On March 4, the Delaware Court of Chancery granted a limited injunction delaying the stockholder vote on a $3.1 billion all-cash merger transaction between Atheros Communications, Inc. and a subsidiary of Qualcomm, Inc. for the purpose of requiring Atheros to remedy certain incomplete or misleading disclosures in its proxy statement.
First, the Court ordered Atheros to disclose that 98% of the fee to be paid to its financial advisor was contingent on the transaction actually closing. In its proxy statement, Atheros had disclosed only that its financial advisor would “be paid a customary fee, a portion of which is payable in connection with the rendering of its opinion and a substantial portion of which will be paid upon completion of the Merger.” The Court found that this disclosure was incomplete. While not creating a bright line rule requiring disclosure of the terms of any contingent-fee arrangements between a board and its financial advisor, the Court concluded that this particular arrangement, with an approximate 50:1 contingency ratio, was material information that Atheros’ stockholders were entitled to have in considering whether to rely on the financial advisor’s opinion that the transaction was fair. Further, given these contingency fee concerns and the unusually late timing of the agreement between Atheros and its financial advisor on the fee (agreed only a few days before the signing of the merger agreement), the Court also mandated that the amount of the fee be disclosed. In doing so, the Court again declined to create a bright line rule requiring disclosure of the fee amount in all situations, but noted that while disclosure of the fee as customary “may be fairly informative in the context of a $200 million merger, it may be insufficiently detailed for a multi-billion dollar merger.”
Second, the Court ordered additional disclosures relating to the negotiation of the Atheros CEO’s continuing employment in the surviving company. The proxy statement disclosed that Atheros’ CEO “had not had any discussions with Qualcomm regarding the terms of his potential employment by Qualcomm” before the parties had reached an agreement on the transaction. While this disclosure may have been literally true because the specific terms of his continuing employment had not been discussed before reaching agreement, the Court nevertheless held that it was misleading because well before that date he had an understanding with Qualcomm that they would employ him after the transaction closed.
This opinion is the latest in a line of cases in the Delaware Court of Chancery cautioning parties to a merger transaction that they risk injunction if they fail to make full disclosure of any circumstances that could be seen to create a conflict of interest with the parties involved in the negotiations of the sale transaction, whether that is the board, management or the financial advisors.
The plaintiffs also alleged that the Atheros’ board breached their Revlon duties by unreasonably entering into an exclusivity agreement with Qualcomm early in the negotiations, thus foreclosing the possibility of a transaction with another potential acquiror and limiting Atheros’ ability to obtain a higher price. The Court declined to issue an injunction on these grounds, concluding instead that, after a “robust and sophisticated” process involving consideration of eleven potential acquirors, the independent Board had reasonably decided to pursue a definite offer from Qualcomm that was conditioned on exclusivity rather than to continue discussions with another potential acquiror at the risk of Qualcomm abandoning the transaction. In so doing, the Court again reinforces that under Revlon, boards must undertake a reasonable sales process, not necessarily a perfect one.