In re Comverge, Inc. Shareholders Litigation: Court of Chancery Declines to Dismiss Claims that Termination Fee Together with Bridge Financing Agreement Precluded Alternative Offers
February 17, 2015
In In re Comverge, Inc. Shareholders Litigation, 2014 WL 6686570 (Del. Ch. Nov. 25, 2014), the Delaware Court of Chancery granted in part the defendants’ motion to dismiss a post-closing stockholder challenge to the acquisition of Comverge, Inc. (“Comverge”) by H.I.G. Capital, L.L.C. (“HIG”), which acquisition the Court had previously declined to enjoin. The plaintiffs alleged that Comverge’s board of directors (the “Board”) breached its fiduciary duties by: (i) failing to bring suit against HIG for an alleged breach of a non-disclosure agreement (“NDA”) between the parties; (ii) conducting a flawed sale process that failed to maximize value for Comverge’s stockholders; and (iii) agreeing to preclusive deal protection measures that prevented Comverge from soliciting alternative bidders. The plaintiffs also claimed that HIG had aided and abetted the Board in breaching its fiduciary duties.
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 Board declined HIG’s offer to buy the company for $2.25 per share, in part because another bidder had suggested interest in a transaction with Comverge at a higher price. An affiliate of HIG thereafter acquired certain notes issued by Comverge, which allegedly violated the two-year standstill provision of the NDA. Following notification of HIG’s actions, the Board considered, but ultimately decided against, suing HIG for breach of the NDA. The notes gave HIG significant leverage over Comverge because they carried the right to accelerate Comverge’s debt and provided HIG with prior approval rights over any acquisition transaction. HIG promptly took advantage of its leverage by notifying Comverge that it was in default under the notes and indicating that it would accelerate the debt under the notes unless the Board accepted HIG’s new, lower-priced offer to acquire the company for $1.50 per share. After further negotiation with HIG, the Board agreed to a merger with HIG at a price of $1.75 per share. At the time of the Board’s approval of the merger, Comverge’s stock was trading at $1.88 per share. The merger agreement included a go-shop period during which HIG agreed not to exercise its blocking rights under the notes. During the go-shop period, Comverge had the right to terminate the transaction to pursue a superior proposal by paying HIG a total fee of 5.55% of the deal’s equity value. After the go-shop period, the total payment required to terminate the agreement rose to 7% of the deal’s equity value. In addition, Comverge entered into a $12 million bridge financing agreement with HIG pursuant to which Comverge issued HIG notes that were convertible at HIG’s election into shares of Comverge common stock at a conversion price of $1.40 per share, which was $0.35 lower than the deal price and $0.48 lower than the then-current trading price of Comverge’s shares.
The Court granted the defendants’ motion to dismiss in part, finding that the Board’s decision not to sue on the NDA and the Board’s sale process did not violate the Board’s fiduciary duties. The Court held that the Board’s decision to pursue a sale transaction rather than uncertain, costly and potentially time-consuming litigation against HIG based on a possible violation of the NDA was reasonable, especially in light of Comverge’s dire financial situation. With respect to the plaintiffs’ sale process claims, the Court found that the Board had engaged in “hard-fought” negotiations with HIG, and had canvassed the market and considered alternatives to the transaction over an 18-month period before agreeing to the merger. While the sale process ultimately resulted in a lower deal price than HIG’s initial offer due to HIG’s superior bargaining position after acquiring the notes, the Court found that the Board’s conduct at most amounted to a breach of the duty of care and did not support a claim for a non-exculpated breach of the duty of loyalty.
The Court also dismissed the aiding and abetting claims against HIG. The Court noted that Delaware case law recognizes an aiding and abetting claim if the acquirer in a merger induces the target board to breach its fiduciary duties “by extracting terms which require the opposite party to prefer its interests at the expense of the shareholders.” While recognizing that HIG’s “hard-nosed and aggressive” negotiating strategy was designed to take advantage of Comverge’s precarious financial position, the Court concluded that HIG had not exploited self-interest on the part of the members of the Board in a manner that would give rise to liability for aiding and abetting a breach of fiduciary duty.
Finally, the Court found that it was conceivable that the combined effect of the termination fee, the expense reimbursement and the convertible bridge loan could have had an impermissibly preclusive effect on potential alternative bidders. The Court noted that, even at the lower end, the combined termination fee and potential expense reimbursement would be 5.55% of the equity value of the transaction and would test the limits of what the Court had found to be within a reasonable range for termination fees in its past decisions. At the higher end, the Court noted that the plaintiffs had contended that the combined fees and Comverge stock issuable under the notes upon termination of the merger agreement could amount to as much as 11.6% to 13.1% of the equity value of the transaction. In light of the potential magnitude of the combined fees and in the context of a deal with a negative premium to market, the Court held that it was reasonably conceivable that the Board had acted unreasonably in adopting the potentially preclusive deal protection measures and refused to grant the defendants’ motion to dismiss in respect of the plaintiffs’ claim that the Board breached its fiduciary duties in agreeing to such measures.