In Re Comverge, Inc. Shareholders Litigation

By Sherwin Salar and Whitney Smith

In Re Comverge, Inc. Shareholders Litigation involves a stockholder challenge to a merger between Comverge, Inc. and H.I.G Capital, L.L.C.  The plaintiff stockholders of Comverge contend that the Comverge board of directors (the “Board”) breached their fiduciary duties by: (1) conducting a flawed sales process and not suing HIG for an alleged breach of a non-disclosure agreement between the parties (the “NDA”); and (2) agreeing to deal protection measures that precluded the possibility of a topping bid.  On November 25, 2014, Vice Chancellor Parsons granted HIG’s motion to dismiss with respect to the first claim, but denied the motion on the second claim.  Furthermore, Vice Chancellor Parsons dismissed Plaintiffs’ claim that HIG aided and abetted the Board’s breaches of fiduciary duties, stating that even if there was a predicate breach of fiduciary duties by the Board, the Plaintiffs only allege conclusory facts that do not support a claim that HIG participated in those breaches.

In late 2010, Comverge was in need of liquidity to continue operations and fulfill obligations under its outstanding revolving credit facility and subordinated promissory notes.  Thus, Comverge hired an investment bank to seek a minority equity investor.  The effort was unsuccessful, but in November 2011 HIG approached a Comverge director expressing an interest in investing in the company.  After executing an NDA that contained both a two-year standstill and an unusually broad carve-out from the standstill, Comverge engaged in due diligence and on December 21 offered to buy the company for $1.75 per share and to make an interim $12 million bridge loan.  After multiple rounds of negotiations, HIG indicated that it would not raise its bid above $2.15 per share unless the company entered into an exclusivity agreement, which Comverge subsequently agreed to.  Five days into the exclusivity period the Board received an indication of interest from another company in the range of $4.00 to $6.00 per share.  Unsuccessful in improving HIG’s bid to more than $2.25, the Board allowed exclusivity to expire and engaged the other bidder.  Undaunted by being rejected, HIG purchased a controlling interest in one of the company’s outstanding subordinated notes (the “PFG Note”), which contained a blocking right on any acquisition proposal (and which plaintiffs allege violated the standstill provisions of the NDA).  HIG then sent a notice of default under the PFG Note and threatened to accelerate the debt owed unless Comverge entered into a merger agreement with HIG at a reduced price of $1.50 per share.  After a period of negotiations the Board approved a deal at $1.75 per share (the stock was then trading at $1.88) and HIG provided Comverge with a $12 million bridge loan that was convertible into Comverge stock at $1.40 per share.  The deal also included a termination fee and expense reimbursement which in the aggregate amounted to 5.55%-7% of the deal’s equity value, and a 30-day go-shop.

Vice Chancellor Parsons noted that the company’s charter contained an exculpation provision and ruled that the Plaintiffs did not plead facts from which a non-exculpated breach of fiduciary duty could be conceivably inferred.  On the issue of the flawed sales process, Vice Chancellor Parsons reasoned that the Board engaged in an involved strategic process over 18-months before agreeing to a merger and was simply outflanked once HIG acquired the PFG Note.  With respect to the decision not to sue HIG for breach of the standstill provision of the NDA, Vice Chancellor Parsons ruled that the Board could have been acting reasonably given the limited resources available to it and the fact that the company would likely have lost its only firm offer and faced bankruptcy.

On the matter of preclusive deal protection measures, the Vice Chancellor noted that although the magnitude of the termination fee and expense reimbursement already test the limits of what the court has found to be reasonable in the past, the more difficult question is whether the convertible note should be considered in the termination fee analysis because the ability to convert at a discount effectively made a topping bid more expensive.  Ultimately, Vice Chancellor Parsons denied Defendants’ motion to dismiss on this claim, ruling that it is reasonably conceivable that the convertible note may have been viewed by potential bidders as additional termination fees, such that the effective cost of termination would be over 13% of the equity value of transaction.

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