In my post of June 24, 2009, I addressed the possible application of Revlon to the negotiations conducted by Data Domain with NetApp, concluding that it is likely that the application of Revlon to the negotiations will be vigorously contested by Data Domain and its board. I discuss herein whether Data Domain has conceded the issue by its response to the June 1, 2009 EMC announcement of its all-shares, all-cash $30 per share tender offer to Data Domain’s stockholders.
EMC announced its offer on June 1, 2009, and sent a letter to Data Domain’s CEO, Frank Slootman, the same day. The Data Domain board met to address the offer that very day, and concluded, after input from its counsel, Fenwick & West, and its banker, Qatalyst, “that EMC’s announcement of the EMC Offer was reasonably likely to lead to a Superior Proposal (as that term is defined in the Initial NetApp Merger Agreement).” Data Domain Schedule 14D-9, dated June 15, 2009, at 13.
The Data Domain/NetApp Merger Agreement contains a no-shop clause, subject to the right and power of the Data Domain board to respond to an unsolicited acquisition proposal as long as several conditions are met, including:
“(i) the Company Board shall have determined in good faith (after consultation with its financial advisor and its outside legal counsel) that (A) such Acquisition Proposal either constitutes or is reasonably likely to lead to a Superior Proposal and (B) the failure to take such action is reasonably likely to result in a breach of its fiduciary duties to the Company’s stockholders under Delaware Law; . . . .”
Merger Agreement § 6.1(c)(i) (emphasis added).
So the Data Domain board had to conclude not only that EMC’s $30 tender offer proposal constituted or was reasonably likely to lead to a “Superior Proposal,” but also that Data Domain’s failure to engage EMC over its offer would be “reasonably likely to result in a breach of its fiduciary duties to the Company’s stockholders under Delaware Law . . . .”
If Data Domain’s position will be that Revlon does not apply to their negotiations with NetApp, on the grounds that the deal was negotiated at arms-length and approved by a board of independent directors, is consistent with Data Domain’s strategic vision, and will not involve a change in control of Data Domain (by reason of the stock to be received in NetApp by Data Domain’s stockholders), à la Paramount Communications, Inc. v. Time Incorporated, 571 A.2d 1140 (Del. 1990), In re Santa Fe Pacific Corporation Shareholder Litigation, 669 A.2d 59 (Del. 1995), and Arnold v. Society for Savings Bancorp, Inc., 650 A.2d 1270 (Del. 1994), then why did the Data Domain board conclude, after taking into account the advice of Fenwick & West, that failure to engage EMC over its proposed tender offer would be “reasonably likely to result in a breach of its fiduciary duties to the Company’s stockholders under Delaware Law”?
Friday, June 26, 2009
Wednesday, June 24, 2009
The Battle for Data Domain, Inc.: Postscript on Application of Revlon to Data Domain/NetApp Merger
In my post of June 10, 2009, I critiqued the negotiations conducted by Data Domain with NetApp, leading to the May 20, 2009 announcement of the Data Domain/NetApp merger agreement, pursuant to which NetApp would acquire Data Domain’s by paying $25 per share in cash and stock (increased to $30 per share in cash and stock after EMC jumped into the fray on June 1, 2009 with its all-shares, all-cash tender offer of $30 per share).
In my critique of the Data Domain/NetApp negotiations, I was too quick to assume the application of Revlon duties (Revlon v. McAndrews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986)) to the negotiations, so I address the issue in this post.
A. When Revlon Duties Apply
When Revlon duties apply, it is the obligation of the board of directors to seek the highest value reasonably available to the stockholders. As I quoted from the Delaware Supreme Court’s recent decision in Lyondell:
“. . . directors must ‘engage actively in the sale process,’ and they must confirm that they have obtained the best available price either by conducting an auction, by conducting a market check, or by demonstrating ‘an impeccable knowledge of the market.’”
Lyondell Chemical Co. v. Ryan, 2009 WL 1024764 at *6 (footnotes omitted).
The reach of Revlon is not unlimited. It has historically been applied in three scenarios:
(i) When a company initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; or
(ii) When, in response to a bidder’s offer, the company abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or
(iii) When approval of a transaction results in a sale or change of control.
Arnold v. Society for Savings Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (citing Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994) and Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990)).
A Revlon change in control does not occur in stock for stock mergers where control of both companies remains in a large, fluid, changeable and changing market. Where there is no controlling or dominant shareholder of the acquiring company in a stock for stock merger, then Revlon is not applicable and the target directors’ decision, if made by independent directors, will not be subject to enhanced scrutiny but to the more director-friendly business judgment rule standard of review. Notable examples of this type of hands-off review in the context of stock-for-stock mergers are the Delaware Supreme Court decisions in Arnold and in Santa Fe Pacific Corporation Shareholder Litigation, 669 A.2d 59 (Del. 1995).
B. Revlon and the NetApp/Data Domain Merger
The shares of NetApp (NTAP) are broadly dispersed. Its largest stockholder, as reported in its proxy statement of March 23, 2009, is Wellington Company Management, holding a little over 10% of NetApp’s outstanding common shares. Wellington is a 13G filer, meaning that it holds its shares for investment, and not with any view to controlling NetApp or influencing its business.
As Chancellor Allen observed in Wells Fargo and Company v. First Interstate Bancorp, 1996 WL 32169 (Del. Ch. 1996), when Revlon duties apply, “the board must seek to achieve [the] greatest available current value; it may not, in effect, trade achievable current value for a prospect of greater future value, as it may normally do in the exercise of its good faith business judgment.” (Id. at *10 note 3.) Or, as Vice Chancellor Lamb observed in his decision in NCS Healthcare (reversed by the Delaware Supreme Court on other grounds), “[t]he record shows that, as a result of the proposed Genesis merger, NCS public stockholders will become stockholders in a company that has no controlling stockholder or group.” In re NCS Healthcare, Inc. Shareholders Litigation, 825 A.2d 240, 255 (Del. Ch. 2002).
The proposed Data Domain/NetApp merger involves both cash and NetApp stock, consisting of $16.45 in cash and from 0.7783 to 0.6370 in shares of NetApp common stock per Data Domain share of common stock, designed to deliver to the Data Domain stockholders an additional $13.55 in value. Thus, of the target consideration of $30 per share, 55% is proposed to be in cash and 45% in NetApp common stock.
So should the conduct of the board of directors of Data Domain be measured by Revlon or by the business judgment rule?
