by adding a materiality qualifier to Dell’s right to receive summaries of initial communications between Compellent and potential competing bidders, and by eliminating Dell’s right to receive copies of subsequent written communications with bidders, substituting a general provision obliging Compellent to keep Dell “reasonably informed.” The termination fee was reduced from $37 million to $31 million, or from 3.85% to 3.23%. Finally, Compellent rescinded the stockholder rights plan in its entirety—relief that the Court described as “exceptional.” Compellent also issued six supplemental disclosures concerning the background of the transaction and the bankers’ fees paid by Compellent and Dell. Compellent also agreed to delay the Company’s meeting of stockholders for at least 21 days.
In determining the appropriate fee to award, the Court stated that “plaintiffs achieved significant benefit by loosening the aggressive deal protections.” The Court noted that modifications to deal protections benefit stockholders because they increase the probability that an alternative bidder will submit a higher bid for a company. According to the Court, this benefit exists whether or not an alternative bidder actually emerges. Under the analytical framework developed by the Court, the amount of the fee awarded to plaintiffs’ counsel should therefore “depend on the increased likelihood of a topping bid under the revised defensive measures.” Accordingly, “[b]ecause more extreme defensive measures should have a more powerful dampening effect, settlements that ameliorate stronger forms of deal protection should warrant larger fees.”
Using statistical evidence submitted in an expert report provided by the plaintiffs and data submitted by the defendants to rebut the report, the Court concluded that the realistic likelihood of a topping bid for Compellent under the original merger agreement was negligible, but that the modifications to the merger agreement raised the probability of a topping bid to approximately 8%. Based upon the 11.37% expected premium of a topping bid calculated by the Court and the Court’s determination that the efforts of the plaintiffs’ attorneys were entitled to 25% of the benefit conferred upon the stockholders, the Court determined that a fee award of $2.3 million was reasonable under the circumstances. The Court also awarded $100,000 for the six supplemental disclosures.
Although noting that the calculation was “admittedly rough,” the Court stated that “estimating the benefit of reduced defensive measures in this fashion helps anchor this Court’s discretionary fee determinations to something more objective than the boldness of the plaintiffs’ ask and the vigor or passivity of the defendants’ response.”