In re Novell, Inc. Shareholder Litigation: Allegations that Board Treated Bidders in Materially Different Manner Stated Claim that Board Acted in Bad Faith
March 11, 2013
In In re Novell, Inc. Shareholder Litigation, 2013 WL 322560 (Del. Ch. Jan. 3, 2013), Vice Chancellor Noble of the Court of Chancery declined to dismiss breach of fiduciary duty claims against the board of directors (the “Board”) of Novell, Inc. (“Novell” or the “Company”), concluding that the plaintiffs’ allegations that the Board had treated a serious bidder in a materially different manner than Novell’s eventual acquiror supported a reasonable inference that the Board had acted in bad faith.
In early 2010, Novell received an unsolicited proposal from Elliott Associates LP (“Elliott”) to acquire the Company for $5.75 per share in cash. Although the Board rejected Elliott’s bid as inadequate, Novell publicly announced on March 20, 2010 that the Board would engage in a process to explore various alternatives to enhance stockholder value. From March 2010 to August 2010, the Board, with the assistance of J.P. Morgan, its financial advisor, contacted over 50 potential acquirors, 30 of which entered into non-disclosure agreements with Novell. Throughout the process, Novell received offers from parties interested in purchasing portions of Novell’s business, Novell’s patent portfolio and Novell as a whole.
Attachmate Corporation (“Attachmate”) and an unidentified private equity firm (“Party C”) emerged as the most serious potential acquirors of Novell. By August 27, 2010, Attachmate and Party C had submitted their “best and final” offers for Novell at the request of the Board. Although Attachmate’s bid ($4.80 per share) was lower than Party C’s bid ($4.86 per share), the Board granted Attachmate a period of exclusivity until September 27, 2010, which was later extended to October 25, 2010, to negotiate a transaction. Near the end of the extended exclusivity period, Novell received an offer from Microsoft Corporation (“Microsoft”) to license or purchase a portion of Novell’s patent portfolio for $450 million. Shortly thereafter, Attachmate increased its offer to $5.25 per share in cash, and on the same day, Party C submitted an unsolicited offer to acquire Novell for $5.75 per share.
The Board then approached Attachmate to gauge Attachmate’s interest in engaging in a transaction whereby Attachmate would acquire Novell as a whole after Novell’s patents were sold to Microsoft. On November 2, 2010, Attachmate raised its offer to $6.10 per share in cash, conditioned upon Novell receiving at least $450 million from the patent sale. On November 21, 2010, Novell entered into a merger agreement with Attachmate and a patent purchase agreement with Microsoft on those proposed terms. In order to facilitate Attachmate’s acquisition of Novell, Elliott, who had been approached by J.P. Morgan about potentially providing financing for Attachmate in the transaction, entered into a separate agreement with Attachmate to contribute a portion of its Novell shares to an affiliate of Attachmate in exchange for a post-merger equity interest in the affiliate. On April 27, 2011, the merger and the patent sale were completed.
Plaintiffs sought post-closing money damages for breaches of fiduciary duty by the Board, alleging, among other things, that Novell’s “improper and opaque” sale process failed to maximize stockholder value with respect to Attachmate’s acquisition of Novell and the patent sale to Microsoft. These process-based claims centered around allegations that the Novell directors breached their fiduciary duties by improperly favoring Attachmate over Party C and other potential bidders throughout the sale process.
Specifically, plaintiffs alleged that the Board allowed Attachmate to partner with two of the Company’s principal stockholders when submitting its preliminary proposal and authorized J.P. Morgan to seek potential financing sources for Attachmate, while not providing these benefits to Party C and other potential acquirors. Additionally, plaintiffs alleged that the Board unreasonably decided to pursue the Attachmate bid without seeking an increased bid from Party C before granting exclusivity to Attachmate, despite the fact that Party C had submitted a higher bid than Attachmate at two stages in the process. Finally, plaintiffs claimed that the Board withheld information from Party C that was shared with Attachmate, including information about the potential sales of Novell’s other businesses and its patent portfolio, that may have incentivized Party C to increase its bid. As a result of these actions, plaintiffs alleged that the Board guided the outcome of the sales process toward a transaction with Attachmate and deprived stockholders of the opportunity to obtain a higher price for their shares.
In addressing the process claims, the Court of Chancery noted that where, as here, a corporation has a Section 102(b)(7) exculpation provision in its certificate of incorporation and the sale process has been run by concededly independent and disinterested directors, the complaint must adequately allege that the board of directors’ conduct amounts to bad faith to survive a motion to dismiss. The Court stated that one way for plaintiffs to meet this standard would be to show that the Board’s conduct was “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” 2013 WL 322560, at *10.
The Court of Chancery concluded that the Board’s alleged conduct created a reasonable inference that the Novell directors and their financial advisor “treated Party C in a way that was both adverse and materially different from the way they treated Attachmate.” Id. at *9. Specifically, the Court questioned the Board’s decision not to tell Party C about the proceeds of the patent sale, while keeping Attachmate fully informed of the various strategic options Novell was considering throughout the process. While acknowledging that potential bidders need not be treated equally in all circumstances and that there may have been a plausible explanation for the Board’s conduct, the Court stated that, at the motion to dismiss stage, the Court did not have access to any factual justifications for the Board’s differential treatment of Attachmate and Party C. Accordingly, because it was reasonably conceivable that plaintiffs may be able to demonstrate that the Board’s conduct was in bad faith, exculpation under Section 102(b)(7) might be unavailable, and the Court concluded that the fiduciary duty claims against the Board must survive the motion to dismiss.
Following entry of the Court’s order with respect to plaintiff’s fiduciary duty claims, the Novell defendants moved for certification of an interlocutory appeal with respect to the bad faith claim. While the Court acknowledged that application of the reasonable conceivability standard in the context of a bad faith claim can be “challenging,” the Court refused to certify the appeal because the Novell defendants failed to demonstrate that the Court’s ruling established a legal right within the meaning of Delaware Supreme Court Rule 42(b). The Supreme Court subsequently refused to hear the interlocutory appeal.