We should soon find out, as a complaint has now been filed in the Delaware Chancery Court challenging the proposed Data Domain/NetApp merger. The action has been brought by the Police & Fire Retirement System of the City of Detroit, as a purported class action, and clearly seeks to slot this merger in the Revlon category:
“Whatever doubt existed about the [Data Domain] Board’s duty to employ a reasoned process to maximize the price paid to shareholders was eliminated with the restructured NetApp deal. The Initial Transaction [at $25 per share] would cash out a significant portion of the Data Domain shareholders’ holdings. The Revised Transaction [at $30 per share], however, is indisputably a change in control because the majority of the consideration to be paid to shareholders is now cash. By agreeing to a transaction which results in the ‘cashing out’ of a majority of the shareholders’ prior equity positions, the [Data Domain] Board took on the obligation to maximize the price being paid.”
Complaint (No. 4663-VCL), dated June 12, 2009, ¶ 9.
There is some sense to granting a board more deference when it engages in a “strategic” merger involving stock for stock. It may make sense to merge with a young Google at a lesser price per share than a mature version 1.0 software company, even if the Google deal has a smaller value than that offered by the more mature suitor. And, while their reference to it appears pro forma, Data Domain and NetApp do cite the “strategic” benefits of their combination in their defense of the deal:
“• Synergy between NetApp and Data Domain. The Data Domain board of directors considered NetApp’s prospects following the closing of the merger. NetApp’s sales and distribution channels and international reach to [sic] offer the Data Domain product line to more customers, accelerating growth and market adoption. The Data Domain board of directors believed that the combination of the two companies would increase the value of NetApp and thereby the value of the NetApp common stock that Data Domain stockholders would receive in the merger.”
NetApp S-4, as amended June 23, 2009, at 37.
On the other hand, the carve-out from review under the Revlon standard for a stock-for-stock deal seems a bit artificial. If a suitor proposes an all-cash deal, the target should conduct a market check or satisfy itself in some other way that the price offered is the best price reasonably available. If the suitor, on the other hand, proposes an equity combination, then, under accepted Revlon jurisprudence, the target need not shop the company or do any other sort of market check. The distinction seems archaic, particularly where the initial suitor is amenable to doing a deal for cash or for cash and stock and/or competing suitors pound on the doors prior to the first deal being inked. And, if equity in the initial suitor is so attractive, why not accept a higher cash deal and let the stockholders decide for themselves whether to invest in the initial suitor (or one or more other companies)?
That a deal is subject to Revlon review does not mean that the board of directors is home free because, even in pure stock for stock deals, where a competing suitor is jilted, the Delaware courts have no hesitation in applying enhanced to scrutiny to the other measures adopted by the target board to protect the deal, such as a selective exemption under a poison pill, no-shop clauses, termination fees, the grant of lock-up options, and stockholder support agreements. And, of course, for the business judgment rule standard to apply in the first place, the “judgment” must be informed. In this deal, a real question arises as to how the Data Domain board of directors could, on an informed basis, enter into the NetApp deal without at least talking to EMC, given that EMC’s interest in doing a deal was made known to Data Domain before the NetApp deal was inked.
So, if the plaintiff in the Delaware action presses ahead for a preliminary injunction, it will be of interest to see how Vice Chancellor Lamb (to whom the case has been assigned) evaluates the conduct of the Data Domain board of directors — by Revlon, by the business judgment rule, or by enhanced scrutiny to the measures adopted by the Data Domain board to protect the NetApp deal.
In my critique of the Data Domain/NetApp negotiations, I was too quick to assume the application of Revlon duties (Revlon v. McAndrews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986)) to the negotiations, so I address the issue in this post.
A. When Revlon Duties Apply
When Revlon duties apply, it is the obligation of the board of directors to seek the highest value reasonably available to the stockholders. As I quoted from the Delaware Supreme Court’s recent decision in Lyondell:
“. . . directors must ‘engage actively in the sale process,’ and they must confirm that they have obtained the best available price either by conducting an auction, by conducting a market check, or by demonstrating ‘an impeccable knowledge of the market.’”
Lyondell Chemical Co. v. Ryan, 2009 WL 1024764 at *6 (footnotes omitted).
The reach of Revlon is not unlimited. It has historically been applied in three scenarios:
(i) When a company initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; or
(ii) When, in response to a bidder’s offer, the company abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or
(iii) When approval of a transaction results in a sale or change of control.
Arnold v. Society for Savings Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (citing Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994) and Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990)).
A Revlon change in control does not occur in stock for stock mergers where control of both companies remains in a large, fluid, changeable and changing market. Where there is no controlling or dominant shareholder of the acquiring company in a stock for stock merger, then Revlon is not applicable and the target directors’ decision, if made by independent directors, will not be subject to enhanced scrutiny but to the more director-friendly business judgment rule standard of review. Notable examples of this type of hands-off review in the context of stock-for-stock mergers are the Delaware Supreme Court decisions in Arnold and in Santa Fe Pacific Corporation Shareholder Litigation, 669 A.2d 59 (Del. 1995).
B. Revlon and the NetApp/Data Domain Merger
The shares of NetApp (NTAP) are broadly dispersed. Its largest stockholder, as reported in its proxy statement of March 23, 2009, is Wellington Company Management, holding a little over 10% of NetApp’s outstanding common shares. Wellington is a 13G filer, meaning that it holds its shares for investment, and not with any view to controlling NetApp or influencing its business.
As Chancellor Allen observed in Wells Fargo and Company v. First Interstate Bancorp, 1996 WL 32169 (Del. Ch. 1996), when Revlon duties apply, “the board must seek to achieve [the] greatest available current value; it may not, in effect, trade achievable current value for a prospect of greater future value, as it may normally do in the exercise of its good faith business judgment.” (Id. at *10 note 3.) Or, as Vice Chancellor Lamb observed in his decision in NCS Healthcare (reversed by the Delaware Supreme Court on other grounds), “[t]he record shows that, as a result of the proposed Genesis merger, NCS public stockholders will become stockholders in a company that has no controlling stockholder or group.” In re NCS Healthcare, Inc. Shareholders Litigation, 825 A.2d 240, 255 (Del. Ch. 2002).
The proposed Data Domain/NetApp merger involves both cash and NetApp stock, consisting of $16.45 in cash and from 0.7783 to 0.6370 in shares of NetApp common stock per Data Domain share of common stock, designed to deliver to the Data Domain stockholders an additional $13.55 in value. Thus, of the target consideration of $30 per share, 55% is proposed to be in cash and 45% in NetApp common stock.
So should the conduct of the board of directors of Data Domain be measured by Revlon or by the business judgment rule?
We should soon find out, as a complaint has now been filed in the Delaware Chancery Court challenging the proposed Data Domain/NetApp merger. The action has been brought by the Police & Fire Retirement System of the City of Detroit, as a purported class action, and clearly seeks to slot this merger in the Revlon category:
“Whatever doubt existed about the [Data Domain] Board’s duty to employ a reasoned process to maximize the price paid to shareholders was eliminated with the restructured NetApp deal. The Initial Transaction [at $25 per share] would cash out a significant portion of the Data Domain shareholders’ holdings. The Revised Transaction [at $30 per share], however, is indisputably a change in control because the majority of the consideration to be paid to shareholders is now cash. By agreeing to a transaction which results in the ‘cashing out’ of a majority of the shareholders’ prior equity positions, the [Data Domain] Board took on the obligation to maximize the price being paid.”
