Chancery Court Holds That Stockholder Vote on Merger Was Neither Fully-Informed nor Uncoerced
By: Lisa R. Stark and Taylor B. Bartholomew
In In re Saba Software, Inc. Stockholder Litigation, C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017, revised Apr. 11, 2017), the Delaware Court of Chancery held that the board of Saba Software, Inc. could not invoke the business judgment rule under the Corwin doctrine in response to a fiduciary challenge arising from Saba’s acquisition by Vector Capital Management, L.P. According to the Court, plaintiff pled facts which supported a reasonable inference that the stockholder vote approving the acquisition was neither fully-informed nor uncoerced. The Court also denied defendants’ motion to dismiss plaintiff’s claims that the Saba board breached its duty of loyalty and engaged in acts of bad faith by rushing the sales process, refusing to consider alternatives to the merger and granting itself substantial equity awards.
Prior to the merger, an Indian subsidiary of Saba engaged in financial fraud, causing Saba to overstate its earnings. Subsequently, in 2013, Saba’s stock was delisted from NASDAQ and, in 2014, Saba was forced to pay a $1.75 million penalty to settle an investigation brought by the Securities and Exchange Commission (the “SEC”) relating to the fraud. As part of the settlement, Saba agreed to restate its financials by February 15, 2015 or face deregistration of its stock. Prior to the February 15, 2015 deadline, but after announcing that it would miss the deadline, Saba agreed to be acquired by Vector. In connection with its approval of the merger, the Saba board approved the cash-out of equity awards previously granted to its members, which had been suspended, lapsed or cancelled due to Saba’s failure to restate its financials and resulted in an apparent windfall for the directors. Subsequently, the SEC deregistered Saba’s stock. When voting on the merger, Saba’s stockholders were left with a choice to either accept the $9 merger consideration (a 2% discount to the stock’s trading price on the OTC market for the week prior to the announcement) or retain their illiquid stock. Saba’s stockholders approved the merger.
In this action, plaintiff alleged that the stockholder vote on the merger was coerced and tainted by material omissions in the proxy statement and, as a result, that the stockholder vote did not result in the application of the business judgment rule under Corwin to the Saba board’s decision-making process. The Court agreed, finding that the Saba board’s failure to disclose in the proxy statement the reasons for Saba’s inability to restate its financials constituted a breach of fiduciary duty. According to the Court, such information was material to the stockholders’ determination of whether Saba had a future as a standalone entity. The Court also agreed with plaintiff that the omissions were coercive because, in a rushed approval process, the stockholders were forced to accept either a no-premium offer or the retention of illiquid stock. Accordingly, because the stockholder vote was neither fully informed nor uncoerced, the Court found that the transaction was subject to Revlon enhanced scrutiny.
The Court next found that plaintiff stated a claim that the Saba board breached its Revlon obligations in bad faith by rushing the sales process, refusing to consider alternatives to a sale, and coercing the stockholders to vote in favor of the deal. The Court also held that plaintiff stated a claim for breach of the duty of loyalty because the Saba board awarded cash payments to itself in place of illiquid awards on the day before the execution of the merger agreement. However, the Court rejected plaintiff’s argument that Saba’s CEO was interested in the sales process by virtue of his post-closing employment arrangements with Vector given that the CEO waited to negotiate his employment with Vector until after all deal terms had been finalized.
Finally, the Court rejected plaintiff’s aiding and abetting claim against Vector because plaintiff failed to prove that Vector knowingly aided and abetted the Saba board in its breach of fiduciary duty. Accordingly, the Court denied the Saba board’s motion to dismiss and granted Vector’s motion to dismiss.
In re Saba Software, Inc. Stockholder Litigation, C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017, revised Apr. 11, 2017)