In re: Cogent, Inc., Shareholder Litigation, Cons. C.A. No. 5780-VCP (Del. Ch. Oct. 5, 2010), read opinion here.

This 54-page decision denied a motion for a preliminary injunction to enjoin a merger and includes serious analysis of key Delaware corporate litigation concepts. At least for the time being, I will highlight in summary fashion only the key legal issues addressed. In addition to applying the prerequisites for a preliminary injunction, which were not satisfied in this case, the Court upheld the board’s decision to choose one bidder over another for seven primary reasons: 

(1) The risk that the unsuccessful suitor would not make a firm offer;

(2) The Court considered the long length of time that it was perceived as being for sale without having received a firm purchase offer besides the successful bidder;

(3) The perception that the unsuccessful bidder was dragging its feet;

(4) The history of start and stop negotiations by the unsuccessful bidder;

(5) The risk that the unsuccessful bidder would withdraw its offer upon completing due diligence; (6) The risk of losing the successful bidder’s offer; and

(7) The risk that the unsuccessful bidder would not make a firm offer increased when the unsuccessful bidder failed to agree to an expedited response timetable.

The Court reviewed each of the challenges to the merger and after careful analysis rejected all of them. For example, it upheld the no-shop and matching rights terms as consistent with prior Delaware case law, and held that they were not unreasonable either separately or in combination. See footnote 40. The Court also reasoned that because of a fiduciary out clause, the board was authorized to engage other bidders who made a superior offer.

The Court reviewed the termination fee which was 3% of the equity, a percentage upheld by prior Delaware cases. The Court declined to accept the argument which viewed the termination fee at 6.6% of the “enterprise value” instead of 3% of the equity value. See footnote 41.

The Court also reviewed the claims involved in the fiduciary duty of disclosure and allegations of material omissions in the Form 14D-9. See, e.g., footnotes 70 and 73. 

The Court also denied a motion for interlocutory appeal.

Supplement: Frank Aquila, on PLI’s Securities Law Center site, comments on the top-up option aspects of this decision here.