Complaint (No. 4663-VCL), dated June 12, 2009, ¶ 9.
There is some sense to granting a board more deference when it engages in a “strategic” merger involving stock for stock. It may make sense to merge with a young Google at a lesser price per share than a mature version 1.0 software company, even if the Google deal has a smaller value than that offered by the more mature suitor. And, while their reference to it appears pro forma, Data Domain and NetApp do cite the “strategic” benefits of their combination in their defense of the deal:
“• Synergy between NetApp and Data Domain. The Data Domain board of directors considered NetApp’s prospects following the closing of the merger. NetApp’s sales and distribution channels and international reach to [sic] offer the Data Domain product line to more customers, accelerating growth and market adoption. The Data Domain board of directors believed that the combination of the two companies would increase the value of NetApp and thereby the value of the NetApp common stock that Data Domain stockholders would receive in the merger.”
NetApp S-4, as amended June 23, 2009, at 37.
On the other hand, the carve-out from review under the Revlon standard for a stock-for-stock deal seems a bit artificial. If a suitor proposes an all-cash deal, the target should conduct a market check or satisfy itself in some other way that the price offered is the best price reasonably available. If the suitor, on the other hand, proposes an equity combination, then, under accepted Revlon jurisprudence, the target need not shop the company or do any other sort of market check. The distinction seems archaic, particularly where the initial suitor is amenable to doing a deal for cash or for cash and stock and/or competing suitors pound on the doors prior to the first deal being inked. And, if equity in the initial suitor is so attractive, why not accept a higher cash deal and let the stockholders decide for themselves whether to invest in the initial suitor (or one or more other companies)?
That a deal is subject to Revlon review does not mean that the board of directors is home free because, even in pure stock for stock deals, where a competing suitor is jilted, the Delaware courts have no hesitation in applying enhanced to scrutiny to the other measures adopted by the target board to protect the deal, such as a selective exemption under a poison pill, no-shop clauses, termination fees, the grant of lock-up options, and stockholder support agreements. And, of course, for the business judgment rule standard to apply in the first place, the “judgment” must be informed. In this deal, a real question arises as to how the Data Domain board of directors could, on an informed basis, enter into the NetApp deal without at least talking to EMC, given that EMC’s interest in doing a deal was made known to Data Domain before the NetApp deal was inked.
So, if the plaintiff in the Delaware action presses ahead for a preliminary injunction, it will be of interest to see how Vice Chancellor Lamb (to whom the case has been assigned) evaluates the conduct of the Data Domain board of directors — by Revlon, by the business judgment rule, or by enhanced scrutiny to the measures adopted by the Data Domain board to protect the NetApp deal.
Friday, June 19, 2009
In re Genentech, Inc. Shareholders Litigation; Settlement; Objection to Fee Request by Class Counsel
I'm all in favor of generously compensating lawyers since I'm one, but the fee request of class counsel for plaintiffs in the Genectech/Roche litigation, for up to $24.5 million, strikes me as over the top. As a modest shareholder of Genentech I received notice of the settlement of the class actions (some 30 were filed the day of or shortly after Roche's initial announcement on July 20, 2008 of its intent to acquire the 45% of Genectech's shares it didn't own) and class counsels' application for an award of fees and expenses. The hearing will be held July 9, 2009, before Vice Chancellor Strine. Given Vice Chancellor Strine's close study of these types of fee requests--see his opus In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005)--his reception of counsel's fee request will be closely watched.
I have commented on the fee application, and reprint my letter to the Court here (deleting information on my stockholding in Genentech):
"In response to the Notice of Pendency of Class Action, Proposed Class Action Determination, Proposed Settlement of Class Action, Settlement Hearing, and Right to Appear, dated May 4, 2009 (the “Notice”), I comment on one aspect of the Notice, plaintiffs’ counsels’ request for an award of up to $24,500,000 in attorneys’ fees and expenses, to be paid by Roche or Genentech. Based upon the history of the negotiations between Roche and Genentech, as laid out in Roche’s Offer to Purchase, as amended, and Genentech’s response, set forth in its Schedule 14D-9, as amended, an award of counsel fees of this magnitude would be excessive.
. . . .
A. Why Object at All?
Any award of attorneys’ fees made by the Court will be paid by Roche and/or Genentech. As a former shareholder of Genentech, I received cash for my shares. Accordingly, the economic burden of any award of counsel fees will not be borne by me (and I am not a shareholder of Roche). So what’s the point of objecting?
This question was addressed by Vice Chancellor Strine in his thorough consideration of a like fee application In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005). The objectors to counsels’ fee application in that case likewise had no economic stake in any award of counsel fees. Nevertheless, the Vice Chancellor concluded that they did have standing to comment on the fee application:
“This is not to go to the other extreme and to say that the objectors have no standing to comment on the requested fee at all. They, of course, do. Stockholders have a cognizable interest in the integrity of the representative litigation process and in ensuring that it functions in a manner that generates benefits for its intended beneficiaries, and not windfalls to attorneys.”
Id. at 639.
B. What Benefits Did Counsel Achieve for Genentech’s Stockholders?
Where a fee award will not be borne by the plaintiff class, the factors to be considered in assessing a fee application are those listed in Sugarland Industries, Inc. v. Thomas, 428 A.2d 142 (Del. 1980). The first and most important factor, and the one I want to address here, are the “benefits achieved in the action.” Based upon the record of negotiations presented by Roche and Genentech, the benefits achieved by plaintiffs’ counsel were modest.
1. The Final Enhancement of Roche’s Offer from $93 to $95
The casual reader could be forgiven for concluding, based upon the background description in the Notice, that plaintiffs’ counsel played a significant role in the final enhancement of Roche’s offer from $93 to $95 a share (an increase that generated in excess of $1 Billion for the non-Roche shareholders of Genentech).
“After the Second Stipulation was approved [on March 11, 2009], during the late evening on March 11, 2009 and early morning on March 12, 2009, counsel to Roche and Co-Lead Counsel again discussed possible grounds on which to settle the Action. Co-Lead Counsel again expressed their view that the optimal outcome for Genentech’s stockholders was for Roche and Genentech to enter into a negotiated merger agreement, pursuant to which all Genentech stockholders would receive the same price per share. Co-Lead Counsel also expressed their view that Roche should increase its offer price from $93.00 per share. Co-Lead Counsel also indicated that, if Roche increased its offer to $95.00 per share, Co-Lead Counsel would support an amendment to the Affiliation Agreement to exclude such a merger from the Affiliation Agreement, so as to ensure that all Genentech stockholders would receive the same price per share, without affecting their appraisal rights under section 262 of the Delaware General Corporation Law.”
