In Chen v. Howard-Anderson, Vice Chancellor Laster considered a motion for summary judgment brought by certain officers and the Board of Directors of Occam Networks, Inc., (“Occam”), a public Delaware corporation seeking a determination by the Court that they did not breach their fiduciary duties. The plaintiffs (former stockholders of Occam) claim that the defendants breached their fiduciary duties “by (i) making decisions during Occam’s sale process that fell outside the range of reasonableness (the “Sale Process Claim”) and (ii) issuing a proxy statement for Occam’s stockholder vote on the Merger that contained materially misleading disclosures and material omissions” (the “Disclosure Claim”).
In 2009, Calix, Inc. and Occam (competitors in the broadband market) began discussing a potential business combination. In response, the Board of Occam determined that formal discussions with Calix were not appropriate at that time and retained Jeffries & Company for advice on strategic alternatives. By June 2010, Occam proposed to acquire Keymile International GmbH (“Keymile”) for $80 million, and Calix submitted a term sheet proposing to purchase Occam for $156 million (in a mix of cash and stock). Another suitor, Adtran, presented a third option by offering a slightly higher cash offer price to acquire Occam as compared with the Calix offer. Occam had a cool reaction to Adtran. Occam prepared April and June financial projections for 2010, 2011, and 2012 which were more positive than the estimates of the two public analysts who followed Occam. The projections were not shared with Adtran, and were materially higher than Adtran’s internal projections for Occam, and later projections that Adtran would create. Occam did not provide Calix with the June financial projections. On June 23, 2010 Calix submitted a revised term sheet increasing its offer to purchase Occam to $171.1 million (to be paid in a mix of cash and stock). Adtran confirmed its interest in acquiring Occam and on June 24, 2010 proposed an all cash offer at a premium of approximately 11% over Calix’s bid. On June 24, 2010 the Board met to consider the various alternatives – the cash and stock merger with Calix, the cash sale to Adtran, or remaining independent and acquiring Keymile. It was not clear that the Board was aware that Adtran’s bid was 11% higher than Calix’s offer. The Board directed Jeffries to conduct a 24 hour “market check.”
On July 1, 2010, the Thursday before July 4th weekend, Jeffries sent e-mails to seven potential acquirers. Each e-mail imposed a 24-hour deadline for response and did not mention Occam by name. Five potential buyers expressed interest but noted that the time frame was too short, and Adtran declined to respond to the timetable. Jeffries prepared projections that came close to the Occam June projection forecast of $182.3 million in 2012. The Board authorized management to respond to the Calix offer of $171.1 million and to propose that the price included all vested management equity awards would be exercised and paid out in the deal. Calix agreed and the Board authorized Occam’s execution of an exclusivity agreement with Calix.
The Board met again in August 2010 and realized that Occam’s financial results were tracking considerably ahead of expectations. The exclusivity agreement with Calix expired on August 6 and Calix failed to reconfirm its intention to proceed with the transaction at the price in the term sheet. This gave the Board an opportunity to contact other bidders. Without using the improved financial results to revisit the price, the Board authorized the extension of exclusivity.
The Board met on August 26, 2010, and was provided a report on improved operating results. On September 15, 2010 the Board considered whether to approve the Calix deal. Jeffries opined that the transaction was fair from a financial point of view to Occam’s stockholders. The Calix transaction represented an approximately 60% premium over Occam’s trading price. The Board unanimously approved the merger and recommended it to the stockholders. Plaintiffs filed suit on October 6. The Occam stockholders approved the merger on February 22, 2011.
In response to the Sale Process Claim, the defendants contend that at most they breached their duty of care and are protected by the exculpation provision included in Occam’s Certificate of Incorporation. The Court applied the “enhanced scrutiny” standard of review. The plaintiffs wanted to escalate the standard of review to entire fairness since they believed that a majority of the directors were interested in the merger and not independent. Howard-Anderson, Occam’s President and CEO and a director, was found to be interested in the merger, since he personally received additional benefits from the merger that were not shared with the stockholders generally. The other directors were found to be disinterested and independent with respect to the merger.
In order to demonstrate that the Board’s decisions were reasonable, the defendants needed to demonstrate (i) the reasonableness of the decision-making process employed by directors (including the information on which the directors based their decision) and (ii) the reasonableness of the directors’ actions in light of the circumstances then existing. The record reflects competing evidence supporting the reasonableness of the Board’s decisions. At this stage of the case the Court could not resolve evidentiary conflicts, but is required to resolve such conflicts in favor of the plaintiffs. The exculpatory provision shields directors from personal liability for monetary damages solely for breach of duty of care violations. As a result, although there is evidence to support an inference that the directors acted outside the range of reasonableness, the exculpatory provision is sufficient to protect the directors. Summary judgment was granted in favor of the director defendants (other than Robert Howard-Anderson because he personally received financial benefits from the merger that were not shared with the stockholders and the exculpatory provision does not protect him) on the Sale Process Claim.
Howard-Anderson played a role in the sale process not only as a director but also as the President and CEO of Occam. The plaintiffs assembled evidence that Howard-Anderson and Jeanne Seeley, Occam’s CFO, showed favoritism toward Calix consistent with their personal financial interests rather than the pursuit of maximum value for the stockholders. Summary judgment was denied to the officer defendants as the exculpatory provision is not available to them under Delaware law.
The defendants claimed that the disclosures in the proxy statement were accurate and that the allegedly omitted information was either disclosed or immaterial. The plaintiffs contend that the defendants should have disclosed revenue projected for 2012 in the proxy statement. The defendants’ claim that the revenue projections for 2012 were unreliable and speculative. The evidence suggests that the projections were created and vetted by management. Summary judgment was denied as to this Disclosure Claim. The plaintiffs also contended that the description of the 2011 projections were misleading and inaccurate. The 2011 projections did not reference whether they included the proposed merger transaction, and did not accurately represent what information was incorporated into the internal financial projections. Finding evidence to support the plaintiffs’ position on this point, the Court denied summary judgment as to this Disclosure Claim.
The Court denied summary judgment with respect to the plaintiffs’ claims that the fairness opinion falsely described the information provided to Jeffries by Occam’s management as there was evidence to suggest that the disclosure was false.
The Court denied summary judgment with respect to the plaintiffs’ contention that the proxy statement offered a misleading description of the sale process as the Court was unable to resolve factual disputes as to materiality of information to be presented in the proxy statement.
Finally, the Court was unable to determine whether the violations relating to disclosure resulted from a breach of the duty of care or the duty of loyalty, and as a result found that the exculpatory provision was insufficient for the Court to grant summary judgment.
The defendants argued that because the merger closed, and because it was not a short-form merger or a merger involving a controlling stockholder, it was no longer possible for the Court to award a remedy for breach of the duty of disclosure. However, this is an incorrect statement of Delaware law. If the plaintiffs prove at trial that the defendants breached their fiduciary duty of disclosure and that such breach is not subject to the exculpatory provision, damages can be awarded using a quasi-appraisal measure.
Occam was dismissed from the Case an as improper defendant as none of the claims were made against Occam.