The Delaware Chancery Court recently ruled that a stockholder’s suit relating to the all-cash acquisition of Saba Software, Inc. against the Company’s Board of Directors could proceed, while simultaneously dismissing related aiding and abetting claims against the buyer, a private equity fund and its affiliates. In re Saba Software, Inc. S’holder. Litig., C.A. No. 10697-VCS (Del. Ch. Ct. Mar. 31, 2017) (Slip Opinion). The Court determined that plaintiffs had adequately pleaded that purported circumstances surrounding the stockholder vote caused the Board’s decision to not be afforded the irrebuttable business judgment presumption available under Corwin v. KKR Financial Holdings and its progeny, such that certain claims could not be disposed of at the pleading stage. Specifically, plaintiff sufficiently alleged, for purposes of a motion to dismiss challenge, that stockholders had not received the opportunity to cast a fully informed and uncoerced vote.
The Stage for the Acquisition
As plaintiff alleged, Saba had fallen on rough times. It allegedly overstated its pre-tax earnings from 2008-12, drawing the ire of the SEC, which required the Company to issue restated financial statements to remain registered. Saba repeatedly assured its stockholders and regulators that those restated financials would be issued, but none were. Given this lack of compliance, Saba was delisted from NASDAQ in mid-2013, and was deregistered by the SEC in February 2015.
Against this backdrop, the Saba Board explored strategic alternatives in late 2014. The Company also announced that it would not be able to meet the SEC’s deadline to restate the Company’s financials. Despite this looming threat, potential bidders had emerged and submitted expressions of interest to Saba’s financial advisor. Vector Capital Management, L.P. (and its affiliates), the ultimate acquiror, submitted an indication of interest to acquire Saba at $9 per share (compared to the OTC closing price for Saba at $9.45 per share that day). While the Board was considering the various options before it, it also granted its members equity awards (in the form of synthetic RSUs) that would be cashed-out upon consummation of the merger in place of prior equity awards that may have lapsed or were suspended due to the Company’s failure to complete its restatement. Days before the SEC’s deadline, Saba and Vector executed the merger agreement, whereupon the deadline passed and the SEC deregistered Saba’s shares. Faced with what the Court dubbed a “Hobson’s choice” of approving the merger and obtaining $9 per share in cash or rejecting the merger and being left with illiquid deregistered shares of a company with uncertain future compliance prospects, the stockholders voted to approve the acquisition.
Plaintiff’s Claims Against the Board Survive
In accordance with Corwin v. KKR Financial Holdings LLC, a case decided by the Delaware Supreme Court two years ago, a transaction that is “approved by a fully informed, uncoerced vote of the disinterested stockholders” is entitled to an irrebuttable business judgment presumption that can be overcome only by a showing amounting to waste. The Court determined the Corwin doctrine did not apply here because stockholders were supposedly: (1) not “fully informed” and (2) “coerced.” As to the first issue, plaintiff had adequately alleged that material information had been withheld from the proxy, preventing a fully-informed stockholder vote. Specifically, allegations that the Company should have disclosed more information as to why the restatement was not issued, what the probability was it would be issued in the future, and what “post-deregistration options [were] available to Saba” survived the pleading challenge from the Board. Given the importance of the deregistration to the Company’s future, the Court allowed claims to proceed on the theory that these omitted facts “dramatically affected the environment in which the Board conducted the sales process” and could be material to a stockholder in deciding how to vote.
The Court also allowed claims to proceed based on allegations the stockholder vote was not free of coercion. “Wrongful coercion” will be found when “stockholders are induced to vote in favor of the proposed transaction for some reason other than the economic merits of that transaction.” This determination necessarily “depends on the facts of the case” and is a “relationship-driven inquiry.” The Court found that the facts alleged here, against the backdrop recited above and the deregistration “elephant in the room,” presented a plausible case of “inequitable coercion,” which can exist “when the fiduciary fails to act when he knows he has a duty to act and thereby coerces stockholder action.” Even though the proxy admittedly “stated the facts neutrally and in a non-threatening manner,” the Court found the “inequitable coercion flowed [not from the proxy’s words or tone but] from the situation in which the Board placed its stockholders as a consequence of its allegedly wrongful action and inaction.”
Also important to these disclosure and vote issues is the Court’s finding that the Board was not protected by the exculpation clause Saba had in its certificate of incorporation pursuant to Section 102(b)(7). The Court noted that while it was a “close call,” it was plausible the Board acted in bad faith given the Company’s past financial fraud, which in turn allegedly led the Board to rush the sales process and not to consider alternatives, cash-in “significant” equity awards for themselves that would have otherwise been “worthless” without the merger, and direct its financial advisor to rely on the “most pessimistic projections” in developing its fairness opinion. Given these allegations, it was “reasonably conceivable that the Board conduct” was not “in the corporate interest.”
Aiding and Abetting Liability Claim Against Buyer Dismissed
While the Court was obviously skeptical of the Board’s motivations and actions, it held that the plaintiff had failed to allege a basis to hold Vector liable for the Board’s potential breach of fiduciary duty. The Court noted that Vector, as an acquiror, could “not knowingly participate in the target board’s breach of fiduciary duty by extracting terms which require the opposite party to prefer its interests at the expense of its stockholders.” Plaintiff, however, had not pled that “Vector [had done] anything of the sort here,” as simply alleging that a buyer “received ‘too good of a deal’” was insufficient to make out an aiding and abetting claim.
As the Court noted, whether stockholders in any transaction are “fully informed” or “coerced” are fact specific inquiries. Clearly, companies facing delisting or deregistration should take note of the Saba decision in navigating a potential acquisition and take particular care to ensure that any stockholder approval of the transaction is fully informed and not subject to circumstance-driven claims of coercion. Given that this decision only concerns the adequacy of plaintiff’s allegations at the pleading stage, it remains to be seen whether plaintiff can actually prove their inadequate disclosure and process claims.