Notice at 7.
In their discussion of the settlement and their “participation in the settlement,” class counsel list, as one of the actions taken by Roche (impliedly at the behest of class counsel):
“G. During conversations with counsel to Roche during the late evening on March 11, 2009 and early morning on March 12, 2009, Co-Lead Counsel indicated that, if Roche increased its offer to $95.00 per share, Co-Lead Counsel would support an amendment to the Affiliation Agreement to exclude such a merger from the Affiliation Agreement, so as to ensure that all Genentech stockholders would receive the same price per share, without affecting their appraisal rights under section 262 of the Delaware General Corporation Law.”
Notice at 9.
But a review of the record as stated by Genentech and Roche paints a different picture. What broke the dam on this deal was Roche’s unilateral increase in its offer from $86.50 per share to $93.00 per share, announced on March 6, 2009. That significant increase in the offer price led Genentech’s Special Committee (headed by Dr. Sanders, Genentech’s Lead Director, and advised by Goldman Sachs and Latham & Watkins) to conclude it was time to cut a deal. And a deal quickly followed:
“On March 8, 2009, Drs. Sanders and Humer [Roche’s CEO] had a series of telephone conversations in which they discussed a price at which the Special Committee would recommend a transaction with Roche pursuant to a negotiated agreement. Dr. Sanders stated his belief that the Special Committee would be willing to support a transaction at a price in the high $90s. At the end of these conversations, Drs. Sanders and Humer agreed that Roche and the Special Committee would be prepared to enter into a transaction pursuant to which Roche would offer to acquire the Shares held by the Company’s public stockholders at a price of $95.00 per Share.”
Genentech’s Schedule 14D-9 (Amendment No. 5), dated March 12, 2009, at 6.
Roche’s description is more succinct:
“On March 8, 2009, Dr. Franz B. Humer, Chairman of Roche, received a call from Dr. Charles A. Sanders, Chairman of the Special Committee. They discussed a range of possible transaction prices and agreed to pursue negotiations concerning a transaction at $95 per Share.”
Roche’s Second Supplement to Offer to Purchase for Cash, dated March 12, 2009, at 7.
If Genentech’s and Roche’s recitations are to be believed, then Roche’s offer price was set at $95 per share on March 8, 2009, making counsel’s discussions with Roche’s counsel over price on March 11 and March 12 irrelevant to the final agreement. Plaintiff’s counsel, therefore, should be given no credit or “benefit” for the $95 per share offer price.
2. The Affiliation Agreement
Genentech and Roche were parties to an Affiliation Agreement, entered into in 1999. The Agreement imposed certain conditions upon any Genentech/Roche merger or like combination, including (i) that the transaction receive the favorable vote of a majority of the Genentech shares not held by Genentech, and (ii) in the event that such a favorable vote were not obtained (or no vote were required, such as in a short-form merger), then the consideration to be paid to the Genentech shareholders would “be equal to or greater than the average of the means of the ranges of fair values for the Shares as determined by two investment banks of nationally recognized standing appointed by a committee of independent directors.” Genentech’s Schedule 14D-9, dated February 23, 2009, at 2.
This provision created a speed bump for any Roche/Genentech short-form merger, both by reason of the delay that would be inherent in securing the bankers’ valuations, and because, theoretically, those valuations could be below or greater than the consideration paid by Roche for Genentech’s other shares pre short-form merger. Presumably (I have not reviewed the Affiliation Agreement), the Affiliation Agreement, being a two-party agreement, could be amended to remove this speed bump. And this is what the parties did, in order to provide speed and certainty as to the consideration payable to the Genentech shareholders in any short-form merger following Roche’s tender offer (and Genentech granted Roche a top-up option, at Roche’s insistence, to ensure that Roche got the 90% of Genentech’s shares after completion of its tender offer (assuming it were accepted by a majority of Genentech’s unaffiliated shareholders). As Genentech acknowledged in its March 12th Amendment to Schedule 14D-9, the amendment to the Affiliation Agreement did carry the risk of depriving the Genentech shareholders in any short-form merger of the possibility of a price higher than $95:
“While the Special Committee recognized that a non-tendering stockholder could potentially receive more than $93.00 per Share if Roche owned 90% or more of the Shares following consummation of the $93.00 Offer, it concluded that the higher price of $95.00 per Share and the certainty that it would be received by all of the public stockholders (assuming a majority of the Shares held by the company’s public stockholders were tendered into the Revised Offer) provided by the Merger Agreement was in the best interest of the Company’s stockholders, other than Roche and its affiliates.”
Id. at 8.
From the get-go, Roche promised, if it secured 90% or more of Genentech’s outstanding shares, to proceed to a short-form merger and pay the same offer price to the remaining Genentech shareholders that it offered to the other non-affiliated Genentech shareholders, “subject to compliance with the Affiliation Agreement between us and Genentech.” Roche Offer to Purchase for Cash, dated February 9, 2009, at 3.
Plaintiffs’ counsel’s objections to the Affiliation Agreement appear to be quibbles, namely, that the provision above quoted from the Affiliation Agreement could delay payment and did not provide assurance of the same price to the remaining stockholders as offered to the other Genentech stockholders. This was solved by the amendment agreed to by Roche and Genentech, an amendment clearly predictable once a deal was cut, given the sophistication of the Roche and Genentech advisors and their experience and competence in doing deals.
3. Other Purported Benefits
The other benefits achieved by plaintiffs’ counsel appear to be trivial or unnecessary. Thus, plaintiffs’ counsel secured in the First Stipulation acknowledgements from Genentech that it had either publicly stated or were noncontroversial, such as that the Affiliation Agreement and Genentech’s Certificate of Incorporation did not limit the Genentech board’s liability for breaches of the duty of loyalty (cf. Del. GCL § 102(b)(7)(i)), or that the Affiliation Agreement did not “eliminate or limit any statutory or common-law requirements for the consummation of a business combination involving Roche and Genentech; . . .” Notice at 5.
_________________________
Genentech’s board of directors, particularly the Special Committee, and the Special Committee’s advisors, demonstrated considerable skill and savvy in their negotiations with Roche. Through their efforts, the Roche Offer was increased from $86.50 per share to $95.00 per share. With respect to these negotiations, plaintiffs’ counsel played the role of sidewalk superintendents. For this role an award of $24,500,000, or anything approaching it, would be clearly excessive."
I have commented on the fee application, and reprint my letter to the Court here (deleting information on my stockholding in Genentech):
"In response to the Notice of Pendency of Class Action, Proposed Class Action Determination, Proposed Settlement of Class Action, Settlement Hearing, and Right to Appear, dated May 4, 2009 (the “Notice”), I comment on one aspect of the Notice, plaintiffs’ counsels’ request for an award of up to $24,500,000 in attorneys’ fees and expenses, to be paid by Roche or Genentech. Based upon the history of the negotiations between Roche and Genentech, as laid out in Roche’s Offer to Purchase, as amended, and Genentech’s response, set forth in its Schedule 14D-9, as amended, an award of counsel fees of this magnitude would be excessive.
