In In re PLX Technology, Inc. Stockholders Litigation, C.A. No. 9880-VCL (Del. Ch. October 16, 2018), the Delaware Chancery Court found that the actions of an activist stockholder in the context of a sale transaction aided and abetted the defendant board of directors in a breach of its fiduciary duty of disclosure but that there was insufficient evidence that the breach ultimately resulted in damages.
The story begins with a blocked attempt by PLX Technology Inc.’s (“PLX”) to sell to Integrated Device Technology, Inc. based on the Federal Trade Commission’s challenge to the sale on antitrust grounds. After the deal failed to go through, PLX’s stock price fell considerably lower. This turn of events drew the attention of Potomac Capital Partners II, L.P.’s (“Potomac”) co-managing member, Eric Singer (“Singer”), who subsequently bought shares of PLX at the lower market prices. Singer believed there was an opportunity to sell the company to a runner up bidder, Avago Technologies Wireless (U.S.A.) Manufacturing, Inc. (“Avago”), who had recently acquired one of PLX’s competitors.
For over a year, Potomac and Singer launched an activist campaign to pressure PLX to sell, culminating in Potomac advancing a slate of directors—one of which was Singer himself—to be elected to PLX’s board (the “Board”). While a newly elected Board member, Singer received information that Avago might again be interested in acquiring PLX at a price of approximately $6.53 a share. It was also disclosed to Singer that Avago would consider a bid for PLX after Avago finalized another deal process in which it was engaged. Singer, despite being a director for PLX and owing a duty of loyalty to PLX, did not disclose this information to PLX’s management team or the rest of the Board. The court found that Singer, through Potomac’s holdings, stood to gain uniquely from a short term gain if the sale went through, diverging his interests from the broader stockholder pool. His confidential communications with Avago and his failure to share this information would later become a factor in the outcome of the case.
About four months later, in May of 2014, PLX agreed in principle to a deal with Avago for $6.50 per share. However, the projections in management’s December 2013 business plan generated a valuation range well above $6.50 per share. In June of 2014, management prepared a new and materially lower set of projections. The Board signed off on the new projections lowering PLX’s valuation despite never receiving an explanation of the changes.
Following the announcement of PLX’s agreement to merge with Avago, Plaintiffs filed for an injunction to block the transaction. Plaintiffs later withdrew their injunction request and proceeded with an action against the Board, Potomac, Avago, and the acquisition subsidiary used to effectuate the merger. The Court dismissed some of the Plaintiffs’ claims, and Plaintiffs settled with the remaining defendants except for Potomac. On November 21, 2014, the Court certified Plaintiff’s class.
Plaintiffs’ remaining claim was that Potomac, through the actions of Singer, aided and abetted the Board in breaching its fiduciary duty. Plaintiffs presented evidence proving that: (1) PLX’s Board had a fiduciary duty to the corporation and its stockholders; (2) PLX’s Board breached its fiduciary duty by failing to make proper disclosures regarding the higher revenue projections in its Recommendation Statement to stockholders; and (3) Potomac, through Singer, knowingly participated in the Board’s breach of its fiduciary duty by failing to disclose important information relating to Avago’s interest in PLX. Critical to the Court’s holding was that Singer withheld crucial information about Avago’s plans for PLX from the rest of PLX’s Board.
It is particularly notable that, the Court found that because of Singer’s relationship with Potomac and his role in directing Potomac’s strategy with regards to PLX, Singer was Potomac’s agent and his knowledge and actions could be attributed to Potomac. Singer, and thus Potomac, had knowingly participated in the breach and took steps not only to breach his fiduciary duties, but to induce the rest of the Board to breach its fiduciary duties as well. Typically, the actions of director-representative of a stockholder cannot be attributed to the stockholder, nor can the actions of an independent director be attributed to the stockholder that nominated him based on the nomination alone. However, the Court reasoned that it was appropriate to attribute Singer’s knowledge and actions to Potomac for several reasons: Singer was co-managing member of Potomac; Singer led Potomac’s activist campaign at PLX; Potomac owned PLX stock; Potomac filed Schedule 13Ds; Potomac served books and record demands; Potomac nominated the dissident-director slate; Potomac filed the proxy materials; and Potomac stood to collect the short-term gains from a quick sale of PLX. Because Singer directed all of these activities and continued to do so once elected to the Board, the Court held that the evidence warranted a finding that Potomac knowingly participated in the steps Singer took to breach his fiduciary duties and to induce a breach by PLX’s other Board members.
Despite these findings, and the application of the enhanced scrutiny standard of review, the Court held that there was insufficient support for a finding of damages under the “quasi-appraisal” measurement of damages it deemed applicable in this case. The Court ruled that Plaintiffs failed to prove any causally related damages, and that Plaintiffs’ valuation of $9.86 per share—more than 50% higher than the actual sale price—was not convincing. In fact, the Court determined that the $6.50 per share sale price likely exceeded the standalone value of the company. Discrediting the expert’s discounted cash flow analysis, the Court based its finding on two main points: (1) the underlying data Plaintiffs’ expert had relied on in valuing PLX at $9.86 per share was unrealistic because it depended on the speculative success of a wholly new product line; and (2) market forces, including Avago’s belief that acquiring PLX would result in significant synergies, meant that a $6.50 per share sale price was likely more than the valuation of PLX standing alone.
The Court stated that if the revenue projections were sufficiently reliable to support Plaintiffs’ claimed valuation, another buyer would have competed with Avago. The pre-sale market checks in which fifteen potential bidders were contacted indicated to the Court that the sale price was a reliable indication of fair market value. This was particularly true, the Court concludes, once no topping bid emerged during the post-signing market check provided for by the structure of the merger agreement between PLX and Avago. The testimony provided by Plaintiffs’ expert was not sufficient to allow the Court to discount the heavy probative value of the pre-market check, post-market check, and sale price.
Although the Court acknowledges that the sale process was flawed from a fiduciary standpoint, the Court ultimately held that the details of the sale and the synergistic nature of the deal resulted in the Plaintiffs receiving consideration that exceeded the value of PLX on a standalone basis. As such, Plaintiffs were unable to prove damages that were casually related to the breach, and the Court entered judgement for Potomac on Plaintiffs’ aiding-and-abetting claim.