In re Comverge: Court of Chancery Denies Preliminary Injunction, Declining to Second-Guess Directors’ Debatable but Reasonable Tactical Choices
June 5, 2012
In In re Comverge Inc. Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. May 8, 2012), the Court of Chancery in an oral ruling denied a motion to preliminarily enjoin the acquisition of Comverge, Inc. (“Converge”) by HIG Capital LLC and its affiliates (“HIG”). The Court found that in hindsight certain choices made by Comverge’s directors were debatable, but the Court declined to second-guess decisions made by the independent directors.
Comverge had lost money every year of its existence and had long sought, to no avail, to solve its liquidity problems through various types of transactions. In November 2011, HIG contacted Comverge to express an interest in acquiring the company. In February 2012, the Comverge board declined HIG’s offer to buy the company for $2.25 per share, in part because another bidder had suggested a higher price. HIG thereafter acquired certain notes issued by Comverge. The notes carried the right to accelerate the company’s debt and (because Comverge was, or soon would be, in default on the underlying loan) likely force it into bankruptcy, as well as to block other acquisition bids and to reject prepayment of the debt. HIG promptly indicated that it would exercise those rights unless the board accepted a new, lower-priced offer. The board negotiated for a somewhat higher price and for a go-shop period, and then took the deal at $1.75 per share.
The plaintiffs alleged that HIG’s purchase of the notes breached a non-disclosure agreement (“NDA”) entered into by Comverge and HIG in connection with due diligence, which prohibited HIG from acquiring Comverge’s securities if that acquisition would violate U.S. securities laws. The plaintiffs argued that the directors breached their fiduciary duties under Revlon by accepting HIG’s $1.75 per share offer rather than suing to enforce the NDA in order to decrease HIG’s negotiating power. On April 27, 2012, the Court granted the motion to expedite based in part on this argument.
Eleven days later, however, the Court denied the plaintiffs’ motion for a preliminary injunction. Although the Court was inclined to agree that Comverge may have had a claim against HIG for breach of the NDA, the Court reasoned that Comverge’s board deliberately considered whether to file suit on more than one occasion and sought legal advice in connection with its decision. As the Court summarized, “the directors had to decide whether shareholders would be better off if the company fought to the end and even won in the legal arena if doing so exposed them to an increased risk of bankruptcy, or if it salvaged whatever value it could, however disappointing, for at least some shareholder return by avoiding litigation and proceeding to get the best deal that it could.” The Court noted that the tactical advantages of either option could be debated, but held that the Comverge board’s decisions were reasonable and therefore satisfied the directors’ fiduciary duties.