. . . .
A. Why Object at All?
Any award of attorneys’ fees made by the Court will be paid by Roche and/or Genentech. As a former shareholder of Genentech, I received cash for my shares. Accordingly, the economic burden of any award of counsel fees will not be borne by me (and I am not a shareholder of Roche). So what’s the point of objecting?
This question was addressed by Vice Chancellor Strine in his thorough consideration of a like fee application In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005). The objectors to counsels’ fee application in that case likewise had no economic stake in any award of counsel fees. Nevertheless, the Vice Chancellor concluded that they did have standing to comment on the fee application:
“This is not to go to the other extreme and to say that the objectors have no standing to comment on the requested fee at all. They, of course, do. Stockholders have a cognizable interest in the integrity of the representative litigation process and in ensuring that it functions in a manner that generates benefits for its intended beneficiaries, and not windfalls to attorneys.”
Id. at 639.
B. What Benefits Did Counsel Achieve for Genentech’s Stockholders?
Where a fee award will not be borne by the plaintiff class, the factors to be considered in assessing a fee application are those listed in Sugarland Industries, Inc. v. Thomas, 428 A.2d 142 (Del. 1980). The first and most important factor, and the one I want to address here, are the “benefits achieved in the action.” Based upon the record of negotiations presented by Roche and Genentech, the benefits achieved by plaintiffs’ counsel were modest.
1. The Final Enhancement of Roche’s Offer from $93 to $95
The casual reader could be forgiven for concluding, based upon the background description in the Notice, that plaintiffs’ counsel played a significant role in the final enhancement of Roche’s offer from $93 to $95 a share (an increase that generated in excess of $1 Billion for the non-Roche shareholders of Genentech).
“After the Second Stipulation was approved [on March 11, 2009], during the late evening on March 11, 2009 and early morning on March 12, 2009, counsel to Roche and Co-Lead Counsel again discussed possible grounds on which to settle the Action. Co-Lead Counsel again expressed their view that the optimal outcome for Genentech’s stockholders was for Roche and Genentech to enter into a negotiated merger agreement, pursuant to which all Genentech stockholders would receive the same price per share. Co-Lead Counsel also expressed their view that Roche should increase its offer price from $93.00 per share. Co-Lead Counsel also indicated that, if Roche increased its offer to $95.00 per share, Co-Lead Counsel would support an amendment to the Affiliation Agreement to exclude such a merger from the Affiliation Agreement, so as to ensure that all Genentech stockholders would receive the same price per share, without affecting their appraisal rights under section 262 of the Delaware General Corporation Law.”
Notice at 7.
In their discussion of the settlement and their “participation in the settlement,” class counsel list, as one of the actions taken by Roche (impliedly at the behest of class counsel):
“G. During conversations with counsel to Roche during the late evening on March 11, 2009 and early morning on March 12, 2009, Co-Lead Counsel indicated that, if Roche increased its offer to $95.00 per share, Co-Lead Counsel would support an amendment to the Affiliation Agreement to exclude such a merger from the Affiliation Agreement, so as to ensure that all Genentech stockholders would receive the same price per share, without affecting their appraisal rights under section 262 of the Delaware General Corporation Law.”
Notice at 9.
But a review of the record as stated by Genentech and Roche paints a different picture. What broke the dam on this deal was Roche’s unilateral increase in its offer from $86.50 per share to $93.00 per share, announced on March 6, 2009. That significant increase in the offer price led Genentech’s Special Committee (headed by Dr. Sanders, Genentech’s Lead Director, and advised by Goldman Sachs and Latham & Watkins) to conclude it was time to cut a deal. And a deal quickly followed:
“On March 8, 2009, Drs. Sanders and Humer [Roche’s CEO] had a series of telephone conversations in which they discussed a price at which the Special Committee would recommend a transaction with Roche pursuant to a negotiated agreement. Dr. Sanders stated his belief that the Special Committee would be willing to support a transaction at a price in the high $90s. At the end of these conversations, Drs. Sanders and Humer agreed that Roche and the Special Committee would be prepared to enter into a transaction pursuant to which Roche would offer to acquire the Shares held by the Company’s public stockholders at a price of $95.00 per Share.”
Genentech’s Schedule 14D-9 (Amendment No. 5), dated March 12, 2009, at 6.
Roche’s description is more succinct:
“On March 8, 2009, Dr. Franz B. Humer, Chairman of Roche, received a call from Dr. Charles A. Sanders, Chairman of the Special Committee. They discussed a range of possible transaction prices and agreed to pursue negotiations concerning a transaction at $95 per Share.”
Roche’s Second Supplement to Offer to Purchase for Cash, dated March 12, 2009, at 7.
If Genentech’s and Roche’s recitations are to be believed, then Roche’s offer price was set at $95 per share on March 8, 2009, making counsel’s discussions with Roche’s counsel over price on March 11 and March 12 irrelevant to the final agreement. Plaintiff’s counsel, therefore, should be given no credit or “benefit” for the $95 per share offer price.
2. The Affiliation Agreement
Genentech and Roche were parties to an Affiliation Agreement, entered into in 1999. The Agreement imposed certain conditions upon any Genentech/Roche merger or like combination, including (i) that the transaction receive the favorable vote of a majority of the Genentech shares not held by Genentech, and (ii) in the event that such a favorable vote were not obtained (or no vote were required, such as in a short-form merger), then the consideration to be paid to the Genentech shareholders would “be equal to or greater than the average of the means of the ranges of fair values for the Shares as determined by two investment banks of nationally recognized standing appointed by a committee of independent directors.” Genentech’s Schedule 14D-9, dated February 23, 2009, at 2.
This provision created a speed bump for any Roche/Genentech short-form merger, both by reason of the delay that would be inherent in securing the bankers’ valuations, and because, theoretically, those valuations could be below or greater than the consideration paid by Roche for Genentech’s other shares pre short-form merger. Presumably (I have not reviewed the Affiliation Agreement), the Affiliation Agreement, being a two-party agreement, could be amended to remove this speed bump. And this is what the parties did, in order to provide speed and certainty as to the consideration payable to the Genentech shareholders in any short-form merger following Roche’s tender offer (and Genentech granted Roche a top-up option, at Roche’s insistence, to ensure that Roche got the 90% of Genentech’s shares after completion of its tender offer (assuming it were accepted by a majority of Genentech’s unaffiliated shareholders). As Genentech acknowledged in its March 12th Amendment to Schedule 14D-9, the amendment to the Affiliation Agreement did carry the risk of depriving the Genentech shareholders in any short-form merger of the possibility of a price higher than $95:
“While the Special Committee recognized that a non-tendering stockholder could potentially receive more than $93.00 per Share if Roche owned 90% or more of the Shares following consummation of the $93.00 Offer, it concluded that the higher price of $95.00 per Share and the certainty that it would be received by all of the public stockholders (assuming a majority of the Shares held by the company’s public stockholders were tendered into the Revised Offer) provided by the Merger Agreement was in the best interest of the Company’s stockholders, other than Roche and its affiliates.”
