On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found in a post-trial opinion that Potomac Capital Partners II, LP (“Potomac”), an activist investor, aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. (“PLX”) in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. (“Avago”), but entered judgment in favor of Potomac because plaintiffs failed to show causally related damages. In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018). After the deal closed, plaintiffs alleged that the sale process was unreasonably influenced by Potomac’s managing member, who became a director of PLX and chaired the special committee charged with exploring strategic alternatives for the company. As discussed in our prior post, see Shearman & Sterling LLP, Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment, Need-to-Know Litigation Weekly, Feb. 21, 2018, https://www.lit-ma.shearman.com/declining-to-find-enhanced-scrutiny-inapplicable-, the Court previously denied a summary judgment motion filed by Potomac, finding that the PLX board’s actions in connection with the sale were subject to enhanced scrutiny and disputes of material fact existed as to whether the sale process was reasonable. Following trial, the Court concluded that although Potomac aided and abetted breaches of fiduciary duty by PLX’s board, plaintiffs had failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged.
Over the course of 2013, Potomac acquired a nearly ten percent stake in PLX and publicly pressed for a sale. Thereafter, Potomac initiated a proxy contest resulting in the appointment of two of Potomac’s nominees to PLX’s board, including Potomac’s managing member, who subsequently was appointed the chair of its special committee. After joining PLX’s board, in December 2013, Potomac’s managing member learned through PLX’s financial advisor that Avago would be open to acquiring PLX for approximately $6.50 per share, after completing a separate transaction involving the acquisition of a PLX competitor (on which the financial advisor was simultaneously acting as financial advisor to Avago). But Potomac’s managing member did not report this “tip” to the other members of the PLX board. After the other Avago deal was consummated four months later, in May 2014, Avago proposed to acquire PLX for $6.25 per share. The PLX board agreed in principle to a deal nine days later at $6.50 per share. In connection with the evaluation of the deal by PLX’s financial advisor in June 2014, PLX’s management prepared financial projections that reflected downward revisions to previous projections. Consistent with the board’s recommendation, PLX’s stockholders tendered approximately 80% of outstanding shares and the deal subsequently closed in August 2014 in a two-step merger.
Following trial, the Court reaffirmed that enhanced scrutiny was the applicable standard of review because the transaction was a sale for cash and the disclosure to stockholders in connection with the recommendation on the tender offer was inadequate. The Court found that the failure to disclose to stockholders the December 2013 “tip” to Potomac, as well as other interactions between the managing member and Avago, constituted material omissions. The Court also found that disclosures regarding the financial projections were misleading because they were prepared for the financial advisor’s analysis and not, as represented, in the “ordinary course of business.” As a result, shareholder ratification did not cleanse the transaction pursuant to Corwin v. KKR Financial Holdings LLC, 143 A.3d 727 (Del. Ch. 2016).
The Court also determined that the board breached its duties in connection with the sale process because, in the absence of Potomac’s self-interested influence, it likely would have decided to oppose the sale to Avago on the terms at issue. The Court explained that the board had previously rejected proposals at similar prices and that its business had only improved in the interim and that it had become susceptible to activist pressure. The Court also noted that PLX’s financial advisor had divergent incentives in favoring a deal, including among other things a contingent fee arrangement and a longstanding relationship with Avago. Moreover, according to the Court, by withholding the information about Avago’s plans for PLX as conveyed to him in December 2013, the activist director “fatally undermined the sale process,” directly breaching his fiduciary duty and inducing the other directors to do so. The Court also concluded that Potomac could be held liable for aiding and abetting because it knowingly participated in these breaches of fiduciary duty through its managing member.
Nevertheless, the Court found that plaintiffs failed to establish that these breaches of fiduciary duty resulted in quantifiable damages. Plaintiff’s theory of damages rested on the premise that PLX should not have been sold at all. Consequently, the Court found that the appropriate measure of damages was the difference between the merger consideration and the company's “fair” value, essentially reflecting a “quasi-appraisal” measure of damages. Plaintiffs contended that the standalone value of PLX was $9.86 per share, or a 52% premium to deal price. The Court, however, reasoned that despite the “flawed” sale process, the deal price should be afforded significant weight given the various indicia of reliability. In particular, PLX had engaged in an extensive pre-signing sale process—which involved contacts with many potential bidders and entry into several non-disclosure agreements—and a post-signing market check that did not result in a topping bid. Further, the Court explained that the acquisition likely included synergies and, therefore, the deal price likely exceeded standalone value. Therefore, the Court entered judgment in favor of Potomac.