Id. at 8.
From the get-go, Roche promised, if it secured 90% or more of Genentech’s outstanding shares, to proceed to a short-form merger and pay the same offer price to the remaining Genentech shareholders that it offered to the other non-affiliated Genentech shareholders, “subject to compliance with the Affiliation Agreement between us and Genentech.” Roche Offer to Purchase for Cash, dated February 9, 2009, at 3.
Plaintiffs’ counsel’s objections to the Affiliation Agreement appear to be quibbles, namely, that the provision above quoted from the Affiliation Agreement could delay payment and did not provide assurance of the same price to the remaining stockholders as offered to the other Genentech stockholders. This was solved by the amendment agreed to by Roche and Genentech, an amendment clearly predictable once a deal was cut, given the sophistication of the Roche and Genentech advisors and their experience and competence in doing deals.
3. Other Purported Benefits
The other benefits achieved by plaintiffs’ counsel appear to be trivial or unnecessary. Thus, plaintiffs’ counsel secured in the First Stipulation acknowledgements from Genentech that it had either publicly stated or were noncontroversial, such as that the Affiliation Agreement and Genentech’s Certificate of Incorporation did not limit the Genentech board’s liability for breaches of the duty of loyalty (cf. Del. GCL § 102(b)(7)(i)), or that the Affiliation Agreement did not “eliminate or limit any statutory or common-law requirements for the consummation of a business combination involving Roche and Genentech; . . .” Notice at 5.
_________________________
Genentech’s board of directors, particularly the Special Committee, and the Special Committee’s advisors, demonstrated considerable skill and savvy in their negotiations with Roche. Through their efforts, the Roche Offer was increased from $86.50 per share to $95.00 per share. With respect to these negotiations, plaintiffs’ counsel played the role of sidewalk superintendents. For this role an award of $24,500,000, or anything approaching it, would be clearly excessive."
Wednesday, June 10, 2009
The Battle for Data Domain; A Critique of Data Domain's Negotiations With NetApp
On May 20, 2009, Data Domain (NasdaqGS: DDUP) announced an agreement to merge with NetApp (NasdaqGS: NTAP) pursuant to which NetApp would acquire Data Domain’s outstanding common stock for $25 per share in cash and stock. EMC Corporation (“EMC”) (NYSE: EMC), which had been put off from participating in the negotiations for the sale of Data Domain, promptly reacted by announcing, on June 1, 2009, an all-shares, all-cash tender offer at $30 per share.
In response, NetApp, which had declared during its negotiations with Data Domain that it “would not engage in a bidding contest” for Data Domain if EMC or any other party were invited into the bidding process, promptly upped its bid to $30 per share, consisting of $16.45 in cash and from 0.7783 to 0.6370 shares of NetApp common stock, designed to deliver to the Data Domain shareholders an additional $13.55 in value (within a 10% collar ranging from $17.41 to $21.27 for NetApp’s common shares) (NetApp closed at $19.17 on June 10, 2009).
We are awaiting Data Domain’s response to the EMC tender offer, which is due by no later than June 16, 2009.
Given the way that the board of directors of Data Domain conducted the negotiations with NetApp, the board may be fortunate that EMC has now launched its tender offer for the outstanding shares of Data Domain. Defending the board’s actions in the face of any Revlon challenge might have been problematic.
A. Dancing with Only One Suitor
As is made clear in the background discussion of the merger in the proxy statement/prospectus filed by Data Domain and NetApp under cover of a Form S-4 filed with the SEC on June 4, 2009 (the “S-4”), Data Domain discussed a deal only with NetApp prior to entering into the merger agreement with NetApp on May 20, 2009. Discussions over a deal were held from time to time since 2006 between Data Domain’s President and CEO, Frank Slootman, and his counterpart at NetApp, Daniel J. Warmenhoven. Discussions turned serious in March of this year. Notwithstanding that it had served as a co-managing underwriter in Data Domain’s IPO in June 2007, Goldman Sachs represented NetApp in the negotiations, and sat in on the early discussions between NetApp and Data Domain, and before Data Domain had hired its financial advisor, Qatalyst Partners, on March 26, 2009, after at least two face-to-face meetings had been held between senior officers of NetApp and senior officers of Data Domain.
Undoubtedly with a view to its possible Revlon duties, Data Domain in its background discussion of the merger articulates early on its board’s justification for discussing a deal only with NetApp:
“The Data Domain board of directors expressed concerns regarding the potential harm to Data Domain’s business relating to any uncertainty perceived by its current or future customers should they learn of discussions regarding a potential business combination involving Data Domain and the ability of Data Domain’s competition to take advantage of any such perceived uncertainty. At the conclusion of the meeting [held March 26, 2009], the Data Domain board of directors confirmed that it had not been seeking a sale of Data Domain, however should NetApp elect to proceed with an offer it would merit further consideration.”
S-4 at 49.
Elegant prose this is not.
Both Data Domain and NetApp are Delaware corporations. As a Delaware corporation, Data Domain is subject to Revlon duties with respect to any change-in-control transaction (Revlon v. McAndrews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986)) requiring it to seek the best price reasonably obtainable on any sale of the company. As the Delaware Supreme Court made clear in its recent decision in Lyondell Chemical Co. v. Ryan, 2009 WL 1024764 (March 25, 2009, revised April 16, 2009), “[t]he duty to seek the best available price applies only when a company embarks on a transaction — on its own initiative or in response to an unsolicited offer — that will result in a change of control.” 2009 WL 1024764 at *6.
So it is in this context that one can appreciate the dance engaged in by the Data Domain board in pursuing a deal with NetApp while, at the same time, declining to conduct any pre-signing market check. While concern about discussing a deal with one’s competitors is legitimate, relying upon this justification for declining to conduct any market check with strategic buyers is tricky, as the justification could justify virtually any board refusal to conduct a pre-signing market check.
Data Domain (or it least its advisors) were clearly cognizant of this balancing act in drafting the justification for the deal, as the concern over potential competitive harm from shopping Data Domain to other strategic partners pre-signing is repeated ad nauseam throughout the background discussion of the S-4.
B. EMC is Put Off While Negotiations with NetApp Continue
What raises the question of whether the Data Domain board’s concern over competitive harm in conducting a market check was pretense is its treatment of EMC. EMC did not jump into the fray with its June 1 announcement of its proposal to acquire Data Domain. On May 7, 2009, in the midst of negotiations between Data Domain and NetApp, an EMC director contacted Slootman, Data Domain’s CEO, to arrange a meeting between Slootman and EMC’s CEO, Joe Tucci, for the stated purpose of sharing with Slootman “EMC’s vision for the future.” S-4 at 52. That very day, at a meeting to discuss the negotiations between Data Domain and NetApp, the Data Domain board reviewed the EMC request. What was the board’s response?
“The Data Domain board of directors was concerned that initiating a market check at this time could jeopardize securing a firm agreement from NetApp and could disrupt Data Domain’s relationships with its current and future customers during the process. The Data Domain board of directors determined that Data Domain should move forward with the potential business combination with NetApp without contacting other companies that might be candidates for a strategic transaction with Data Domain, but that the Data Domain board of directors would continue to evaluate this strategy and consider the matter further based upon the progress and terms of the potential business combination with NetApp.”
S-4 at 53.
This is a windy way of saying “no” to EMC. Nevertheless, Tucci persisted, requesting a meeting with Slootman on Tucci’s next trip to the Bay Area. Slootman agreed to meet Tucci on May 27, 2009.
C. No Apparent Consideration of a Go Shop
Throughout its extended discussion of the negotiations with NetApp leading to the announcement of a deal on May 20, and its repeated statement of the board’s justification for not conducting a market check, there is no discussion whatsoever of why the Data Domain board did not insist on a post-signing go shop. Indeed, the initial draft of the merger agreement prepared by NetApp’s counsel, Wilson Sonsini, preposterously excluded even a fiduciary out for the Data Domain if a superior proposal were presented to Data Domain after it entered into a deal with NetApp. After Omnicare (Omnicare v. NCS HealthCare, Inc., 818 A. 2d 914 (Del. 2003)), even suggesting such a lockup is a joke, and, of course, the ultimate Data Domain/NetApp deal includes a fiduciary out and the ability to terminate the agreement if the Data Domain board receives and accepts an unsolicited superior proposal (and pays a $57 million breakup fee to NetApp). But the background discussion omits entirely any reference to negotiations over a go shop, which one would think would have been an obvious (and acceptable, if properly structured) market check mechanism if, indeed, the board’s concerns over competitive harm in conducting a pre-signing market check were legitimate.
D. Were Slootman and Bhusri Compromised?
The negotiations with NetApp on behalf of Data Domain were, as made apparent in the discussion of the background of the merger in the S-4, conducted primarily by Slootman and Aneel Bhusri, Chairman of the Data Domain board of directors. Showing less than a deft hand, Warmenhoven, NetApp’s CEO, at an early meeting, in which, apparently, only the executive officers of the two parties were present, “informed Mr. Bhusri of the potential for a role on the NetApp board of directors for Mr. Bhusri and a role in the management of NetApp for Mr. Slootman.” S-4 at 50.
While such ham-handedness might not by itself support a finding of lack of independence on behalf of Slootman or Bhusri, the potential for divided loyalty presented by such a proposal would lead some boards to either replace Bhusri as lead negotiator for the board or insist that he and Slootman be “babysat” by Data Domain’s financial advisor in all substantive negotiations between the parties. When the Data Domain board was informed of the overture, it apparently took no such action, as the description of the Data Domain/NetApp negotiations in the background discussion of the merger contains numerous examples of negotiations occurring apparently only between the principals.
E. What Might Have Been
Had EMC’s tender offer not mooted the question, it would have been interesting to see how the Delaware Chancery Court would have treated the Data Domain board of directors on any challenge to their conduct of the negotiations and approval of a merger with NetApp in the face of a Revlon challenge. As a board’s Revlon duties are explained by the Delaware Supreme Court in its recent Lyondell decision:
“There is only one Revlon duty — to ‘[get] the best price for the stockholders at a sale of the company.’ No court can tell directors exactly how to accomplish that goal, because they will be facing a unique combination of circumstances, many of which will be outside their control. As we noted in Barkan v. Amsted Industries, Inc., ‘there is no single blueprint that a board must follow to fulfill its duties.’ That said, our courts have highlighted both the positive and negative aspects of various boards’ conduct under Revlon. The trial court drew several principles from those cases: directors must ‘engage actively in the sale process,’ and they must confirm that they have obtained the best available price either by conducting an auction, by conducting a market check, or by demonstrating ‘an impeccable knowledge of the market.’”
Lyondell Chemical Co. v. Ryan, 2009 WL 1024764 at *6 (footnotes omitted).
Under this articulation, since the Data Domain board did not conduct an auction or a market check (pre- or post-signing), they would have been left to establishing “an impeccable knowledge of the market.”
That is a defense that now need not be made, given EMC’s all-shares, all-cash tender of $30 per share. Attention will now focus on how the Data Domain board and NetApp respond to the offer.
In response, NetApp, which had declared during its negotiations with Data Domain that it “would not engage in a bidding contest” for Data Domain if EMC or any other party were invited into the bidding process, promptly upped its bid to $30 per share, consisting of $16.45 in cash and from 0.7783 to 0.6370 shares of NetApp common stock, designed to deliver to the Data Domain shareholders an additional $13.55 in value (within a 10% collar ranging from $17.41 to $21.27 for NetApp’s common shares) (NetApp closed at $19.17 on June 10, 2009).
We are awaiting Data Domain’s response to the EMC tender offer, which is due by no later than June 16, 2009.
Given the way that the board of directors of Data Domain conducted the negotiations with NetApp, the board may be fortunate that EMC has now launched its tender offer for the outstanding shares of Data Domain. Defending the board’s actions in the face of any Revlon challenge might have been problematic.
A. Dancing with Only One Suitor
As is made clear in the background discussion of the merger in the proxy statement/prospectus filed by Data Domain and NetApp under cover of a Form S-4 filed with the SEC on June 4, 2009 (the “S-4”), Data Domain discussed a deal only with NetApp prior to entering into the merger agreement with NetApp on May 20, 2009. Discussions over a deal were held from time to time since 2006 between Data Domain’s President and CEO, Frank Slootman, and his counterpart at NetApp, Daniel J. Warmenhoven. Discussions turned serious in March of this year. Notwithstanding that it had served as a co-managing underwriter in Data Domain’s IPO in June 2007, Goldman Sachs represented NetApp in the negotiations, and sat in on the early discussions between NetApp and Data Domain, and before Data Domain had hired its financial advisor, Qatalyst Partners, on March 26, 2009, after at least two face-to-face meetings had been held between senior officers of NetApp and senior officers of Data Domain.
Undoubtedly with a view to its possible Revlon duties, Data Domain in its background discussion of the merger articulates early on its board’s justification for discussing a deal only with NetApp:
“The Data Domain board of directors expressed concerns regarding the potential harm to Data Domain’s business relating to any uncertainty perceived by its current or future customers should they learn of discussions regarding a potential business combination involving Data Domain and the ability of Data Domain’s competition to take advantage of any such perceived uncertainty. At the conclusion of the meeting [held March 26, 2009], the Data Domain board of directors confirmed that it had not been seeking a sale of Data Domain, however should NetApp elect to proceed with an offer it would merit further consideration.”
S-4 at 49.
Elegant prose this is not.
Both Data Domain and NetApp are Delaware corporations. As a Delaware corporation, Data Domain is subject to Revlon duties with respect to any change-in-control transaction (Revlon v. McAndrews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986)) requiring it to seek the best price reasonably obtainable on any sale of the company. As the Delaware Supreme Court made clear in its recent decision in Lyondell Chemical Co. v. Ryan, 2009 WL 1024764 (March 25, 2009, revised April 16, 2009), “[t]he duty to seek the best available price applies only when a company embarks on a transaction — on its own initiative or in response to an unsolicited offer — that will result in a change of control.” 2009 WL 1024764 at *6.
So it is in this context that one can appreciate the dance engaged in by the Data Domain board in pursuing a deal with NetApp while, at the same time, declining to conduct any pre-signing market check. While concern about discussing a deal with one’s competitors is legitimate, relying upon this justification for declining to conduct any market check with strategic buyers is tricky, as the justification could justify virtually any board refusal to conduct a pre-signing market check.
Data Domain (or it least its advisors) were clearly cognizant of this balancing act in drafting the justification for the deal, as the concern over potential competitive harm from shopping Data Domain to other strategic partners pre-signing is repeated ad nauseam throughout the background discussion of the S-4.
B. EMC is Put Off While Negotiations with NetApp Continue
What raises the question of whether the Data Domain board’s concern over competitive harm in conducting a market check was pretense is its treatment of EMC. EMC did not jump into the fray with its June 1 announcement of its proposal to acquire Data Domain. On May 7, 2009, in the midst of negotiations between Data Domain and NetApp, an EMC director contacted Slootman, Data Domain’s CEO, to arrange a meeting between Slootman and EMC’s CEO, Joe Tucci, for the stated purpose of sharing with Slootman “EMC’s vision for the future.” S-4 at 52. That very day, at a meeting to discuss the negotiations between Data Domain and NetApp, the Data Domain board reviewed the EMC request. What was the board’s response?
“The Data Domain board of directors was concerned that initiating a market check at this time could jeopardize securing a firm agreement from NetApp and could disrupt Data Domain’s relationships with its current and future customers during the process. The Data Domain board of directors determined that Data Domain should move forward with the potential business combination with NetApp without contacting other companies that might be candidates for a strategic transaction with Data Domain, but that the Data Domain board of directors would continue to evaluate this strategy and consider the matter further based upon the progress and terms of the potential business combination with NetApp.”
S-4 at 53.
This is a windy way of saying “no” to EMC. Nevertheless, Tucci persisted, requesting a meeting with Slootman on Tucci’s next trip to the Bay Area. Slootman agreed to meet Tucci on May 27, 2009.
C. No Apparent Consideration of a Go Shop
Throughout its extended discussion of the negotiations with NetApp leading to the announcement of a deal on May 20, and its repeated statement of the board’s justification for not conducting a market check, there is no discussion whatsoever of why the Data Domain board did not insist on a post-signing go shop. Indeed, the initial draft of the merger agreement prepared by NetApp’s counsel, Wilson Sonsini, preposterously excluded even a fiduciary out for the Data Domain if a superior proposal were presented to Data Domain after it entered into a deal with NetApp. After Omnicare (Omnicare v. NCS HealthCare, Inc., 818 A. 2d 914 (Del. 2003)), even suggesting such a lockup is a joke, and, of course, the ultimate Data Domain/NetApp deal includes a fiduciary out and the ability to terminate the agreement if the Data Domain board receives and accepts an unsolicited superior proposal (and pays a $57 million breakup fee to NetApp). But the background discussion omits entirely any reference to negotiations over a go shop, which one would think would have been an obvious (and acceptable, if properly structured) market check mechanism if, indeed, the board’s concerns over competitive harm in conducting a pre-signing market check were legitimate.
D. Were Slootman and Bhusri Compromised?
The negotiations with NetApp on behalf of Data Domain were, as made apparent in the discussion of the background of the merger in the S-4, conducted primarily by Slootman and Aneel Bhusri, Chairman of the Data Domain board of directors. Showing less than a deft hand, Warmenhoven, NetApp’s CEO, at an early meeting, in which, apparently, only the executive officers of the two parties were present, “informed Mr. Bhusri of the potential for a role on the NetApp board of directors for Mr. Bhusri and a role in the management of NetApp for Mr. Slootman.” S-4 at 50.
While such ham-handedness might not by itself support a finding of lack of independence on behalf of Slootman or Bhusri, the potential for divided loyalty presented by such a proposal would lead some boards to either replace Bhusri as lead negotiator for the board or insist that he and Slootman be “babysat” by Data Domain’s financial advisor in all substantive negotiations between the parties. When the Data Domain board was informed of the overture, it apparently took no such action, as the description of the Data Domain/NetApp negotiations in the background discussion of the merger contains numerous examples of negotiations occurring apparently only between the principals.
E. What Might Have Been
Had EMC’s tender offer not mooted the question, it would have been interesting to see how the Delaware Chancery Court would have treated the Data Domain board of directors on any challenge to their conduct of the negotiations and approval of a merger with NetApp in the face of a Revlon challenge. As a board’s Revlon duties are explained by the Delaware Supreme Court in its recent Lyondell decision:
“There is only one Revlon duty — to ‘[get] the best price for the stockholders at a sale of the company.’ No court can tell directors exactly how to accomplish that goal, because they will be facing a unique combination of circumstances, many of which will be outside their control. As we noted in Barkan v. Amsted Industries, Inc., ‘there is no single blueprint that a board must follow to fulfill its duties.’ That said, our courts have highlighted both the positive and negative aspects of various boards’ conduct under Revlon. The trial court drew several principles from those cases: directors must ‘engage actively in the sale process,’ and they must confirm that they have obtained the best available price either by conducting an auction, by conducting a market check, or by demonstrating ‘an impeccable knowledge of the market.’”
Lyondell Chemical Co. v. Ryan, 2009 WL 1024764 at *6 (footnotes omitted).
Under this articulation, since the Data Domain board did not conduct an auction or a market check (pre- or post-signing), they would have been left to establishing “an impeccable knowledge of the market.”
That is a defense that now need not be made, given EMC’s all-shares, all-cash tender of $30 per share. Attention will now focus on how the Data Domain board and NetApp respond to the offer.
Subscribe to:
Posts (Atom)
Posts
